Law School Case Brief
Duray Dev., LLC v. Perrin - 288 Mich. App. 143, 792 N.W.2d 749 (2010)
Once a limited liability company comes into existence, limited liability applies, and a member or manager is not liable for the acts, debts, or obligations of the company. MCL 450.4501(3). In contrast, a person who signs a contract on behalf of a company that is not yet in existence generally becomes personally liable on that contract. However, a company can become liable if, (1) after the company comes into existence, it either ratifies or adopts that contract, (2) a court determines that a de facto corporation existed at the time of the contract, or (3) a court orders that corporation by estoppel prevented the opposing party from arguing against the existence of a corporation.
Developer Duray filed an action for breach of contract against defendant member of LLC and the LLC itself. Defendant argued that at the time he signed the contract on behalf of his LLC, it has not obtained “filed” status and thus, the contract was not valid. The trial court ruled in favor of Duray and found that defendant was in breach of contract. However, the trial court concluded that the Limited Liability Company Act clearly and specifically provides for the time that a limited liability company comes into existence and has powers to contract and therefore superseded the de facto corporation doctrine and made it inapplicable to limited liability companies altogether. Defendant appealed.
Does the de facto corporation doctrine and corporation by estoppel doctrine apply to limited liability companies?
It was error to find that the de facto corporation doctrine could not apply to LLCs. The plain language of the Limited Liability Company Act and the Business Corporation Act did not supplant the doctrine, and the similarities between the acts supported the conclusion that the doctrine applied to both forms of business. The doctrine of corporation by estoppel could reasonably be extended to LLCs. There was no plain error, however, in the trial court's failure to sua sponte raise the issue of corporation by estoppel, as the doctrine had not been applied to LLC's in the past.
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