Last week, I threatened that I might have outtakes from the the Association of American Law Schools ("AALS") panel discussion for the Section on Agency, Partnerships, LLCs and Unincorporated Associations, "Contract is King, But Can It Govern Its Realm?".  The "conversation" between panelists and among panelists and audience members was rich and far-ranging, although much of it was not "new news" to those of us focused on the many legal questions relating to contracts in the unincorporated business associations space.  Here is my brief additional comment on the panel discussion, ex post.  A recording of the session should later be available, for those interested in listening in.

Although most of the discussion was intentionally not scripted (but, rather, organized by a set of questions shared with the panelists in advance), a few of us did have assignments.  I was charged with two key areas of earmarked participation.  First, I accepted an invitation to identify and categorize non-Delaware state law issues at the intersection of unincorporated business association law, contract law, and legislative drafting.  Second, I was invited to comment on my work on the LLC [operating] agreement as contract (or non-contract).  Although each topic is worthy of attention, I already have written a bit about the latter in this forum.  So, I will focus here on just the state law piece.

This specific area of focus, the non-Delaware issues, is a favorite area of mine in LLC law and business associations law more generally.  As teachers and scholars, we all-too-often focus on Delaware law–and most often, for good reason.  But sometimes we ignore, to our detriment, the fact that other laws, while not leading or as well developed, deserve attention in their own right–attention that may help the judiciary, the legislature, and the bar (including our former students).  So, I took on this first assignment for the AALS panel to help ensure that we consider state laws more broadly.  And for those who have done any work in this area, you know the specific doctrine can vary!

I made three observations on the non-Delaware state law issues relating to whether contract is king in LLC law.  First, I observed that states describe the contractarian nature of their LLC laws differently.  Some, like Delaware, articulate a policy of giving maximum effect to principles of freedom of contract and the enforceability of LLC [operating] agreements.  See, e.g., the statutes in Indiana, Kansas, Kentucky, Missouri, New Mexico, and Virginia.  At least one state, Pennsylvania, declares that contract is king unless otherwise noted in the certificate of organization or otherwise in the statute.  A number of states, including my home state of Tennessee, have what I refer to as "RUPA-like" provisions (i.e., statutory language similar to that included in the Revised Uniform Partnership Act) that merely, without being subject to an overarching policy as to interpretation, give effect to the provisions in the LLC [operating] agreement unless those provisions are expressly proscribed by statute.

My second observation was that states treat exculpation and private ordering with respect to fiduciary duties and the implied covenant of good faith and fair dealing differently.  Again, some states follow Delaware in allowing (1) exculpation except for bad faith violations of the implied covenant of good faith and fair dealing and (2) the elimination of fiduciary duties (but not the implied covenant of good faith and fair dealing).  Kansas is an example that I noted.  Mississippi, however, limits exculpation in ways not unlike those used in corporate law.  Colorado LLC law provides that fiduciary duties may be  restricted or eliminated if not "manifestly unreasonable" and allows for the provision of standards for compliance with the implied covenant of good faith and fair dealing (but does not permit its elimination).  Tennessee, the District of Columbia, and others use a RUPA-like approach that does not permit exculpation and allows tailoring, but not elimination, of fiduciary duties (under separate standards for loyalty and care) and the articulation of standards by which performance of the obligation of good faith and fair dealing is to be measured, if not "manifestly unreasonable".

Finally, I observed that state legislatures may or may not focus on these issues or the differences among the state statutes concerning these matters.  I noted, however, based on my experiences in Massachusetts and Tennessee, that the bar is attentive to both the issues and (at least to some extent) the differences.  In other words, I see anecdotal evidence of conscious path-dependence in business entity legislation planning and drafting.

I wonder if these observations ring true to you.  I also wonder if you have your own observations in this regard.  Let me know in the comments.