The new Iowa LLC Act implements new provisions regarding operating agreements, including modified rules for defining, limiting, and sometimes eliminating elements of fiduciary duties. The Act parallels the Revised Uniform Limited Liability Company Act (“RULLCA”) to establish a “not manifestly unreasonable” standard for the modification of fiduciary duties. Unlike other statutes using the term, however, the LLC Act purports to provide direction to courts applying the standard via section 489.110(8), which – in determining whether a modification is manifestly unreasonable – requires the court to make its determination as of the time the challenged term became part of the operating agreement and to consider only circumstances existing at that time. It further provides that a term may be invalidated only if, in light of the purposes and activities of the LLC, it is readily apparent the objective of the term is unreasonable, or the term is an unreasonable means to achieve the provision’s objective.
Despite the attempted clarification of the standard, the new Act's approach leaves open for debate the extent to which courts will actually allow operating agreements to redefine the scope of fiduciary duties because the "not manifestly unreasonable" standard has yet to be clearly defined.
The "not manifestly unreasonable standard" first appeared in business statutes when the Revised Uniform Partnership Act (RUPA) borrowed the concept from the UCC. The phrase appears in various code provisions and is mentioned in various cases, but as one author has noted, although "numerous cases apply the concept, they rarely explain why a provision is found manifestly unreasonable." (Mark J. Loewenstein, Fiduciary Duties and Unincorporated Business Entities: In Defense of the "Manifestly Unreasonable" Standard, 41 Tulsa Law Review 411, 431 n. 112 (Spring 2006)).
Official Comments to the UCC suggest that a "manifestly unreasonable" provision might be equated to an "obviously unfair" provision. Other commentators say it is falls somewhere between "unreasonable and unconscionable" or "passing beyond the outer limits of permissiveness." (See Timothy R. Zinnecker, The Default Provisions of Revised Article 9 of the Uniform Commercial Code: Part I, 54 Business Law 1113, 1124 (May 1999)).
Ultimately, however, existing statutes with a not manifestly unreasonable standard, like the new Iowa LLC Act, fail to clearly define the term, and case law does little to clarify. Definitions or suggested interpretations are limited, and those that exist very by court and context. Forecasting a court's treatment of the not manifestly unreasonable standard is difficult. One thing is certain: someone is going to be the guinea pig for the Iowa Supreme Court as it tries to draw the line between unreasonable and unconscionable.
Ms. Erickson is an associate with the Dickinson Law Firm and a contributor to this blog.
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