The Illinois Limited Liability Company Act (Act) permits an LLC to continue after dissolution solely to wind up its business, and only for a reasonable time. In Sienna Court Condominium Assoc. v. Champion Aluminum Corp., 2017 IL App. (1st) 143364, the Illinois First District Appellate Court determined that the “reasonable time” limitation applied to the right to participate in litigation and that 3 ½ years after dissolution was too long to wait before an LLC filed counterclaims.
After the Sienna Court condominium development sustained water damage, its condominium association sought to bring suit for faulty building design and construction. However, Roszak/ADC, LLC (Roszak), the general contractor, was bankrupt and had been involuntarily dissolved by the Illinois Secretary of State. Accordingly, Sienna Court commenced suit against other defendants involved in the project.
Later, Sienna Court learned that Roszak possessed substantial liability coverage for the project. It secured an order lifting the bankruptcy stay solely to sue Roszak and recover against its insurers. In December 2013, Sienna Court added Roszak as a defendant. Roszak, in turn, filed counterclaims against its subcontractors and material suppliers. The court dismissed Roszak’s counterclaims. Roszak appealed.
Among other issues, the appellate court considered whether Roszak, dissolved since July 2010, had the legal capacity to bring counterclaims against its subcontractors in February 2014. In holding that it could not, the court noted that Section 35-4(c) of the Act permits an LLC to continue after dissolution “only for the purpose of winding up its business” and that “a person winding up [an LLC’s business] may preserve the company’s business or property as a going concern for a reasonable time, prosecute and defend actions and proceedings, whether civil, criminal, or administrative….and perform other necessary acts.” The court found it significant that the Act’s language addressing a dissolved LLC’s right to sue appeared in the same passage as that stating that winding up must occur within a “reasonable time.”
The court held it would be illogical to interpret the Act as confining an entity’s winding up period to a reasonable time while allowing its right to sue or be sued to extend indefinitely. While declining to adopt a bright-line rule defining a “reasonable time,” the court held that Roszak’s nearly 4-year delay in filing the counterclaims did not meet that description. Moreover, Roszak contended that if it lacked legal capacity to sue, so too should it lack capacity to be sued by Sienna Court. The court disagreed because the bankruptcy court expressly granted Sienna Court the right to sue Roszak.
The result in Siena Court is somewhat surprising because Roszak filed its counterclaims less than two months after it was sued by Sienna Court. Plainly, not only does a defunct LLC have to pursue claims within a reasonable time, it cannot defend against a lawsuit with the same tools as an active LLC if it is sued after that reasonable amount of time has passed. That said, Roszak’s failure to seek bankruptcy court leave — noted by the court — may have doomed its inability to bring counterclaims. If an LLC has any reason to suspect a potential need to assert a claim, or counterclaim, it should ensure that it remains active or risk losing its ability to do so.
At Novack and Macey, we have extensive experience advising shareholders involved in closely held company disputes, as well as advising companies on how to avoid disputes in the first place. For more information about our services, please contact Laura Jennings at 312.419.6900 or email@example.com.