TREATING LIMITED LIABILITY COMPANIES AS CORPORATIONS

As Michigan law provides some effective remedies and developed common law to govern disputes involving corporations, it is often desirable to apply corporate law principles to limited liability companies. I’ve never seen any reason to treat the entities differently in regard to civil claims and would argue in virtually all respects that the well-developed corporate common law ought to be applied to LLCs

Michigan courts continue to inch closer to this reality. Just this week, the Michigan Court of Appeals released a decision indicating that the doctrines of “De Facto Corporation” and “Corporation by Estoppel” both apply to LLCs. This case, Duray Development, LLC v Perrin, (docket # 287722 released 04/13/10), is yet another step in the direction of common treatment of both types of entities. The decision provides plenty of good language to use when arguing for common treatment including comments regarding the common goal of both structures as limiting liability.

Statutory Conversion Creativity

Michigan’s statutory conversion statute (MCLA 600.2919a) used to confine its enhanced remedy to those who were wrongfully in receipt of converted assets. However, as it didn’t make sense to treat the person receiving the assets more harshly than the converter, the Michigan Legislature expanded the statute in 2005 to also charge the converter with treble damages and attorney fees.

Since that time, I’ve seen more and more creativity used in trying to take advantage of the enhanced remedy. In my view, one of the more creative uses was set forth in the recent Michigan Court of Appeals case of Junge v Bartles and Burrell, (Docket No. 285035, released October 20, 2009). There, the plaintiff alleged that the defendants had converted his membership interest in a limited liability company by opening an identical competing company. The Court of Appeals impliedly accepted the theory based on the fact that a person’s membership interest in a LLC is personal property.

I previously raised the possibility of using MCLA 600.2919a in conjunction with the Builders Trust Fund Act (See 06/20/2009 blog post). I know that at least once Court has subsequently accepted this theory to provide the enhanced remedy to a BTFA claim.

Precluding Fraud Claims- The Winning Provision to put in your Contracts

For years, commercial litigators have used merger clauses within contracts as a defense to fraud claims. The merger clause can prevent evidence of fraud from being introduced via the parol evidence rule and can also make any alleged reliance “unreasonable.” This has been a good tool – but it lacked the ability to defeat “fraud in the inducement” claims as that type of fraud invalidates the entire contract, including the merger clause itself.


A recent decision out of the Western District of Michigan, Whitesell Corporation v Whirlpool Corp, Case 1:05-cv-00679-RHB (opinion released 10/05/09) provides an even stronger weapon that appears to reach and preclude claims of fraud in the inducement. These are “no reliance” clauses whereby the parties agree that neither is relying on any representations made by the other party. The Whitesell Court emphasized that courts are more willing to uphold these provisions if:

1. The no-reliance clause is its own separate clause rather than being embedded in another clause;

2. The clause expressly mentions and disclaims “reliance.”

3. The parties are sophisticated.


Transactional lawyers would be well advised to make sure a “no-reliance” clause becomes standard language in their documents

Actions Involving Corporations

Business litigation involving a corporation typically involves claims brought under the Michigan Business Corporations Act (“BCA”), MCLA 450.1101 et. seq. However, the BCA is not the only source of statutory claims involving corporations. Section 3605 of the Revised Judicature Act, MCLA 600.3605 provides Circuit Courts with wide-ranging powers to govern corporations and their officers. Moreover, creditors of the corporation can use this statute to recover funds that have been unlawfully transferred out of the corporation. Check out the statute here.