Tuesday, February 4, 2014

Courts Should Get the Doctrinal Distinction Between LLCs and Corporations


I understand that I may be one of the few people who seems to actually care about such a thing, but it seems to me courts really should be careful about their descriptions of limited liability entities.  I have written about this before (here, here, and here), but it continues to frustrate me.  

One of the things that got me thinking about this again (but let's be honest, it seems I am always thinking about this) is a post over at The Conglomerate.  There, Christine Hurt (who, to be clear, is a lot smarter and more knowledgeable than I) discusses the Illinois governor's interest in generating more jobs by shifting to "the $39 limited liability company."  In her post, she makes a couple references to incorporation in the context of LLC formation.  But, in fairness, that's a blog post, and I can't claim that I have always been as precise as I should be in my blog writing, either.  

Courts, however, should be more careful.  The U.S. Court of Appeals for the Ninth Circuit, for example, loves to call limited liability companies "limited liability corporations" in their cases.  Take, for example, CarePartners, LLC v. Lashway, 545 F.3d 867 (9th Cir. 2008), the caption of which is:  "CAREPARTNERS LLC, limited liability corporation under the Laws of the State of Washington doing business as Alderwood Assisted Living . . . ."  That is wrong. Washington LLC law provides that an LLC is a limited liability company.  Even more significant, Washington LLC law provides specifically that  an LLC's name "[m]ust not contain any of the words or phrases:  . . . 'corporation,' 'incorporated,' or the abbreviations 'corp.,' 'ltd.," or 'inc.,'  . . . ." Wash. Stat. 25.15.010(d)  (2014).  

A quick search of Westlaw provides ten more cases using the term "limited liability corporation" in reference to an LLC since January 23, 2014.  Maybe it doesn't matter much in most cases, but in cases dealing with new issues under LLC law, it sure can (see, e.g., here).   And until courts start getting more precise, from time to time I'll keep reporting on their lack of precision. 



Business Associations, Corporations, Joshua P. Fershee, LLCs, Unincorporated Entities | Permalink

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So true. I have also seen opinions referring to the members of an LLC as shareholders. I know many judges didn't study LLCs in law school, but their clerks at least should know better.

Posted by: Steve Bradford | Feb 4, 2014 7:07:35 AM

In my area, B Lab is calling the companies they certify "B Corporations" even those many (if not most) of the entities they certify are LLCs. Thus, you end up with ABC, LLC, a certified B Corporation. I brought this to B Lab's attention and they did not seem to care. Perhaps only professors care about this kind of precision.

Posted by: Haskell Murray | Feb 4, 2014 9:29:49 AM

It may be just professors, but I agree completely with the post. Even worse is when lawyers are describing a fact pattern to me. I am told that it is an LLC, but then they start talking about "shareholders." I'm usually asking about whether there is also a corporation in the mix, and we have to spend a few minutes in confusion.

Posted by: Douglas | Feb 5, 2014 6:55:07 AM

We are covering LLCs now and I have stressed the proper nomenclature to my students warning them that they may see court decisions calling them corporations. When we deal with hybrid entities, time permitting, I will make sure they understand the same thing.

Posted by: Marcia Narine | Feb 6, 2014 7:31:26 AM

The failure of courts and attorneys to make doctrinal distinctions "grates" on me. With the immense flexibility accorded to non-corporate entities it is often difficult to "draw" the courts along to distinguish between the role and equity held in a non-corporate entity. Sadly, respectful correction often really means, "yeah, six of one - - half dozen of another."

Posted by: Tom N | Feb 6, 2014 8:18:44 AM

Anyone read the SCOTUS' decision in Daimler AG v. Bauman? Justice Ginsburg refers to MBUSA LLC as a "limited liability corporation" and says it was "incorporated" in Delaware. Totally inexcusable.

Posted by: Sandra F | Feb 6, 2014 11:56:29 AM

I have been trying to get the litigation bar here in Nevada to recognize this problem for YEARS. It is shocking and disappointing how few modern litigators understand even the simplest differences between LLCs and Corporations. This is especially troubling given Nevada's move to replace Wyoming as the "Delaware of LLCs" - THANK YOU for fighting to good fight. I hope the 9th Circuit reads this!

Posted by: Glenn Truitt | Oct 21, 2014 2:31:25 PM

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