Wednesday, July 24, 2013

Indiana Court of Appeals Addresses Agency on Behalf of an Administratively Dissolved LLC

Indiana Court of Appeals Addresses Agency
on Behalf of an Administratively Dissolved LLC

            In a recent decision, the Indiana Court of Appeals addressed the liability of a member of an LLC that had been administratively dissolved for legal fees incurred in connection with the LLC.  The court found that the member was no liable on those debts.  Pazmino v. Bose McKinney & Evans, LLP, 989 N.E.2d 784 (Ind. App. 2013). 
            Bose McKinney & Evans, LLP (“Bose”), a law firm, rendered services to Buena Vista Realty Group, LLC from February through June of 2008; the LLC was administratively dissolved in April of that year. These services were requested by Pazmino – the opinion does not address whether he was a member, a manager, or a mere agent of the LLC.  Of a total unpaid bill of $12,580.09, some $9,618.39 of that amount was incurred after the administrative dissolution.  Bose sought to hold Pazmino liable on the LLC’s debt on a pair of basis:  first, it was he who requested the work on the LLC’s behalf even after it was dissolved, and second that he was purporting to act on behalf of a non-existent principal and therefor liable on the obligation.  Bose was awarded summary judgment against Pazmino, and this appeal followed.
             Cutting to the chase, the summary judgment was reversed.  As to the first assertion, the Court of Appeals determined that if Pazmino was acting on behalf of the LLC in requesting that the legal work be done for it, then he was not liable for the related charges.  To that point the Court noted that the firm identified the LLC as the client in its invoices.  Therefore, Bose was not entitled to summary judgment against Pazmino.On the other hand, as Pazmino’s tender of evidence did not provide detail as to why and on whose behalf he requested the services, he was not entitled to summary judgment.
            Bose argued that, from the LLC’s administrative dissolution on April 24, 2009, it ceased to exist as a principal on whose behalf Pazmino could act.  There being no principal, Pazmino could not be acting on the LLC’s behalf.  In response, Pazmino pointed to section 23-18-10-3 of the Indiana Business Flexibility Act (i.e., the Indiana LLC Act) for the proposition that an LLC, after administrative dissolution, continues to exist but may not carry out on any business except that necessary for its winding up and termination.  While the Court’s language is not express – “Thus, regardless of the nature of the work performed by Bose, [the LLC] continued to exist as a principal that could be bound by the acts of its agents.” – it seems to interpret the statute as keeping in place a principal on whose behalf an agent may act, even if the principal may not properly engage in the activities for which the agent would bind it.  
      Treating for these purposes Pazmino as a mere employee (and not a member or manager) of the LLC, Bose argued that while members are shielded from liability post-dissolution, it follows that a mere employee does not, post-dissolution, enjoy limited liability.  Rejecting that notion, the Court of Appeals found that “[W]e do not agree that the notion that an employee who continues to act on behalf of a dissolved LLC is always personally liable on that conduct.”  Differentiating the statutory rule as to capacity to act from the common laws rules of agency allocating responsibility between the principal and the agent, the Court was not willing to interpret the statute as, by omission, imposing liability upon a mere employee:
In fact, none of the cases cited by Bose suggest that an employee properly acting on behalf of a dissolved LLC is personally liable for such acts, and nothing in the Act suggests that the Legislature intended to expose employees of a dissolved LLC acting on behalf of the LLC to personal liability while protecting members from personal liability.  Instead, we believe that reference to the personal liability of members in Indiana Code Section 23-18-9-3(b)(2) is intended to clarify that, even upon dissolution, an LLC, not its members, remains liable for the LLCs obligations.
      Likely the outcome of this case would not be different under Kentucky law.  Under KRS § 275.300(2), a dissolved LLC “shall continue its existence but shall not carry on any business except that appropriate to wind up and liquidate its business and affairs.”  As such, the Kentucky LLC Act has rejected the now quite dated notion that, upon dissolution, the legal existence of the business entity terminates.  Rather, upon dissolution the permissible activities of the entity are limited.  Still, there is a question as to whether an agent, on behalf of a limited principal, should be protected from liability on obligations undertaken after the dissolution that are not appropriate for winding up and termination.  While this Indiana court seems to have answered “no,” section 3.07(4) of the Restatement (Third) of Agency would answer “yes.”  Of course, the analysis changes again if the company is subsequently reinstated.

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