THE FAILURE OF AN LLC TO SATISFY ITS INITIAL PUBLICATION REQUIREMENTS COULD RESULT IN THE DISMISSAL OF AN ACTION COMMENCED BY ITPrint Article
- Posted on: Mar 13 2020
Limited liability companies afford their owners protection from personal liability and, therefore, are a common business form. “In 1994, New York State enacted the Limited Liability Company Law (L 1994, ch 576, § 1). A limited liability company is an ‘unincorporated organization of one or more persons having limited liability for the contractual obligations and other liabilities of the business’ (Limited Liability Company Law § 102 [m]). Section 202 of the Limited Liability Company Law, enumerating the powers conferred on all limited liability companies, includes the right to sue and to access New York courts (Limited Liability Company Law § 202 [a]).” Barklee Realty Co. v. Pataki, 309 A.D.2d 310 (1st Dep’t 2003).
Pursuant to Section 206 of the Limited Liability Company Law, within 120 days after a newly formed limited liability company’s initial articles of organization (“Articles”) become effective, the LLC must publish in two newspapers, a copy of those Articles or information similar to that contained within the Articles. Limited Liability Company Law § 206(a); Barklee, 309 A.D.2d at 311. “If within one hundred twenty days after its formation, proof of such publication, consisting of the certificate of publication of the limited liability company with the affidavits of publication of the newspapers annexed thereto has not been filed with the department of state, the authority of such limited liability company to carry on, conduct or transact any business in this state shall be suspended, effective as of the expiration of such one hundred twenty day period.” Limited Liability Company Law § 206(a). As a result of the suspension, “the limited liability company will be precluded from ‘maintaining any action or special proceeding’ in any New York court ‘unless and until’ it complies with that requirement.” Barklee, 309 A.D.2d at 311. However, such suspension “shall not limit or impair the validity of any contract or act of such limited liability company, or any right or remedy of any other party under or by virtue of any contract, act or omission of such limited liability company, or the right of any other party to maintain any action or special proceeding on any such contract, act or omission, or right of such limited liability company to defend any action or special proceeding in this state, or result in any member, manager or agent of such limited liability company becoming liable for the contractual obligations or other liabilities of the limited liability company.” Limited Liability Company Law § 206(a).
In Small Step Day Care v. Broadway Bushwick Builders, L.P., 137 A.D.3d 1102 (2nd Dep’t 2016), the Court affirmed the dismissal of the compliant pursuant to CPLR 3211(a)(3) (lack of capacity to sue), noting that “since the plaintiff failed to comply with the publication requirements of Limited Liability Company Law § 206, it is precluded from bringing this action.” Small Step, 137 A.D.3d at 1103 (citations omitted).
On March 6, 2020, the Supreme Court of the State of New York, New York County, decided One Stone Lending LLC v. Alta Operations, LLC. The plaintiff in One Stone loaned defendant $499,000 secured by a mortgage. Upon defendant’s default, plaintiff commenced a mortgage foreclosure action and moved for summary judgment. Defendant opposed the motion for summary judgment and cross-moved to dismiss the complaint based on plaintiff’s failure to comply with the publication requirements of Limited Liability Company Law § 206(a). Plaintiff first attempted to satisfy its publication requirement upon receipt of defendant’s cross-motion and claimed to have completed the publication process by the time that the motions were orally argued.
The One Stone court rejected plaintiff’s argument that its failure to satisfy the publication requirements of Limited Liability Company Law § 206(a) prior to the commencement of its foreclosure action was “not a jurisdictional defect that warrant[ed] dismissal.” The court answered in the negative the question of “whether it can overlook the fact that when plaintiff started this case, it had not complied with section 206.”
In so doing, the court noted that a “review of the most recent amendment to [Limited Liability Company Law § 206] shows that the legislature increased the number of publication days from four to six and reduced the time frame for an LLC to publish from eighteen months to twelve months (New York Bill Jacket, 2006 S.B. 6831, Ch. 44). (Emphasis in original.) The goal was to make information about LLC’s ‘available to the public in a manner which reinforces the public’s right to know the entities with which they are dealing’ and ‘to the benefit of consumers and other persons who do business in this state’ (id.).” In addressing the concerns with plaintiff LLC’s conduct, the court stated:
Clearly, the legislature requires LLC’s to publish with the intent to provide the citizens of this state with potentially helpful information about the entities with which they might be dealing. This Court finds that these technical and cumbersome requirements cannot be overlooked simply because plaintiff decided to comply with the law only after Defendants pointed out plaintiff’s failure to meet its obligations. Under these circumstances, it would make a mockery of the statute to allow plaintiff to maintain its case by complying with the law after starting a lawsuit and after Defendants pointed out this glaring omission.
The fact is that plaintiff started a case when it did not have the capacity to do so. It does not matter that plaintiff later may have rectified this error. Simply put, what would be the purpose of the legislature creating strict statutory requirements for LLCs to publish only for the courts to give a plaintiff a chance to comply if and when a defendant raises it as a defense? This court cannot condone the LLC’s practice of ignoring the statute, unless and until it is caught, and then pretending it shouldn’t make a difference.
(Emphasis in original.)