Relating to Real Estate
Court of Appeals to LLCs: Stay in Good Standing
The Court of Appeals dismissed the petition of certiorari that it had granted to 7222 Ambassador Road, LLC, a Maryland limited liability company (7222), because 7222’s charter had been forfeited before it petitioned for cert. 7222 Ambassador Road, LLC v. National Center on Institutions and Alternatives, Inc., 470 Md. 66 (2020).
In the underlying action, 7222 had leased certain property to the National Center on Institutions and Alternatives, Inc. (NCIA). 7222 claimed that NCIA left the premises in poor condition, and it brought suit in the Circuit Court for Baltimore County. 7222 failed to designate its expert witness within the time period set in a scheduling order, and the circuit court refused to permit 7222’s witness to testify. This led to the circuit court’s issuing a judgment in favor of NCIA. On appeal, a divided panel of the Court of Special Appeals (CSA) affirmed. 7222 filed a petition for certiorari and the Court of Appeals granted it.
Because 7222 is a Maryland limited liability company (LLC), it is obligated by law to file a personal property return with the Maryland State Department of Assessments and Taxation (SDAT) every year by April 15. However, 7222 did not do that by April 15, 2019, nor did it file within the 60-day cure period. Furthermore, it may have been that not all of 7222’s contributions, reimbursement payments, interest and penalties due by September 30, 2019, were paid. 7222’s right to do business was forfeited by the SDAT on October 11, 2019, and the right was not reinstated until March 27, 2020.
Corporations and Associations Article (CA) §4A-920 provides that forfeiture of the right to do business of a LLC does not invalidate prior contracts involving the LLC nor prevent the LLC from defending itself in any judicial action against it. With respect to the second exception, the Court of Appeals cited with approval language from an earlier case where the CSA held that the negative implication of the portion of §4A‑920 authorizing the defense of a judicial action is that the prosecution of such an action is not permitted while an LLC’s charter is forfeited. Therefore, the Court of Appeals dismissed 7222’s petition for certiorari.
In a concurring opinion, Judge Jonathan Biran posed an interesting question: If pursuant to its mandate the Court of Appeals must grant a writ of certiorari because it finds that to be “desirable and in the public interest,” and the Court hypothetically did so regarding 7222 Ambassador Road, LLC, why should it matter whether 7222 was in good standing on the date that it petitioned for certiorari?
1. Apparently, prosecuting an appeal of a lawsuit is prohibited as doing business for an LLC that is not in good standing, whereas defending a lawsuit is not. 7222 had originally sued NCIA for leaving the leased premises in bad shape. What if 7222 held a large security deposit that it refused to return because of the condition of the property, and NCIA had sued 7222? Would the appeal in 7222 Ambassador Road, LLC have been permitted to continue because 7222 was the original defendant?
2. Clients frequently ask: What is the penalty if an LLC transacts business after its right to do business has been forfeited? CA §4A-919 provides that a person who does this is guilty of a misdemeanor and is subject to a fine of up to $500. The Court of Appeals scoffed at the prospect that a State’s Attorney might actually pursue such an action. Moreover, a prosecution for an LLC’s transacting business when not in good standing may not be instituted after the date articles of reinstatement of the LLC are filed.
For questions, contact Edward J. Levin.