Tuesday, January 5, 2016

U.S. Courts Called LLCs Corporations About Once a Day in 2015

Some day, I may tire of calling out courts (and others) that refer to limited liability companies (LLCs) as "limited liability corporations, but today is not that day. Looking back on 2015, I thought I'd take a quick look to see who the worst offenders were, starting with the state courts.  I figured I'd start with Delaware.

As a state that is proud of its status as a leader as a key forum of choice for corporations, and Delaware has done well for uncorporations, as well, it seemed logical.  The book Why Corporations Choose Delawarewritten by Lewis S. Black, Jr., and printed and distributed by the Delaware Department of State,  Division of Corporation, explains:

Delaware continues to be the favored state of incorporation for U.S. businesses. Delaware has been preeminent as the place for businesses to incorporate since the early 1900s, and its incorporation business, supplemented by the growth in numbers of such “alternative entities” as limited liability companies, limited partnerships and statutory trusts, continues to grow smartly.

And Delaware does have a generally well-informed and skilled judiciary.  Still, even Delaware is not above calling an LLC a "limited liability corporation." Better than many jurisdictions, Westlaw reports that the state had just three cases in 2015 making that error, and no such mistakes were noted after March 2015.  Not ideal, but not bad. 

Here are some other states I reviewed for 2015 (again, using Westlaw): 

  • Michigan: 0
  • Pennsylvania: 3
  • Ohio: 4
  • Florida: 5
  • Nevada: 6
  • California: 7
  • New York: 7
  • Texas: 8

Overall, state courts called LLCs "corporations" 105 times in 2015.  Federal courts did the same 280 times in 2015.  As such, it works out to just over once a day that some U.S. court is making this mistake.  

Big picture, given the number of cases courts see each year, it may seem that these are small numbers. Not really.  A search of federal courts for the term "limited liability company" turns up 2949 cases from 2015, which suggests that around 10% of cases (9.49%) referring to LLCs in some substantive manner made a reference to a "limited liability corporation." NOTE:  If one searches for "LLC," the number of cases exceeds 10,000 for 2015, but I decided that a court taking the time to spell out "limited liability company" suggested that the entity choice had a heightened relevance to the case.

At the state level, the numbers are a little better.  State courts referred to "limited liability companies" 1691 times in 2015. With 105 cases calling an LLC a corporation, that works out to just over 6% of the time.  Not great, but a substantial improvement.  

I admit this is not a scientific review of the data and I am making some assumptions, but the sheers number do, I think, support the notion that all our courts can do better on this issue. And give state courts credit -- although federal courts are often viewed the more prestigious courts, state courts are holding their own on this issue.  Perhaps state courts are a little more careful because entities are generally (though not always) creatures of state law.

This is not, I am sure, just the courts.  I suspect a lot of these errors come from attorneys who call LLCs corporations, then the court just take their lead.  Still not okay, but I can imagine that some courts just follow the lead of those arguing the cases before them on such issues.  

So, for 2016, I issue a challenge to all U.S. courts and the lawyers who practice in them: let's cut these numbers in half!  (I'd like them to go to zero, but one needs to be somewhat realistic, right?)  

https://lawprofessors.typepad.com/business_law/2016/01/us-courts-called-llcs-corporations-about-once-a-day-in-2015.html

Corporations, Delaware, Joshua P. Fershee, Law Firms, LLCs, Unincorporated Entities | Permalink

Comments

I have tired of reading your posts on this topic. It's time to move on.

Posted by: Kahn | Jan 5, 2016 7:12:07 AM

Someone tired of it before I did. Thanks for the input. Duly noted, but for now, I still have some unfinished business.

Posted by: Joshua Fershee | Jan 6, 2016 8:00:59 AM

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