Maryland Limited Liability Companies’ Rights to Sue and Be Sued after Forfeiture of Status

Before filing suit in Maryland as a limited liability company (“LLC”) or against an LLC, you must consider both entities’ status with the Maryland State Department of Assessments and Taxation - a forfeited status can lead to consequences in litigation.

Under Md. Code Ann., Corps. & Ass’ns. § 4A-920 (2018), 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.”

Under this statute, the General Assembly distinctly declared that an LLC can still be sued even if its status is forfeited and contracts and acts of a forfeited LLC are still valid and can be enforced.

However, the General Assembly has never directly addressed whether a forfeited LLC can maintain a lawsuit while forfeited, leaving it up to the courts to address this issue in Price v. Upper Chesapeake Health Ventures, 192 Md. App. 695, 995 A.2d 1054 (Md. Ct. Spec. App. 2010).  

In Price, the Maryland Court of Special Appeals noted that section 4A-920 of the Corporations and Associations Article failed to address this question.  The Court pointed out that “with respect to court proceedings, the statute expressly provides that a forfeited LLC may only defend an action in court. The negative implication of such language, and the sweep of the ‘doing business’ and name ‘using’ prohibition is that the company may not file or maintain a lawsuit after its rights have been forfeited.”  Price, 192 Md. App. at 708, 995 A.2d at 1061.

The Court also noted that under Md. Rule 2-201, “[e]very [court] action shall be prosecuted in the name of the real party in interest[.]” therefore, “[a]n LLC whose right to use its name has been forfeited for failure to pay or file taxes cannot satisfy this rule and therefore cannot file an action in court.” Md. Rule 2-201; Price, 192 Md. App. At 708, 995 A.2d at 1062.

On this reasoning, the Court held “an LLC whose rights have been forfeited for tax failures still exists as an entity, but may only defend an action in court, not prosecute one.” Price, 192 Md. App. at 709, 995 A.2d at 1062.  

Conclusion

A forfeited LLC can be sued and defend a lawsuit, but a forfeited LLC cannot prosecute/maintain a lawsuit.