In In re Reinz Wisconsin Gasket, LLC, C.A. No. 2022-0859-MTZ (Del. Ch. May 8, 2023) (Reinz), the Delaware Court of Chancery held in a post-trial letter opinion that a canceled limited liability company (LLC) could not be represented by counsel in legal proceedings unless a receiver was first appointed. The case presented an unusual circumstance where counsel representing the defunct LLC argued against the appointment of a receiver and against the nullification of the LLC’s certificate of cancellation.
The letter opinion centered around the cancellation of Reinz Wisconsin Gasket, LLC (RWG), a Delaware LLC. RWG was a defendant in a tort action before the U.S. District Court for the District of Massachusetts. After the case commenced, RWG was canceled under Delaware law. The District of Massachusetts concluded that RWG no longer existed and granted its counsel’s motion to withdraw from the federal tort case. Linda A. Cook, an adverse party in the federal litigation, then moved for default judgment against RWG in the federal case because “it was unrepresented by counsel and could not represent itself.”
Shortly after RWG was canceled, Cook filed a petition in the Delaware Court of Chancery seeking the appointment of a receiver and the nullification of RWG’s certificate of cancellation. Richards, Layton & Finger, P.A. (Counsel) represented RWG in opposing the appointment of a receiver and the nullification of its cancellation. The Court concluded a receiver should be appointed but questioned in its post-trial opinion whether a canceled company could be represented by counsel. Cook filed a motion to determine the proper respondent and counsel. The Court granted Cook’s motion in part, concluding that the legal representation of a defunct LLC is “impossible.”
The Court held that Ration precludes a defunct entity from retaining counsel and litigating prior to the appointment of a receiver “even in a proceeding in which it must be named as a respondent.” The Court explained that Delaware’s Limited Liability Company Act provides that a company’s existence “as a separate legal entity shall continue until cancellation of the limited liability company’s certificate of formation.” Once an entity is canceled, its legal existence ends. The Court explained that a defunct company may only speak through a receiver to manage litigation or other outstanding business. As the Court observed, “the receiver is appointed because there are no other fiduciaries to make decisions for the entity.” Counsel argued that defunct entities had been represented by counsel in prior Court of Chancery cases. The Court dismissed this argument and stated, “[t]hat something has happened before without being identified as a problem does not make it legally correct.”
The Reinz case is a useful reminder that once an LLC is canceled, its existence as a separate legal entity ceases. Short of having a receiver appointed or the certificate of cancellation revoked, there is little an LLC can do once canceled, including opposing the appointment of a receiver. Practitioners should be sure that an LLC has completely wound up its affairs and made proper provisions prior to cancellation.