IMPORTANT CHANGES TO LLC ACT EFFECTIVE JUNE 10, 2010

Date: June 8th, 2010

Back in October of 2009, I wrote an article on latent defects in Washington’s Limited Liability Company Act, RCW 25.15. et seq (the “Act”) highlighted by Substitute House Bill 1592 and the Washington Supreme Court’s May 14, 2009 decision in Chadwick Farms Owners Association v. FHC, LLC.

The article focused on inconsistencies in the Act regarding the dissolution and winding up of a Washington limited liability company (“LLC”), particularly caused by the statutory filing of a “Certificate of Cancellation” – the mechanism by which an LLC’s Certificate of Formation was terminated. By filing a Certificate of Cancellation, the LLC ceased to exist as a separate legal entity, and the dissolved LLC could no longer wind up its affairs. The fact that a Certificate of Cancellation could be filed and effective at any time was in direct conflict with the Act’s three-year survival of claims statute, and effectively stripped away the protections the three-year survival period provided third parties injured by the acts of the dissolved LLC. In other words, one statute in the Act took away the exact protections another statute in the Act another provided.

Without question, when the Chadwick Court spoke, the Washington Legislature got the message loud and clear. On March 6, 2010 the Washington House of Representatives unanimously passed Substitute House Bill 2657 (“SB 2657”), which had been unanimously passed by the Washington State Senate just four days earlier. Effective June 10, 2010, SB 2657 makes much needed changes in the Act, specifically dealing with the dissolution of Washington LLCs.

The most critical and drastic change made by the Washington Legislature is the termination of the “Certificate of Cancellation” and the simultaneous creation of the “Certificate of Dissolution.” This is a major conceptual revision to the Act, the most important effect of which is that the critical winding-up period and the three-year survival period are no longer cut short by the filing of a Certificate of Cancellation. In short, the inconsistencies created by the Certificate of Cancellation have been canceled: Problem solved.

With the Certificate of Cancellation squarely in the rearview mirror, the Legislature moved to further clean up the dissolution and winding-up process for LLCs. The revised statute introduces a simplified new filing – the Certificate of Dissolution. A new section is added to the Act, providing that after dissolution occurs under RCW 25.15.270, a Washington LLC may deliver a Certificate of Dissolution to the Secretary of State.[1. The Certificate of Dissolution must (a) set forth the name of the dissolved LLC; and (b) state that the LLC is dissolved under RCW 25.15.270.]

While the filing of a Certificate of Dissolution is optional for dissolved LLCs, the Legislature provided clear incentives for doing so. In a new section added to the Act, a dissolved LLC that files a Certificate of Dissolution with the Secretary of State may take advantage of a new procedure for disposing of known claims. Much like the Washington Business Corporations Act and the Washington Uniform Limited Partnership Act, after filing a Certificate of Dissolution the dissolved LLC may give notice of dissolution to known claimants who then have one hundred twenty (120) days to bring a claim against the LLC, or have those claims forever barred. All unknown claims not subject to the notice period must be brought within the three-year survival period, which now begins when the Certificate of Dissolution is filed.

Implicit in the revised statutes is the fact that if a dissolved LLC never files the Certificate of Dissolution, the one hundred twenty (120) clock to bar known claims, and the three-year survival period never toll, meaning that the LLC might remain exposed to third-party claims until the expiration of any applicable Statute of Limitations, which can be much longer than three years. The “Certificate of Dissolution” concept and procedure offers much needed certainty in the laws governing Washington LLCs. For LLC management, the best practice now is to file the Certificate of Dissolution as soon as the decision is made to dissolve the company.

The revised Act now imposes express “responsibility” for winding-up the LLC upon those members or managers of the LLC who had responsibility for managing the business and affairs of the LLC before it was dissolved. Under current law, “any person” could wind up the LLC and would face personal liability for failing to wind up the LLC properly. The revisions go further and expressly assign the winding up responsibility to the controlling members or managers, who are now the ones facing personal liability if the wind up is not done properly.

Looking forward, SB 2657 appears to be a welcome evolution of LLC law in Washington, and seems to provide solid solutions for many of the defects found in the previous incarnation of the Act. However, the Act is still not without its problems. For example, the Act is still silent about fiduciary duties and conflict of interest transactions, has insufficient records inspection rights for members, and there is still not much case law to provide guidance and predictability on those issues. While my preference for Washington corporations and limited partnerships is still strong, I must commend the Washington Legislature for getting it right and fixing some major defects in the Act.