The Mechanism for—and Importance of—Service on Defunct Maryland LLCs in Construction Cases

Posted on by James Howard in Litigation.

When defending a general contractor in a construction litigation, you may need to effectuate proper service of a cross-claim or third-party complaint on a potentially responsible subcontractor.  What are your options if the subcontractor is a forfeited limited liability company (“LLC”)?

Maryland law treats defunct corporations in a different manner than defunct LLCs.  While a forfeited corporation loses all powers conferred by law[1], a forfeited LLC loses only the right to do business in the State and the right to the use of its name.[2]  The Maryland statute “Contracts with forfeited LLC” states:

The forfeiture of the right to do business in Maryland and the right to the use of the name of the limited liability company under this title does not impair the validity of a contract or act of the limited liability company entered into or done either before or after the forfeiture, or prevent the limited liability company from defending any action, suit, or proceeding in a court of this State.[3]

 

The Maryland Court of Special Appeals, in interpreting this statute, asserted that “tax-failure forfeiture by an LLC, while resulting in the loss of important rights, does not make the LLC a legal non-entity.”[4]  Accordingly, an LLC is a proper party to be sued, and may defend actions against it.

Once you determine the LLC can be sued, you must determine how to properly achieve service.  Maryland law provides the means for proper service on an LLC that no longer has a resident agent.  Specifically, it calls for service on the Maryland State Department of Assessments and Taxation (“SDAT”).  Maryland Rule 2-124, titled “Process—Persons to be Served,” reads in pertinent part:

(o) Substituted Service Upon State Department of Assessments and Taxation. Service may be made upon a…limited liability company…by serving two copies of the summons, complaint, and all other papers filed with it, together with the requisite fee, upon [SDAT] if (i) the entity has no resident agent; (ii) the resident agent is dead or is no longer at the address for service of process maintained with [SDAT]; or (iii) two good faith attempts on separate days to serve the resident agent have failed.

 

The SDAT website is an important resource.  Typically, the website entry for a defunct LLC will read “NO ACTIVE RESIDENT AGENT FOUND.”  This satisfies Md. Rule 2-124(o)(i), and you may serve SDAT.  Occasionally, SDAT will list a resident agent and an address for that resident agent.  If you attempt service at that address but the resident agent is no longer at that address, you have satisfied Md. Rule 2-124(o)(ii), and now may serve SDAT.

The logical next question is: Why waste your time and your client’s money serving a defunct LLC that will be unable to contribute financially to any settlement or jury award?  The answer: The LLC may have an applicable insurance policy.  For general contractors, the importance of subcontractors’ insurance cannot be overstated.  Three of the most important reasons to ensure you properly serve a defunct subcontractor LLC are that: (1) proper service may trigger the LLC’s insurer’s duty to defend, thus providing more resources to aid the general contractor in defending against the plaintiff’s underlying claims; (2) if the LLC is found liable for harming the plaintiff, the insurer’s duty to indemnify may be triggered, thus obligating it to contribute to any award plaintiff receives, which in turn reduces the share the general contractor’s must pay; and (3) as general contractor, you may be named as an additional insured on the subcontractor’s policy.

Attorneys at Ferguson, Schetelich & Ballew, P.A. have knowledge of and experience in all aspects of construction law, and can provide guidance to potential litigants in lawsuits related to construction.

 

 

[1] A defunct corporations still can be sued in its own name under certain circumstances, such as when it is in the process of “winding up” its affairs.  See Thomas v. Rowhouses, Inc., 206 Md.App. 72, 47 A.3d 625 (2012) for a discussion of service on forfeited corporations.

[2] Compare Md. Code, Corp. & Assoc., § 3-503(d) with Md. Code, Corp. & Assoc., § 4A-911(d) and § 4A-920.

[3] Md. Code, Corp. & Assoc., § 4A-920 (emphasis added).

[4] Price v. Upper Chesapeake Health Ventures, 192 Md.App. 695, 704, 995 A.2d 1054, 1059 (2010).