Wednesday, May 2, 2018

Undisputed Facts: LLCs are Not Corporations & Lawyers and Courts Need to Be More Vigilant

Here's how this week's post came to be.  I thought: "I should probably write about something other than LLCs being mischaracterized by courts. Maybe I will add some thoughts about Joan's post about her thoughtful new essay, Let's Not Give Up on Traditional For-Profit Corporations for Sustainable Social Enterprise. But first, I'll read through the cases that call LLCs 'limited liability corporations.'"  And read them I did.  I was about to let it go, but then I read something that (as usual) made me cringe. It's from a 2012 opinion that apparently just showed up on Westlaw. Here it is:
II. UNDISPUTED FACTS.
 
. . . . The facts, viewed in the light most favorable to the Plaintiffs, are as follows. Plaintiff Edgar Lopez is a New Mexico resident. Compl. at 1, ¶ 1. Lopez owns and operates Plaintiff IMA, LLC, a New Mexico limited liability corporation that formerly managed the Perry Corners Shopping Center. . . . Lopez is the managing partner and the only surviving voting member of Hunt Partners, LLC, a Nevada corporation that has its principal place of business in New Mexico. . . . . Hunt Partners wholly owns, as the “sole equity member,” another LLC called “Perry Corners Shopping Center, LLC,” a Delaware Corporation with its principal place of business in New Mexico, which, in turn, owns as its only asset the Perry Corners Shopping Center, which is located in Georgia.
Lopez v. Killian, No. 10CV0882 JCH/GBW, 2012 WL 13080169, at *3 (D.N.M. Mar. 2, 2012) (emphasis added). 
 
Again, LLCs are not corporations.  They are limited liability companies.
 
More important, though, these "facts" are not undisputed.  I pulled the complaint.  The plaintiffs are Edgar Lopez and IMA, Inc., not IMA, LLC, as the opinion states.  As such, it is true that the IMA is a "limited liability corporation," which is a rather old timey way of referring to the modern corporation, but true.  I looked up (here) the entity information from the New Mexico Secretary of State's office, and it's clear that IMA, Inc., is a "Domestic Profit Corporation" under New Mexico's statute, Chapter 53: Corporations, articles 11 through 18.  I will note that article 19 of that chapter is "Limited Liability Companies." [Banging head on desk.] 
 
My initial thought here was to put sole responsibility on the court. "How could the court get this wrong in the facts section when it has the case caption correct with IMA, Inc.?" Odd, to be sure. But the complaint reveals the likely source of some of this information. Counsel for Lopez/IMA, Inc. states specifically: "2. Plaintiff IMA, Inc. is a New Mexico Limited Liability Company owned and managed by Edgar Lopez." [More banging of head.] (Side note: it appears unrelated, but filing counsel withdrew shortly after defendants' motion to dismiss was filed.)
 
Also, in the complaint,"Hunt Partners, LLC," is described as a "Nevada Limited Liability Company," which appears correct, but later in the complaint, the entity is described as follows: "Hunt Partners, LLC, i.e., the parent Nevada Corporation." The complaint further refers to the various LLCs as corporations in multiple places, and claims that the defendants do not "have the right to manage or control the corporation known as Perry Comers Shopping Center LLC." I would not have imagined this case would have a high likelihood of success based on this complaint. (Note: This case was ultimately dismissed for lack of prosecution.)  
 
I also pulled the defendants' motion to dismiss to see how they dealt with the entities.  That filing has it right.  The motion states clearly: "This case involves a Delaware Limited Liability Company known as Perry Corners Shopping Center, LLC (“Perry LLC”) that owns a shopping center in Georgia [sic]. Perry LLC is wholly owned by Hunt Partners, LLC, a Nevada Limited Liability Company (“Hunt LLC”)."  Kudos, counsel, on the entity treatment. (Missed a typo there, as I sometimes do, too, but I appreciate getting the substance right.)  
 
This is obviously not going to change overnight.  Attorneys, please try to be accurate in how you describe entities.  One of the issues in the case had to do with personal jurisdiction, and the rules for jurisdiction are quite different for corporation and LLCs.  The distinction is not only important for the sake of accuracy; it could be outcome determinative.  And courts, you're the last line of defense. It's still the court's job to get the law right, even if the parties have gotten it wrong.
 
Here's a thought for lawyers, clerks, and judges: where there is an entity involved, look the entity up.  It doesn't take too long, and it can help you be more accurate, it might save you time in the long run, and it's just not that hard. I know I am not alone in this mission to properly identify entities.  We can do this, but we really, really, need some help.  
 
 

http://lawprofessors.typepad.com/business_law/2018/05/undisputed-facts-llcs-are-not-corporations-lawyers-and-courts-need-to-be-more-vigilant.html

Corporations, Joshua P. Fershee, LLCs | Permalink

Comments

Post a comment