Tuesday, October 13, 2015

Respect Limited Liability Rules, Respect the Entity

Readers of this blog know how much I hate courts that call LLCs "corporations." (If you're a new reader, welcome. And now you know, too.)  I am also one who likes to remind people that entity choices come with both rights and obligations, as do choices about whether to have an entity at all. Recent events in Illinois touch on both of these issues. 

A recent news story from Chicago's NBC affiliate laments a recent court decision in Illinois that requires entities to have counsel if they are to make an appeal, even in the administrative process related to a parking ticket.  The story can be found here.  The short story is this: if one registers a vehicle in the name of a corporation, then the corporation must be represented by counsel to contest the ticket.  The reason for this determination comes from a non-parking related decision from 2014. 

In that decision, Stone Street Partners LLC v. City of Chicago Department of Administrative Hearings, the court determined that "the City’s administrative hearings, like judicial proceedings, involve the admission of evidence and examination and cross-examination of sworn witnesses–all of which clearly constitute the practice of law." 12 N.E.3d 691, at ¶ 15 (Ill. App. Ct. May 20, 2014). As such, the court held, the "representation of corporations at administrative hearings–particularly those which involve testimony from sworn witnesses, interpretation of laws and ordinances, and can result in the imposition of punitive fines–must be made by a licensed attorney at law." Id. at ¶ 16.

As the news story reports, the parking division has adopted this rationale. Thus, the owner of an entity, even a sole owner, cannot represent the entity in an administrative challenge (unless he or she is a licensed attorney).  The report notes that the parking tickets were "unfair," which seems to be a fair characterization because the recipient appears to show that she had paid for the spot but was given a ticket anyway. Okay, so it stinks that the city gave an erroneous ticket, but the idea that the entity has different rules than an individual doesn't exercise me much at all.   

The complaint is that a small corporation is somehow unduly burdened by this rule.  They even talked to Chicago Kent law professor Harold Krent, who agrees.  The report notes:

"The problem is when the rule is applied to a very small corporation -- particularly if the corporation is one person -- the rule doesn't make any sense," Krent explained. “I think that if it's asked, the court itself would carve out an exception for the simple category of traffic tickets. It doesn't make sense if the corporation is an individual. The individual should be able to represent him or herself just like they can in any other case."

I respectfully disagree.  First, it makes a lot of sense if you take seriously the reciprocal nature of limited liability. That is, if the owner of a small corporation went bankrupt and the entity did not have funds to pay the parking tickets, I would adamantly defend the small business owner's individual right to avoid the ticket.  The city should not be able to just disregard the entity in that instance just because the corporation is an individual.  But for that to work, I think it has to work both ways.  

Second, the small business owner in this instance almost certainly made this specific decision to gain the protections of the entity.  I don't know Illinois car registration well, but it is my understanding that, if you lease a vehicle, the vehicle is owned by an entity, but registered (in part) in the lessee's name. In such a case, the lessee is responsible for parking tickets, and could thus contest them in their individual capacity.  As such, it's likely that an individual could choose to register the car in their own name; they just chose not to.  Decisions have consequences. 

Now, I may agree with Prof. Krent in some ways, in that I will concede that it does seem a little silly to suggest that the procedural nature of contesting a parking ticket through the mail is something that requires a law license, and I am pretty sure it's not efficient, but it's not an unreasonable decision from the court, either. And it's a decision that can likely be fixed by the legislature (despite some strong language in Stone Street). Still, as the court notes, "If anything, our holding will protect the rights of corporations which may lose valuable rights or property because they have lost administrative hearings due to the presence of an unqualified representative working on their behalf."  Id. at ¶ 19.

Lastly, I would be remiss if I did not point out a major flaw in the the Stone Street decision.  The entity -- Stone Street Partners, LLC --  is a limited liability company.  It is not a corporation. However, making the same type of mistake so many other courts have, throughout the decision the court called Stone Street "the corporation" and its counsel is called "corporation counsel."  So, what we have here is a case that requires those who form an entity to respect the entity, but the court fails to respect the entity type.  It appears it's just too much to ask to have both. 

H/T: Kentucky Business Entity Law


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



Let me play devil’s advocate.

The corporation (or the LLC) is an entity, separate from its owners, but it can only act through individuals. The corporation can be a party to a contract, but some authorized agent must sign that contract on its behalf.

If the board can authorize the president to sign the contract on behalf of the corporation, why can’t it authorize the president to appear on behalf of the corporation when the corporation is representing itself in an administrative proceeding? Just as the contract is not the president’s action, but the corporation’s, the appearance would be by the corporation, not the president.

How is that disregarding the entity any more than the use of the president to sign the contract? If anything, isn’t it giving full respect to the idea that the corporation, like an individual, is a person in its own right, albeit one that must act through individuals?

Posted by: Steve Bradford | Oct 13, 2015 12:53:40 PM

Steve, great questions. The thing is, I am taking this in stride with Stone Street case. That is, the court says that all administrative hearings are just like court. Thus, one either appears pro se or it requires an attorney. Once Stone Street reaches the conclusion that the hearing is a court-equivalent event, I think it’s done. (It’s a fair question whether the decision is right, and I’d be okay with at least certain administrative hearings not requiring counsel.)

Now, I suppose one could argue that corporations, as people, should be able to be represented pro se, too. Perhaps we could limit those who could represent the corporation pro se to officers or board-designated agents, or I suppose one could just support any agent as the corporate representative. An interesting thought, but I don’t like any of those options, as I am still okay with certain distinctions between natural persons and persons, with the pro se option being one thing I’d limit to natural persons.

Ultimately, though, I am okay with there being a few burdens that go along with the benefits of limited liability, especially because some additional requirements help justify, in my mind, the grant of limited liability in the first place.

Posted by: Joshua Fershee | Oct 13, 2015 1:06:58 PM

This is consistent with a memorandum decision reported by Checkpoint this week -

"The Tax Court in Rochlani, TC Memo 2015-174 , held that a married couple's ticket purchase and resale business was a corporation, even though it was registered as such by their son without their authorization."
Concluding with "Their adoption of the corporate form required the acceptance of its tax disadvantages."

Posted by: Scott Bonacker CPA | Oct 14, 2015 6:36:47 AM

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