Why it matters

Earlier this month, California Governor Jerry Brown signed into law Assembly Bill 506, a measure that amended the state's Revised Uniform Limited Partnership Act, making it easier for lenders to make loans and protect their interests with respect to limited liability companies (LLCs). The new law tweaks some of the requirements for association and disassociation of members of LLCs as well as the consent for merger or modification of an LLC's operating agreement, eliminating the obligation that a lender confirm that each member of the LLC agreed to a merger, for example. Other changes were made to the provisions for judgment creditors, indemnity and payment of LLC obligations, as well as fraud and material misrepresentations of value, with an overall message of greater deference to the LLC's operating agreement. The new law takes effect January 1, 2016.

Detailed discussion

Changes to the California Revised Uniform Limited Partnership Act were signed into law by Governor Jerry Brown last month, set to take effect January 1, 2016. For lenders, the changes will make it easier to make a loan to a limited liability company (LLC) or a member of an LLC secured by liens on the borrower's membership interest.

The amended law tweaked association and disassociation from an LLC. One or more persons may form an LLC by signing and delivering articles of organization to the Secretary of State. As for disassociation, members can disassociate at any time by express will; disassociation can also occur upon specified events, such as an individual's death.

The Act authorizes the legal representative of a member to exercise all of his or her rights. For example, if the member has died or his interest is being administered by a third party under a valid power of attorney, the executor, administrator, guardian, conservator, attorney-in-fact, or other legal representative may step in his shoes with all powers the member had under the articles of organization.

For lenders, this means greater protection of rights as a lien holder on a borrower's LLC membership if the loan documents included a power of attorney.

Previously, the law required that all members of the LLC had to approve a merger, conversion, or amendment of the operating agreement. In turn, lenders were required to confirm with each member of a merged LLC that they agreed to the merger. The Act eliminated this due diligence requirement for lenders, who no longer need to confirm the merger with each member.

A modification to provisions on the indemnity and payment obligations of an LLC could also prove beneficial to lenders. Pursuant to AB 506, the LLC must indemnify any "agent" to the extent that the third party has been successful on the merits in defense or settlement of any claim, issue, or matter if the agent acted in good faith. The bill broadly defined the term "agent" to encompass any officer, employee, or other agent—including a lender, if he or she acted in good faith and in a manner that the agent reasonably believed to be in the best interests of the LLC and its members.

Other changes were made to the requirements for dissolution and the LLC's certificate of cancellation, the conversion of the LLC to another form of entity, and made the LLC law consistent with another recent bill that allows for electronic signatures without compliance with the Electronic Signatures in Global and National Commerce Act.

To read AB 506, click here.