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Duray Development, LLC v. Perrin

Michigan Court of Appeals
288 Mich. App. 143 (2010)
ELI5:

Rule of Law:

The common law doctrine of de facto corporation, which treats a defectively formed corporation as a legal entity, can be extended to limited liability companies (LLCs) to shield individuals from personal liability on contracts entered into after a good-faith attempt to form the LLC but before its legal formation was complete.


Facts:

  • Duray Development, LLC, a residential development company, was developing a 40-acre property called 'Copper Corners.'
  • On September 30, 2004, Duray Development entered into an initial excavation contract with Carl Perrin, Perrin Excavating, and KDM Excavating.
  • Perrin and Dan Vining were in the process of forming a new excavation company, Outlaw Excavating, LLC.
  • On October 27, 2004, Duray Development and 'Outlaw' entered into a new contract, intended to supersede the first, for the same excavation work.
  • Perrin and Vining signed the second contract on behalf of Outlaw, holding themselves out as its owners.
  • All parties proceeded under the second contract as if Outlaw were the contractor, with Duray Development receiving billings from and a certificate of liability insurance for Outlaw.
  • Outlaw Excavating, LLC's articles of organization were not officially endorsed as 'filed' by the state until November 29, 2004, a month after the contract was signed.
  • The excavation and grading work performed under the contract was unsatisfactory and not completed on time.

Procedural Posture:

  • Duray Development, LLC sued Carl Perrin and his companies in a state trial court for breach of contract.
  • Defendants filed an answer and a counterclaim.
  • After Duray Development learned during discovery that Outlaw, LLC was not properly formed at the time of the contract, it filed an amended complaint.
  • A default judgment was entered against defendants, which the trial court later set aside.
  • The trial court sanctioned defendants for failing to timely file a witness list by barring them from calling any witnesses at trial.
  • Following a bench trial, the trial court found Perrin personally liable for breach of contract, awarding $96,637.68 in damages to Duray Development.
  • The trial court ruled that the de facto corporation doctrine could not be applied to an LLC.
  • Perrin (appellant) appealed the judgment to the Michigan Court of Appeals.

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Issue:

Does the de facto corporation doctrine apply to a limited liability company (LLC) to shield an individual from personal liability for a contract signed on behalf of the LLC before it was legally formed?


Opinions:

Majority - Per Curiam

Yes. The de facto corporation doctrine applies to limited liability companies. A statute specifying the exact moment an LLC is formed does not automatically abrogate the common law doctrine that protects individuals who made a good-faith effort to create the entity. The court reasoned that because the Business Corporation Act and the Limited Liability Company Act share the common purpose of forming a business and both contemplate a specific moment of existence, they should be interpreted consistently. Citing the precedent of Newcomb-Endicott Co, the court held it would be arbitrary to apply the de facto corporation doctrine to corporations but not to LLCs, as the underlying equitable principles are the same. Since Perrin satisfied the four elements for a de facto corporation—(1) good faith, (2) under a valid statute, (3) for an authorized purpose, and (4) execution of articles of association—Outlaw existed as a de facto LLC, and thus Outlaw, not Perrin individually, is liable for the breach of contract.



Analysis:

This decision extends the long-standing common law de facto corporation doctrine to the modern business form of the LLC, clarifying that specific statutory formation requirements do not necessarily eliminate equitable protections for organizers. This provides a crucial shield against personal liability for entrepreneurs who transact business in good faith before all legal formalities are complete. The ruling harmonizes the treatment of corporations and LLCs in this context, promoting consistency in business law. By distinguishing de facto corporation (which confers legal status) from corporation by estoppel (an equitable remedy preventing denial of existence), the opinion also provides a valuable analytical framework for future cases involving defectively formed business entities.

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