A Friendly Reminder: You And Your LLC Are Different
Individuals regularly hold their real estate in LLCs for many reasons, including asset protection, because an LLC is a “separate legal entity” RCW 25.15.071 (3) and members are not liable for debts of the LLC RCW 25.15.126 (1). The distinction between an individual member and an LLC was front and center in a recent Washington Division I case, Price v. SEL, Inc., No. 80572-0-I, 2021 WL 82344 (Wn. App. Jan. 11, 2021).
The Prices formed a single member LLC named 4356 92nd Avenue LLC (the “LLC”) to purchase and hold real property on the Mercer Island waterfront (the Redfin link is here—the property is BEAUTIFUL). The LLC financed the purchase using seller financing. The LLC entered into a promissory note for $3.65 million payable to the Neffs, which was secured by a deed of trust on the property.
The LLC defaulted on payments to the Neffs. The Neffs, through counsel, accelerated the remaining portion of the loan. The LLC failed to pay and a foreclosure sale ensued. The Prices and the LLC then filed the action which is the subject of this post against the Neff’s counsel alleging a violation of the Consumer Protection Act, RCW 19.86. The Neff’s counsel moved for summary judgment to dismiss all claims, which the trial court granted. The Prices and the LLC then appealed.
LLCs Are Distinct Legal Beings
The Court’s Price decision illustrates the simple reality that individuals and LLCs are separate entities, and this reality applies equally in litigation. Just as the real property at issue was owned by the LLC and the promissory note and deed of trust entered into by the LLC, any claims arising out of the property or the promissory note ALSO belonged only to the LLC. In this case, the Prices brought claims of their own, alleging the damage caused to the LLC arising out of the property and the promissory note harmed the Prices. However, this theory did not respect the difference between the Prices individually and the LLC. The Court noted:
The Prices knew that they were not a party to the real estate and related loan transactions with the Neffs. Having strategically chosen the protection of an LLC, the Prices cannot now bypass the LLC and claim an individual interest in the LLC’s action against the seller or other parties. They cannot, in their individual capacities, commandeer and assert the legal rights of 92nd Avenue LLC.
Price, slip op. at pg. 9. In this case, the Court dismissed the Price’s CPA claim as it was “a cause of action they d[id] not own.” The Court then went on to dismiss the LLC’s claims as it failed to establish a question of fact as to the elements of a CPA claim.
For practitioners involved in LLC issues on a daily basis, often times the “fundamentals” such as the distinct legal nature of an LLC can get lost in the weeds. However, as Price demonstrates, failure to adhere to such fundamentals can prove fatal to claims involving LLCs.
For more Washington business entity law considerations, refer to this blog every Wednesday at 12 PM, noon.