Uniform Law Commission Creates Drafting Committee To Clean Up And Modernize American LLC Law


Regulations Concept with Wooden Blocks in Red Color



The Uniform Law Commission has created a drafting committee to consider changes to the laws of so-called “unincorporated organizations”, which includes primarily the Uniform Limited Liability Company Act (ULLCA) but also includes the Uniform Limited Partnership Act (ULPA). The drafting committee, which will be chaired by DLA Piper lawyer Lisa Jacobs, is not expected to propose any major policy changes to these laws, but instead the project seems to have as its goal the updating and general sprucing-up of these Acts.

The fact is that laws are not static, but evolve as new issues — and often flaws in the laws as drafted — are identified, and the courts make rulings commensurate with how they believe the laws were intended to work. Often the courts correctly identify the intent of the drafters and all is swell, but not infrequently the courts will sometimes issue rulings that go off the rails, and in that case the drafters have to step back in and through amendments get the train running in the right direction again. That is largely the purpose of this drafting committee: Identify those areas where the courts have struggled or gone off the rails and get their rulings back on the right track. Additionally, the drafting committee will have to examine the enactments of ULLCA by the states and explore why certain states have adopted particular non-uniform provisions.

This form of updating is particularly important in the area of limited liability companies, since such companies have within just the last twenty years become the primary legal form through which small businesses are organized. This is largely because LLCs have a simplified contractual form of management as opposed to corporations (which still must conduct most business through largely superfluous shareholder and director meetings and resolutions), but also because LLCs have the benefit of so-called charging order protection which has the added advantage of allowing them to more easily be bankruptcy-remote entities.

But there are also significant flaws in the existing LLC laws which have been identified and require drafting remediation. Probably the most significant flaw to be addressed is that of how out-of-state (“foreign”) LLCs are to be dealt with, since the current version of ULLCA inadvertently excludes them from much of the application of that Act — including, importantly, Article V of the ULLCA which deals with assignee and creditor rights and charging orders. Some courts have taken the Act at face value, saying basically “you drafted it, you meant it” and have excluded foreign LLCs from the application of the charging order provisions, which other courts have recognized the statutory flaw and held that the charging order provisions should apply no matter what the text of the statute says. An example of this particular issue is found here.

There are numerous other issues relating to charging orders that the drafting committee will consider, nearly all driven by court opinions where the involved judges have either shown confusion or driven off the rails entirely. But charging orders are not the only area of concern, as there are also very significant issues to be considered in other parts of the ULLCA, such as those involving fiduciary duties owed to members.

The webpage for the drafting committee is found here, and the Uniform Law Commission welcomes interested observers (anybody can be an observer) who are generally allowed to participate in discussions and give their proverbial $0.02 worth. Those desiring to register as an observer should contact the Uniform Law Commissions staff liaison, Ms. Libby Snyder, at lsnyder@uniformlaws.org

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