Business divorce and non-judicial (a/k/a voluntary) dissolution of a business entity rarely intersect. But when they do, or even in a non-business divorce setting, if a business owner needs to rescind a certificate of voluntary dissolution allegedly filed improperly by someone else, what recourse is there? Confronted with a meritorious demand, does the secretary of state have authority and discretion to rescind the dissolution certificate and reinstate the entity to active status? Or must the party seeking rescission go to the time and expense of seeking a judicial remedy?

Two recent cases involving LLCs — one decided under New York’s LLC Law and the other under New Jersey’s version of the Revised Uniform LLC Act — arrived at the same conclusion: the respective governing statutes do not authorize the secretary of state to rescind an LLC’s voluntarily filed certificate of dissolution and termination. Only the courts in a civil action may do so.

New York’s LLC Law Expressly Limits State Department Review

If the filing for a newly-formed LLC meets the minimal statutory criteria and the filing fee is paid, the Secretary of State’s job is done. LLC Law § 209 expressly states that “the department shall not review such articles or certificates for legal sufficiency; its review shall be limited to determining that the form has been completed.”

Section 209 was put to an unusual test in a federal court lawsuit brought by the alleged victim of identity theft. In Smith v. New York State Secretary of State, the plaintiff discovered that someone had used her name and credit card without her knowledge or authorization to form and register a new LLC with the department of state. The articles of organization named the plaintiff as the registered agent for service of process at a New York address not belonging to plaintiff. The LLC’s articles of organization were filed and signed by a person unknown to plaintiff at a foreign address.

The plaintiff informed the Department of State that her identity was stolen and requested that it dissolve and inactivate the LLC to avoid further damage to her credit. The Department advised the plaintiff that it had no statutory authority to do either and suggested that she contact the District Attorney.

The plaintiff went nuclear, filing a class action complaint against the Secretary of State alleging violations of her rights to due process and freedom of association under the U.S. and New York State Constitutions. Her complaint sought damages, a declaratory judgment, and an injunction requiring the Department to provide “a legal mechanism that affords a hearing and constitutionally adequate process by which to challenge the legality of the formation of fraudulent companies created as the result of identity theft” and to dissolve such companies.

The Secretary moved to dismiss the complaint based on the Eleventh Amendment’s bar against federal court jurisdiction over an action against state officials acting in their official capacity. The plaintiff argued that her complaint fell within the exception to Eleventh Amendment immunity carved out by Ex Parte Young, 209 U.S. 123 (1908), for suits against state officials on the basis of state law. The District Court disagreed, pointing to the complaint’s claims seeking relief for violation of federal law.

Getting to the essence of the matter, the court also emphasized that the Secretary lacks “the authority and duty to enforce the statutory scheme of limited liability company formations and dissolutions under New York law” and that LLC Law § 209 “expressly prohibits the Department of State from reviewing limited liability company findings ‘for legal sufficiency,’” i.e., the officials of the Department “lack the power and duty to grant the requested relief.”

The court’s opinion stopped there, without discussing what other remedies might be available to the plaintiff in state court.

Different Approach, Same Result Under RULLCA

The plaintiffs seeking rescission of an LLC dissolution in Patel v New Jersey Department of Treasury took a less inflammatory, more productive approach to the problem.

After the New Jersey Department of Treasury declined the plaintiffs’ request to rescind a voluntary LLC dissolution certificate filed by a former member of the LLC, the plaintiff filed a civil action in New Jersey state court’s Law Division. The complaint named the Department as defendant and sought an order compelling reinstatement of the LLC.

The Law Division issued orders denying any obligation to grant the plaintiffs relief or that the court had authority to reinstate the LLC under applicable statutes, and without opposition from the parties transferred the case to the Appellate Division. The Appellate Division, recognizing the novelty of case, invited the New Jersey State Bar Association to file an amicus brief, which it did.

As related in the appellate court’s opinion, the subject LLC operates a Ramada Inn. The LLC went through a series of transfers of membership interests leading up to the plaintiffs’ buyout of the other members. The plaintiffs apparently delayed updating the LLC’s certificate to reflect its new ownership pending resolution of a tax issue with the sellers. In the meantime, without plaintiffs’ knowledge, one of the former LLC members, for reasons not disclosed in the court record, filed a certificate of voluntary dissolution.

On appeal, the plaintiffs urged the court to exercise its equitable powers to cancel the wrongly filed certificate of dissolution. The Department argued that it had no legal authority to cancel the certificate, but also acknowledged that the trial court could apply principles of law and equity to provide relief, without taking a position on whether relief was justified in the particular case.

In its review of the governing RULLCA provisions, the court highlighted the statute’s “catchall” provision authorizing the filing of a “certificate of correction” of a previously filed record to correct inaccurate information or remedy a defective signature.

The court contrasted the statute’s limited express authority for corrective action, as well as the statute’s express authorization to reinstate an LLC that is administratively dissolved for failure to pay fees, with RULLCA’s omission of any explicit provision authorizing the Department or the courts to rescind an LLC’s certificate of dissolution and termination. As the court explained,

It is plain that such a rescission–which would revive a defunct LLC–would exceed a mere “correction” . . . of a form that had been filed with the [Department].

We do not construe the statute to repose such authority upon the [Department] which, in essence, functions in this context as a filing office, not as a substantive decision-maker. Nor are there any regulations that address the question.

Then, in a first-impression ruling, the appellate court proclaimed the court’s equitable power to rescind a dissolution certificate, writing:

[T]here should be a clear avenue for the present members of an LLC to pursue the rescission of an LLC’s dissolution and termination on equitable grounds, in instances where the certificate has been filed improperly. Without reciting the eligible circumstances exhaustively here, they may include situations of inadvertence, miscommunication, confusion, computer error–or even possibly misconduct or fraud by the party who filed the certificate.

The court concluded that “the appropriate mechanism to pursue such rescission is through a civil action in the trail court” at which all the “pertinent facts and circumstances can be developed through the presentation of evidence.” The court also cautioned that the public’s reliance on the Department’s public database requires that any hearing be preceded by “appropriate notice served upon identifiable persons or entities who have an interest in the matter or will be materially affected,” including members listed in the Department’s records, creditors, claimants against the LLC, and taxing authorities.

Rescission of a Different Kind

In my practice, the closest I’ve come to undoing a dissolution was when I assisted a client whose New York limited partnership was officially designated “inactive,” not because someone improperly filed a certificate of dissolution, but by inadvertently overlooking the partnership’s expiration date in its certificate of limited partnership filed many years before with the Department of State.

Upon the client’s initial inquiry, the Department advised that a court order would be required to reinstate the partnership. We then filed a petition in a special proceeding seeking an order directing the Department to annul the partnership’s termination and to reinstate it nunc pro tunc as of the previously filed expiration date. The petition also sought the Department’s acceptance for filing of an amended certificate of limited partnership with a new expiration date.

Counsel from the Attorney General’s office appeared for the Department. I was impressed by the Assistant AG’s cooperation and professionalism. Before submitting to the court our proposed form of order, we shared it with the Assistant who suggested some language changes and subsequently filed an affirmation consenting to entry of the proposed order. The court entered the order without further ado, and the Department thereafter reactivated the limited partnership and accepted the amended certificate. Problem solved.