Cancelled LLC cannot sue or be sued but members could have liability
Chadwick Farms Owners Ass’n v. FHC LLC, 207 P.3d 1251, 2009 WL 1333004 (Wash. May 14, 2009) (NO. 80450-8, 80459-1)
These consolidated cases involve the capacity of limited liability companies to sue and be sued after their certificates of formation are canceled pursuant to provisions in the Washington Limited Liability Company Act, RCW chapter 25.15 (the Act). Under the plain terms of the Act, a limited liability company ceases to exist as a legal entity and cannot be sued once its certificate of formation is canceled. At the same time, it cannot sue other entities once it is canceled. RCW 25.15.303, enacted after the actions in the present cases were brought, does not change this result. This statute provides that dissolution does not affect any remedy available and it establishes a statute of limitations for suits against limited liability companies that runs from the date of dissolution. The statute does not authorize suits after cancellation, either against or by the limited liability company. The Supreme Court reversed the Court of Appeals’ decisions in these cases and held that the defendant limited liability companies were not subject to suit once they were canceled.
By its plain language, RCW 25.15.303 provides that (1) dissolution does not affect any claim against a limited liability company and (2) there is a three-year limitations period from the date of dissolution in which to commence suit against a limited liability company. The statute never mentions “cancellation.” RCW 25.15.295(2) unambiguously states that after a limited liability company is dissolved and before cancellation, i.e., during the winding up period, a manager or other representative who winds up the company’s affairs may “prosecute and defend suits” only until cancellation. There is a clear distinction between dissolution and cancellation. A dissolved company still exists for the purpose of winding up, during which it can sue or be sued. But once a limited liability company’s certificate of formation is canceled, it no longer exists as a separate legal entity for any purpose.
On its face, and read in the context of the entire Act, RCW 25.15.303 means that an action against a limited liability company, whether arising before or after dissolution, must be brought within three years of dissolution, but an action against a limited liability company will abate upon cancellation.
Personal liability of members
Also at issue was whether the members of the companies can be sued in their individual capacities. There are several circumstances in which individual liability may exist for members of a cancelled LLC. In general, members and managers of a limited liability company are not personally liable for the company’s debts, obligations, and liabilities. RCW 25.15.125(1). There are exceptions to this general rule. For example, an individual member is personally liable for his or her own torts. RCW 25.15.125(2). A member is also liable for contributions to which they have agreed and for the return of distributions made while the limited liability company is insolvent or which render the limited liability company insolvent if the member knew the distribution was wrongful. RCW 25.15.195(1), .235(2).
Under RCW 25.15.060, a member may also be liable under the theory of piercing the veil of the limited liability company if respecting the limited liability company form would work injustice, in the same way that an individual may be personally liable under the theory of piercing the corporate veil. In general, to pierce the corporate veil the plaintiff must show that the corporate form was used to violate or evade a duty and that the corporate veil must be disregarded in order to prevent loss to an innocent party. A plaintiff would have to show that the limited liability company form was used to violate or evade a duty and that the limited liability company form must be disregarded to prevent loss to an innocent party.
Another exception exists when a member is responsible for winding up the affairs of the limited liability company and does so improperly. Following dissolution and during the period of winding up, a limited liability company that is dissolved must pay or make reasonable provision for paying all claims and obligations known to the company, including “contingent, conditional, or unmatured claims and obligations.” RCW 25.15.300(2). RCW 25.15.300(2) also states that “[a]ny person winding up a limited liability company’s affairs who has complied with this section is not personally liable to the claimants of the dissolved limited liability company by reason of such person’s actions in winding up the limited liability company.” It follows that, as the Court of Appeals determined in Emily Lane, personal liability to claimants may result if the persons winding up the company’s affairs do not comply with RCW 25.15.300.