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Post Dissolution Liability of Limited Liability Company Members and Corporate Shareholders Compared

A recent decision of the Appellate Division of the Massachusetts District Court held that a group of creditors had no claim against the members of a limited liability company that had dissolved and disposed of all of its assets prior to trial. In Marina Sales & Service, LLC v. Theoharidis, 2014 Mass. App. Div. 55, Massachusetts Lawyers Weekly 13-014-14, the defendant fishermen obtained a judgment against the plaintiff LLC on a counterclaim where the court found that the company had improperly performed repairs on their fishing vessel. As the company had no assets, the defendant fishermen sought a recovery against the members of the LLC, claiming they had fraudulently dissolved the company and disposed of all of its assets prior to trial. In its decision, the court determined that the members had complied with the requirements of MGL c. 156C, the Massachusetts Limited Liability Company Act, in winding up the company, and therefore there was no enforceable claim against them.

The dissolution of an LLC may occur without any action by its members in accordance with the terms of the company’s operating agreement or by a vote of the members in accordance with that agreement. No filing or publication is required to inform the public that dissolution has occurred. The company must first make provision for all known claims including known claims where the identity of the claimant is unknown. The company’s assets are then distributed first to creditors, including members as creditors, and then to the members. Once the winding up period has been completed a certificate of cancellation must be filed with the Secretary of State. The Marina Sales Court found that these requirements had been complied with notwithstanding the valid claim of the fishermen because their claim was not known by the members until after the LLC had completed its winding up.

MGL c. 156D, the Massachusetts Business Corporation Law, provides greater protection to holders of claims against a dissolved corporation. First, dissolution does not occur until a notice of dissolution has been filed with the Massachusetts Secretary of State, which provides public notice that can be examined on the Secretary’s website. Second, the corporation must publish notice of its dissolution in a newspaper located in the vicinity in which it is located and, if the company has a website, there as well. Third, the corporation must establish a reasonable reserve that makes provision for unknown and contingent claims, which may be provided by insurance, and which must be maintained for three years after the corporation has been dissolved. Distributions may then be made to known creditors and shareholders in that order. Failure to comply with these requirements would leave the shareholders liable to return funds distributed to them until the expiration of the statute of limitations in order to satisfy claims of unknown and contingent creditors. Finally, notwithstanding that the foregoing requirements have been satisfied, the shareholders of the corporation must return any amounts distributed to them within the three year period following dissolution of the company if the funds are needed to satisfy any unknown claims that arise within that period. Therefore, the fishermen’s claim against Marina Sales & Service, LLC would have been enforceable against the members of the company if it had been a corporation to the extent of any distributions that had been made to them.[1]

[1] The decision does inform whether distributions had been made to the members in dissolution.

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