The Mandatory Provisions of the 2014 LLC Act Are Not Subject to Oral or Implied Modifications

The 2014 Utah Revised Uniform Limited Liability Company Act, Utah Code Ann. § 48-3a-101, et seq., (the “2014 LLC Act”) governs disputes between and among members of a limited liability company (“LLC”). There are three general types of provisions in the 2014 LLC Act: (1) administrative; (2) mandatory or ‘non-waivable’ (the operating agreement may not over-ride or alter them); and (3) default (the operating agreement may over-ride or alter them).

Under the pre-2014 version of the Utah LLC Act, titled the “Utah Revised Limited Liability Company Act,” Utah Code Ann. § 48-2c-100, et seq., (the “Prior LLC Act”), default provisions were tagged with a phrase such as “except as otherwise provided in the operating agreement.” That tag phrase is rarely used in the 2014 LLC Act.

The 2014 LLC Act, Utah Code Ann. § 48-3a-102(16), allows for oral modification of an operating agreement:

“Operating agreement” means the agreement, whether or not referred to as an operating agreement and whether oral, implied, in a record, or in any combination thereof, of all the members of a limited liability company, including a sole member, concerning the matters described in Subsection 48-3a-112(1). The term includes the agreement as amended or restated.

It allows implied modifications, apparently referring to modifications through conduct alone, such as custom and practice. It allows oral modifications in combination with implied modifications and records other than the written operating agreement. It is easy to interpret this provision as allowing oral or implied modifications of written operating agreements, utilizing one member’s notes of a meeting as evidence, even if the operating agreement states that all modifications must be in writing.

Consequently, when determining whether there has been an oral or implied modification to an written operating agreement of an LLC created after January 1, 2014, it will be necessary to determine whether the purported modification is of a mandatory or ‘non-waivable’ provision (the operating agreement may not over-ride or alter them); or a default provision (the operating agreement may over-ride or alter them). This issue is the threshold question in an investigation to a determination as to whether there has been an oral or implied modification of an operating agreement. Without tag lines such as “except as otherwise provided in the operating agreement,” rarely used in the 2014 LLC Act, additional litigation is in store for LLC members.

© 2014 Mark A. Larsen & Brent R. Armstrong