When I first started practicing law, the idea of the limited liability company had yet to be birthed. A decade later, I co-authored an article speculating on whether California would enact a limited liability company law: Are Limited Liability Companies Coming to California? 13 CEB California Business Law Reporter 135 (1991). Five years later, I participated in the drafting of legislation that would ultimately be enacted as The Beverly-Killea Limited Liability Company Act of 1994, Stats. 1994, ch. 1200.
Although corporations and LLCs may share some characteristics (such as limited liability for owners), they are not interchangeable under the Corporations Code. Title 1 of the Corporations Code governs provides for the formation of corporations and imposes certain requirements on foreign corporations. Title 2.5 governs the formation of domestic limited liability companies and imposes certain requirements on foreign limited liability companies. Thus, I was surprised to read a recent opinion in which a court applied the provisions of Title 1, the General Corporation Law, to a foreign limited liability company.
Hurst v. Buczek Enters., LLC, 2012 U.S. Dist. LEXIS 61624 (N.D. Cal. May 2, 2012) involved a claim by an individual alleging violations of California wage and hour laws, unfair competition, and breach of the implied covenant of good faith and fair dealing. The defendant, a company named Buczek Enterprises, LLC, asserted counterclaims against the plaintiff for breach of contract and of the implied covenant of good faith and fair dealing. The plaintiff then moved for partial summary judgment in part because the defendant lacked standing to bring its counterclaims because it is not authorized to conduct intrastate business in California.
For reasons not explained in the opinion, the court analyzed the effect of the Defendant's failure to qualify under Title 1, not Title 2.5, of the Corporations Code:
Under California Corporations Code § 2105(a), "[a] foreign corporation shall not transact intrastate business without having first obtained from the Secretary of State a certificate of qualification." Any corporation that fails to obtain such certificate of qualification "shall not maintain any action or proceeding upon any intrastate business so transacted in any court of this state." Cal. Corp. Code § 2203(c); United Med. Mgmt. Ltd. v. Gatto, 49 Cal. App. 4th 1732, 1740 (1996) ("If the defendant establishes the bar of the statute, . . . the matter should be stayed to permit the foreign corporation to comply. If the foreign corporation plaintiff complies . . . by qualifying and paying fees, penalties and taxes, it may maintain the action. If the foreign corporation fails to comply, the matter should be dismissed without prejudice.").
The court continues with a lengthy analysis of some of the activities described in Corporations Code § 191 (such as effecting sales through independent contractors) that won't by themselves constitute transacting intrastate business. Again, § 191 is part of Title 1 of the Corporations Code. The court ultimately concluded to grant the plaintiff's motion for summary judgment with respect to the defendant's counterclaims.
It seems to me that the court should have applied Title 2.5 (Corporations Code §§ 17001(ap)(2), 17451 and 17456). Granted, the court nowhere explicitly states that the defendant is a limited liability company, but the "LLC" included in the defendant's name suggests that it is. Moreover, the court describes the defendant as being based in New York and a check of the New York Department of State's records reveals a domestic (New York) limited liability company by the same name.
If the court did indeed cite the wrong statutes, this probably shouldn't affect the court's reasoning as the provisions of the Beverly-Killea Act are substantially the same as those in the California General Corporation Law.
