Recent Washington cases make LLC dissolution a potential trap
July, 2007
In a remarkable trio of same-day rulings, the Washington Court of Appeals has created a significant liability trap for limited liability companies, otherwise known as LLCs.
Chadwick Farms Owners Association v. FHC, LLC (No. 58796-0-1), Emily Lane Homeowners Association v. Colonial Development, LLC (58825-7-1) and Maple Court Seattle Condominium Association v. Roosevelt, LLC (56879-5-1) were all decided on June 18, 2007 and all dealt with the following issues.
- Does the three-year limitations period for suits against a dissolved LLC allow for claims even after a Certificate of Cancellation has been filed?
- If so, does such an LLC have the right to bring affirmative claims against others during this same period?
Some history is relevant. In 2006, the Washington legislature passed an amendment (RCW 25.15.303) to the Washington Limited Liability Companies Act which states:
The dissolution of a limited liability company does not take away or impair any remedy available against that limited liability company, its managers, or its members for any right or claim existing, or any liability incurred at any time, whether prior to or after dissolution, unless an action or other proceeding thereon is not commenced within three years after the effective date of dissolution. Such an action or proceeding against the limited liability company may be defended by the limited liability company in its own name. (emphasis added)
This statute was enacted to keep alive claims against LLCs (and their members and managers) that may arise after dissolution.
These cases dealt with claims that were brought against LLCs that had been dissolved and then cancelled by way of a Certificate of Cancellation. The court held that even though the legal entity no longer existed (which occurs after a Certificate of Cancellation is filed), RCW 25.15.303 provides claimants a full three years after dissolution to bring claims, regardless of whether a Certificate of Cancellation was filed. This conclusion is contrary to the assumption held by many that the filing of a Certificate of Cancellation bars all claims against LLCs, and their members and managers. Clearly, that is not the case.
But here comes the troubling part. The court then addressed whether the LLC could bring affirmative claims during this same three year period. Surprisingly, the court read RCW 25.15.303 strictly and held that the statute dealt with claims against the LLC, its members and managers and not claims by the LLC. As a result, once an LLC is dissolved, it can no longer bring affirmative claims on its own behalf. To be clear, it is the dissolution and not the filing of the Certificate of Cancellation that bars such claims.
This can spell disaster, especially for construction-related LLCs. For example, in Chadwick Farms Owners Association v. FHC, LLC, FHC was a general contractor LLC that was administratively dissolved because it failed to file its annual reports. Because FHC did not reinstate itself, the Secretary of State filed a Certificate of Cancellation. After FHC was dissolved but prior to the filing of the Certificate of Cancellation, FHC was sued in a construction defect case. FHC defended the action and attempted to file third party actions against its subcontractors. The court held that the dissolution of FHC and the filing of the Certificate of Cancellation did not bar the plaintiff's claims against FHC but that FHC could not bring the third party claims. As a result, FHC had to defend the construction defect claims but had no ability to seek relief from those that may have actually caused the defects. Had FHC simply reinstated itself prior to the filing of the Certificate of Cancellation, it could have brought the third party claims.
LLCs and their members and managers must be wary of this trap and should retain legal counsel to address the impact of RCW 25.15.303 and a strategy for dissolution and winding up. At the very least, LLCs need to avoid any unintentional dissolution and cancellation. This applies especially to LLCs that are in litigation or in threat of litigation. Consideration should also be given to the type of business that the LLC operates and any applicable statutes of limitations. Client and counsel can then determine the advantages and disadvantages of dissolution and winding up or maintaining the entity for a specific period of time even after business operations have concluded.