Exit Transactions - July 12

Question 1

What is the dissolution of a corporation? (Q)

Answer 1

Dissolution is the process by which a corporation ceases to carry on business activities except those required to wind up its affairs. Thus, a dissolved corporation continues to exist for purposes of paying its debts, collecting and disposing of its assets, and conducting other activities related to winding up and liquidating its business.

Question 2

Does dissolution transfer title to a corporation’s property? (Q)

Answer 2

No. Dissolution does not by itself transfer title to a corporation’s property. Instead, the corporation must dispose of its property in the process of winding up and liquidating its business.

Question 3

Does dissolution prevent transfer of the corporation’s shares or other securities? (Q)

Answer 3

No. Dissolution does not by itself prevent transfer of the corporation’s shares or other securities. The corporation may still transact its securities in the course of winding up and liquidating its business.

Question 4

Does dissolution change the standards of conduct required of the corporation’s directors and officers? (Q)

Answer 4

No. Dissolution does not change the standards of conduct required of the corporation’s directors and officers. The directors and officers retain all duties and liabilities that they had before the dissolution.

Question 5

Does dissolution change a corporation’s procedural requirements for voting, selection of its officers and directors, or amendment of its bylaws? (Q)

Answer 5

No. Dissolution does not change a corporation’s procedural requirements for voting, selection of its officers and directors, or amendment of its bylaws. The procedures that regulate these aspects of the corporation’s business remain the same as before the dissolution.

Question 6

Does dissolution prevent the filing of legal proceedings against the corporation, or suspend any pending legal proceedings? (Q)

Answer 6

No. Dissolution does not prevent the filing of legal proceedings against the corporation, nor does it suspend any pending legal proceedings. Claimants may initiate proceedings on their claims after dissolution.

Question 7

Does dissolution terminate the authority of a corporation’s registered agent? (Q)

Answer 7

No. Dissolution does not by itself terminate the authority of a corporation’s registered agent. The agency relationship remains the same as it was before the dissolution.

Question 8

What is a voluntary dissolution? (Q)

Answer 8

A voluntary dissolution is a dissolution initiated by choice of the corporation’s incorporators, initial directors, or board of directors plus shareholders.

Question 9

Is a corporation authorized to carry out any tasks after it is dissolved? (Q)

Answer 9

Yes. After a corporation is dissolved, it is not allowed to engage in ordinary business tasks, but it may still carry out tasks involving the winding up and liquidation of the corporation’s affairs. Permitted tasks include:

collecting assets,
discharging liabilities,
disposing of properties that will not be distributed to shareholders,
distributing any remaining property among shareholders, and
doing any other act necessary for winding up and liquidation.

Question 10

If a corporation has not issued shares, or has not commenced doing business, may the corporation be dissolved by a majority of the incorporators or initial directors? (Q)

Answer 10

Yes. A corporation that has not issued shares, or has not commenced doing business, may be dissolved by a majority of the incorporators or initial directors. The incorporators or directors may dissolve the corporation by filing articles of dissolution with the secretary of state. The articles of dissolution must include a statement that the corporation has no unpaid debts, and that the net assets have been distributed to any shareholders.

Question 11

May a corporation be voluntarily dissolved by agreement of the board of directors and the shareholders? (Q)

Answer 11

Yes. A corporation may be voluntarily dissolved by agreement of the board of directors and the shareholders. The board of directors must first adopt a resolution authorizing the dissolution. The board must then submit the proposal to the shareholders for a vote, along with either a recommendation for approval or an explanation of why the board does not recommend approval. If the shareholder vote is to take place at a meeting, notice of the meeting and the proposed dissolution must be provided to all shareholders, including those not entitled to vote. Alternatively, the vote may be taken in writing without a meeting. The required number of shareholder votes for approval may be established by:

the board of directors,
the articles of incorporation, or
the default quorum rules under the MBCA.

Question 12

Must all shareholders approve a corporation’s voluntary dissolution? (Q)

Answer 12

No. Not all shareholders must approve a corporation’s voluntary dissolution. The corporation must notify all shareholders if a meeting is being proposed to consider dissolution. However, generally, at the meeting, only a quorum consisting of the majority of shareholders who are entitled to vote must be present for a vote to take place.

Question 13

What are articles of dissolution? (Q)

Answer 13

Articles of dissolution are documents setting forth:

the name of the corporation,
the date on which dissolution was authorized, and
a statement reflecting shareholder approval, if required.
A corporation that is dissolving must file the articles of dissolution with the secretary of state or other appropriate authority. The dissolution is effective as of the date of the articles of dissolution.

Question 14

May a corporation revoke a voluntary dissolution? (Q)

Answer 14

Yes. A corporation may revoke a voluntary dissolution within 120 days after the date of the dissolution. Revocation must be approved in the same way that the dissolution was approved, unless the dissolution authorization allows the board of directors to revoke the dissolution without shareholder approval. To revoke a dissolution, the corporation must file articles of revocation with the secretary of state, indicating the date and the process by which revocation was approved. A revocation relates back to the effective date of the articles of dissolution.

Question 15

A corporation was involved in complicated patent-infringement litigation with a competitor, and a loss would mean the end of the corporation. The court ruled in the competitor’s favor. The corporation moved for the court to reconsider its decision but began the dissolution process. The board voted in favor of dissolution, and the shareholders followed suit at a properly noticed meeting. The board then filed the necessary dissolution paperwork with the state. One week after the dissolution became effective, the court reconsidered its ruling and ruled in the corporation’s favor.

May the directors now revoke the corporation’s dissolution? (Q)

Answer 15

Yes. The directors may now revoke the corporation’s dissolution. After a voluntary dissolution is authorized, the corporation must file a certificate or notice of dissolution with the state identifying the dissolution and its effective date. Even after this official action, a corporation may still revoke the dissolution within 120 days of the dissolution’s effective date.

Here, the corporation was validly dissolved. However, the court’s favorable ruling came only one week after the effective date of the dissolution. Because the corporation has 120 days from the effective date to revoke its dissolution, the board still has time to revoke the corporation’s dissolution.

Question 16

What is an administrative dissolution of a corporation? (Q)

Answer 16

An administrative dissolution is a dissolution initiated by the secretary of state as a consequence of a corporation’s failure to comply with administrative regulations regarding corporations.

Question 17

For what reasons may a state’s secretary of state administratively dissolve a corporation? (Q)

Answer 17

A state’s secretary of state may commence a proceeding to administratively dissolve the corporation if the corporation:

fails to pay required taxes, fees, or penalties;
fails to deliver its annual report in time;
does not have a registered agent or office;
fails to notify the secretary of state of a change to its registered agent or office; or
exceeds the period of duration specified in its articles of incorporation.
A corporation will be given an opportunity to correct any of these problems before the corporation is actually dissolved. Further, even after a corporation is administratively dissolved, it may apply for reinstatement within two years of the dissolution.

Question 18

What is a judicial dissolution of a corporation? (Q)

Answer 18

Judicial dissolution is the dissolution of a corporation following a judicial procedure.

Question 19

Under what circumstances may a state’s attorney general seek judicial dissolution of a corporation? (Q)

Answer 19

A state’s attorney general may seek judicial dissolution of a corporation if:

the corporation obtained its articles of incorporation by fraud or
the corporation has exceeded or abused its legal authority.

Question 20

Under what circumstances may a shareholder seek judicial dissolution of a corporation? (Q)

Answer 20

A shareholder may seek judicial dissolution if:

the directors are deadlocked in managing the corporation, the shareholders cannot break the deadlock, and the deadlock either threatens irreparable harm to the corporation or prevents the conduct of the corporation’s business for the shareholders’ benefit;
the directors are acting in a manner that is illegal, oppressive, or fraudulent;
the shareholders are deadlocked in voting and have failed for at least two consecutive annual meetings to elect successors to directors whose terms have expired;
corporate assets are being misapplied or wasted; or
the corporation has abandoned its business but failed to liquidate and distribute its assets.
However, a shareholder may not seek dissolution of most publicly traded corporations, nor of corporations with at least 300 shareholders and at least $20,000,000 in market value.

Question 21

There were six directors on a corporation’s board. The board had splintered into two factions of three directors each, and the two factions voted against each other on every proposal. Because of this deadlock, proposals could not garner the necessary majority vote to be approved. All corporate business had come to a halt, and the corporation was losing clients rapidly. The shareholders sought to break the deadlock, but the articles of incorporation allowed shareholders to approve proposals only by super-majority vote. No proposal could get the super-majority level of shareholder support.

May a shareholder have the corporation judicially dissolved? (Q)

Answer 21

Yes. A shareholder may have the corporation judicially dissolved. A shareholder may request and obtain the judicial dissolution of a corporation if:

the corporation’s directors are deadlocked (i.e., split into equal opposing factions);
the shareholders are unable to break the deadlock; and
either irreparable injury to the corporation is threatened or being suffered, or the business can no longer be conducted to benefit the shareholder because of the deadlock.

Here, the two factions of directors are deadlocked, having split into equal, opposing factions of three apiece. The shareholders are unable to garner the super-majority necessary to break the deadlock and approve any proposals. The deadlock has caused the corporation to lose clients and cease doing business, which will hurt the shareholders. Thus, a shareholder may have the corporation judicially dissolved.

Question 22

May a creditor seek the judicial dissolution of a corporation? (Q)

Answer 22

Yes. A creditor may may seek judicial dissolution of a corporation if the creditor can establish that:

the creditor’s claim has been reduced to judgment, an execution on the judgment has been returned unsatisfied, and the corporation is insolvent; or
the corporation has admitted in writing that the creditor’s claim is due and owing, and the corporation is insolvent.

However, under no circumstances may a creditor seek judicial dissolution of a solvent corporation.

Question 23

An investor agreed to lend a distressed corporation $50,000 on an unsecured basis. The corporation agreed to repay the money within 90 days. Unfortunately, the corporation was unable to pay the debt when due because it was facing a liquidity crisis that had prevented it from paying any of its bill for the prior two months. The corporation sent the investor an email acknowledging that it was unable to make a timely payment on the debt. The investor wanted to force the corporation to dissolve in hopes of getting the debt paid through selling off the corporation’s capital assets.

May the investor seek to have the corporation judicially dissolved? (Q)

Answer 23

Yes. The investor may ask to have the corporation judicially dissolved. A creditor may seek judicial dissolution of a corporation if the creditor can establish that:

the creditor’s claim has been reduced to judgment, an execution on the judgment has been returned unsatisfied, and the corporation is insolvent; or
the corporation has admitted in writing that the creditor’s claim is due and owing, and the corporation is insolvent.

Here, the investor’s $50,000 loan to the corporation makes the investor a creditor with a claim against the corporation. The corporation admitted in writing (i.e., by email) that the investor’s claim is due and unpaid. Finally, the corporation has been unable to pay its debts as they come due, meaning it is insolvent. Thus, the investor is entitled to seek a judicial dissolution of the corporation.

Question 24

Under what circumstances may a corporation seek its own judicial dissolution? (Q)

Answer 24

A corporation may seek its own judicial dissolution by asking to have its voluntary dissolution continued under the supervision of the court.

Question 25

What parties are authorized to seek judicial dissolution of a corporation? (Q)

Answer 25

The parties who are authorized to seek judicial dissolution of a corporation are:

the state’s attorney general,
a shareholder of the corporation,
a creditor of the corporation, and
the corporation itself.

However, each of these parties may act only under certain conditions specified by law.

Question 26

In general, must a corporation’s shareholders be made parties to a suit for judicial dissolution? (Q)

Answer 26

No. In general, a corporation’s shareholders need not be made parties to a suit for judicial dissolution unless the party bringing the action seeks relief against the shareholders individually.

Question 27

What general forms of relief may the court provide in a judicial dissolution? (Q)

Answer 27

In general, the court in a judicial dissolution may:

issue injunctions,
take action to preserve corporate assets,
appoint one or more receivers or custodians to oversee the winding up of the corporation’s business,
enter a decree of dissolution to dissolve the corporation, and
itself direct the winding up of the corporation’s business, including the satisfaction of claims and the disposition of assets.

Question 28

What are the three types of corporate dissolution? (Q)

Answer 28

The three types of corporate dissolution are:

voluntary dissolution,
administrative dissolution, and
judicial dissolution.

Question 29

If a corporation is dissolving, what must the corporation do to properly address known, unpaid claims against it? (Q)

Answer 29

If a corporation is dissolving, the corporation must send a written notice to all known claimants of the dissolution explaining how to make a claim against the dissolving corporation. This notice must:

provide a mailing address where a claim should be sent,
describe the information that must be included in a claim,
state the deadline for submitting a claim (at least 120 days from the date the written notice is effective), and
inform the creditor that any claim not received by the deadline will be barred.
Once properly noticed, a known creditor’s claim will be barred if either:

the claim is not submitted by the deadline, or
the corporation rejects the claim and the creditor fails to commence an enforcement proceeding within 90 days after rejection.

Question 30

A corporation’s board of directors and shareholders voted to dissolve the corporation. The corporation sent a dissolution notice to all known creditors explaining that the corporation was dissolving and providing an address for making any claims. The notice also informed the creditors that all claims against the corporation would be barred unless the claims were filed within the next 90 days.

Is this a valid notice of dissolution to known creditors? (Q)

Answer 30

No. This is not a valid notice of dissolution to known creditors because the claim-filing deadline was too short. If a corporation is dissolving, the corporation must send creditors holding known claims a written notice of the dissolution explaining how to make a claim against the dissolving corporation. This notice must:

provide a mailing address where a claim should be sent,
describe the information that must be included in a claim,
state the deadline for submitting a claim (which must be at least 120 days from the date the written notice is effective), and
inform the creditor that any claim not received by the deadline will be barred.

Here, the dissolution notice purports to establish a 90-day claim-filing deadline. Because a valid notice must provide a filing deadline of no less than 120 days, this deadline is too short, and the notice is invalid.

Question 31

A corporation’s board of directors and shareholders voted to dissolve the corporation. The corporation sent a dissolution notice to all known creditors. This notice complied with all legal requirements, including explaining that the corporation was dissolving, giving an address for making claims, and setting a 150-day claim-filing deadline. A local vendor filed a claim with the corporation for $100,000. The corporation rejected the vendor’s claim, arguing that it had paid the bill last month.

Does the corporation’s rejection automatically bar the local vendor from pursuing the claim any further? (Q)

Answer 31

No. By itself, the corporation’s rejection does not bar the vendor’s claim. If a corporation is dissolving, it must sent a dissolution notice all creditors holding known claims to give the creditors a chance to present these claims to the dissolving entity. Once proper notice is given, a known creditor’s claim will be barred if either:

the claim is not submitted by the notice’s deadline, or
the corporation rejects the claim and the creditor fails to commence an enforcement proceeding within 90 days after the rejection.
Here, following proper notice, the corporation rejected the vendor’s claim. By itself, this rejection did not automatically bar the claim. The vendor may still bring an enforcement proceeding within 90 days of the rejection to pursue the claim further. However, the claim will be automatically barred if the vendor does not bring an enforcement proceeding in the next 90 days.

Question 32

If a corporation is dissolving, what must the corporation do to properly address possible unknown claims against it? (Q)

Answer 32

If a corporation is dissolving, the corporation must address possible unknown claims against it by giving constructive notice to unknown claimants. To accomplish this, the corporation must publish a dissolution notice (with information about how to present claims for payment) either:

in a general-circulation newspaper in the same county as the corporation’s principal office or
on its corporate website for at least 30 days.
Once constructive notice is given, all unknown claims against the dissolved corporation will be barred unless a proceeding to enforce the claim is commenced within three years after the notice’s publication.

Question 33

A corporation’s board of directors voted to dissolve the corporation. The corporation anticipated that many currently unknown claims would be made against it after dissolution. The directors understood that if the corporation provided some sort of notice to future unknown claimants, after three years, any unknown, unfiled claims against the dissolved corporation would be permanently barred. To try to trigger this protection, the directors posted a dissolution notice on the corporate website for one week. The notice gave all the legally required information: a mailing address for claims, the information needed to make a claim, and a statement that any claims would be barred unless an enforcement proceeding was brought within three years of the notice’s posting.

Have the directors protected the corporation by barring any unknown claims that are not filed within the next three years? (Q)

Answer 33

No. The notice will not protect the corporation by barring anything. If a corporation is dissolving, it must give constructive notice of the dissolution to any unknown creditors by publishing a dissolution notice (stating how to make claims against it) either:

in a general-circulation newspaper in the same county as the corporation’s principal office or
on its corporate website for at least 30 days.
Once constructive notice is given, all unknown claims against the dissolved corporation will be barred unless the creditor starts an enforcement proceeding within three years.

Here, the constructive notice had the proper content, and the corporate website was an acceptable location for posting it. However, the notice was posted only for a week, which was less than the 30 days needed for a website notice. Thus, the notice was not valid and will not protect the corporation by barring any claims.

Question 34

May the shareholders of a dissolving corporation be held personally liable for payment of known and unknown claims against the corporation? (Q)

Answer 34

Yes. The shareholders of a dissolving corporation may be held personally liable to a claimant for claims against the corporation if the corporation’s assets have been distributed to the shareholders. Each shareholder’s liability for a claim is limited to the shareholder’s pro rata share of the claim or the amount of corporate assets that have been distributed to that shareholder, whichever is less. However, a shareholder’s total liability for all claims may not be greater than the corporate assets distributed to that shareholder.

Question 35

May the directors of a dissolving corporation be held personally liable to the corporation if they do not make a reasonable provision for the payment of known and unknown claims against the corporation? (Q)

Answer 35

Yes. The directors of a dissolving corporation may be held personally liable to the corporation if they do not make a reasonable provision to pay the corporation’s known and unknown claims.

Question 36

In a corporate dissolution, may the board of directors distribute corporate assets to shareholders before paying or providing for claims against the corporation? (Q)

Answer 36

No. In providing for the payment of claims and distribution of corporate assets upon dissolution, the board of directors must pay or provide for all claims against the corporation before distributing any remaining assets to the shareholders. A director who violates this requirement will be personally liable to the corporation.

Question 37

A corporation had $100,000 in its bank account and no other assets. The corporation faced $90,000 in unpaid creditor claims. The corporation initiated a voluntary dissolution. The board of directors voted to pay creditors one-third of their respective claim amounts, for a total of $30,000 to the creditors. The directors then distributed the remaining $70,000 in the bank account to the corporation’s shareholders.

May the directors be held personally liable for the plan to address creditor claims? (Q)

Answer 37

Yes. The directors may be held personally liable for the plan to address creditor claims. In a dissolution, corporate directors are required to make a reasonable provision for the payment of all known and unknown claims against a corporation. A reasonable provision means that distributions to shareholders may be made only after paying or providing for the payment of all claims. Directors who do not make a reasonable provision to pay all claims face personal liability to the corporation for the creditors’ unsatisfied claims against the corporation.

Here, the corporation has sufficient funds to satisfy all unpaid creditor claims. However, the directors paid a fraction of each claim and disbursed the remaining funds to shareholders instead of the creditors. This is not a reasonable plan to pay all claims against the corporation. Thus, the directors may be held personally liable.

Question 38

A board of directors and the shareholders voted to dissolve a corporation that had manufactured trampolines. Based on historical data, the board of directors knew that the corporation usually paid approximately $1 in tort claims for every 10 trampolines sold in a given year. In the past year, the corporation had sold 500,000 trampolines and, thus, anticipated $50,000 in tort claims from these sales. The corporation had $100,000 in its corporate account and no other assets. The corporation owed known creditors $50,000. The directors voted to pay all known creditors in full and then distributed the remaining funds to shareholders.

May the directors be held personally liable for how the dissolving corporation’s $100,000 was distributed? (Q)

Answer 38

Yes. The directors may be held personally liable for how the dissolving corporation’s funds were distributed. If a corporation is dissolving, its directors must make a reasonable provision to pay all known and unknown claims against the corporation. A reasonable provision means paying or providing for the payment of all claims before making any distributions to shareholders. Directors who disregard this requirement can face personal liability for unsatisfied claims against the corporation.

Here, the corporation had $50,000 in likely future tort claims. These unknown claims must be paid or reasonably provided for before distributing any funds to shareholders. However, the directors paid only the known claims and distributed the remaining funds to shareholders, without setting aside funds for unknown but likely future tort claims. Thus, the directors face potential personal liability.

Question 39

What procedure may a dissolving corporation follow to insulate its directors and shareholders from personal liability for unknown claims? (Q)

Answer 39

To avoid personal liability for claims that are unknown upon dissolution, a corporation may ask the governing state court to issue a ruling determining the appropriate amount of funds to set aside for the corporation’s unknown and reasonably anticipated claims. If the corporation complies with this ruling, its directors and shareholders will be insulated from personal liability even if the amount set aside is insufficient to pay all valid, unknown claims that are ultimately made against the dissolved corporation.

Question 40

The board of directors and shareholders of a corporation voted to dissolve the corporation. The directors were having difficulty effectively estimating the amount of funds that should be set aside to address future unknown claims against the dissolved corporation. The directors properly requested the state court to determine the appropriate amount of funds to set aside. The court issued a ruling providing an amount, and the directors set aside the funds in accordance with the court’s decision. The directors also published a proper constructive notice that barred any unknown claims not filed within three years of the notice. However, the designated funds were not sufficient to pay all the claims that were eventually submitted to the dissolved corporation.

May the directors be held personally liable for the corporation’s failure to set aside sufficient funds to address the unknown claims? (Q)

Answer 40

No. The directors may not be held personally liable for failing to set aside enough funds. If a corporation is dissolving, its directors must make a reasonable provision to pay all known and unknown claims against the corporation and may be personally liable if they fail to do so. However, if it is difficult to determine the amount of funds to set aside for unknown claims, the directors may ask a state court to determine this amount. A corporation that complies with the court’s ruling insulates its directors from liability, even if the designated amount is ultimately not enough to pay all valid, unknown claims.

Here, a state court determined the amount to set aside to cover unknown claims, and the corporation complied with the court’s ruling. Thus, even though this amount was not enough to pay all the unknown claims, the directors are insulated from personal liability for that shortfall.

Question 41

In general, what events will cause the dissolution of an LLC? (Q)

Answer 41

In general, an LLC will be dissolved upon:

the occurrence of an event or condition specified in the operating agreement as sufficient for dissolution;
the agreement or consent of all members,
the passage of 90 consecutive days during which there are no members of the LLC;
the entry of a judicial order of dissolution, upon application by a member, due to substantial unlawful activities, an inability to conduct business in accordance with the certificate of organization and the operating agreement, or the illegal, fraudulent, or harmful acts of the managers or controlling members; or
an administrative dissolution by the secretary of state for failure to pay taxes, failure to pay fees, failure to make a timely annual report, or failure to maintain a registered agent for 60 consecutive days.

Question 42

May an LLC carry on any activities after dissolution? (Q)

Answer 42

Yes. After dissolution, an LLC may carry on those activities needed to wind up its affairs, including:

discharging debts and other liabilities,
collecting and distributing the company’s assets,
participating in legal and administrative proceedings, and
transferring its property.

Question 43

May an LLC rescind its dissolution? (Q)

Answer 43

Yes. An LLC may rescind its dissolution if it has not been dissolved by a judicial order or by an administrative action of the secretary of state. Rescission requires the affirmative consent of each member and the filing of a statement with the secretary of state.

Question 44

May an LLC seek reinstatement after an administrative dissolution? (Q)

Answer 44

Yes. An LLC may seek reinstatement by applying to the secretary of state not later than two years after an administrative dissolution.

Question 45

If an LLC is dissolving, what must it do to properly address known, unpaid claims against it? (Q)

Answer 45

If an LLC is dissolving, it must send to all known claimants a written notice of the dissolution explaining how to make a claim against the LLC. This notice must:

provide a mailing address where a claim should be sent,
describe the information that must be included in a claim,
state the deadline for submitting a claim (at least 120 days from the date the written notice is effective), and
inform the claimant that any claim not received by the deadline will be barred.
Once properly noticed, a known claim will be barred if either:

the claim is not received by the deadline, or
the LLC rejects the claim and the claimant fails to commence an enforcement proceeding within 90 days after rejection.

Question 46

Several friends formed an LLC and decided to run the company together. The LLC experienced several setbacks and was forced to dissolve. The LLC sent a proper dissolution notice and a claim form to all its known creditors. A vendor received the notice and properly submitted a claim. However, the LLC rejected the claim and provided all proper notice of the rejection to the vendor. The vendor filed an action against the LLC five months after the LLC’s rejection of the claim.

Is the vendor’s claim against the LLC barred? (Q)

Answer 46

Yes. The vendor’s claim against the LLC is barred. If a corporation is dissolving, including an LLC, it must sent a dissolution notice all creditors holding known claims to give the creditors a chance to present these claims. Once proper notice is given, a known creditor’s claim will be barred if either:

the claim is not submitted by the notice’s deadline, or
the corporation rejects the claim and the creditor fails to commence an enforcement proceeding within 90 days of the rejection.
Here, the LLC sent a proper dissolution notice to the vendor. Once the LLC rejected the vendor’s claim, the vendor had 90 days to commence an enforcement proceeding or else the claim would be barred. However, the vendor waited five months to bring an action, which means the vendor did not commence an enforcement proceeding within 90 days of the rejection. Thus, the vendor’s claim against the LLC is barred.

Question 47

If an LLC is dissolving, what notice must the LLC give to properly address possible unknown claims against it? (Q)

Answer 47

If an LLC is dissolving, it must give notice of the dissolution and the process to submit claims to its unknown creditors. Although it is not possible to give actual notice to an unknown creditor, an LLC may provide constructive notice by publishing a notice in a newspaper of general circulation either:

in the county where the LLC’s principal office is located or
if the LLC does not have a principal office in the state, the county where the LLC’s registered agent is or was last located.
The notice must explain the information required in a claim and a mailing address to which the claim may be sent. The notice must also explain that any claims that are not brought within three years after the notice’s publication will be barred.

Question 48

Several friends formed an LLC and decided to run the company together. The LLC experienced several setbacks and was forced to dissolve. The LLC had no known creditors but anticipated that a number of unknown creditors could come forward after dissolution was complete. The friends decided to provide a dissolution notice to these creditors by posting a notice on the door of the LLC’s principal office, stating that the LLC had dissolved and including all other legally required content.

Is this a legally sufficient way to give unknown creditors notice of the LLC’s dissolution? (Q)

Answer 48

No. The notice was not sufficient to inform unknown creditors of the LLC’s dissolution. If an LLC is dissolving, it must give constructive notice of the dissolution and the process to submit claims for resolution by publishing a notice in a newspaper of general circulation either:

in the county where the LLC’s principal office is located or
if, the LLC does not have a principal office in the state, the county where the LLC’s designated office is or was last located.
Unknown claimants may commence an enforcement proceeding at any point within three years of the notice’s publication.

Here, the notice was posted only on the LLC’s door. The notice was never published in a newspaper in any county. Thus, the notice was not sufficient to give constructive notice of the LLC’s dissolution to unknown creditors.

Question 49

Several friends formed an LLC and decided to run it together. Unfortunately, the LLC experienced several setbacks and was forced to dissolve. The LLC anticipated a number of unknown creditors coming forward after dissolution. The LLC gave proper constructive notice to all unknown creditors. Two years after publication of the constructive notice, a person was injured by a product that the LLC had manufactured.

May the injured person still bring a claim against the dissolved LLC? (Q)

Answer 49

Yes. The injured person may still bring a claim against the dissolved LLC. If an LLC is dissolving, it must give constructive notice of the dissolution and the process to submit claims for resolution by publishing a notice in a newspaper of general circulation either:

in the county where the LLC’s principal office is located or
if, the LLC does not have a principal office in the state, the county where the LLC’s designated office is or was last located.
Unknown claimants may commence an enforcement proceeding at any point within three years of the notice’s publication.

Here, the LLC provided proper notice to its unknown creditors. The injured person was injured two years after this notice was published. As long as the injured person commences a proceeding in the next year (i.e., before the three-year claim window closes), the injured person may still bring a claim against the dissolved LLC. (Q)

Question 50

What procedure may a dissolving LLC follow to insulate its members and transferees from personal liability for unknown claims? (Q)

Answer 50

To insulate its members and transferees from personal liability for claims that are unknown upon dissolution, an LLC may ask the governing state court to issue a ruling determining the appropriate amount of funds to set aside for the corporation’s unknown and reasonably anticipated claims. If the LLC complies with this ruling, then the LLC has fulfilled its obligations to any unknown claimants. Moreover, the LLC can prevent the enforcement of any unknown claim against a member or transferee based on receipt of the company’s assets.