Change to Washington Statute of Limitations Following LLC’s Dissolution Is Not Retroactive

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Change to Washington Statute of Limitations Following LLC’s Dissolution Is Not Retroactive

Washington’s LLC Act limits the time period for filing lawsuits against a dissolved LLC. In 2010 the LLC Act was amended so that the limitations period does not start until the dissolved LLC files a certificate of dissolution with the Secretary of State, and the Court of Appeals recently had to decide whether that change applied retroactively. Houk v. Best Dev. & Constr. Co., No. 31163-5-III, 2014 WL 997225 (Wash. Ct. App. Mar. 13, 2014).

In 2004 William and Janice Houk moved into a new home they purchased from Nicholas & Shahan Development, LLC (NSD). There were multiple defects in their home, and in December 2010 they sued NSD for their damages on theories of breach of contract, breach of warranties, negligence, and violations of Washington’s Consumer Protection Act.

NSD moved for summary judgment dismissing the claims on the grounds that they were time-barred because the lawsuit was filed more than three years after NSD’s dissolution. NSD had been administratively dissolved in October 2006 by the Secretary of State for noncompliance with the LLC Act’s administrative requirements (e.g., not paying the annual fee or not filing an annual report).

The trial court denied NSD’s motion because of a 2010 amendment to the LLC Act that took effect before the Houks filed their lawsuit. The amended LLC Act required (as it does now) that a certificate of dissolution must be filed in order to start the three-year limitations period, and NSD had not filed a certificate of dissolution. Although three years had elapsed since NSD’s dissolution, the trial court applied the new filing requirement retroactively and allowed the Houks’ suit to go forward.

The three-year post-dissolution statute of limitations was added to the LLC Act by an amendment in 2006: “The dissolution of a limited liability company does not take away or impair any remedy available against that limited liability company, its managers, or its members for any right or claim existing, or any liability incurred at any time, whether prior to or after dissolution, unless an action or other proceeding thereon is not commenced within three years after the effective date of dissolution….” Wash. Rev. Code § 25.15.303 (2006) (emphasis added).

Section 303 was again amended in 2010 so that the three-year limitations period only begins to run when and if the dissolved LLC files a certificate of dissolution with the Secretary of State. Wash. Rev. Code § 25.15.303. An LLC can dissolve by a vote of its members and is not required to file a certificate of dissolution, but if it does so, the filed certificate makes the dissolution a matter of public record. Wash. Rev. Code § 273(1).

The Court of Appeals pointed out that statutory amendments are presumed to be prospective “unless there is a legislative intent to apply the statute retroactively or the amendment is clearly curative or remedial.” Houk, 2014 WL 997225, at *1 (emphasis added) (citing Johnson v. Cont’l W., Inc., 99 Wash.2d 555, 559, 663 P.2d 482, 484 (1983)).

The court explained that a statutory amendment is curative if it clarifies or technically corrects an ambiguous statute. Id. at *3. Section 303 had previously been held by the Supreme Court to be unambiguous, so the Court of Appeals found that the amendment was not curative. Id. (citing Chadwick Farms Owners Ass’n v. FHC LLC, 166 Wash.2d 178, 207 P.3d 1251 (2009)).

A statutory amendment is remedial if it relates to practice, procedure, or remedies, and does not affect a substantive right. Id. NSD had a legal right to assert the statute of limitations under the 2006 version of Section 303. The 2010 amendment, if retroactively applied, would have denied NSD the right to assert the statute of limitations as a complete defense. The court accordingly found that the 2010 amendment affected a substantive right and was not remedial.

Having determined that the 2010 amendment was neither curative nor remedial, the court followed the presumption that the statute is prospective, and reversed the trial court and granted summary dismissal of the Houks’ suit.

Comment. For lawyers who work with LLCs, the result in Houk is important less for what it teaches about whether statutory changes are retroactive, and more for its lesson on the importance of certificates of dissolution for dissolved Washington LLCs. The three-year statute of limitations in Wash. Rev. Code § 25.15.303 can be very helpful in a dissolved LLC’s winding up, but under the current LLC Act there is no special limitations period for a dissolved LLC unless it files a certificate of dissolution.

LLC members and managers sometimes decide to dissolve an LLC by simply ignoring its administrative requirements and letting the Secretary of State administratively dissolve the LLC. That works, but the benefits of a reasonably short three-year statute of limitations are so significant that the certificate of dissolution should almost always be filed. The certificate of dissolution is a simple one-page document, Wash. Rev. Code § 25.15.273, and there is no filing fee, Wash. Admin. Code § 434-130-090(11).

Although it played no part in the Houk case, the LLC Act also provides a method for a dissolved LLC to dispose of known claims on an accelerated basis, if the LLC has filed a certificate of dissolution. Wash. Rev. Code § 25.15.298. The LLC can give notice of its dissolution to known claimants, who must then assert claims within 120 days or their claims will be barred. If after receiving the notice a claimant asserts a claim that is then rejected by the LLC, the claimant must sue on the claim within 90 days or the claim will be barred. This “fish or cut bait” process has risks and may not be desirable in particular circumstances, but in some cases it can be a highly useful way to bring matters to a head.

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