LLCs must have attorneys in federal court

This came down last month and LLC owners who do not want to hire a lawyer need to think again.

LLCs must have attorneys in federal court:

"Owners of limited liability companies must be represented by an attorney to appeal a decision in federal court, ruled the 7th Circuit Court of Appeals today. Because a company and its president appealed a District Court's decision without an attorney, the appellate court dismissed the appeal.
In United States of America v. Derrik Hagerman and Wabash Environmental Technologies, LLC, No. 08-2670, Wabash and its president, Derrik Hagerman, appealed the District Court's dismissal of the government's petition for relief after Wabash agreed to start paying restitution and furnish specific financial information. The defendants were convicted of criminal violations of the Clean Water Act and ordered to pay $250,000 in restitution and placed on five years of probation.

In United States of America v. Derrik Hagerman and Wabash Environmental Technologies, LLC, No. 08-2670, Wabash and its president, Derrik Hagerman, appealed the District Court's dismissal of the government's petition for relief after Wabash agreed to start paying restitution and furnish specific financial information. The defendants were convicted of criminal violations of the Clean Water Act and ordered to pay $250,000 in restitution and placed on five years of probation.


The 7th Circuit dismissed Hagerman's appeal because he wasn't a party to the probation-violation proceeding and no order naming him was entered, wrote Judge Richard Posner. Wabash's appeal also must be dismissed because they are proceeding pro se with the appeal, which can't be done in a federal court.

Hagerman claimed, as president and "member" of Wabash, he can represent the company in proceedings. But corporations aren't permitted to litigate in federal court unless represented by an attorney who is licensed to practice in that court, and the same applies to LLCs, wrote the judge. Even though the appellate court hadn't ruled on whether an LLC can litigate only if represented by a lawyer, the same rule applies.

The right to conduct business confers privileges, and one of those is the obligation to hire an attorney if you want to sue or defend on behalf of the company, Judge Posner wrote.

Indiana Law on Judicially Dissolving a Limited Liability Company

Indiana has no case law on dissolving a limited liability company. The statute setting the procedure for judicially dissolving a LLC is IC 23-18-9-2:

On application by or for a member, the circuit or superior court of the county in which the limited liability company's principal office, or if there is none in Indiana, in which the registered office is located, may decree dissolution of the limited liability company whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.

Which made Judicial Dissolution of the Unprofitable LLC from New York Business Divorce Blog very interesting. New York's statute parallels Indiana's 23-18-9-2 without any significant differences and there is case law interpreting the statute.

Thinking over the argument regarding profitability as grounds for dissolution, I can see why the New York judges considered lack of profitability as grounds for dissolution but I think the argument against this position is the better one. I cannot think of any judges I am acquainted with having any experience in business. I can see them thinking that an unprofitable business equates to a failure of the operating agreement.

I see here a reference for us in Indiana for litigation purposes and a bit more. I read the following as something for us to think of when drafting a LLC operating agreement:

Profitability or the lack thereof, by itself, clearly is no basis to grant or deny dissolution, assuming the operating agreement itself does not set forth some measure of financial distress as ground for dissolution.

Limited Liability Companies: A Very Good FAQ from New Jersey

Yes, New Jersey. The New Jersey Lawyers Blog published Limited Liability Company – Questions and Answers. I see little disagreement with Indiana law and some common-sense answers to the questions.

I thoroughly agree with this (see my post "More about do it yourself LLC Operating Agreements"):

Question 5: I know that I can form an LLC online by myself. Why do I need a professional advisor such as an attorney?

Answer: True, you can form the company online, but the mere existence of the LLC offers little protection. A professional can draft the Operating Agreement to include the provisions you want and need and can monitor activities that may cancel statutory protection. You need good documents and procedures to benefit from the statutory protection. Further, you may get significantly more protection from an LLC formed in a different state or country. An advisor familiar with the options can help you make the right decision.

I will admit that the post raises a point for favoring LLC's over corporations that I had never considered:

Question 6: What is the difference between an LLC and a corporation?

Answer: The sole remedy of a creditor of a debtor/LLC member is the charging order against distributions. The creditor of a debtor/corporation shareholder may attach and gain ownership of the shares, thus giving the creditor significant management rights. For asset-protection purposes, the LLC is a better structure.

Yet, I do not see this as a major concern in Indiana. Corporate stock falls within the category of intangible personal property. Indiana's exemption law keeps stock with a fair market value of less than $200.00 in the hands of the owner/debtor. A closely held corporation's stock has no fair market value because of the lack of a market. I think this is an interesting idea but ultimately a wash.

If you are thinking of starting an Indiana LLC, remember that I am taking on new clients.