Monday, December 9, 2019
Calling LLCs "Corporations" Is Sometimes Harmless Error, But It Can't Be Ignored
Once again, a court seems to arrive at the correct outcome, while making mistakes in the describing entity type. As usual, the court mislabeled a limited liability company (LLC). Here we go:
Andrea and Timothy Downs each held a 50% interest in a corporation, Downs Holdings, Inc. It held limited liability corporation (“LLC”) and limited partnership (“LP”) ownership interests. Eventually, the Downs agreed to dissolve the corporation and, as shareholders, passed a corporate resolution electing dissolution.
In re: ANDREA STEINMANN DOWNS, Debtor. NORIO, INC., Appellant, v. THOMAS H. CASEY, Chapter 7 Tr., Appellee., No. 8:16-BK-12589-CB, 2019 WL 6331564, at *1 (B.A.P. 9th Cir. Nov. 25, 2019) (emphasis added).
The Downs did not follow the necessary formalities to dissolve Downs Holdings, Inc., and had instead ask that the corporation's management company "distribute the payments and monies owed to Downs Holdings to each shareholder separately, 50% to Mr. Downs and 50% to Ms. Downs." Id. Further, it appeared that the Downs asked to be treated as separate interest holders for both the LLC and LP. Id. Ms. Downs later borrowed $50,000 from Norio, Inc. and pledged pledged her claimed interests in the LLC and the LP as collateral. Id. at *2.
Because Downs Holdings, Inc., was the named interest holder in the LLC and the LP, and it had not been dissolved, and because there was no showing "that the assets transferred from Downs Holdings to Ms. Downs, the bankruptcy court did not err when it determined that Norio, Inc. lacked secured status. Id. at *5.
That all seems about right. At the beginning of the opinion, the court states,
We acknowledge that some of the bankruptcy court’s findings lack support in the record, but we ignore harmless error because the bankruptcy court’s ultimate conclusion is correct: Downs Holdings owned the relevant assets, and Ms. Downs could not pledge them to Norio as collateral for the loan.
Id.at *1. Calling a LLC a corporation in this context is, this time, anyway, harmless error. But I am not inclined to ignore it. I mean, the entity type is specifically at issue in this case, with respect to the corporate form. Making sure the corporation and the LLC are clearly recognized as distinct entity types may not be essential to finding right outcome, but it sure would be appropriate.