Opinion ID: 2593436
Heading Depth: 1
Heading Rank: 5

Heading: Whether a limited liability company may be sued after cancellation

Text: ¶ 19 The first issue is whether a limited liability company may be sued after its certificate of formation is canceled, ending its existence as a legal entity. ¶ 20 In Chadwick Farms, the Owners Association filed their suit after Chadwick Farms was administratively dissolved and before its certificate of formation was canceled. In reversing the trial court's grant of summary judgment in favor of FHC, the Court of Appeals first said that prior to enactment of RCW 25.15.303 the statutes governing limited liability companies did not provide for survival of a claim after the company's affairs were wound up and a certificate of cancellation had been filed. Chadwick Farms, 139 Wash.App. at 305, 160 P.3d 1061. In other words, under the statutes as they existed prior to RCW 25.15.303, any suit properly filed against a limited liability company abated upon cancellation of the certificate of formation. This conclusion is correct. ¶ 21 Under the statutory scheme applying to limited liability companies that are administratively dissolved, if the company does not seek reinstatement it must wind up the company's affairs within that two year period, because once the two years pass, the company no longer exists and has no power to act. While the company still exists, and during the time it is winding up (the time following dissolution and before cancellation of the certificate of formation), it has the power to prosecute and defend suits. RCW 25.15.295(2). But once the company is canceled, it can no longer prosecute or defend suits; it no longer exists as a legal entity. Id. (expressly stating that those individuals winding up may prosecute or defend suits until the filing of a certificate of cancellation); RCW 25.15.070(2)(c) (a limited liability ceases to exist as a separate legal entity once its certificate of formation is canceled). In addition, during the winding up period a limited liability company must pay or make arrangements for paying known claims and obligations, including all known contingent, conditional, or unmatured claims and obligations. RCW 25.15.300(2). ¶ 22 Here, FHC, as an administratively dissolved limited liability company, had two years in which to wind up, including prosecuting and defending suits, or else it had to seek reinstatement to obtain additional time in which to complete the winding up process. Because FHC did not seek reinstatement, then any suits it brought or any suits against it were limited to the two year period available for winding up the affairs of the company before it was canceled as a matter of law. Once the two-year reinstatement/winding up period passed and the company's certificate of formation was canceled, it could no longer sue or be sued because it ceased to exist. ¶ 23 The Owners Association contends, however, that in the case of administrative dissolution and cancellation, cancellation means only that the company cannot seek reinstatement once two years have passed without an application for reinstatement. The Owners Association argues that until a certificate of cancellation is actually filed in the secretary of state's office, the limited liability company can continue to wind up, including prosecuting and defending suits. ¶ 24 This argument fails because it conflicts with the Act. If a limited liability company is dissolved upon events specified in the company agreement or the consent of the members, for example, the company and its managers and members control the timing of dissolution, winding up, and filing a certificate of cancellation. In such circumstances, the certificate of formation is canceled by and upon the filing of a certificate of cancellation. RCW 25.15.080. But when the secretary of state administratively dissolves a limited liability for failure to pay fees or file reports (as here), cancellation of the certificate of formation automatically occurs two years later if the company does not seek reinstatement. See RCW 25.15.080 ([a] certificate of formation shall be cancelled upon the effective date of the certificate of cancellation, or as provided in RCW 25.15.290); RCW 25.15.290(1) (an administratively dissolved limited liability company has a two-year period in which to seek reinstatement); RCW 25.15.290(4) (the certificate of formation of the limited liability company shall be canceled if the company does not seek reinstatement within two years). ¶ 25 In other words, filing a certificate of cancellation in the case of a nonadministratively dissolved company establishes the time of cancellation of the certificate of formation, while in the case of an administratively dissolved company, by law the secretary of state must cancel the company's certificate of formation at the end of the two-year period. RCW 25.15.080, .290(4). In either case, the critical event is the cancellation of the certificate of formation. RCW 25.15.070(2)(c) states, as noted, that a limited liability company continues as a separate legal entity until cancellation of the limited liability company's certificate of formation.  (Emphasis added.) ¶ 26 In addition, just as in the case of other dissolutions, dissolution in the form of administrative dissolution begins the winding up period, contrary to the Owners Association's argument. RCW 25.15.285(3) provides that an administratively dissolved limited liability company must liquidate and wind up its business and affairs. It states that after dissolution, an administratively dissolved limited liability company may not carry on any business except as necessary to wind up and liquidate its business and affairs. Id. The statutes do not permit an administratively dissolved limited liability company to continue winding up, including prosecuting and defending suits, on its own schedule after cancellation of the company's certificate of formation. [3] RCW 25.15.295(2) applies to administratively dissolved companies every bit as much as applies to others, and this provision states that winding up, including prosecuting and defending suits, can continue only until cancellation. ¶ 27 Chapter 25.15 RCW, as it existed before enactment of RCW 25.15.303, provided that an action against a limited liability company abates after the company's certificate of formation is canceled; instead, its existence as a separate legal entity ends. Thus, when FHC's certificate of formation was canceled on March 24, 2005, it ceased to exist as a separate legal entity and could no longer be sued. Similarly, because the Condominium Association's suit was filed in Emily Lane after Colonial filed its certificate of cancellation, Colonial was not subject to suit under the statutes as they existed prior to enactment of RCW 25.15.303. There is no basis to treat a member canceled limited liability company differently than an administratively dissolved company, as the Court of Appeals said. [4] RCW 25.15.303 ¶ 28 The next issue is whether RCW 25.15.303, enacted while these cases were pending, alters the result. It does not. ¶ 29 RCW 25.15.303 provides: 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.) ¶ 30 Although the statute expressly refers to dissolution, not cancellation, the Court of Appeals characterized the legislature's choice of the term dissolution as inartful and held that the statute permits actions against canceled limited liability companies and not just dissolved limited liability companies. Chadwick Farms, 139 Wash.App. at 307-12, 160 P.3d 1061. Therefore, the Court of Appeals held, the Owners Association could pursue their action against FHC. Similarly, the court determined, the post-cancellation suit brought in Emily Lane was viable. ¶ 31 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. Of utmost importance, the legislature did not alter any provision in chapter 25.15 RCW and thus it left intact the statutes discussed above which provide that a limited liability company maintains its existence as a separate legal entity during dissolution but only until cancellation. In particular, as noted, 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. [5] ¶ 32 The Condominium Association in Emily Lane contends, however, that all canceled limited liability companies are also first dissolved companies, and logically the statute applies to dissolved companies that later cancel themselves. Amicus Washington State Association for Justice Foundation makes a similar argument. ¶ 33 However, 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. [6] RCW 25.15.303 does not even mention cancellation, and the legislature did not alter any of the existing provisions in the Act. 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. ¶ 34 The plain language in RCW 25.15.303 and the other provisions in the Act resolve the statute's meaning. Because we find no ambiguity, we have no reason to consider legislative history. See Christensen v. Ellsworth, 162 Wash.2d 365, 372-73, 173 P.3d 228 (2007); Cockle v. Dep't of Labor & Indus., 142 Wash.2d 801, 808, 16 P.3d 583 (2001). But we note that, in any event, the statute's history supports our reading of its plain language. RCW 25.15.303 journeyed through the legislative process hand in hand with the amendment to the survival statute pertaining to corporations that was addressed by this court in Ballard Square Condominium Owners Ass'n v. Dynasty Construction Co., 158 Wash.2d 603, 146 P.3d 914 (2006). Both statutory provisions were in response to the Court of Appeals' decision in Ballard Square, where that court determined that, absent a survival statute, claims against a corporation arising after dissolution of the corporation abated. The legislature's concern after this decision was the possibility of a similar court decision in the context of a limited liability company, i.e., a ruling that suit could not be brought following dissolution of a limited liability company. The house bill report noted, A recent court decision has left many homeowners without a remedy for claims against a dissolved corporation. H.B. Rep. on S.B. 6531, at 2, 50th Leg., Reg. Sess. (Wash.2006). The report also explains that the Act as it existed had no express provision regarding the preservation of remedies or causes of action following dissolution of the business entity. Id. The house bill report's summary of the effect of the bill states: Dissolution of a limited liability company will not eliminate any cause of action against the company that was incurred prior to or after the dissolution if an action on the claim is filed within three years after the effective date of the dissolution. Id. at 3. ¶ 35 Both the senate and house bill reports disclose that the legislature clearly knew the difference between dissolution and cancellation indeed, the house bill report expressly differentiates between the twoand that its intent was to expressly provide that causes of action do not abate upon dissolution, with a three year limitations period applying to suits brought after dissolution. [7] The legislature plainly responded to the concern raised by the Court of Appeals' decision in Ballard Square, i.e., ensuring that suit could be prosecuted against a limited liability company after dissolution. The legislature did not otherwise change the statutory scheme. [8] ¶ 36 The Owners Association argues, however, that unless the statute is applied to canceled companies, a limited liability company could ignore its obligations to pay, fail to file reports and pay fees, and simply wait for two years until it could no longer be sued. Similarly, the Owners Association says, a dissolved company could simply file a certificate of cancellation and so avoid liability. These arguments do not take into account the whole statutory scheme, however. A dissolved limited liability company must, under the Act, properly complete the winding up process, which includes paying or making arrangements to pay known obligations and claims, even if unmatured or contingent. Members of a limited liability company who fraudulently attempt to use the provisions of the act to avoid liability and members who wind up a limited liability company improperly expose themselves to individual liability, as addressed more fully below. ¶ 37 The homeowners associations also argue that RCW 25.15.303 must be read to apply to a canceled limited liability company because otherwise the statute would be rendered inoperative. But the statute, in conjunction with the rest of the statutes in chapter 25.15 RCW, is effective when applied according to its terms. It provides a three-year period after dissolution in which to assert claims against a limited liability company, up to the time the company's certificate of formation is canceled. In some cases, actions will abate prior to expiration of the three-year period, for example, in a case involving an administratively dissolved limited liability company that does not seek reinstatement. But even in the context of administrative dissolution the statute remains effective because an action might be resolved within the two-year reinstatement period or the administratively dissolved limited liability company might seek reinstatement, which would relate back to the date of dissolution, RCW 25.15.290(3), and thereby obtain time in which to prosecute and defend existing actions. An administratively dissolved limited liability company may have significant incentive to seek reinstatement because individual members who are winding up a limited liability company's affairs may be personally liable if they fail to do so properly. ¶ 38 We recognize, however, that these arguments reflect the homeowners' view that the statute is unfair when it is applied according to its express terms. However, if the result here is not what the legislature envisioned it is, nonetheless, what the statute plainly provides. We understand from the house and senate bill reports that a comprehensive review of the Act is underway. If the result here is not what the legislature wants, it will be positioned to make additional changes deemed necessary. It is not, however, the province of this court to rewrite RCW 25.15.303 or any other provision of the Act. ¶ 39 We conclude that the statute means precisely what it says. Dissolution does not take away or impair any remedy provided that an action is commenced within three years of dissolution. RCW 25.15.303 does not authorize actions against a limited liability company whose certificate of formation has been canceled. [9] ¶ 40 In Chadwick Farms the Owners Association's action against FHC abated when FHC's certificate of formation was canceled and it ceased to exist as a separate legal entity. We reverse the Court of Appeals and hold that the trial court properly granted summary judgment in favor of FHC. In Emily Lane, the Condominium Association could not properly sue Colonial because it was a canceled limited liability company at the time suit was brought. We reverse the Court of Appeals and hold that Colonial's motion for summary judgment should have been granted by the trial court.