|
Date: 10/2/2009
The Washington Supreme Court's ruling in the recent consolidated cases of Chadwick Farms Owner's Association v. FHC, LLC and Emily Lane Homeonwer's Association v. Colonial Development, LLC highlights important considerations for Washington limited liability company members who have dissolved, or are considering dissolving, their LLC.
In Chadwick and Emily Lane, construction defect cases involving dissolved LLC developers, the Court clarified the extent to which dissolved LLC's and their members retain liability for claims arising out of the LLC's active operations. The Court ruled as follows:
(1) A lawsuit against an LLC which has been dissolved, but which has not yet cancelled its LLC Certificate of Formation with the Secretary of State, may be commenced at any time within three years of the date of the LLC's dissolution;
(2) Once the LLC cancels its Certificate of Formation with the Secretary of State (an act which must occur when the "winding up" process for the LLC's affairs is completed), however, the LLC itself ceases to exist and may no longer sue or be sued, even if less than three years have passed since dissolution;
(3) A lawsuit against an LLC, even if filed prior to the LLC's dissolution or within the three year post-dissolution survival period, may not go forward once the LLC cancels its Certificate of Formation; and
(4) The members or other persons winding up the affairs of the LLC, a process which consists of paying or making "reasonable provisions" for paying all claims and obligations, including "contingent, conditional or unmatured obligations" known to the LLC, may be subject to personal liability if they fail to make such "reasonable provisions."
The Court did not create a bright-line rule or go into detail regarding what the "reasonable provisions" requirement entails, but did seem to fault the former members of the Chadwick developer for failing to seek reinstatement of the dissolved LLC in order to assert the LLC's third-party claims against its subcontractors.
While an LLC can effectively eliminate all organizational liability by dissolving and cancelling its Certificate of Formation with the Secretary of State, it remains unclear as to exactly what lengths an LLC member must go to ensure that it will not be subject to potentially catastrophic personal liability for failing to make "reasonable provisions" for payment of all potential obligations and claims during the winding up process.
Members of active or dissolved Washington LLC's and prospective business venturers weighing the relative pros and cons of the corporate and LLC business forms should seek legal advice regarding the following important questions raised by this Washington Supreme Court decision:
(1) When, if ever, is it proper to voluntarily dissolve an LLC to avoid organizational liability when such dissolution could increase the risk of personal liability of the LLC's members?
(2) Should individuals winding up a dissolved LLC agree to spread amongst themselves the risk of personal liability for failing to properly wind up the LLC's affairs?
(3) What precautions can LLC members take in winding up the LLC's affairs to minimize their risk of personal liability?
(4) What are the relative differences in the liability exposure for former members of dissolved LLC's and former shareholders of dissolved corporations?
Stewart Sokol and Gray, LLC is a Pacific Northwest law firm, emphasizing construction and design law, business and commercial litigation, business and corporate law, real estate, insurance coverage and defense, bankruptcy, and surety and fidelity law. The firm's highly respected attorneys have decades of experience representing and advising businesses and individuals throughout the Pacific Northwest and the United States.
|