Simple cases make good law, right? Well, maybe not, but at least one simple case serves as a good reminder.
A recent unpublished opinion from the Appellate Court of Maryland, , 2 (), reminds us of the importance of foreign entity qualifications. In that case, Omaha Property Manager, LLC (“OPM”) brought a quiet-title action against Kamal Mustafa (“Mustafa”) with respect to certain real property in Maryland. OPM alleged that Mustafa had fraudulently conveyed the property to an entity owned by Mustafa that had a name identical to an entity owned by OPM. Default judgment was entered against Mustafa, but on appeal he challenged OPM’s standing to bring the quiet-title action based on Section 4A-1007 of the Maryland Limited Liability Company Act (the “Act”).
Under the Act, foreign limited liability companies (those formed in another state) are required to register in Maryland if they are “doing business” in this State. Section 4A-1009 of the Act defines what it means to be doing business in Maryland by listing a number of activities that, on their own, do not constitute doing business. All other activities, depending upon their nature and scope, may constitute doing business for purposes of the Act, and any foreign limited liability company engaging in such activities in Maryland is required to register as a foreign limited liability company with the State Department of Assessments and Taxation (SDAT).
There are several consequences for failing to qualify as a foreign limited liability company, when required by the Act. The case at hand highlights one such consequence. Mustafa’s argument on appeal was that because OPM was not qualified as a foreign limited liability company in the State, it could not maintain its quiet-tile action pursuant to Section 4A-1007 of the Act, which provides, in relevant part, that “[i]f a foreign limited liability company is doing or has done any intrastate, interstate, or foreign business in this State without complying with the requirements of this subtitle, the foreign limited liability company and any person claiming under it may not maintain suit in any court of this State…”. Mustafa’s argument was ultimately dismissed by the Court since the only actions performed by OPM were found to be included in the laundry list of actions under Section 4A-1009 of the Act that, on their own, do not constitute doing business in the State. Nevertheless, the decision is a good reminder of the importance of qualifying as a foreign entity when required by law.
In addition to legal consequences, there may be a myriad of practical consequences flowing from a failure to qualify as a foreign entity, or a failure to maintain that qualification. For example, if your business is in the process of obtaining financing from a bank, the bank will conduct due diligence on this issue and if the business is not qualified, or the qualification has lapsed, the bank will likely require you to come into compliance before lending funds, which may leave you scrambling prior to closing. Similarly, if you are in the process of selling your business, the purchaser will investigate this issue and require you to provide a representation and warranty that you are in compliance with the law. If you are not, and if the purchaser suffers some loss as a result, you will likely be liable for that loss.
Maryland law is not unique in its foreign qualification requirements, and such requirements do not apply only to limited liability companies. If you are engaging in business in Maryland or in any other jurisdiction, whether as a limited liability company, a corporation, or in some other form, and you are wondering if your company should be qualified as a foreign entity, and we can advise you on your obligations, potential consequences, process for qualifying, etc.
Kevin D’Anna is a Principal at Miller, Miller & Canby and a member of the firm’s Real Estate (finance) and Business & Tax practice groups. Kevin regularly advises financial institutions in connection with asset-based, real estate, and USDA and SBA guaranteed loan transactions. In addition, he has become trusted outside counsel for local and regional businesses of varying size and industry, providing legal advice on matters ranging from business formation to disposition, and providing practical legal advice in connection with complex business transactions. He may be reached at firstname.lastname@example.org