June 24, 2009
Dissolution, Cancellation and LLC Survival Statutes. Chadwick Farm Owners Ass'n v. FHC LLC (Wash. 2009)
We all know how survival statutes work--or at least we think we do. The recent opinion in Chadwick Farm Owners Ass'n v. FHC LLC, 207 P.3d 1251 (Wash. 2009) (en banc) (majority and dissenting opinions) may change that.
Under the Washington Limited Liability Company Act, Wash. Rev. Code, Chapter 25.15, dissolution of an LLC starts winding up. § 25.15.270. Dissolution does not impair remedies against the LLC, its managers or members, unless an action or proceeding is started within three years of dissolution. § 25.15.303. Those winding up the affairs have the right to bring or defend lawsuits after dissolution, but only until the filing of certificate of cancellation. § 25.15.295(2). The filing of a certificate of cancellation cancels the certificate of formation, § 25.15.080, and terminates the existence of the LLC as a separate entity, § 52.15.070(c).
Chadwick Farm Owners Ass'ninvolved LLCs that had been administratively dissolved under Section 25.15.280. An administratively dissolved LLC has two years to seek reinstatement. § 25.15.290(1). What happens if the LLC is not reinstated within two years? Here the statutes conflict. Under Section 52.15.270(6), that triggers dissolution (again?) of the LLC. Under Section 25.15.290(4), the secretary of state "shall cancel the limited liability company's certificate of formation." Which controls? The majority in Chadwick Farm Owners Ass'n held that Section 25.15.290(4)controlled, and that pending suits against the LLC abated once a certificate of cancellation had been filed:
Under the statutory scheme applying to limited liability companies that are administratively dissolved, if the company does not seek reinstatement it must wind up the company’s affairs within that two year period, because once the two years pass, the company no longer exists and has no power to act. While the company still exists, and during the time it is winding up (the time following dissolution and before cancellation of the certificate of formation), it has the power to prosecute and defend suits. But once the company is canceled, it can no longer prosecute or defend suits; it no longer exists as a legal entity.
* * *
* * * The statutes do not permit an administratively dissolved limited liability company to continue winding up, including prosecuting and defending suits, on its own schedule after cancellation of the company’s certificate of formation. * * * There is no basis to treat a member canceled limited liability company differently than an administratively dissolved company.
207 P.3d at 1257-58 (citations and footnotes omitted).
What about three-year survival of actions under Section 25.15.303?
By its plain language, RCW 25.15.303 provides that (1) dissolution does not affect any claim against a limited liability company and (2) there is a three-year limitations period from the date of dissolution in which to commence suit against a limited liability company. The statute never mentions “cancellation.” Of utmost importance, the legislature did not alter any provision in chapter 25.15 RCW and thus it left intact the statutes discussed above which provide that a limited liability company maintains its existence as a separate legal entity during dissolution but only until cancellation. In particular, as noted, RCW 25.15.295(2) unambiguously states that after a limited liability company is dissolved and before cancellation, i.e., during the winding up period, a manager or other representative who winds up the company’s affairs may “prosecute and defend suits” only until cancellation.
The Condominium Association in Emily Lane contends, however, that all canceled limited liability companies are also first dissolved companies, and logically the statute applies to dissolved companies that later cancel themselves. Amicus Washington State Trial Lawyers Association Foundation makes a similar argument.
However, there is a clear distinction between dissolution and cancellation.A dissolved company still exists for the purpose of winding up, during which it can sue or be sued. But once a limited liability company’s certificate of formation is canceled, it no longer exists as a separate legal entity for any purpose. RCW 25.15.303 does not even mention cancellation, and the legislature did not alter any of the existing provisions in the Act. On its face, and read in the context of the entire Act, RCW 25.15.303 means that an action against a limited liability company, whether arising before or after dissolution, must be brought within three years of dissolution, but an action against a limited liability company will abate upon cancellation.
The plain language in RCW 25.15.303 and the other provisions in the Act resolve the statute’s meaning. * * *
207 P.3d at 1259 (emphasis added) (citations and footnotes omitted).
What happens after other dissolutions? Could the members (or managers) file a certificate of cancellation, and stiff plaintiffs in pending suits? Yes, but the Court warns:
* * * [That does] not take into account the whole statutory scheme, however. A dissolved limited liability company must, under the Act, properly complete the winding up process, which includes paying or making arrangements to pay known obligations and claims, even if unmatured or contingent. Members of a limited liability company who fraudulently attempt to use the provisions of the act to avoid liability and members who wind up a limited liability company improperly expose themselves to individual liability....
207 P.3d at 1261 (emphasis added); see also, id. at 1262-64 (discussing individual liability for improper winding up).
Finally, the Court rejected the argument that its interpretation was not the "bvest" result:
We recognize, however, that these arguments reflect the homeowners’ view that the statute is unfair when it is applied according to its express terms. However, if the result here is not what the legislature envisioned it is, nonetheless, what the statute plainly provides. We understand from the house and senate bill reports that a comprehensive review of the Act is underway. If the result here is not what the legislature wants, it will be positioned to make additional changes deemed necessary. It is not, however, the province of this court to rewrite RCW 25.15.303 or any other provision of the Act.
207 P.3d at1261. So, the Washington legislature has some work to do. I offer a couple of thoughts
- If the legislature intended for dissolution, rather than cancellation of the certificate of formation, to apply to LLCs not timely reinstated, the statutes should be amend to provide for an initial administrative suspension of the right to do business, followed by an administrative dissolution.
- Alternatively, it can change the survival statute to survival for three years after cancellation.
Also, the potential of personal liability, if widely known, may reduce the number of LLC "walk-aways," where the owners of an unsuccessful LLC abandon it to administrative dissolution, and make no attempt to wind up its affairs in an orderly fashion.
posted by Gary Rosin
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