Summary: Rules governing corporate conduct must be harmonized with the constitutional rights of the individuals who own and manage businesses. In 2003, Atlantic Legal took an important stand on this issue in a case challenging New York State’s rules regulating the activities of limited liability companies (LLCs).
Since 1994, New York has required LLCs to publish within 120 days of formation their articles of organization or comparable information. Section 206 of New York’s Limited Liability Company Law stipulates that publication must be done weekly, for six consecutive weeks, in two local newspapers selected by the county clerk where the LLC has its principal office. Following publication, the LLC must file with the Department of State an affidavit declaring that it has fulfilled the requirement. Companies that do not comply with this requirement are barred from "maintaining any action or special proceeding" in court. While failure of an LLC to meet the requirement does not prevent it from defending itself in court against suits and other actions brought against them, it does prevent an LLC from pursuing a suit or proceeding that it has itself initiated.
The publication requirement has proven to be an expensive and unnecessary nuisance for many small limited liability companies operating within the State of New York. All LLCs are inconvenienced by the sheer redundancy of the requirement, which obligates them to republish information that is freely available on the Internet as well as from the Secretary of State’s office. Small businesses are particularly burdened by the cost of meeting the publication requirement, which can cost well over a thousand dollars.
Barklee Realty Company and Barklee 94 are two such businesses. Barbara Kraebel, who had spent $1,845 meeting the publication requirements for another LLC, chose not to comply with the requirement when forming these two new LLCs. Instead, she decided to challenge the constitutionality of the requirement. Kraebel alleged that the requirement violated her right to due process, that it deprived her of equal protection under the law, and that it interfered with her right to unencumbered access to the New York courts. The trial court agreed with Kraebel’s claim and Kraebel’s motion for summary judgment, ruling that Section 206 of New York’s Limited Liability Company Law was unconstitutional and forbidding the state from enforcing it.
The court’s judgment was fair, timely, and courageous. Had it been allowed to stand, Atlantic Legal would not have become involved. When the State of New York announced its intention to appeal, however, we sprang to action. On behalf of Community Housing Improvement Program, the Rent Stabilization Association of N.Y.C., Inc., and Small Property Owners, Inc.–all organizations with a stake in relieving the economic burden Section 206 places on small and medium-sized property owners–we filed an amicus brief arguing that the court’s original ruling was sound and should be affirmed.
Atlantic Legal’s brief focused on two issues: the uselessness of the publication requirement and its manifest unconstitutionality.
We began by observing that the publication requirement had long been criticized for the expensive red tape that it is. The Association of the Bar of the City of New York had strongly objected to it, we noted, as had the New York State Attorney General, who opposed it as "costly and unnecessary" and who even suggested that the only beneficiaries of the requirement were the news organizations that profited by it. Following this line of thought, we argued that the publication requirement is practically useless because it does not ensure the publicity that supposedly justifies it. People simply do not comb the classified section every week to look for word of newly formed LLCs. They research these organizations when and as their own interests require it.
We addressed the constitutional question by refuting the state’s claim that LLCs are not barred from the courts because Section 206 only prevents them from maintaining actions, not from bringing them. Noting that there is no point in bringing an action if one cannot maintain it, we stressed that Section 206 effectively denied LLCs the due process, the equal protection, and the access to the courts that is guaranteed by both the Constitution and by statutory law.
We concluded that there is simply no credible argument in support of the position that the publication requirement encourages commerce in the state of New York.
Unfortunately, the ruling was overturned on appeal. The appellate court found the case against the LLC publication law unconvincing, arguing that "plaintiffs have not met their heavy burden of demonstrating unconstitutionality beyond a reasonable doubt." Since that time, the court has dismissed both an attempt to appeal the reversal ("upon the grounds that no substantial constitutional question is directly involved") and a motion for leave to appeal.