Tuesday, October 27, 2015

For the Love of All that Is Holy, LLCs Are Not Corporations

So, my rants about the problem of courts (and others) conflating LLCs and corporations are not new.  Unfortunately for the proper evolution of the law, but good fodder for my posts, I continue to get examples.  We now have a new one that raises the bar a bit.

 A recent case from the United States District Court for the Western District of Pennsylvania continues the trend. The beauty, if one can call it that, of the case is that there are failures to recognize the difference between LLCs and corporations at multiple levels. 

 First, though, let’s recap what LLCs are.  LLCs are limited liability companies, and they are creatures of statute. See, e.g., 6 Del. C. § 18-101, et seq.  As such, they are not corporations, which are creatures of other statutes. Cf., e.g., 8 Del. Code § 101, et. seq. In contrast, LLCs, like corporations and other associations, can be people.  See, e.g.,  Dictionary Act, 1 U.S. Code § 1 (“[The wor[d] 'person' . . . include[s] corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals.").

Back to our newest example, which I think of as a strikeout. The case was filed by the Pennsylvania General Energy Company, LLC, (PGE), which challenged the “constitutionality, validity and enforceability of an ordinance adopted by Grant Township that established a so-called Community Bill of Rights.” Penn. Gen. Energy Co., LLC, v. Grant Township, C.A. No. 14-209ERIE, at 1 (Oct. 14, 2015, W. Dist. Pa.), available here.   As Judge Baxter explains, “The Ordinance lays out the framers' beliefs that corporations should not have more rights than the people of its community and that the people have the right to regulate all activities pursuant to a right of local self government.” Id. at 2-3.    

The framers are our first group that does not appear to know that corporations are not the same as LLCs.  Strike one.  Here’s the ordinance (emphasis added): 

Section 3 - Statements of Law -Prohibitions Necessary to Secure the Bill of Rights

(a) It shall be unlawful within Grant Township for any corporation or government to engage in the depositing of waste from oil and gas extraction. 

(b) No permit, license, privilege, charter, or other authority issued by any state or federal entity which would violate the prohibitions of this Ordinance or any rights secured by this Ordinance, the Pennsylvania Constitution, the United States Constitution, or other laws, shall be deemed valid within Grant Township. 

So, unless the city has some definition or the other basis to say that an LLC is a corporation (which I did not see), this Bill of Rights does not apply to LLCs, partnerships, or other unincorporated entities.   

As such, the plaintiff’s first argument, I think, should have been that the statute does not cover us as an LLC at all.  The complaint (here) shows only an argument that LLCs are people  -- the argument that PGE was not a corporation was not made.  In fact, the complaint says LLCs are corporations. "The Community Bill of Rights Ordinance purports to strip corporations, such as PGE, of their status as natural persons and declares that corporations do not possess any other legal rights, privileges, power, or protections." Complaint ¶ 99.  Strike two.  

Finally, Judge Baxter, in what is mostly a reasonable opinion, skips right to equating LLCs and corporations, too. She explains, 

Defendant provides no precedential statute or constitutional provision authorizing its action other than its assertion that Plaintiff has no rights -- from contracting to do business in Grant Township to bringing a lawsuit to complain about an ordinance -- because it is not a person. This view is contrary to over one hundred years of Supreme Court precedent that establishes that corporations are considered "persons" under the United States Constitution.

Id. at 7-8. An arguably true statement of the law that is wholly irrelevant because plaintiff is not a corporation.  Plaintiff is an LLC, and the this is not transitive. That is, just because both LLCs and corporations can be persons, it does not mean that, therefore, LLCs are corporations.  Strike three.  

All in all, if the Grant Township ordinance has included all entities (or limited the options only to natural persons), then most, if not all, of Judge Baxter’s opinion would be correct.  As it is, it’s just wrong. Absent some other analysis, the ordinance at issue did not apply to the plaintiff at all. I, for one, hope Judge Baxter amends the opinion or the case is appealed so that the court can get it right.  The language here could set a terrible precedent. 

Who am I kidding? It just continues the long line of other terrible precedent. But it should still be fixed.


Corporations, Joshua P. Fershee, Lawyering, LLCs | Permalink


Haha…. I’ll note another startling example of this common oversight: the Delaware Chancery Court’s recent In re KKR Financial Holdings LLC decision. Yes, that chancery court--the premier business law court in the U.S.

In the KKR Financial case, involving the merger of a LLC into a limited partnership, the chancellor summarizes the dispute at the outset as raising “the novel claim that a holder of less than one percent of the stock of a Delaware corporation was a controlling stockholder and thus owed fiduciary obligations to the other stockholders of the corporation.” Of course, there was no corporation with stockholders to begin with. But the opinion goes on to describe KKR’s members as “stockholders” throughout and even applies Delaware corporate law precedent without questioning or recognizing the application of corporate law to an LLC. This confusion is all the more startling because the KKR Financial opinion was not a throwaway; it set important precedent.

Chief Justice Strine seemed likewise bothered by this conflation LLCs and corporations. In affirming the chancery, his opinion for the Delaware Supreme Court makes special mention of it: “We wish to make a point. We are keenly aware that this case involves a merger between a limited partnership and a limited liability company, albeit both ones whose ownership interests trade on public exchanges. But, it appears that both before the Chancellor, and now before us on appeal, the parties have acted as if this case was no different from one between two corporations whose internal affairs are governed by the Delaware General Corporation Law and related case law. We have respected the parties’ approach to arguing this complex case, but felt obliged to note that we recognize that this case involved alternative entities, and that in cases involving those entities, distinctive arguments often arise due to the greater contractual flexibility given to those entities under our statutory law.”

Posted by: Mohsen Manesh | Oct 27, 2015 10:05:20 PM

LOL at that headline - and timely too as I head into a faculty workshop to head off an argument that they are the same!

Posted by: Steve Diamond | Oct 28, 2015 11:42:15 AM

These cases (sort of) remind me of the recent esurance commercials, best exemplified by the one on which Buster Posey is "sort of" the woman's doctor because he and the doctor have certain, albeit incredibly limited, similarities.


IMHO, for many folks (sadly including a bunch of judges), LLCs are "sort of" corporations because they both provide limited liability (and have other similarities about which we all know. But "sort of" is not the same, is it?

Keep up the good work with these posts...maybe someday the message will get through to judges!

Posted by: Joe Leahy | Oct 28, 2015 8:57:32 PM

Post a comment