Court of Appeals of Michigan, 792 N.W.2d 749 (2010)
P is a residential development company with a single member. The member’s responsibilities “were to locate and purchase property, and then work with engineering companies and municipalities to have the property zoned and fully developed for residential living.” P entered into a contract with D to excavate a property purchased by P. The member signed on behalf of P and D signed on behalf of himself (Perrin) and Perrin Excavating.
Shortly thereafter, Duray Development and Perrin entered into a new contract, which was supposed to supersede the former contract. This contract was between Duray Development and Outlaw – which is an excavation company that Perrin and Vining, another owner of Outlaw. Perrin and Vining signed the new contract on behalf of Outlaw. They both also held themselves as owners of Duray Development as well.
Ds then began excavation, but did not perform as expect on time. Duray Development then sued Ds for breach of contract. Ds later learned that Outlaw did not obtain an adequate filing status as a LLC in time, thus Outlaw was not a valid LLC at the time of the second contract.
D argues he isn’t personally liable because he signed on behalf of Outlaw, which was treated by all parties as a properly formed LLC. In so doing he cites the de facto corporation doctrine.
Standard of Review:
Limited Liability Act – “the existence of the limited liability company begins on the effective date of the articles of organization … the document is effective at the time it is endorsed.” However, the Michigan Supreme Court stated that once the articles of operation are executed and acknowledged, they are a de facto corporation. The idea is to permit a poorly formed corporation from not being recognized as a corporation because of the defect when the parties acknowledged and believed it to be one.
Whether the de facto corporation doctrine applies to limited liability companies.
Yes, affirmed. While the trial court argued for a literal interpretation of the Limited Liability Act and excluded de facto corporation application to LLCs, this court believes there is no reason specifically outlined in case law precedent or statute which prevents de facto corporation doctrine for applying to LLCs. Because there is no precedent stating otherwise, and the LLC Act and the Business Corporation Act are so similar, is would be arbitrary to conclude the de facto corporation doctrine doesn’t apply to both.
The court looks closely at an element requirement regarding whether they proceeded in “good faith.” Duray Development proceeded thinking that Outlaw was a valid corporation. There is no evidence to suggest they proceeded in any manner other than good faith. “Accordingly, the trial court was correct to conclude that, had Outlaw been formed as a corporation instead of a limited liability company, it would have been a de facto corporation for purposes of liability.”