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"De Facto" Company Doctrine

Articles of Organization (“Articles”) for a newly formed limited liability company (the “LLC”), formed by a son and the daughter of the grantor of the deed in question, were executed on October 4, 2001 but not filed with New York’s Department of State (“Department”) until November 16, 2001. On November 2, 2001, before the Articles were filed, the mother of the two persons above-referenced executed a deed transferring the ownership of certain property to the LLC. The deed was recorded on December 3, 2001.

After the grantor died, representatives of the children of two predeceased children of the grantor asserted that the property was not properly conveyed to the LLC and should be distributed as an asset of the Estate. The Surrogate’s Court, Kings County, held that the conveyance was valid, holding that the LLC was operated as a valid “de facto” company prior to the filing of the Articles. The “de facto” company doctrine, traditionally applicable to corporations, applies “where there exists (1) a law under which the corporation might be organized, (2) an attempt to organize the corporation, and (3) an exercise of corporate powers thereafter”.

The Appellate Division, Second Department, reversed the Order of the Surrogate, holding the conveyance to be void because there was no attempt to file the Articles before the deed was executed. The Court of Appeals affirmed. According to the Court, while the de facto corporation doctrine applies to limited liability companies, “the formation of a de facto company requires a ‘colorable attempt to comply with the statutes governing incorporation’ prior to the exercise of corporate powers, including the filing requirement”. In this case, there was no bona fide attempt to file the Articles before the deed was executed. “Because an entity that is neither de facto nor de jure cannot take title to real property [citation omitted], there was no entity in existence capable of receiving title to the real property and the purported conveyance is therefore void”. Estate of Hausman, decided December 1, 2009, is reported at 13 N.Y. 3d 408.

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This page contains a single entry from the blog posted on March 8, 2010 2:58 PM.

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