Business partners, seeking to make their fortunes, form their LLCs at a moment when they expect to work together indefinitely, with good will between them and nothing but cooperation as their modus operandi. At this time in a business partnership, the idea of distrusting their business partner and needing to dissolve the LLC is furthest from their minds. Commerce demand their attention, and they may forget to sign their operating agreement after they register their LLC with the California Secretary of State. What happens when dissension leads one partner to reject the terms of the unsigned OA, simply because they never signed it. Answer: they probably have to honor it anyway.
LLC Operating Agreements (“OA”) are governed by the law of contracts. The National Conference of Commissioners on Uniform State Laws, Uniform Limited Liability Company Act (2006)(Last Amended 2013) With Prefatory Note and Comments, 2014, at p. 15, states in the discussion of the definition of “Operating Agreement” the following:
An operating agreement is a contract, and therefore all statutory language pertaining to the operating agreement must be understood in the context of the law of contracts.
Every contract requires consenting parties. (See California Civil Code §§1550, 1565; 1 Witkin, Summary 11th Contracts § 116 .) A party’s consent is gathered from the reasonable meaning of her words and acts, and not from any unexpressed intentions or understanding. (1 Witkin, Summary 11th Contracts § 116 .) For instance, your partner’s consent is demonstrated when they comply with a term in the OA—like asking the co-member to consent to a transfer of their membership to their trust. Or perhaps your partner will cite the OA in a legal document, like, when the LLC applies for a bank loan.
Such consent can also be evidence of ratification of the unsigned OA. Ratification arises when your partner benefits from the bank loan based on their signed Certificate of Incumbency. If your LLC stands to receive income as a result of a loan-- perhaps enabling investment funds to be leveraged geometrically with borrowed funds—then ratification can arise.
California Civil Code section 2310 states:
RATIFICATION OF AGENT'S ACT
A ratification can be made only in the manner that would have been necessary to confer an original authority for the act ratified, or where an oral authorization would suffice, by accepting or retaining the benefit of the act, with notice thereof.
In Rakestraw v. Rodrigues (1972) 8 Cal. 3d 67, ratification was found where signer Rakestraw, whose signature was forged on a deed of trust, did nothing to repudiate the challenged signature because she anticipated receiving monetary benefits from the mortgaged property. In Rakestraw, the court found that the forger was acting as agent for principal Rakestraw. On that basis, the court held that any requirement that the ratification be done in writing was inapplicable. (Rakestraw at 76.) Written ratification required under California Civil Code section 2310 was not intended to apply to a ratification as between a principal and agent. (Rakestraw at 77, citing Sunset-Sternau Food Co. v. Bonzi (1964) 60 Cal.2d 834.)
Consent and ratification are two classic contract principles that support validation of the unsigned OA. If your partner is repudiating your unsigned OA, look back over the years for indicia and evidence of consent and ratification. It’s probably there.
Kathleen J. Smith is an experienced civil litigator. Kathi advises clients on and handles all types of civil litigation, including employment matters, wage and hour, business, real estate, trademark disputes, class action defense, trust and probate, and homeowners association disputes. Kathi is experienced in all types of dispute resolution, from mediation to arbitration to civil trial.
To find out more about LLC operating agreements, please feel free to contact the knowledgeable attorneys at Schneiders & Associates, LLP. We will be pleased to answer any questions you may have, and make sure you are comfortable with our law firm. For more information please call or email our Oxnard office.