Monday, November 7, 2011

The Ky LLC Act, the Statute of Frauds and “In a Written Operating Agreement”

The Ky LLC Act, the Statute of Frauds and
“In a Written Operating Agreement”
          The various default rules of the LLC Act that permit their modification “in a written operating agreement” may be understood as being subject, in each instance, to a particular statute of frauds.  The “particular” qualification is important.  While the traditional Statute of Frauds requires that the agreement be signed by the person against who it would be enforced (see KRS § 371.010), there is no requirement that the operating agreement (or any amendment thereto) be signed by any member.  The requirement that the modification be in a written operating agreement is just that; proving a particular writing has been adopted as the operating agreement is a matter of general contract law.  See also KRS § 275.185(1)(d).
         A LLC may exist without a written operating agreement, in which case it will be governed by an oral and course of conduct operating agreement, if any, and by the default rules of the LLC Act.  See Racing Investment Fund 2000, LLC v. Clay Ward Agency, Inc., 320 S.W.3d 654, 657 (Ky. 2010).  While not express in the statute, and even as operating agreements may be oral, the Statute of Frauds should apply.  To the degree an obligation asserted to have been undertaken in an oral operating agreement would be unenforceable by reason of the Statute of Frauds, the permissibility of an oral operating agreement should not render that obligation enforceable.  For example, the agreement of a member to contribute Blackacre to an LLC should be subject to the Statute of Frauds; if Blackacre’s owner has not signed the operating agreement calling for its contribution, no obligation to contribute may be enforced.  While this point has not been squarely addressed by a Kentucky court, such an outcome would be consistent with the ruling of the Delaware Supreme Court rendered in Olson v. Halvorsen.  Olson v. Halvorsen, 986 A.2d 1150 (Del. 2009). See also Thomas E. Rutledge, Statute of Frauds and Partnerships/Operating Agreements, 11 J. Passthrough Entities 33 (Nov./Dec. 2008).  While, subsequent to the Olson decision, the Delaware legislature amended its LLC Act to exempt obligations undertaken in an oral operating agreement from the statute of frauds (see Del. Code Ann. tit. 6, § 18-101(7)), no similar effort has been undertaken in Kentucky.

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