Is Washington’s LLC Act Modeled on the Uniform LLC Act? Does It Matter?

By Douglas Batey and David C. Tingstad¹1 The authors are members of, and Doug Batey is a past co-chair of, the WSBA Business Law Section’s Partnership and Limited Liability Company Law Committee, which was responsible for drafting and recommending the 2016 comprehensive revision of Washington’s Limited Liability Company Act. The views expressed by the authors are fully supported and endorsed by the Partnership and Limited Liability Company Law Committee. The authors would like to thank Andrew Tingstad, third-year law student at Willamette School of Law, for his research and drafting assistance with this article.

Washington lawyers and appellate judges sometimes must interpret provisions in Washington statutes that are unclear or silent on a particular question. In doing so we occasionally look for guidance from uniform laws with similar provisions. However, erroneously concluding that a Washington statute is modeled on a uniform law can lead to analytical mistakes where the two acts are manifestly different, as is the case with Washington’s LLC Act and the Uniform LLC Act. 

The Court’s Misstatement in Berman v. Tierra Real Estate Group

Last year the Washington Court of Appeals analyzed an issue under Washington’s Limited Liability Company Act. The question was whether two LLCs were bound to arbitrate disputes with their members under arbitration clauses in their operating agreements, or whether the arbitration clauses only applied to disputes between the members. Not surprisingly, the court found that the LLCs were bound by the arbitration clauses, quoting the Washington LLC Act: “the limited liability company agreement governs … [r]elations among the members as members and between the members and the limited liability company.”²2 Berman v. Tierra Real Estate Group, LLC, 23 Wn. App. 2d 387, 392, 515 P.3d 1004 (2022) (quoting RCW 25.15.018(1)(a), emphasis added by the court).

The court found further support for its conclusion in the Uniform Limited Liability Company Act (ULLCA), which explicitly provides that an LLC is bound by its own LLC agreement.³3 ULLCA, § 106(a). ULLCA does not govern Washington law, but the court apparently attempted to bridge that gap by stating: “As Washington’s [LLC] act was substantially modeled on the ULLCA, we may look to the ULLCA to assist in our interpretation.”⁴4 Berman, supra note 2, at 392.

But the Berman court was incorrect—Washington’s LLC Act was not modeled on ULLCA. The authors have served on the Partnership and LLC Law Committee of the WSBA’s Business Law Section (the “Committee”) for many years. The Committee began considering revisions to Washington’s LLC Act in 2008. After an initial review of ULLCA, the Committee voted not to recommend the adoption of ULLCA, and instead focused on modernizing and improving Washington’s LLC Act using many sources, including Washington limited partnership law, Washington corporate law, and Delaware’s LLC law. Over several years the Committee drafted a substantial revision of Washington’s LLC Act, which was supported by the WSBA, passed by the Legislature, and went into effect in 2016 (the “Act”). 

ULLCA compared with Washington’s LLC Act: Multiple Material Differences

Lawyers should not be misled by the Berman court’s incorrect statement about Washington’s LLC Act (the Act) being modeled on ULLCA. There are many significant differences between ULLCA and the Act. For the purposes of this article, we will focus on four such differences:

(1) statutory apparent authority; 

(2) dissenter’s/appraisal rights; 

(3) fiduciary duties; and 

(4) additional miscellaneous differences. 

Each difference is significant, in that the Act and ULLCA directly reject certain concepts and/or drastically alter provisions present in the other. Additionally, each difference is material, in that the rejected concepts and/or drastically altered provisions result in practical differences in the application of each act’s provisions for individuals and practicing attorneys alike. Each significant and material difference will be discussed in turn.

1. Under the Act, Members and Managers Have Statutory Apparent Authority, Which is Absent From ULLCA 

By default under the Act, members of a member-managed LLC and managers of a manager-managed LLC are agents of the LLC and have the authority to bind the LLC with regard to matters in the ordinary course of its activities. In contrast, ULLCA rejects statutory apparent authority of a member or manager in toto.

Washington’s Act codifies statutory apparent authority. The Act codifies statutory apparent authority for members in member-managed LLCs, and for managers in manager-managed LLCs. The Act states that if an LLC is member-managed, “each member is an agent of the limited liability company and has the authority to bind the limited liability company with regard to matters in the ordinary course of its activities.” RCW 25.15.151(2) (emphasis added). The Act states an identical rule for managers of a manager-managed LLC. RCW 25.15.154(2). 

As one commentator has noted, Washington recognizes, that: 

[t]he LLC approach to management [(or, positional authority),] is best understood against the background of partnership law. The time-honored partnership rule is that each partner has “positional” authority as a partner to bind the firm. This is based on the idea that a partner’s ownership interest gives her special concern for the welfare of the firm and therefore the right incentives and interests in the firm to participate in management.

Larry Ribstein, An Analysis of the Revised Uniform Limited Liability Company Act, 3 Va. Law & Bus. Rev. 35, at 57-58 (2008). Professor Ribstein continues, stating, “[a]n LLC managed by members is like a partnership: each member has the power, as such, to bind the firm, at least as to ordinary matters, while all the members must agree as to extraordinary matters.” Id. This reasoning is exemplified in the Act’s approach to statutory apparent authority for members in ULLCA. 

ULLCA rejects statutory apparent authority. ULLCA directly contradicts the Act, rejecting statutory apparent authority entirely. ULLCA is clear: “[a] member is not an agent of a limited liability company solely by reason of being a member.” § 301(a). While ULLCA does not have an analogous statement regarding a manager’s apparent authority, the ULLCA comments indicate that a manager has no apparent authority solely by virtue of being a manager. The comments to ULLCA § 407(a) state: “[a]lthough this act has eliminated the link between management structure and statutory apparent authority, the act retains the manager-managed and member-managed constructs as options for members to use to structure their inter se relationship.” ULLCA § 407, comment (a).

ULLCA reasons that “‘statutory apparent authority’ is an attribute of partnership formality that does not belong in an LLC statute.” Prefatory Note to ULLCA (2006), Noteworthy Provisions of the 2006 Act, The Operating Agreement. Instead, ULLCA relies upon other law, and most especially the common law of agency, to determine power-to-bind questions. ULLCA §301, cmt. 

The Committee grappled with rejecting statutory apparent authority similar to ULLCA. In the Act, Washington expressly declined to follow the ULLCA approach, instead resolving to maintain its codification of statutory apparent authority. 

2. The Act Maintains Dissenter’s/Appraisal Rights, but ULLCA Excludes Statutory Dissenter’s/Appraisal Rights 

In the event of a domestic merger, the Act entitles a member of an LLC to dissenter’s rights. Conversely, ULLCA provides no such default dissenter’s rights. Under ULLCA, a dissenting member is only entitled to contractual appraisal rights (if any) to the extent provided in an LLC agreement or plan of merger. 

Washington LLC—dissenters’ rights. The Act devotes all of Article XII to dissenter’s rights. The Act entitles a member of an LLC, unless the LLC agreement says otherwise, to dissent from a plan of merger and obtain payment of the fair value of the member’s interest in the LLC if the LLC’s plan of merger consummates. RCW 25.15.471(1). The right to dissent terminates upon the occurrence of abandonment/rescission of merger, permanent judicial enjoinment to set aside the merger, or the dissenting member withdraws their demand for payment with the written consent of the LLC. RCW 25.15.471(3). 

The default dissenter’s rights and right to “fair value” in the Act are a dissenting member’s exclusive remedy in the Act. (See RCW 25.15.471(b) and Sound Infiniti v. Snyder, 169 Wn.2d 199, 206, 237 P.3d 241 (2010)).

ULLCA—appraisal rights. In contrast to the Act, ULLCA provides for no such default dissenter’s rights. Rather, the dissenter is solely entitled to contractual appraisal rights (if any) only to the extent provided in the operating agreement or the plan of merger. ULLCA § 1006. In fact, ULLCA makes no mention of statutory dissenter’s rights, which is consistent with ULLCA’s default rule that an LLC’s merger requires the approval of all the LLC’s members. ULLCA § 1023. 

As such, the application of the ULLCA approach materially differs from the Act. Specifically, a hallmark Washington Supreme Court case may be decided differently altogether under the ULLCA approach. In Sound Infiniti, the court held that dissenter’s rights in amending a corporation’s articles of incorporation to reflect a reverse stock split were the dissenting shareholders’ sole remedy. Although Sound Infiniti is a corporate case, the language of RCW 23B.13.020 is similar to RCW 25.15.417(b). 

3. The Act Limits Fiduciary Duties and Does Not Permit Their Elimination; ULLCA Does Not Limit Fiduciary Duties and Permits Their Elimination if not “Manifestly Unreasonable” 

The Act and ULLCA fundamentally differ on their provisions relating to limiting fiduciary duties in two major ways. 

First, limiting, or “cabining in” fiduciary duties. The Act limits (Professor Ribstein refers to it as “cabins in”) the fiduciary duties of managers in a manager-managed LLC or members in a member-managed LLC to the duty of loyalty and the duty of care. Conversely, ULLCA includes the duties of loyalty and care in a manager’s or managing member’s fiduciary duties but does not limit, or cabin in, fiduciary duties to loyalty and care. The Act states: “The only fiduciary duties that a member in a member-managed limited liability company or a manager has to the limited liability company and its members are the duties of loyalty and care under subsections (2) and (3) of this section.” RCW 25.15.038(1)(a). (emphasis added). The Act also limits the duty of loyalty and the duty of care (“(2) The duty of loyalty is limited to the following: … (3)(a) The duty of care is limited to … .”)

Note that the fiduciary duties of a general partner in a Washington limited partnership are limited with language similar to the rule for LLCs: “The only fiduciary duties that a general partner has to the limited partnership and the other partners are the duties of loyalty and care under subsections (2) and (3) of this section.” RCW 25.10.441(1). (emphasis added).

Conversely, ULLCA provides: “A member of a member-managed limited liability company owes to the company and, subject to Section 801, the other members the duties of loyalty and care stated in subsections (b) and (c).” ULLCA § 409(a). Note that the qualifier “only” is not included.

The fiduciary duty rule of § 409(a) likewise applies to managers in a manager-managed LLC. ULLCA § 409(i)(1). 

ULLCA’s refusal to cabin in fiduciary duties was a reversal from its predecessor. Prefatory Note to ULLCA (2006), Noteworthy Provisions of the 2006 Act, Fiduciary Duty. The ULLCA approach to fiduciary duties (along with some other aspects of ULLCA) was controversial at the time and was criticized significantly (See, e.g., Larry Ribstein, An Analysis of the Revised Uniform Limited Liability Company Act, 3 Va. Law & Bus. Rev. 35, 62 (2008)). 

Second, alteration or elimination of such fiduciary duties. The Act does not allow the limited liability agreement to provide for elimination of fiduciary duties, RCW 25.15.018, except to the limited extent permitted under RCW 25.15.038(6). ULLCA bars the alteration or elimination of the fiduciary duties of loyalty and care, ULLCA § 105(c)(5). However, ULLCA allows the operating agreement to alter or eliminate the “aspects” of the loyalty and care fiduciary duties, so long as such alteration or elimination is not “manifestly unreasonable” (whatever that means). ULLCA § 405(d)(3). Furthermore, it is unclear whether ULLCA’s “manifestly unreasonable” standard applies differently to the “unreasonable” standard applied throughout ULLCA. Practically speaking, ULLCA’s bar on alteration or elimination of fiduciary duties is moot because it allows for their alteration or elimination by the sum of their parts.

4. Additional Miscellaneous Differences—Organization, Definitions, Shelf LLCs, and Special Litigation Committees

The foregoing significant and material differences are merely the tip of the iceberg. While this article is not an exhaustive list of differences, it is important to note several other differences between the Act and ULLCA. First, the organization of the Act drastically differs from that of ULLCA. Not only is there a mismatch between the respective articles, but the Act includes full articles which ULLCA omits, and vice versa. The Act has 13 articles, while ULLCA has 11. 

Second, definitions in the Act substantially differ from those in ULLCA in three major aspects: (1) the Act defines some terms differently,⁵5 For example, in RCW 25.15.006, the Act terms a “Certificate of Formation,” while Section 102 of ULLCA terms a “Certificate of Organization.” (2) the Act includes definitions omitted from ULLCA,⁶6 For example, the Act includes definitions of “Agreed Value,” “Execute,” “Foreign Professional Limited Liability Company,” “Limited Liability Company Agreement,” “Manager-Managed,” “Professional Limited Liability Company,” “Professional Service,” “Tangible Medium,” and “Withdraw,” while ULLCA does not. and (3) the Act omits definitions included in ULLCA.⁷7 For example, ULLCA includes definitions of “Contribution,” “Debtor in Bankruptcy,” “Jurisdiction,” “Jurisdiction of Formation,” “Manager-Managed Limited Liability Company,” “Organizer,” “Property,” “Registered Agent,” “Registered Foreign LLC,” and “Sign,” while the Act does not.

Third, the Act authorizes shelf LLCs⁸8 RCW 25.15.071.—namely, an LLC formed without any members—while ULLCA does not.⁹9 ULLCA § 201(d).

Fourth, the Act makes no provision for special litigation committees with respect to derivative actions. In contrast, ULLCA authorizes the appointment of a special litigation committee when the LLC is a party to a derivative proceeding. ULLCA § 805. Appointment of such a committee, if properly constituted, can result in a stay of discovery while the committee investigates and prepares a report of its recommendations. The committee may recommend continuing the suit under control of the committee or the plaintiff, that the suit be settled on terms approved by the committee, or that the suit be dismissed. If ULLCA’s requirements for the committee’s proceedings are met, the court is required to enforce the committee’s recommendations.

Again, while the differences explained in this article are by no means exhaustive, the significant and material differences identified herein clearly indicate that the Act is not modelled after ULLCA and must not be interpreted as such. 

Conclusion

The title of this article asks whether the differences between the Act and ULLCA matter. The authors unequivocally answer that question with a resounding “yes.” The differences between the two acts made no difference to the resolution of the arbitrability question at issue in Berman v. Tierra Real Estate Group. However, a Washington court considering the Act in the future with respect to statutory apparent authority, dissenter’s rights, fiduciary duties, or any of the foregoing will likely come to a different interpretation of the law depending on whether the court analyzes the issues under the Act or ULLCA. Washington’s LLC Act should be carefully considered without resorting to ULLCA and its comments. Washington is not an ULLCA state.  

NOTES

1. The authors are members of, and Doug Batey is a past co-chair of, the WSBA Business Law Section’s Partnership and Limited Liability Company Law Committee, which was responsible for drafting and recommending the 2016 comprehensive revision of Washington’s Limited Liability Company Act. The views expressed by the authors are fully supported and endorsed by the Partnership and Limited Liability Company Law Committee. The authors would like to thank Andrew Tingstad, third-year law student at Willamette School of Law, for his research and drafting assistance with this article.

2. Berman v. Tierra Real Estate Group, LLC, 23 Wn. App. 2d 387, 392, 515 P.3d 1004 (2022) (quoting RCW 25.15.018(1)(a), emphasis added by the court).

3. ULLCA, § 106(a).

4. Berman, supra note 2, at 392. 

5. For example, in RCW 25.15.006, the Act terms a “Certificate of Formation,” while Section 102 of ULLCA terms a “Certificate of Organization.”

6. For example, the Act includes definitions of “Agreed Value,” “Execute,” “Foreign Professional Limited Liability Company,” “Limited Liability Company Agreement,” “Manager-Managed,” “Professional Limited Liability Company,” “Professional Service,” “Tangible Medium,” and “Withdraw,” while ULLCA does not.

7. For example, ULLCA includes definitions of “Contribution,” “Debtor in Bankruptcy,” “Jurisdiction,” “Jurisdiction of Formation,” “Manager-Managed Limited Liability Company,” “Organizer,” “Property,” “Registered Agent,” “Registered Foreign LLC,” and “Sign,” while the Act does not.

8. RCW 25.15.071.

9. ULLCA § 201(d).