Source: https://www.keytlaw.com/callclaw/author/asulawguy/
Timestamp: 2019-04-24 09:55:58+00:00

Document:
So far Jon Brinkman has created 10 blog entries.
Administrative dissolution of an LLC occurs when an LLC fails to follow the state’s requirements, resulting in the state agency penalizing or dissolving the LLC. In California, these requirements include payment of the annual tax and fee, in addition to filing the initial and biennial Statement of Information. When an administrative dissolution occurs, the LLC must act in a timely manner to correct the deficiency.
There are many instances when an LLC is administratively dissolved, yet it continues to operate. This often occurs when the LLC is not aware of the administrative dissolution. An issue then arises as to who is liable for acts when an administratively dissolved LLC enters into a contract and subsequently is unable to pay or perform. This issue was dealt with in Pannell v. Shannon, when a single-member Kentucky LLC was dissolved, but continued to enter into a lease agreement. When the dissolved LLC defaulted on the lease, the other party sued not only the dissolved LLC, but also the single member. The LLC responded by immediately taking steps for reinstatement, which was granted by the Kentucky Secretary of State. Still, the issue remained whether or not the single member was personally liable.
The Supreme Court of Kentucky affirmed the lower courts’ decision in holding that the member was not personally liable for the administratively dissolved LLC’s lease. By relying on the Kentucky LLC Act, the court determined that since the reinstatement related back to the date of the dissolution, the LLC was essentially never dissolved in the first place. The court emphasized the absurdity of limiting an unintentionally dissolved LLC to only winding-up activities. This limit on activities, if taken literally, would prevent the LLC from filing the necessary paperwork to be reinstated. Also, the court highlighted the purpose of the LLC Act: to limit personal liability. A missed LLC fee or tax payment does not justify disregarding the most important principle behind why people form LLCs.
The opinion reveals that despite a complicated scenario, an understanding of the basic reason behind a limited liability company is not to be ignored: An LLC is meant to protect owners and members from personal liability. The opinion also shows that the normal requirements for a winding-up LLC do not apply for LLCs which are unintentionally dissolved. By protecting managers and remembering the purpose of an LLC, this ruling should be regarded as a victory.
Florida’s Fourth District Court of Appeals recently published an important LLC opinion in Young v. Levy. The issue in this case was whether a writ of garnishment could be used against distributions by the limited liability company. Specifically, this case interpreted “exclusive remedy” within the charging order provisions to decide the outcome. This opinion is not only relevant to Florida LLC members and managers, but also to the LLC members and managers in 15 states that have similar charging order “exclusive remedy” language in their state’s LLC statutes. FYI: California LLC law is not one of the states that has the charging as the exclusive remedy for a creditor who gets a judgment against a member of a California LLC. It is undetermined if other states will follow in Florida’s footsteps, but an understanding of the Young v. Levy decision would benefit LLCs who are looking to determine what remedies are available in a cases similar to Young v. Levy.
In this case, Levy owned 51% of the LLC, while Young owned the other 49%. Due to business-management differences, Levy removed Young from the business. This led Young to sue Levy for injunctive relief and damages. Initially, the trial court granted Young’s requests. However, Levy soon after filed a motion to dissolve the injunction, which was granted. Then Levy moved for damages regarding attorneys’ fees. These fees were awarded to Levy, totaling $41,409.45.
To obtain this money, Levy looked to use a writ of garnishment on distributions by the LLC. The garnishee (LLC) owed over $44,000 to Young. Young claimed that he was exempt from the garnishment, while Levy filed objections, stating that the garnishment was proper. This was the key issue analyzed by Florida’s Fourth District Court of Appeals.
The interpretation of “exclusive remedy” only allows plaintiffs to obtain charging orders on the members’ distributions by the LLC. Plaintiffs cannot obtain a garnishment on these distributions. As stated earlier, a similar “exclusive remedy” provision exists in 15 states, besides Florida. If these other states rule similarly, it will be more difficult for the LLC to collect judgment from a member.
Some states require that a limited liability company (LLC) have at least two members. Many states, including California, allow for single member LLCs. Another jurisdiction that permits a single member LLC is Alabama. The LLC law of California and Alabama provide that when the single member dies, the LLC must be dissolved, subject to two exceptions. First, the single member LLC can continue if the operating agreement provides for the continuation and a method for determining the successor(s) to the deceased member. Second, the LLC can continue if the assignee(s) of the interest of the deceased members elect to continue the business within 90 days of the death. Recently, in L.B. Whitfield III, Family LLC v. Whitfield, the Supreme Court of Alabama dealt with the dissolution of the single member LLC.
In this case, the single member of an Alabama LLC died, and left his interest in the LLC to his four children. There was no vote to continue the LLC, and no special provisions in the operating agreement. Still, the children operated the business for 10 years after their father’s death. The four children began to have business disputes and one child (the manager) filed a lawsuit against the other three children. The three defendants discovered the Alabama law that dissolves a single member LLC unless the majority of the heirs agree to continue the business within 90 days. The three children then sued for a court order that the LLC distribute its assets to the members because the LLC was statutorily dissolved 90 days after the father’s death.
Despite the defenses offered by the plaintiff, the court held that the three children were correct, and that the LLC was dissolved when the children failed to continue the business within 90 days after the father’s death. The Supreme Court of Alabama said it did not matter that the LLC continued to operate for 10 years. The court highlighted that the fundamental principles of an LLC include membership admission through a written agreement that is signed. Since this new agreement was never established, the LLC was dissolved.
On April 11th, Minnesota signed into law the “New Act,” replacing the Minnesota Limited Liability Company Act. This New Act was largely based the Revised Uniform Limited Liability Company Act (RULLCA) provided by the National Conference of Commissioners on Uniform State Laws (NCCUSL). By passing the New Act, many of the default rules which governed Minnesota LLCs were modified or changed completely. These changes are to take place on August 1, 2015, but do not affect LLCs formed prior to that date, unless the LLC requests otherwise. For access to the entire text of the New Act, visit the Minnesota State Legislature’s website.
With Minnesota’s enactment, RULLCA has now been adopted in 9 states (including California) and the District of Columbia. Additionally, South Carolina introduced their version of RULLCA this year. When first passed in 2006, RULLCA was criticized for having awkward phrasing, in addition to creating uncertainty regarding fiduciary duties and remedies. However, after a slow start, RULLCA seems to be picking up steam. In the past two years, four states have enacted RULLCA, and other states, like South Carolina, may not be far behind.
For information on California’s Revised Uniform Limited Liability Company Act, click here. The article provides access to all provisions of California’s version of RULLCA.
In Kosanovich v. 80 Worcester Street Associates, LLC, the Massachusetts Appellate Division ruled that a single-member LLC’s veil should be pierced because of poor record keeping. This case is particularly interesting because it seems inconsistent with previous rules and cases.
(12) use of the corporation or LLC in promoting fraud.
The court noted that when analyzing these factors, the veil-piercing was justified. In particular, the court looked to the pervasive control and poor record keeping to support the trial court’s decision. The court suggested that the poor record keeping applied to the other factors, since the LLC member could not provide documents convincing the court otherwise.
This decision seems odd because this case was not regarding fraud or injustice (the reason the court stated that veil-piercing should exist). Also, the burden of proof in this case seemed to have shifted to the LLC member by suggesting that it was this duty to keep good records to show that the 12 factors weighed in his favor. Still, one of the ways to prevent a veil piercing is to formally treat the LLC as a business. This means keeping good books and records, and following the formalities of ordinary businesses.
Do I Need to Reserve a Name for My New California LLC?
Question: I intend to file Articles of Organization with the California Secretary of State to create a new California LLC. Should I reserve the LLC’s name with the California Secretary of State?
If the name is available for the LLC it has been available from the beginning of time up to the moment the California Secretary of State grants the reservation.
The fact the California Secretary of State reserves the name of a to be formed LLC does not mean the name can actually be used by the to be formed LLC. Although nobody else can use the reserved name for a California entity while the reservation is active you won’t know if the Secretary of State will actually allow the LLC to be formed with the name until you file the Articles of Organization and the Secretary of State approves it.
The reservation is expires after 60 days.
Its a waste of $10.
If you do want to reserve a name for your new California limited liability company just follow the instructions on and file the California Secretary of State’s Name Reservation Request form.
An LLC’s Operating Agreement can modify basic functions of LLC members or managers. This includes indemnification clauses which may require the LLC to indemnify members or managers against lawsuits. In Branin v. Stein Roe Inv. Counsel, a disagreement arose when the LLC amended the indemnification provision. Unlike the old provision, the new indemnification rules prevented an employee from being indemnified in certain circumstances. That employee, Francis Branin, filed suit arguing that his original indemnification rights should not be replaced by the new amendment. The Delaware Court of Chancery agreed.
In this case, Branin was being sued by his former employer for soliciting former clients. After 10 years of litigation, the charges were eventually dismissed. In this interim period, the LLC which Branin worked for changed their indemnification clause in the operating agreement. This second version of the indemnification clause was much more stringent, and would not cover Branin’s $3million legal fees. The question then became the following: Does the second version of the indemnification preclude the indemnification allowed under the original clause?
The court decided that the first agreement included an enforceable indemnification clause. Also, after looking to previous cases involving indemnification clauses, the Delaware Court of Chancery ruled that the right to be indemnified vests when the initial lawsuit was filed. Due to Branin’s right being vested under the first version of the indemnification provision, the second version had no effect. This shows that LLCs cannot rid their responsibility to indemnify once the provision has been triggered. Therefore, LLCs should design these types of clauses carefully and not blindly accept a boilerplate indemnification clause which may expose the LLC to more liability than desired.

References: v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v.