Another Application of the Rule That an LLC is Separate From Its Members

Another Application of the Rule That an LLC is Separate From Its Members

      A recent decision from the Appellate Court of Illinois has applied the rule that an LLC and its members are legally distinct from one another.  Peabody-Waterside Development, LLC v. Islands of Waterside, LLC, No. 5-12-0490 (Ill. App. 5^th Dist. Sept. 3, 2013).

      Peabody-Waterside Development, LLC was one of the two equal members of Islands of Waterside, LLC; the other equal member was Praxis Waterside, LLC.  Peabody performed significant work on property owned by Islands.  It was, however, not paid for that work.  Seeking to protect its position, Peabody filed a mechanic’s lien against Islands’ property.  The lender on the project, Regents Bank, sought to have the mechanic’s lien set aside on the basis that Peabody performed the work for its own benefit as co-owner of the property.  The trial court agreed with that analysis.  Peabody then appealed, arguing that “being a member of a limited liability company does not equate with being jointly interested or having a co-ownership in the real property owned by that limited liability company.”

      The Court of Appeals agreed with Peabody.  Noting the statutory rule that an LLC is a legal entity distinct from its members, it went on to differentiate an LLC from a joint venture, which is not a distinct legal entity and in which the co-venturers are treated as the co-owners of the property held by the venture.  This is contrasted with the Illinois LLC Act, which provides “that membership in a [LLC] does not confer any ownership interest in the property, real or personal, of the LLC.”, the Court citing 805 ILCS 180/30-1(a).

      On that basis, the mechanic’s lien was held to be valid.

      It is all too common for courts to recite that LLCs are similar to partnerships but have the limited liability characteristic of a corporation.  This mindset fosters an environment in which the significant distinctions between LLCs and partnerships are ignored.  It is important always to carefully review the issue at hand in light of the law governing LLCs.