Is AI personhood already possible under U.S. LLC laws? (Part Three)


This is the final installment of a three-part series examining whether legal personhood is already possible under US laws governing limited liability companies (LLCs), which Shawn Bayern suggests provide an active path to personhood for autonomous systems. The first two posts in this series examined the two legal sources (New York’s LLC law and the Revised Uniform LLC Act) that Bayern used to support his contention that it is possible to use LLC laws to create an autonomous AI system with, for all intents and purposes, legal personhood.

The specific mechanism that Bayern proposed is creating an LLC whose operating agreement that effectively places the LLC under the control of an AI system, and then have every member of the LLC withdraw, leaving the system effectively unsupervised.  I concluded from my own review of New York’s law and the laws of six states that have adopted RULLCA in some form that they do not provide a vehicle for creating LLC’s of the type Bayern described.  The purpose of this final post is to examine a few other states’ LLC laws to see if my conclusions for New York and the RULLCA states are generalizable to other state laws.

A Sampling of Non-RULLCA States’ LLC Laws

The sampling of states I am using for this analysis consists of the largest state I haven’t yet examined (Texas), the most important state for business organization law (Delaware), and the two remaining states in which I hold a law license (Michigan and Oregon). Each of these states’ statutes contain provisions that appear to make memberless LLCs impossible.  Some of the states are even more explicit than New York, and far clearer than most RULLCA states, in requiring that an LLC have at least one member.

Texas

Among the states I examined, Texas appears to have given the most thought to what should happen if a supposed LLC has zero members.   Section 101.101 of the Texas Business Organizations Code states that “a limited liability company must have at least one member” except under two sets of circumstances, one covering the period when an LLC is formed, and one the period after a single-member LLC’s last surviving member dies or dissolves.

First, if a newly formed LLC is manager-managed and has at least one manager, it can exist without any members “for a reasonable period of time between the date the company is formed and the date the first member is admitted to the company.”  Tex. Code Ann., Bus. Org. Code 101.101(b).  Because managers must be “persons,” id. 1.002(51) and 101.302(a), this ensures that a “person” controls the LLC at all times.

Second, if the last surviving member of an LLC dies, becomes incompetent, or (in the case of a corporation or other legal entity) dissolves, Texas’s rule is more or less in line with RULLCA’s.  Id. 101.101(c) and 11.056.  That is, the LLC dissolves unless, within 90 days of the death or other terminating event, the “legal representative or successor of the last remaining member” makes arrangements to give the LLC a new member.  Id. 11.056.  Bayern’s proposal thus could not be implemented under Texas law.

Delaware

Delaware’s law makes it clear that an LLC must have at least one member, or else it is not an LLC:

(6) “Limited liability company” and “domestic limited liability company” means a limited liability company formed under the laws of the State of Delaware and having 1 or more members.

Del. Code Ann. tit. 6, § 18-101.

For good measure, the Delaware statute’s dissolution section has a provision basically identical to New York’s providing that an LLC dissolves if it has no members, subject to a “safe harbor” provision.  Id. § 18-801(4). Delaware’s safe harbor provides that the LLC does not dissolve if, within 90 days or some other fixed period of time stated in the operating agreement, the legal representative of the last remaining member makes arrangements to have a new member join the LLC.  Id.  For the reasons explained in Part One’s analysis of New York’s statute, a court confronted with a “memberless LLC” would likely hold that the LLC had dissolved upon the departure of the last member unless there was a real, active plan in place to install at least one new member.

Oregon

Similar to Delaware, Oregon defines an LLC as “an entity that is an unincorporated association having one or more members.”  ORS 63.001(17).  The statute specifically provides that an LLC dissolves at any “such time as the limited liability company has no members.  ORS 63.621(4). Oregon, like New York, does not permit an LLC’s operating agreement to contain provisions inconsistent with the LLC statute.  ORS 63.057; ORS 63.431(1).

Michigan

Among the states I have examined, Michigan’s law appears the most amenable to an interpretation allowing zero-member LLCs.  Michigan’s law contains no explicit requirement or definition that requires an LLC to have at least one member.  In addition, nothing in Michigan’s law requires an LLC to dissolve upon the loss or departure of its last remaining member.

But even the Wolverine State’s LLC statute betrays a clear presumption that an LLC will have at least one member.  Michigan defines an LLC as “an unincorporated membership organization.” MCL 450.4102(k). A memberless membership organization is a contradiction in terms.

In addition, Michigan’s statute, like all state LLC laws I have examined, requires that LLC’s be managed by managers or members, MCL 450.4401, and requires that both members and managers be “persons.”  Id. 450.4102(o)-(p). Those managers (or member-managers) owe fiduciary duties. MCL 450.4404(1). Granted, the managers have to be looking out for the best interests of the LLC, not of society or even non-member stakeholders.  But the existence of a fiduciary duty still means that a manager has to monitor the LLC’s activities to ensure it is not doing anything that would create liability for the LLC.  Thus, in an LLC whose operations are controlled by an autonomous system, the manager would still have a legal obligation to exercise due care in monitoring the AI system’s operations.

The definition of “operating agreement” also implies that LLC’s must have at least one member. MCL 450.4102(r) (“‘Operating agreement’ means a written agreement by the member of a limited liability company that has 1 member, or between all of the members of a limited liability company that has more than 1 member.”) For these reasons, even under Michigan’s poorly drafted law, I don’t see how it would be possible to have an unsupervised AI system pulling an LLC’s levers.

Why this matters

I realize that through all of these three posts, I neglected until now to answer one basic question: why does Bayern’s “zero-member LLC” concept matter? To answer that question, it is important to pause for a moment and explain why legal personhood matters in the first place.

Why personhood matters

The main answer is something I frequently say both on this blog and elsewhere: the law operates on and through persons, and the overarching purpose of any legal system is to allocate legal rights and responsibilities among persons. If something is not a person, the legal system does not care much about it, except to the extent it affects the legal rights and responsibilities of those that are persons.

Because the ability to participate in the legal system is the fundamental characteristic of a legal “person,” the key feature of legal personhood is the ability to sue or be sued. (The ability to sue and be sued is referred to as “capacity,” although some sources use the related but not-quite-the-same term “standing,” which I also mention below.). Thus, the definition of a “legal entity,” which is the catch-all term for legal persons who are not human beings, is:

A body, other than a natural person, that can function legally, sue or be sued, and make decisions through agents.

LEGAL ENTITY, Black’s Law Dictionary (10th ed. 2014). Absent the ability to sue and be sued, an entity is not a legal entity and therefore is not a person.  And because such an entity is not a person, it would be unable to utilize the legal system.

Because, for all the reasons described above and in the previous parts of this series, a court would likely hold that an LLC dissolves upon the loss of its last member, a “memberless LLC” would be a legal nonentity, unable to sue to enforce its rights.  Relatedly, a person or entity must actually be in existence in order to sue; you can’t bring a lawsuit on behalf of a dead or fictitious person or a defunct entity.

Consequently, if a memberless LLC wanted to go to court to enforce a contract, seek redress for harm, or whatever, it would find itself unable to do so.  If it tried, the opposing party could simply point out that the erstwhile LLC is not a person and therefore lacks legal existence and the capacity to sue.

An eight-decade-old New York case wonderfully explains these points.  That case involved a dissolved corporation rather than an LLC, but the principle remains the same:

Every action must have parties competent to sue and be sued, and for and against whom a judgment may be rendered. The very existence of a cause of action implies that there is some one entitled to sue and some one who may lawfully be sued, and consequently an action cannot be maintained if there is lacking either the former or the latter. A corpse is not a person; and an action does not lie in the name of a decedent before the appointment of an administrator for an injury to the decedent in his lifetime. In every action there must be a real plaintiff, and for a standing as party plaintiff it is necessary that plaintiff be a person in law. A civil action can be maintained only in the name of a person in law, an entity, which the law of the forum can recognize as capable of possessing and asserting a right of action. The rule is sometimes stated so as to comprehend only two forms of legal entity for the purpose of maintaining an action. Thus the rule has been formulated that ‘in all civil actions the prime requisite as to parties is that the plaintiff * * * must * * * be either a natural or artificial person’; and that an action cannot be maintained in the name of a plaintiff who is not a natural or artificial person having legal entity to sue or be used.  In addition to possessing a legal entity or existence a plaintiff must be possessed of a legal capacity to sue. The capacity to sue is the right to come into court.
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The capacity to sue exists only in persons in being, and not in those who are dead or who have not yet been born, and so cannot be brought before the court. Thus a proceeding cannot be brought in the name of a deceased plaintiff; such a proceeding is a nullity. Thus, where an association has no corporate existence either de jure or de facto, and there is no estoppel, it cannot do any act whatever as a legal entity. It cannot take title to real or to personal property, convey real property, maintain proceedings to condemn land, acquire rights by contract or otherwise, or incur debts or other liabilities, either in contract or in tort, unless by operation of an estoppel; nor can it sue or be sued. A cause of action does not exist, unless there is a person in existence capable of suing, or of being sued. At common law every real or personal action abated on the death of either the sole plaintiff or the sole defendant before verdict and judgment, and this is still the law except in so far as the common-law rule has been modified by statute. Justice Story, in Mumma v. Potomac Co., 8 Pet. 281, 286, 8 L. Ed. 945, said: ‘There is no pretence to say, that a scire facias can be maintained, and a judgment had thereon, against a dead corporation, any more than against a dead man.’ The dissolution of a corporation implies its utter extinction and obliteration as a body capable of suing or being sued, or in whose favor obligations exist or upon which liabilities are imposed. No action can be instituted against a corporation after its dissolution. Nor has the corporation after its dissolution any capacity to sue.
MacAffer v. Boston & M.R.R., 242 A.D. 140, 144–45, 273 N.Y.S. 679, 685 (App. Div. 1934).  While this decision was later reversed in a complicated decision, 268 N.Y. 400, 197 N.E. 328 (1935), the basic reasoning that a dissolved entity has no capacity to sue remained undisturbed.  A dissolved entity may have some residual legal existence for the purpose of winding up its affairs, but that is all.

A party may not even have to wait for the memberless LLC to sue it in order to challenge its legal existence.  Common law courts (which are the dominant type of court in the English-speaking world) have broad equitable powers to grant relief even when there is no adequate remedy at law.  As long as someone can establish standing to challenge the LLC’s continued existence or ability to transact business, that person can bring a suit seeking an injunction against the LLC’s continued operation.  And standing is a pretty low bar in most jurisdictions.

But bear in mind that the capacity to sue is coextensive with the capacity to be sued. As a result, there is a dark flip side to an entity’s inability to sue to enforce its rights–namely, that others cannot sue that entity to enforce their rights.  Ordinarily, when someone is injured or their rights are violated, that person can sue whoever caused the injury and seek compensation or some other form of redress.  This option is not available if the injury was caused by something that is not a legal person.  Thus, the well-known legal maxim that “for every wrong, the law provides a remedy” does not hold true for harms caused by things that do not possess legal personhood.

This means that a memberless LLC controlled by an autonomous system, assuming such entities are not legal persons, would be effectively immune from suit.  Injuries caused by the system would be like injuries caused by a wild beast. Tough break, but unless you can find someone who had a legal responsibility to monitor the system’s/beast’s activities, you’re out of luck.

Why Bayern’s articles matter

With that as background, I turn to the reasons I felt the need to spend so much time disputing Bayern’s analysis in his law review articles.  Despite the fact that the dominant American law reviews are not peer-edited (they are instead edited by law students), many people read law review articles as a source of legal information, particularly in emerging and uncertain areas of law.  If the information in a law review article is inaccurate or incomplete, a reader will end up with a skewed idea of what the law is.  That danger is particularly acute if the reader is someone without legal training.

There is sparse case law discussing the possibility of a zero-member LLC, and no case law discussing AI personhood. Consequently, if someone wants to know whether it is possible to create an autonomous AI system and have the law treat it like a person, Bayern’s articles and those citing it would very likely be among the first things they would come across.

Relatedly, if a person decides, whether for business reasons or out of curiosity, that they actually want to create an AI system that has personhood, they might read Bayern’s articles and have an “aha!” moment.  Following Bayern’s instructions, they could set up a single-member LLC under member management, create an operating agreement placing the LLC under the control of an AI system, withdraw as a member, and declare that they have created a legal person.  Following Bayern’s reasoning, the creators of the AI-controlled LLC would believe that the LLC is a real legal entity and that they, as a result, are not legally responsible for the AI system’s operations through the LLC.

Regardless of whether Bayern’s analysis is right or wrong, the resulting situation would be troubling.  If Bayern’s analysis is correct and the memberless LLC remained a legal person, then we would have a completely unaccountable AI system with all the rights of legal persons, and with no human who could be held responsible for injuries that the AI system causes.

But if Bayern’s analysis is not correct, the result might be even more troubling. The original organizer of the LLC, having bought into Bayern’s proposal, would not bother to monitor the AI system’s operations.  If the AI system causes injury, a court would have two choices: (1) use its equitable powers to hold the now-departed organizer responsible; or (2) hold no one responsible.  Option (1) would obviously be the opposite of what the organizer intended, and the organizer may not have the resources to compensate the injured party anyway.

Option (2) would mean that, in effect, the organizer had created a wild beast.  We would still have a completely unaccountable AI system, this time with no possibility of seeking redress from the LLC that the AI system controls.

As noted in the first segment in this series, courts use common sense and examine the spirit and purpose of a statute when determining what a statute means.  For these reasons, I frankly do not have much fear that a court would recognize a memberless LLC as a legal person.  But courts generally do not get involved until after something has gone wrong.  By that point, it might be too late if someone suffers an injury caused by an AI system that inhabits an LLC.

That’s why I felt it was important to lay out an opposing viewpoint now, when all of this is merely at the theoretical stage. Hopefully, a person who comes across Bayern’s article will now come across these posts as well and realize that following Bayern’s roadmap to AI personhood would entail running into more than a few roadblocks.

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