Barker Martin

Condo-HOA Blog

Chadwick Farms lets Dissolved LLCs off the Hook at Possible Expense of the LLC's Members

On May 14, 2009, the Washington Supreme Court published its opinion in Chadwick Farms v. FHC, LLC, 2009 WL 1333004 (May 14, 2009). The issue in Chadwick Farms was the capacity of LLCs to sue or be sued after cancellation of the LLC pursuant to the Washington LLC Act (Chapter 25.15). Without much analysis, the court first held that administratively dissolved LLCs are actually cancelled by operation of law two years later if the LLC has not reinstated the LLC. 

Based on RCW 25.15.290, the court then held that claims against LLCs abate once the LLC is cancelled. In other words, once the LLC is cancelled, it ceases to exist and cannot prosecute or defend claims against it, even if the LLC is currently involved in a lawsuit in which it has been sued or has sued others. 

The court said that the new statute regarding a 3-years statute of limitations after dissolution, RCW 25.15.303, did not change the result because of its “inartful” use of the term dissolution rather than cancellation.

As if to balance the seemingly disastrous result, the court reminded everyone of the existing rule that where an LLC is cancelled, there may be personal liability for LLC members who allow their LLC to get cancelled if they failed to properly wind up and “make provision” for “known” liabilities.  Thus, at least where an LLC has a known liability (like a lawsuit against it), members of LLCs might want to ensure that the LLC is not cancelled in order to avoid personal liability.