Where There Is No LLC Operating Agreement, The Statute Controls

Davis v. WINNING STREAK SPORTS, LLC, Kan: Court of Appeals 2013 - Google Scholar:

Sometimes an LLC is formed, but the parties fail to prepare an operating agreement. Here, the parties formed an LLC and then engaged in litigation.

How are disputes resolved when the parties do not prepare an operating agreement? There is a simple answer - the state statute provides the terms of the parties operating agreement.

The Court explained:


"The controlling statute for this appeal is K.S.A. 17-7670, which provides:

"(a) Subject to such standards and restrictions, if any, as are set forth in its operating agreement, a limited liability company may, and shall have the power to, indemnify and hold harmless any member or manager or other person from and against any and all claims and demands whatsoever.
"(b) To the extent that a member, manager, officer, employee or agent has been successful on the merits or otherwise or the defenses of any action, suits or proceeding, or in defense of any issue or matter therein, such director, officer, employee or agent shall be indemnified against expenses actually and reasonably incurred by such person in connection therewith, including attorney fees."

Since there was no operating agreement, the plaintiff who had prevailed in other litigation with the LLC was entitled to indemnification. The Appellate Court remanded the case and instructed the trial court to use standards developed in Delaware courts interpreting Delaware's limited liability company act.

Comment: We see this problem quite often - people establish an LLC, but fail to take the time to engage a lawyer and complete the operating agreement. They are then often stuck with a bargain they did not anticipate in that the state statute provides the terms of the operating agreement. This is a cautionary but common tale.

Edward X. Clinton, Jr.

www.clintonlaw.net
www.clintonlegalmalpractice.net

'via Blog this'