Using the Dissolution Statutes to Reduce Claims Against Troubled Businesses

The state law dissolution statutes offer a cost-effective method to minimize claims when a business cannot reorganize. While reorganization is often the goal when a business experiences financial distress, some businesses are fundamentally broken and must be wound up.  There are a number of options available to wind up a business.  The state law dissolution statutes offer a possible preferred approach to minimizing claims.

Michigan’s Business Corporation Act (the “BCA”), MCL 450.1101 et seq., and Michigan’s Limited Liability Company Act (the “LLC Act”), MCL 450.4101 et seq., each contain an Article 8 addressing a business’s dissolution and the effect of that dissolution on claims against the dissolving entity.  MCL §§ 450.1801-1864, 450.4801-4808.  Ordinarily, a corporation or limited liability company (“LLC”) is dissolved when a certificate of dissolution[1] is filed with the Michigan Department of Licensing and Regulatory Affairs (“LARA”). MCL §§ 450.1803(2), 450.1804(7), 450.1805, 450.4804.[2]  After dissolution, the business takes on a “zombie afterlife” that prohibits it from conducting business but allows it to:

1. Collect its assets;
2. Sell or otherwise transfer, with or without security, assets which are not to be distributed in kind to its shareholders;
3. Pay its debts and liabilities, and
4. Do all other acts incident to liquidation of its business and affairs.

MCL § 450.1833.[3]  In addition, a dissolved business can sue and be sued during this period.  MCL §§ 450.1834(e), 450.4805(3).  The “zombie afterlife” continues “only until [the business] has concluded ‘winding up its affairs’” and when its affairs are “wound up”, it ceases to exist for all purposes.  Flint Cold Storage v Dept of Treasury, 258 Mich App 483, 495-496 (2009), quoted by Drake v. Plum Hollow Lanes, et al., 2024 Mich App LEXIS 1013, *10 (Feb. 9, 2024).  “The general rule is that after … the termination of the existence of a corporation, no action can be maintained against it, and it has no capacity to be sued.” Flint Cold Storage v Dept of Treasury, 258 Mich App at 498.

            Importantly, a corporation or LLC may take action through the dissolution statutes to shorten the statute of limitations when claims may be brought against it. The dissolving business may give written notice to its known creditors and/or give unknown creditors notice by publication. MCL §§ 450.1841a, 450.1842a, 450.4806, 450.4807 (collectively, the “SOL Shortening Sections”).  The SOL Shortening Sections “afford a dissolving [business] the ability, in the course of winding up its affairs, to cut off its liability for any and all claims that either have arisen (i.e., “existing claims”) or that may arise in the future but are not yet known to the corporation.  By implication, the failure of a dissolving [business] to avail itself of either of these options leaves it with the possibility that claims can be brought against it beyond the 6-month and 1-year periods provided under the respective statutory sections.” Drake v. Plum Hollow Lanes, et al., 2024 Mich. App. LEXIS 1013, *16.

Where there are known creditors, the SOL Shortening Sections provide for written notice to the creditors.  If a dissolving business gives written notice to its known creditors, then (i) the creditor has not less than 6 months to submit a claim and (ii) if the creditor submits a claim and the claim is denied, then it must commence litigation within three months after notice of denial of its claim. [4]  MCL §§ 450.1841a(3), 450.4806(3).  If the creditor does not submit a claim within the six month period or commence litigation within the three month period after notice of denial of its claim, then the creditor’s claim is forever barred. MCL §§ 450.1841a(3), 450.4806(3).  Notwithstanding use of the known creditor statute, a creditor may commence litigation to collect its claim when the creditor timely files its claim and the dissolving business does not reject the claim.[5]

Where there may be unknown creditors, the SOL Shortening Sections provide for notice by publication.   If creditors are given notice by publication in a “newspaper of general circulation in the county where the dissolved corporation has its principal office, or if there is no principal office in this state, its registered office, is or was last located”[6], then creditors have one year from the date of publication to commence proceedings to collect their claims.[7]  MCL §§ 450.1842a(2), 450.4807.  If litigation is not brought within one year after the publication date, then it is forever barred. MCL §§ 450.1842a(2), 450.4807.  However, a creditor with a known claim is not barred from commencing a proceeding to enforce the claim until 6 months after it has actual notice of the dissolution.[8]  MCL §§ 450.1842a(4), 450.4807(4).

The Michigan Court of Appeals recently addressed the effect of a dissolving entity’s failure to take advance of the SOL Shorten Sections in Drake v Plum Hollow Lanes, which involved a personal injury claim against the dissolving entities that occurred prior to their dissolution. 2024 Mich. App. LEXIS 1013, *1-2.  The dissolving entities knew of the claim because the injury had been reported to its staff when it occurred and an ambulance had been called to their premises.  Id. at 14. The businesses dissolved 18 months after the injury by filing their articles of dissolution with LARA, but neither gave their creditors written notice of dissolution nor notice by publication.  Id. at 2.  The businesses alleged that they were fully wound down and their existence terminated 19 months after the injury occurred.  Id. Thirty-six months after the injury, plaintiff sued the dissolved businesses. Id. at 3.

The Court of Appeals concluded that the dissolved businesses were not fully wound down before plaintiff sued because (i) the dissolved businesses had not paid all of their debts and liabilities as required by MCL 1833(c) and “the statute unambiguously includes paying liabilities other than debts in the winding up period”, (ii) the known personal injury claim was a liability of the dissolved businesses that accrued before their dissolution under the applicable tort law, and (iii) the dissolved businesses failed to give written notice or notice by publication which would have reduced the statute of limitation on the claim.  Id. at *11-*15.  The Court concluded, “Because plaintiff’s claim against [the dissolved businesses] was not contingent^[[9]], and [the dissolved businesses] did not act to cut off plaintiff’s claim, or any other potential claim for that matter, in either of the manners provided by the [SOL Shortening Sections], [the dissolved business] could not in fact have wound up their affairs in January 2020. Plaintiff’s suit, having been brought within the 3-year statute of limitation, is therefore viable.” Id. at 16.

While Drake presents a cautionary tale where the SOL Shortening Sections were not used, the SOL Shortening Sections are powerful tools to minimize known and unknown claims against a dissolving business because they compel potential creditors to act much more quickly than they may desire or be barred from any recovery.  As a result, the SOL Shortening Sections should be regularly considered when determining the most appropriate method to wind up a business.  This is particularly true where neither a chapter 7 bankruptcy nor an assignment for the benefit of creditors (“ABC”)[10] discharges the debtor-entity of its liabilities leaving the debtor-entity open to suit (such as its recovery may be) after the conclusion of the bankruptcy case or the ABC case. 11 USC §§ 727(a)(1), 1141(d)(3).  See generally MCL §§ 600.5201-5265.  By contrast, a statutory dissolution, done properly, may accomplish that finality.