Illinois Court Addresses Effect of Reinstatement of LLC, Gives Effect to the Fact That Dissolution Did Happen

Illinois Court Addresses Effect of Reinstatement of LLC, Gives Effect to the Fact That Dissolution Did Happen

      A recent decision from Illinois interprets and places certain limits upon the effect of the statute providing that, upon reinstatement after administrative dissolution, it is as if it never took place. In this case, the fact that it took place had legal effect. CF SBC Pledgor 1 2012-1 Trust v. Clark/School, LLC, __ N.E.3d __, 2016 Il. App. (4^th) 150568, 2016 WL 4702589 (Ill. App. 4th Dist. Sept. 8, 2016).

      Clark/School LLC was the borrower pursuant to a mortgage that included as an event of default the failure to maintain the LLC as an LLC.  A default was declared under the mortgage on the basis that the LLC had been administratively dissolved as well as other defaults in the covenants.  In response to a declaration of default and the appointment of a receiver, the LLC asserted that there was no default in the existence covenants in that the LLC had been reinstated by the Illinois Secretary of State pursuant to a statute that provides, inter alia, that the reinstatement after administrative dissolution relates back to and in effect cures the dissolution.  The lender responded, inter alia, that the subsequent cure of the dissolution did not impact the fact that it had taken place.  Rather:

In this case, Section 4.14 of the party’s mortgage security agreement plainly stated that the mortgage loan was made in reliance on defendant’s continued existence as an LLC.  Defendant agreed to maintain its existence and ensure its continuous right to carry on its business.  The party’s agreement defined defendant’s breach of Section 4.14 as an “Event of Default.” In its December 2013 complaint, plaintiff alleged defendant failed to maintain its existence as an LLC because it was not in good standing with the Secretary of State and dissolved in September, 2011.  Defendant acknowledges that, at the time plaintiff filed its complaint, it was not in good standing and had been dissolved.  Under these circumstances, we hold the LLC Act’s relation-back provision does not apply to prevent defendant’s dissolution from constituting an “Event of Default under the party’s agreement.

      In support of its ruling on the LLC Act, the court cited Virendra S. Visla M.D., Ltd. v. Parvais, 884 N.E. 2d 790, 796 (Ill. App. 3d 2008) wherein an employment agreement was found to be terminated by the administrative dissolution of the employer medical corporation.

      This ruling should be considered in light of the provisions of the Kentucky LLC Act which provide for the dissociation of certain business entity members upon the dissolution thereof.