My colleague, Doug Batey, has previously blogged about the ability of dissolved Washington LLCs to both initiate and defend against lawsuits. These blog entries track the development of Washington law in this area leading up to the Washington Legislature’s enactment of Wash. Rev. Code § 25.15.303. With respect to LLCs formed in Washington, Wash. Rev. Code § 25.15.303 expressly bars all claims by or against the LLC, its managers or its members unless filed within three years following the filing of a certificate of dissolution with the Washington Secretary of State. If no certificate of dissolution is filed, then claims by or against the Washington LLC or its managers or members are not time-limited, except by any applicable statutes of limitations. It is important to note that not all states have passed legislation like Wash. Rev. Code § 25.15.303. Moreover, a recent opinion from the Washington Court of Appeals reminds us that the laws of an LLC’s home state govern its ability to initiate or defend lawsuits after dissolution and termination. Berschauer Phillips Constr. Co. v. Concrete Sci. Serv. of Seattle, LLC,Nos. 64812-8-I, 65012-2-I, 2011 Wash. App. LEXIS 726 (Wash. Ct. App. Mar. 28, 2011) (unpublished).
In March 2004, Berschauer Phillips Construction Co., a Washington corporation (“BPCC”), sued Concrete Science Services of Seattle, LLC, a Minnesota limited liability company (“CSS”), approximately six months after CSS filed a notice of dissolution and articles of termination with the Minnesota Secretary of State and after the Minnesota Secretary of State issued a certification of termination. CSS failed to appear to defend itself; however, even if CSS had appeared to defend itself, the fact that CSS had been terminated would not have had any effect because the Minnesota Limited Liability Company Act (Minn. Stat. ch. 322B, the “Minnesota LLC Act”) allows claims to be asserted against an LLC for two years after the LLC files a notice of dissolution. Minn. Stat. § 322B.82, Subd. 3. BPCC obtained a default judgment against CSS in August 2005.
Not surprisingly, CSS did not have any readily identifiable assets with which to satisfy the judgment. However, CSS had purchased insurance but never tendered the BPCC claim to the insurer. Instead, in September 2005, approximately two years after CSS’s existence was terminated, BPCC notified CSS’s insurer of the claim and demanded payment. Instead of paying the claim, CSS’s insurer retained counsel to represent CSS. The attorneys waited an additional 10 months before filing a motion to vacate the default judgment. Not surprisingly, the motion was denied on the grounds that it was not brought within a reasonable period of time. Nonetheless, CSS’s insurers never paid BPCC.
In October 2008, approximately five years after CSS’s existence was terminated, BPCC filed a separate lawsuit to attach CSS’s claims against third parties. BPCC’s complaint, as amended in July 2009 (approximately five years and nine months after CSS’s existence was terminated), sued to attach CSS’s property including its potential claims against (i) CSS’s insurer for failing to reasonably respond to the default judgment; (ii) CSS’s attorneys for committing malpractice by failing to address the default judgment in a timely fashion and putting the interests of the insurer above those of CSS; and (iii) CSS’s president and one of its members for failing to timely tender claims to the insurer and failing to cooperate with CSS’s insurer and attorneys to resist the default judgment.
In December 2009, the King County Superior Court issued three writs of execution on the CSS’s potential claims against third parties (the “choses in action”). CSS filed a motion in King County Superior Court to quash the writs of execution on two grounds. First, the choses in action are too contingent to be considered property. Second, even if the choses in action could be considered property, CSS did not acquire the choses in action, because they only came into existence after CSS lost the ability to initiate lawsuits against third parties. Therefore, CSS had no property that could be attached. The trial court agreed on both counts and quashed the writs of execution. On appeal, the trial court was affirmed on both counts. In this blog, I will only discuss the second issue as it pertains to LLC law.
The Washington court treated the choses of action as property and found that the case turned on the question of whether a Minnesota LLC could acquire property after termination. The ability of an LLC to acquire property is a right related to the LLC’s organization and internal affairs. Under Wash. Rev. Code § 25.15.310(1)(a),
[t]he laws of the state, territory, possession, or other jurisdiction or country under which a foreign limited liability company is organized govern its organization and internal affairs and the liability of its members and managers[.]
Therefore, the court applied the Minnesota LLC Act to this case because CSS (despite having “Seattle” in its name) was formed in Minnesota under the Minnesota LLC Act. The Minnesota LLC Act does not indicate that an LLC can acquire property subsequent to its termination. Instead, Minn. Stat. § 322B.03, Subd. 48 states that termination is “the end of a limited liability company’s existence as a legal entity.” The court interpreted this language to mean that a Minnesota LLC cannot acquire property subsequent to its termination. Therefore, even though Minn. Stat. § 322B.82, Subd. 3 allows a Minnesota LLC to defend lawsuits for two years after filing its notice of dissolution, the Minnesota LLC Act does not expressly provide a right for terminated LLCs to initiate claims within the same time period. Therefore, BPCC was denied its writ of execution on CSS’s nonexistent property interests in the choses of action.
Unfortunately, the Berschauer court does not address Minn. Stat. § 322B.866, which states:
After a limited liability company has been terminated, any of its former managers, governors, or members may assert or defend, in the name of the limited liability company, any claim by or against the limited liability company.
This statute was addressed in the parties’ briefing of this case, but the court ignored it in its opinion. If, under the Minnesota statute, former managers, governors or members of an LLC have the ability to prosecute claims “in the name of the limited liability company,” then who has the property interest in any recovery from a successful lawsuit? Furthermore, is Minn. Stat. § 322B.866 limited to claims that ripened prior to termination of the LLC? The statute is unclear as it does not place any time limit on a LLC’s former managers’, governors’ or members’ ability to file claims on behalf of the LLC.
Even if CSS were a Washington LLC, I believe that BPCC would be out of luck for a different reason. If CSS were a Washington LLC, it probably would have accrued a property interest in the choses of action because the choses of action probably accrued sometime before July 2006, when CSS’s counsel finally filed the motion to vacate the default judgment, within three years after CSS filed its notice of dissolution in September 2003. However, under Wash. Rev. Code § 25.15.303, if CSS were a Washington LLC, its property interest in the choses of action would have disappeared in September 2006 (three years after filing its notice of dissolution). As BPCC did not attempt to execute its judgment upon the choses of action until October 2008, roughly five years after CSS filed its notice of dissolution and two years after CSS would have lost its property rights in the choses of action, the differences in LLC law probably did not lead to an ultimate difference in the outcome of this case.
Nonetheless, this case should serve as a word of caution for parties in Washington dealing with foreign LLCs. I have three main takeaways from this case:
First, always identify the home state for any LLC that you are contracting with. This makes sound practical sense because there can be different LLCs formed in different states with the same name. Also, do not assume that the LLC’s name is an indication of where it was formed. As evidenced by Berscahuer, the home state of an LLC can have nothing to do with the geographic location used in the LLC’s name.
Second, as I described above, when dealing with foreign LLCs, you must be aware that the laws of the jurisdiction under which the foreign LLC is organized may be different from Washington law in meaningful ways. Each state’s LLC act, even if based on a model act, is unique. Not all state legislatures have acted to prevent the harsh outcome that Doug has previously discussed in relation to Chadwick Farms Owners Association v. FHC LLC, 166 Wn.2d 178, 207 P.3d 1251 (2009). See Doug Batey, Washington Supreme Court: LLC Can Terminate All Lawsuits by Filing Certificate of Cancellation – Personal Liability for Improper Winding Up, supra. Moreover, in Berschauer,the presence of insurance did nothing for BPCC because at termination CSS itself lost its ability to sue its insurer. You should consider any limitations on liability imposed by the foreign state’s LLC act to determine if alternative security or guarantees are necessary.
Third, and last, when looking at the foreign LLC act, look for any ability to reopen the affairs of a terminated LLC. This may also require a separate action to be filed in the LLC’s home state becauseit is a matter for the judiciary in the home state to rule on a cause of action to “reopen the affairs of a terminated LLC and declare the LLC to be the owner of an asset.” Berschauer, 2011 Wash. App. LEXIS 726, at *10-11.