The Journal of The DuPage County Bar Association

Back Issues > Vol. 18 (2005-06)

The Illinois Limited Liability Company Act After a Dozen Years — What Guidance Have the Courts Given Us About LLCs in Illinois?
By William F. Knee

Nearly a dozen years have passed since The State of Illinois has officially recognized Limited Liability Companies as statutory business entities. Since the passage of the Illinois Limited Liability Company Act in 1992 1 ("the Act") there has been an explosion of LLC formations. In fact, 132,253 foreign and domestic LLCs have been formed or authorized to do business in Illinois since the law became effective. At the end of fiscal year 2004, new LLC formations had increased approximately 13% from the pervious year, while the formation of new business corporations declined by 3-4% during the same period.2

The LLC has been touted as a business entity providing, among other things, limited liability for its owner/members, pass-through or conduit tax treatment, and flexible control over operations and management. Judging by the number of LLCs formed, it appears that Illinois business owners consider the LLC an ideal business entity. However, despite the theoretical attractiveness of the LLC as a business form, there is a dearth of case law interpreting the provisions of the Illinois Limited Liability Company Act. There are few court opinions directly concerning the formation, governance and dissolution of Limited Liability Companies in Illinois. This article will briefly review the court decisions and suggest that Illinois LLC law is not especially well-settled relative to other more established business forms such as corporations and partnerships which have been recognized by statute for much longer periods of time. As a consequence, attorneys should carefully review the statute itself when advising clients on LLC formation, governance and dissolution.

Types of businesses which may do Business as an LLC

LLCs are well suited to a variety of different businesses and professional practices. The act provides that an LLC, with certain enumerated exceptions, may generally engage in any lawful business in Illinois.3 Since 1923, there has been a general prohibition of the corporate practice of medicine.4 This prohibition was upheld by the Illinois Supreme Court in 1936.5 The General Assembly has since carved our certain limited exceptions to the corporate medical practice prohibition. The most recent specific exception came with the amendment, effective January 1, 1996, of Section 1-25 of the Limited Liability Company Act.6 The amendment provides that an LLC may be formed to practice medicine only if all members, managers, and organizers are licensed to practice medicine pursuant to the Medical Practice Act of 1987. This amendment was recognized by the Courts in dicta shortly after its effective date.7

Personal Liability of Members and Existence of Fiduciary Duty Among Members

Amendments made in 1998 changed the provisions of Section 10-10 of the Act, dealing with the Liability of members and managers. The original version of Section 10-10 provided that members and managers of an LLC were personally liable for the acts, debts, and obligations of the company or another member to the extent that a shareholder (in the case of a member) and directors (in the case of a manager) of an Illinois business corporation would have been liable in similar circumstances. In effect, one was required to look to "piercing the corporate veil" principles of Illinois corporate law to determine personal liability.

Additionally, the amended Section 10-10 eliminated this reference to corporate law and now provides that the debts, obligations and liabilities of a limited liability company, whether arising in contract, tort or otherwise, are solely the debts, obligations and liabilities of the company. Unlike in traditional corporate law, the amended Section 10-10 further provides that failure to observe usual company formalities is not in and of itself grounds for imposing personal liability on the members or managers.8 The case of Longview Aluminum. LLC v. Industrial General LLC determined for pleading purposes in a memorandum opinion, that failure to reference an entity’s limited liability status in its name does not, as a matter of law, precipitate "the loss of all protections and advantages of the corporate form among them the fundamental protection of limited liability."9

A few cases have addressed the issue of the existence of a fiduciary duty between members of an LLC. The Second District case of Anest v. Audino dealt with an LLC that was formed prior to the 1998 amendment of Section 10-10. The court ruled that an individual who held a minority interest in a member-managed limited liability company owed a fiduciary duty to fellow members, since his role was akin to that of an officer or director in a corporation.10 Another case is brand new, having been decided in the September of 2005. It involves litigation between attorneys and parties to an LLC operating agreement. In his trial court Memorandum Opinion and Order in Thorpe v. Levenfeld, Judge Marovich addressed the ability of LLC members to contract around provisions of the Act in operating their agreements. It also addresses the existence of fiduciary duty among LLC members. It confirms the existence of that duty, and that LLC members cannot eliminate or reduce a member’s fiduciary duties, but may identify specific types or categories of activities that do not violate these duties, if not manifestly unreasonable.11 It is unclear whether a member holding a minority stake in a member-managed LLC has the same duty under the amended Act.

It is also unclear whether the 1998 amendment eliminates the doctrine of piercing the corporate veil. However, as an equitable doctrine, the courts are likely to disregard the LLC where recognizing it would promote fraud or injustice.12 In fact, in 2002 Judge Schmetterer of the Bankruptcy Court in Illinois’ Northern District acknowledged that piercing the entity veil in certain circumstances may be appropriate, again making reference to corporation law and the prevention of fraud or injustice.13 Dugan v. Quanstrom implies in an unpublished employee benefits case that the alter ego theory of piercing the corporate veil applies to LLCs.14

Manager as Agent of the LLC

Another federal trial court memorandum opinion in Capco 1998-D7 Pipestone, LLC v. Milton Ventures, LLP, 15 confirms that there is an agency relationship between the LLC and its manager created by Section 15-3(b) when apparently carrying on, in the ordinary course, the company’s business or business of the kind carried on by the company binds the company, unless the manager had no authority to act for the company in the particular matter and the person with whom the manager was dealing knew or had notice that the manager lacked authority.16 The case also reminds us that the agency relationship is does not exist as a matter of law, but rather is fact-specific.

LLCs and Civil Procedure

There is only one reported case concerning LLCs and civil procedure. Direct Marketing Concepts, Inc. v. Trudeau,17 dealt with issue preclusion and claim preclusion. In a case where LLCs were attempting to bring claims in the Federal District Court in Illinois which were the same as or similar to claims previously brought by an individual plaintiff and adjudicated (and dismissed) in California. The Federal District Court for the Northern District of Illinois ruled that for preclusionary purposes, LLCs were in privity with the individual where the individual involved, exercised exclusive and total control over each LLC and the LLCs’ claims arose from same core of operative facts as individual’s claims against company in prior action. Thus the judgment in the individual’s prior action against company barred the LLCs’ claims against company,

Conclusion

The Limited Liability Act has created a popular entity for Illinois business owners. Despite the passage of more than a decade, the courts have given sparse interpretation of the issues which arise between owners of LLCs and those that do business with them. Whether the lack of case law suggests that the General Assembly has created a business entity that has promoted special business harmony or merely that not enough time has passed for the development of a body of cases, practitioners will do well to read the Act very carefully when advising business owners on the establishment and management of Limited Liability Companies in Illinois. And since a large proportion of the cases touching on LLC issues do not have precedential value, the lawyer’s interpretation of the act may be the only one available.

1. 805 ILCS 180/1 et seq. (The Act became effective January 1, 1994).

2. Source: Office of the Illinois Secretary of State, LLC Section.

3. Act Section 1-25

4. Ill.Rev.Stat.1923, ch. 91, § 2

5. People v. United Medical Service, Inc., 362 Ill. 442, 454-55, 200 N.E. 157, 163 (1936)

6. (Pub. Act 89-201, eff. January 1, 1996 (1995 Ill.Legis.Serv. 2512, 2516-17 (West)) (amending 805 ILCS 180/1-25, 5-1 (West 1994)))

7. Berlin v. Sarah Bush Lincoln Health Center, 279 Ill.App.3d 447, 215 Ill.Dec. 940
(4th Dist.,1996)

8. P.A. 87-1062, Art. 10, § 10-10, eff. Jan. 1, 1994. Amended by P.A. 90- 424, § 10, eff. Jan. 1, 1998.

9. Longview Aluminum, L.L.C. v. Industrial General, L.L.C., Not Reported in F.Supp.2d, 2003, WL 21518585, N.D.Ill.,2003.

10. Anest v. Audino, 265 Ill.Dec. 840, 332 Ill.App.3d 468, 773 N.E.2d 202, rehearing denied, appeal denied 272 Ill.Dec. 339, 202 Ill.2d 598, 787 N.E.2d 154 (2nd Dist.2002)

11. Thorpe v. Levenfeld, Slip Copy, 2005 WL 2420373, N.D.Ill.,2005

12. 7 Ill. Prac. §5, Charles Murdock. 2004 Pocket Part.

13. In re Securities Investor Protection Corp. v. R.D. Kushnir & Co., 274 B.R. 768
Bkrtcy.N.D.Ill.,2002.

14. Dugan v. Quanstrom, Not Reported in F.Supp.2d, 2003 WL 22326581, N.D.Ill.,2003, October 09, 2003. See also Tam v. Lo, 968 F.Supp. 1326, N.D.Ill.,1997.

15. Capco 1998-D7 Pipestone, LLC v. Milton Ventures, LLP, Slip Copy, 2005 WL 1667445, N.D.Ill.,2005.

16. See 805 ILCS 180/15-5(b)(6)(A).

17. Direct Marketing Concepts, Inc. v. Trudeau, N.D. Ill., 266 F.Supp.2d 794. (2003)

William Knee is a sole practitioner in Oak Brook, serving clients in family law, business counseling and transactions, real estate and general litigation. Bill received his JD from Northern Illinois College of Law in 1995, and a BA in Political Science from the University of Colorado at Boulder in 1991. He is the current chairman of the DuPage Bar Legal Aid committee.


 
 
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