Is AI personhood already possible under U.S. LLC laws? (Part One: New York)

Forewarning, this will be far longer and far more of a technical legal post than usual.  It is also part 1 of what will be a 3-part post.  Part 2 is posted here, and Part 3 is posted here.

One particularly hot topic in the world of law and AI is that of “artificial personhood.”  The usual framing of this issue is: “should we grant ‘legal personhood’ to A.I. systems and give them legal recognition in the same way that the law recognizes corporations and natural persons?”  This is, to be sure, an excellent question, and artificial personhood is one of my favorite topics to discuss and write about.

But some authors in the past few years, most notably Shawn Bayern, have gone one step further, claiming that existing laws already permit the recognition of AI personhood for all intents and purposes.  Bayern focuses his attention primarily on the prospect of a “Zero-Member” or “memberless” LLC.  (“Members” of a LLC are roughly analogous to partners in a partnership).

In a 2015 article, Bayern argues that it is possible in at least some states to create a LLC that is effectively controlled by an autonomous system, if the LLC’s organizers follow a series of steps:

(1) an individual member creates a member-managed LLC, filing the appropriate paperwork with the state; (2) the individual (along, possibly, with the LLC, which is controlled by the sole member) enters into an operating agreement governing the conduct of the LLC; (3) the operating agreement specifies that the LLC will take actions as determined by an autonomous system, specifying terms or conditions as appropriate to achieve the autonomous system’s legal goals; (4) the sole member withdraws from the LLC, leaving the LLC without any members. The result is potentially a perpetual LLC—a new legal person—that requires no ongoing intervention from any preexisting legal person in order to maintain its status.

Shawn Bayern, The Implications of Modern Business-Entity Law for the Regulation of Autonomous Systems, 19 Stan. Tech. L. Rev. 93, 101 (2015).  To argue that these steps could actually lead to the creation of an autonomous LLC in practice, Bayern primarily relies on two sources: New York’s LLC law, and the Revised Uniform Limited Liability Company Act (RULLCA).  Bayern’s analysis focuses largely–indeed, almost exclusively–on the provisions in these legal sources (I say “legal sources” instead of “statutes” because RULLCA is a model law, not an enacted statute) that set forth the circumstances under which a LLC must dissolve.

In the interest of encouraging deeper scholarly analysis of this important issue, this post takes a critical approach to Bayern’s “memberless LLC” argument.  Today’s post will focus on New York’s statute; next week’s will examine RULLCA and the variations on it adopted by several states.

The Good

I actually agree with most of Bayern’s arguments and premises, and I want to start by emphasizing the strongest positive aspects of Bayern’s work.  First, this sort of academic work is extremely valuable when it comes to cutting-edge areas of law.  Right now, AI exists in what is more or less a legal vacuum, with governments having passed very few rules governing the creation, deployment, or operation of autonomous AI systems.  As a result, it is important to have people in the legal community pore over existing laws and examine where such systems might fit.  Bayern’s papers have done a great service in kickstarting that process on the issue of AI personhood, as evidenced by the increasing number of new papers that rely and expand on Bayern’s work.

Second, Bayern points to one disturbing consequence of the immense flexibility that most states have built into their LLC laws.  Because many states give LLCs nearly unfettered autonomy in drafting the operating agreements that govern their day-to-day activities–and often their management structure as well–a LLC could conceivably be governed by an operating agreement that effectively requires it to do whatever an autonomous system tells it to do.

Theoretically, the “autonomy” of such a system should be held in check by the LLC managers’ (or member-managers’) fiduciary duty of care.  But some state LLC statutes give LLCs the freedom to craft operating agreements that limit or even eliminate that duty of care.  The managers of such an entity may have no personal legal obligation to actually perform their management responsibilities.  (At least not to the LLC itself or its members; LLC laws do not eliminate the possibility that a third party could “pierce the veil” and sue a LLC member/manager directly)

Also, even if those duties cannot be contractually eliminated, the principle of limited liability dampens the incentive that members and managers would have to supervise the system, particularly given that LLC laws focus almost exclusively on managers’ responsibilities to the LLC and its members, rather than to third parties.  The moral hazard created by limited liability is hardly a new phenomenon, but it is especially troubling in an age of autonomous machines.

Third, Bayern actually does point out one potential “loophole” through which an autonomous AI system could effectively control a LLC and thereby have the functional equivalent of legal personhood.  That loophole would involve setting up two LLCs in which each LLC was the sole member of the other, and where both LLC’s have identical operating agreements giving effective control over both LLCs to one autonomous system.  He points to this “entity cross-ownership” path to personhood in a footnote to the article in which he first lays out his “memberless LLC” argument.  In at least a couple states (including New York), I do not see any provisions that would obviously prevent or even discourage such a setup.  The entity cross-ownership concept deserves further exploration, although conducting that exploration is beyond the scope of this already-overlong blog post.

Many states’ statutes exacerbate these issues still further by effectively permitting LLCs’ membership and management structure to be anonymous and opaque to the outside world.  That means that even if a memberless LLC is technically illegal everywhere, outside parties would have no way of knowing if a LLC did become a memberless entity under the control of an AI system.  Here too, concerns about the dangers of anonymous LLCs are hardly new or unique to AI, but that doesn’t make them any less disturbing.

For these reasons, Bayern’s work carries immense benefit for the legal community.  As Bayern astutely observes, “[t]he permission of just a single state would be sufficient to enable autonomous businesses.”  Shawn Bayern, Of Bitcoins, Independently Wealthy Software, and the Zero-Member LLC, 108 N.W. U. L. Rev. Online 257 (2014).  By pointing out the considerable flexibility and sometimes-sloppy legislative drafting of LLC acts in the United States, Bayern has directed a much-needed spotlight on those laws.  Hopefully, his work will spur others to examine state laws more carefully to see whether they create a plausible path to AI personhood; certainly, he has spurred me to do so.  And regardless of whether AI personhood currently exists, Bayern persuasively argues that LLC acts could, for good or ill, serve as a useful model for AI personhood in the future.

My Concerns

That being said, the maxim that “extraordinary claims require extraordinary evidence” applies to the laws of men no less than it applies to the laws of nature.  The central thesis of Bayern’s “Entity Law” article is that it is already possible for an unsupervised artificial intelligence system to obtain legal personhood under existing law. To me–and I think to most lawyers and laypeople alike–that is an extraordinary claim.

Historically, legal systems have only recognized (1) human beings and (2) entities ultimately controlled by human beings, as entities endowed with “legal personhood”–that is, the ability to sue, be sued, and take actions in the world that the legal system will enforce.  (The only semi-exception I’m aware of is that animals were occasionally charged with crimes in medieval Europe.)  Bayern’s argument, if true, would mean that legislatures have inadvertently created a new category of personhood–the first in history to be free of active human control.  A person wishing to make such a claim should have to back it up with a thorough and meticulous legal analysis of whatever law(s) that supposedly make such artificial personhood possible, using the standards by which a court of competent jurisdiction would assess the argument if presented with it.  (For this reason, I do not yet endorse Bayern’s entity cross-ownership model as a plausible path to AI personhood; I simply have not had the time to conduct the necessary analysis.)

Given the increasing prominence of the argument that “AI personhood is already here”, I think it is important to provide some counterpoint to Bayern’s analysis.  I do not claim the below analysis to be the “final word” when it comes to the import of these statutory (and, in the case of RULLCA, quasi-statutory) provisions.  Instead, it is to encourage future authors who wish to write on this subject to examine the law with a more critical eye when making claims about what is and is not possible for AI systems under existing laws.

Today’s post will focus on New York’s statute; next week’s will examine RULLCA and the variations on it adopted by several states.  The bottom line is that I do not think it likely that a court considering either New York’s statute or RULLCA would conclude that either statutory framework permits the continued existence of a LLC once it has zero members.

Does New York law really make memberless, AI-run LLCs possible?

The centerpiece of Bayern’s “memberless LLC” argument is that the dissolution provisions in New York’s LLC act permit a LLC to continue to exist even after all of its members withdraw.  The relevant provision states that a LLC “is dissolved and its affairs shall be wound up” if:

at any time there are no members, provided that, unless otherwise provided in the operating agreement, the limited liability company is not dissolved and is not required to be wound up if, within one hundred eighty days or such other period as is provided for in the operating agreement after the occurrence of the event that terminated the continued membership of the last remaining member, the legal representative of the last remaining member agrees in writing to continue the limited liability company and to the admission of the legal representative of such member or its assignee to the limited liability company as a member, effective as of the occurrence of the event that terminated the continued membership of the last remaining member;

NY Limit Liab Co § 701(a)(4).  According to Bayern, the italicized language means that a LLC’s members could enter into an operating agreement setting a period of 1 million years before the legal representative of the last member must agree in writing to continue the LLC.  And during those million years, the LLC could continue operating as an effective legal entity, with an AI system pulling all the levers pursuant to a carefully drafted operating agreement.

It seems highly unlikely that a court would accept this reading of § 701(a)(4).  Bayern’s interpretation is certainly plausible based on the plain language of the § 701(a)(4) when read in isolation.  But in New York, as in all jurisdictions, courts construe a statute as a whole, examining each section with reference to other sections, rather than examining only particular provisions.  E.g., Albany Law Sch. v. N.Y. State Office of Mental Retardation & Developmental Disabilities, 19 N.Y.3d 106, 120, 968 N.E.2d 967, 974 (2012).  In New York, this principle is, itself, codified in a statute.  N.Y. Stat. Law § 130 (“Generally, it is immaterial in the construction of a statute that it is divided into sections, chapters, or titles, and all sections of a law must be read together to determine its fair meaning.”).  The overarching goal is to discern legislative intent, which requires examining the spirit and purpose of legislation as well as the text, context, and legislative history* of the statute.  Nostrom v. A.W. Chesterton Co., 940 N.E.2d 551, 554 (N.Y. 2010).

* I have not read the legislative history of New York’s LLC statute (yet), but I can’t imagine that anything in it would alter the below analysis.

Here, based both on the language and structure of § 701(a)(4) itself and on the content of other provisions in the same statute, it is, at best, unclear whether § 701(a)(4) permits an LLC to exist when it has no members. Various provisions in New York’s LLC act indicate that a member-managed LLC must have at least one member and thus ceases to exist once it loses its last member and/or demand that a LLC be managed by one or more members or managers.  And under the statute, both managers and members must be “persons.”  Section 701(a)(4)’s reference to the “legal representative” of a member (rather than to the member himself/herself/itself) is also significant in light of the text of another section (§ 608) of the LLC act.

These provisions suggest that the legislature did not intend to allow memberless LLCs to exist.  Bayern, focusing on § 701(a)(4), interprets the statute differently.  In cases where a statute is susceptible to more than one reasonable interpretation, the court will choose the construction that harmonizes any seemingly conflicting provisions in light of the apparent legislative intent behind the statute as a whole.  E.g., Ador Realty, LLC v. Div. of Hous. & Cmty. Renewal, 25 A.D.3d 128, 134, 802 N.Y.S.2d 190, 196 (N.Y. App. 2005) (“The rules of statutory construction . . . require that, where it is possible to do so, the various parts of the statutory scheme be harmonized, reading and construing them together and reconciling the apparently conflicting provisions in the manner most consistent with the overall legislative intent.”).

In my view, the construction that best achieves that goal is one that construes § 701(a)(4) not as containing a loophole allowing the indefinite existence of memberless LLCs, but rather as a “safe harbor” or “cure” provision.  Specifically, it is best construed as applying to cases in which the last remaining member of a single-member LLC dies (or, in the case of a corporate member, is dissolved), and makes no provision for the disposition of the member’s interest in the LLC.  In such a case, § 701(a)(4) provides an opportunity for the executor, heir, or successor of the last remaining member to “cure” the dissolution of the LLC by transferring the deceased/defunct member’s interest to a new member.

Of “persons” and the humanness of LLC management

First, here is how New York defines a “Limited liability company”:

(m) “Limited liability company” and “domestic limited liability company” mean, unless the context otherwise requires, an unincorporated organization of one or more persons having limited liability for the contractual obligations and other liabilities of the business . . . .

NY Limit Liab Co § 102(m).  The statute defines “person,” in turn, as (paraphrasing) a natural person, corporation, or other legal entity.  Id. § 102(w).  It seems obvious that the “person(s)” referenced in § 102(m) are the LLC’s members (and possibly its managers).

The statute requires the LLC to be managed either by its members or by member-appointed managers. Id. §§ 401(a) and 408. Both members and managers must be “persons.”  Id. § 102(p)-(q).  Unless the articles of organization expressly provide for manager-management, “management of the limited liability company shall be vested in its members who shall manage the limited liability company in accordance with this chapter.”  Id. 401(a).  And if the articles call for manager management, then management “shall be vested in one or more managers” who “shall manage the limited liability company by the affirmative vote of a majority of the managers.”  Id. 408(a)-(b).  The managers or member-managers owe the LLC fiduciary duties of loyalty and care in exercising their management responsibilities.  See id. § 409; In re Die Fliedermaus LLC, 323 B.R. 101, 110 (Bankr. S.D.N.Y. 2005) (citing § 409).  Unlike many other provisions in the statute (and unlike in some other states), those duties cannot be altered by the operating agreement.  See § 409(a).  Likewise, the provisions requiring that either managers or members actually manage the LLC appear to be mandatory.

In fact, the statutory context strongly indicates that the managers or member-managers must be natural persons.  Section 409(a) states that each manager (including members acting as managers, see § 401(b)) “shall perform his or her duties . . . in good faith and with that degree of care that an ordinarily prudent person in a like position would use under similar circumstances.”  See also id. § 409(b) (allowing managers to rely on information provided by certain other persons “[i]n performing his or her duties”).  The use of gendered pronouns is a powerful signal that the statute only contemplates LLCs managed by natural persons.

It thus appears that during the million-year period suggested by Bayern’s hypothetical, any remnant of the LLC wouldn’t be a LLC.  An erstwhile member-managed LLC that loses its last member no longer meets the definition of a LLC or the fundamental statutory requirements of how a LLC must be managed.  Ergo it would not be a LLC.  There might not yet be articles of dissolution or other documents showing that the LLC had dissolved but, nevertheless, it would no longer be a legal entity in any practical sense.  At a minimum, this is a plausible alternative construction to Bayern’s.

A New York case published several years before Bayern’s article illustrates this point.  The case involved a Professional Limited Liability Company, which is basically a regular LLC with the additional requirement that the LLC’s member(s) must be a practicing physician, attorney, etc.  The LLC at issue in the case was a medical practice that had one physician-member.  That physician-member’s medical license was suspended, and losing his status as a practicing physician meant that he could no longer legally be a member of the LLC.  The court explained the impact of this event:

Once his medical license was suspended, he became legally disqualified from practicing medicine within the state and was disqualified from continuing as a member of plaintiff (see Limited Liability Company Law § 1209). Dissolution occurred on the effective date of the suspension of Dr. Braver’s medical license since, at that point, there were no remaining members of the professional service limited liability company (see Limited Liability Company Law § 701[a][4] [a “limited liability company is dissolved and its affairs shall be wound up … at any time there are no members”] ).  We note that although articles of dissolution have now been filed, there is no statutory requirement that articles of dissolution be filed before commencement of the winding up process.

A.B. Med. Servs., PLLC v. Travelers Indem. Co., 895 N.Y.S.2d 759, 761 (N.Y. App. Term 2009).  Notably, the district court had reached the same conclusion, stating that “the entity since it is without members and since it has not taken steps to transfer ownership to a qualified member, must dissolve and wind up its affairs in accordance with Article VII of the Limited Liability Company Law.”  A.B. Med. Servs. PLLC v. Travelers Indem. Co., 20 Misc. 3d 509, 513 (Dist. Ct. 2008) (emphasis added).  (The appellate court reversed the district court’s decision on other grounds).  In other words, because the LLC had no active members and had no active plan to get a member in the immediate future, the LLC had dissolved.

True, there is no indication that this LLC had Bayern’s hypothetical “million-year” provision or something like it.  But the courts’ reasoning suggests that the period after the disassociation of the last member is a period during which someone can cure the LLC’s dissolution by making arrangements to introduce a new member, not a period during which the memberless LLC can continue conducting business as usual.  That conclusion also is more consistent with the grammatical structure of § 701(a)(4), under which the dissolution is effective as of the date the last member disassociates “unless” the necessary steps are taken to ensure the LLC’s continued existence.  See also NY Limit Liab Co § 211(d)(4), (requiring a LLC to file amended articles of organization within 90 days of an event that would trigger dissolution if the LLC wishes to continue its operations).

New York’s LLC law includes other provisions outside § 701 that would be impossible to fulfill or would make no sense if a LLC had no members or managers.  For instance, a LLC must maintain a current list of all members (and managers).  NY Limit Liab Co § 1102(a)(1)-(2).  And the provisions relating to management of a LLC all seem to operate on the presumption that the LLC has at least one member.  Id. §§ 401 et seq.

Operating Agreements: Not so malleable in New York

Bayern’s “memberless LLC” concept also fails to account for the fact that under New York law, operating agreements cannot be used to override provisions in articles of organization or the LLC act itself.  Unlike RULLCA, which treats most of its rules as mere “default rules” that can be dispensed with by a company’s operating agreement, New York’s statute expressly states that a LLC can “make and alter its operating agreement, not inconsistent with its articles of organization or with the laws of this state.” NY Limit Liab Co § 202(j).  See also id. § 417 (operating agreement can “contain[] any provisions not inconsistent with law or its articles of organization relating to (i) the business of the limited liability company, (ii) the conduct of its affairs and (iii) the rights, powers, preferences, limitations or responsibilities of its members, managers, employees or agents, as the case may be.”).

Granted, many provisions describing the particulars of LLC management and membership do include an explicit “except as provided in the operating agreement” provision.  But many key provisions–including the definitions of “LLC”, “manager”, “member,” and “person”; the necessity of management by managers or members; and the powers of a deceased member’s estate (see below)–contain no such carve-out.  The LLC laws of New York are not, therefore, merely default rules that a LLC can override through an operating agreement.

The most likely real meaning of § 701(a)(4)

Section 701(a)(4) refers to the “legal representative of the last remaining member” rather than just to “the last remaining member.”  The statute contains only one other reference to the “legal representative” of a LLC member.  That reference appears in § 608, which describes the rights and obligations of the “legal representative” of (1) a human LLC member who “dies or a court of competent jurisdiction adjudges him or her to be incompetent”; and (2) a LLC member that is a non-human legal entity that “is dissolved or terminated.”  NY Limit Liab Co § 608.  In such a case, the member’s executor, guardian, or other legal representative is empowered to exercise the member’s rights in the LLC.  Id.

A court would read the portion of § 701(a)(4) that Bayern quotes in light of § 608, which appears just four sections earlier in the statute, contains many of the same key terms, and appears to cover similar sets of circumstances.  Section 608 strongly suggests that § 701(a)(4) is a “safe harbor” for cases in which the sole remaining member of a LLC dies (or dissolves, in the case of a business entity) or becomes legally incapacitated without leaving clear instructions regarding what should happen to the member’s interest in the LLC.  This makes sense, because it is only under those circumstances that the statute would need to contemplate action by the “legal representative” of the last remaining member rather than the member himself/herself/itself.

Section 701(a)(4) thus recognizes that a member’s heir or successor may have an interest in continuing a LLC that otherwise would dissolve.  There is no indication that the provision was meant to allow the last remaining member of a LLC to voluntarily resign while permitting the LLC itself to continue operating.

Purpose of the LLC Statute

The purpose of the LLC statute as a whole does not alter this analysis.  “[T]he purpose of the Limited Liability Company Law was to encourage business and commerce by allowing for formation of a new type of business entity—one that combined a corporation’s limitations on personal liability with the operating flexibility of a partnership . . . .” Barklee Realty Co., LLC. v. Pataki, 309 A.D.2d 310, 315, 765 N.Y.S.2d 599, 604 (2003).  See also Landa v. Herman, 9 Misc. 3d 1125(A), 862 N.Y.S.2d 809 (N.Y. Sup. Ct. 2005) (“An LLC combines the corporate limitation on personal liability of the owners (who are called ‘members’) with the partnership’s operating and management flexibility by its members (which would be ‘member-managed’) or by persons selected by its members (which would be ‘manager-managed’).”) (internal punctuation omitted).

The legislative intent to provide LLCs with “flexibility” thus does not extend as far as Bayern suggests.  LLCs are intended to have roughly the same flexibility in managing their internal affairs that a partnership would have.  And partnerships cannot exist with zero partners.  N.Y. P’ship Law § 10 (“A partnership is an association of two or more persons. . . .”).  Like single-shareholder corporations, a LLC can exist with a single member, whereas a partnership requires an association of at least two persons as partners.  But as far as I am aware, neither partnerships nor corporations can exist with zero partners or shareholders under New York law.

Conclusion

Lastly, it is worth noting that New York courts, like all courts:

• avoid constructions that lead to absurd results, In re Fay, 291 N.Y. 198, 216, 52 N.E.2d 97, 103 (1943) (“In the construction of a statutory or constitutional provision a meaning should not be given to words that are the subject of construction that will defeat the purpose and intent of the statutory provision or that will make such provision absurd. “);
• avoid constructions that are unreasonable or would undercut the purpose behind a statutory provision; id.; City of Buffalo v. Maggio, 27 A.D.2d 635, 636, 275 N.Y.S.2d 698, 701 (1966), aff’d, 21 N.Y.2d 1017, 238 N.E.2d 494 (1968) (“[A]n unreasonable construction, contrary to the general statutory policies and standards of the state, should not be adopted in the absence of a definite intent, clearly and unmistakably expressed..”). See also Chatsworth 72nd St. Corp. v. Rigai, 336 N.Y.S.2d 604, 612 (Civ. Ct. 1972) (“[T]he ordinary rules of common sense . . . are integrated`1 into every issue of statutory construction.”); and
• recognize that legislatures expect courts to use common sense when interpreting a statute.  Bond v. United States, 134 S. Ct. 2077, 2088 (2014) (“‘Part of a fair reading of statutory text is recognizing that ‘Congress legislates against the backdrop’ of certain unexpressed presumptions. . . . The notion that some things ‘go without saying’ applies to legislation just as it does to everyday life.”).

Here, a construction of § 701(a)(4) that would permit a LLC to set a million-year safe harbor period would plainly undercut the purpose of the provision, which is to ensure that LLCs dissolve if they become memberless.  It also would, frankly, be an unreasonable and absurd result.  Courts tend to avoid such constructions even if they are most consistent with a statute’s plain language.  E.g., United States v. Arnold, 126 F.3d 82, 89 (2d Cir. 1997) (“A statute should not be literally applied if it results in an interpretation clearly at odds with the intent of the drafters. While the Court cannot and should not rewrite a poorly drafted statute, it has an obligation to interpret a statute so as to give it reasonable meaning.”).  In any event, and as explained above, Bayern’s interpretation of § 701(a)(4) would actually be inconsistent with the plain language of many provisions in New York’s LLC law.

Reading § 701(a)(4) in isolation, Bayern’s interpretation of New York law makes sense.  But viewed in the broader context of the statute as a whole–which is how courts construe statutes–it seems highly improbable that a memberless LLC “inhabited” by an AI system could exist as an effective legal entity for a million years–or even one day–under New York law.  One can never be certain, but I would be willing to bet dollars to donuts that if a court were tasked with construing this statute, it would reject Bayern’s assertion that § 701(a)(4) could be used as a vehicle for creating memberless LLCs controlled by an AI system.

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The next post will take a critical look at whether RULLCA–and, more importantly, the variations on RULLCA that states have enacted–would permit the existence of a memberless LLC.  That post will not be as comprehensive as this post, but it will point out that the case for AI personhood under RULLCA is not as clear-cut as Bayern’s articles suggest.