In Mickman v. Am. Int'l Processing, LLC, 2009 Del. LEXIS 43 (April 1, 2009) the Delaware Chancery Court drew this conclusion in a comparison to corporations: "Based on the flexible and less formal nature of LLCs, it is reasonable to consider evidence beyond the four corners of the operating agreement, where, as here, the plaintiff has presented admissible evidence that, notwithstanding the language of the operating agreement, suggests the parties to that agreement intended to make, and believed they had made, the plaintiff a member of the LLC."
At first blush I thought an integration/merger clause in the operating agreement would solve this or a provision requiring all amendments to be in writing. The opinion is silent as to whether the operating agreement in this case contained such provisions. But I am not so sure. Then I remembered something from law school called the parol evidence rule and thought that should clear things up. Nope.
In Iowa the parol evidence rule "forbids the use of extrinsic evidence to vary, add to, or subtract from a written agreement." Montgomery Props. Corp. v. Econ. Forms Corp, 305 NW 2d 470, 476 (Iowa 1981). But this is limited to negotiations or agreements that are prior to or contemporaneous with the written instrument. Garland v. Brandstad, 648 NW 2d 65, 69 (Iowa 2002).
In this case you have an operating agreement that presumably identified two persons as the members of an LLC and extrinsic evidence after the fact (i.e. a tax return) showing three.
I take exception with the Chancery Court that LLCs are less formal than corporations, less rigid, yes, and certainly more flexible, but in any case no less entitled to application of the same contract rules as apply to corporations.
The reason the Iowa LLC Committee adopted 489.111(4) (there is no comparable provision in the Uniform Act) was to avoid this situation. Section 111(4) says "An operating agreement in a signed record that excludes modification or rescission except by a signed record cannot be otherwise modified or rescinded."
Is this court saying that such a limitation can be ignored because LLCs are informal organizations and members don't mean what they say in a contract? I hope not. It does reinforce in my mind the absolute necessity of restricting amendments to those that are in writing and agreed to by (usually) all of the members.
-Marc Ward
Comments