Commercial Division Blog

Posted: March 16, 2021 / Categories Commercial, Contracts, Judgment and Collection

That LLC Was Not Formed When it Was Assigned Note Did Not Cause it to Lack Standing to Enforce Note

On March 10, 2021, the Second Department issued a decision in Torto Note Member, LLC v. Babad, 2021 NY Slip Op. 01438, holding that even though an LLC was not formed when it was assigned a note, the LLC had standing to sue on the note, explaining:

The appellants also failed to raise a triable issue of fact as to whether the assignment of the note to the plaintiff was a nullity on the ground that the plaintiff, a limited liability company, was not yet formed or in existence on the date of the assignment. New York has recognized that an unincorporated entity can take title or acquire rights by contract if it is a de facto corporation. Under very limited circumstances, courts may invoke the de facto corporation doctrine where there exists (1) a law under which the corporation might be organized, (2) an attempt to organize the corporation and (3) an exercise of corporate powers thereafter. The de facto corporation doctrine is equally applicable to LLCs. Here, the plaintiff submitted affidavits that demonstrated the applicability of the de facto corporation doctrine. Specifically, the plaintiff demonstrated that there was a law under which the LLC might be organized, that the plaintiff made a colorable attempt to comply with the statutes governing the formation of an LLC, including the filing requirement, and that the plaintiff exercised its powers as an LLC thereafter.

(Internal citations omitted).

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