Vol. 82, No. 3, March 2009
n recent years, limited liability entities have been hailed as win-wins for members. The statutorily best-defined and seemingly most popular form seems to be the limited liability company (LLC).1 Chapter 183 of the Wisconsin Statutes governs the organization, governance, liability, and powers of LLCs. An LLC is characterized generally as having limited liability, management by members or managers, and a limitation on ownership transfers. Significantly, LLCs differ from corporations in that LLCs are taxed by Wisconsin as partnerships.2 From nonprofit organizations to trucking companies, any manner of enterprise can assume the limited liability form. By far the biggest selling point to becoming an LLC is that the members of the LLC generally are not personally liable for the LLC’s liabilities.3 However, this benefit can be a curse if the LLC does face litigation and its members risk violating the unauthorized-practice-of-law statute if they attempt to represent the LLC. As more and more businesses choose to form as limited liability entities, lawyers must develop strategies to not only serve clients but also deal ethically with these nonlawyers.
Identifying the Issues in the Statutory Text and Case Law
The trouble with an LLC is that its finest benefit may be problematic in litigation. Namely, one cannot both have limited liability and then avoid the consequences of that limited liability when it becomes inconvenient. The statute governing the unauthorized practice of law is Wis. Stat. section 757.30.4 Section 757.30(2) provides that “[e]very person who appears as agent, representative or lawyer, for or on behalf of any other person, or any firm, partnership, association or corporation in any action or proceeding in or before any court of record ... shall be deemed to be practicing law within the meaning of this section.”5 Although the statute has been criticized as shielding lawyers from competition, many argue that the law seeks to “assure that the public is not put upon or damaged by inadequate or unethical representation.”6 The practicing of law includes defending against and filing lawsuits.
The penalty for violating the statute is that the person “shall be fined not less than $50 nor more than $500 or imprisoned not more than one year in the county jail or both, and in addition may be punished as for a contempt.”7 The contempt sanctions and procedures are set forth in chapter 785. With the exception of a situation in which a nonlawyer unrelated to the entity tries to represent the entity,8 the actual likelihood of these penalties being enforced is low, very low in the instances described in this article. Negative outcomes may, however, surface from
these situations in the form of weak and sometimes unjust default judgments and continued delay in litigation.
There is no case law explicitly addressing whether a nonlawyer is violating section 757.30 if he or she appears on behalf of a limited liability entity. The cases broaching the issue have focused on whether a nonlawyer can represent a corporation in large claims court. In these cases, the answer is a resounding “no.”
In Jadair Inc. v. U.S. Fire Insurance Co.,9 the Wisconsin Supreme Court evaluated whether a notice of appeal signed by a nonlawyer was valid. The court interpreted section 757.30 to mean that “only lawyers can appear on behalf of, or perform legal services for corporations in legal proceedings before Wisconsin courts.”10 Further, the court held that “[w]hen a nonlawyer engages in [practicing law], not on his own behalf but on behalf of a corporation, that person is subject to penalty under Wis. Stat. § 757.30.”11
Courts interpreting Jadair have found that the holding is not limited to the signing of a notice of appeal. For instance, in Carmain v. Affiliated Capital Corp.,12 a nonlawyer prepared a letter and filed it with the clerk of the court, declaring it to be an answer.13 The plaintiff responded by filing a default judgment, asserting that a timely answer had not been filed.14 Citing Jadair, the court held that a nonlawyer “could not legally appear on behalf of [the defendant] and her letter was not a legally valid answer.”15 The court of appeals affirmed the lower court’s finding that the letter was not a proper answer and that default judgment was appropriate.16
Nonlawyers who are full-time authorized employees of the LLC can represent LLCs in small claims court.17 But, can a nonlawyer represent an LLC in a large claims action? Although the reach of Jadair and Carmain is far, neither decision specifically addressed or excluded new business forms such as the LLC.
A Close Statutory Reading
Returning to the statute for guidance, the first step is to see whether an LLC fits into any of the enumerated entities giving rise to a violation of section 757.30. Under most traditional canons of construction, because limited liability entities are not listed in the series and no exception is made for other entities, an LLC is not automatically included in the list and must fit within the listed categories. Unfortunately, chapter 757 does not define the terms association, firm, partnership, corporation, and person, and therefore other statutes must be consulted.
Other than in references to racketeering and to homeowner’s associations, there is no definition of association seemingly on point in the Wisconsin Statutes. Black’s Law Dictionary defines an association as an unincorporated business organization that is not a legal entity separate from the persons who compose it.18 Although an LLC is unincorporated, it is a legal entity separate from the persons who compose it; thus, it is not an association.
Renee M. Mehl, Marquette cum laude 2006, formerly was an associate at the commercial litigation firm of Kohner, Mann & Kailas S.C., Milwaukee. She has litigated a broad range of business and commercial finance matters with a particular focus on contract disputes before federal courts and the state courts of Illinois and Wisconsin. She currently practices with Nyhan, Bambrick, Kinzie & Lowry P.C. in Chicago.
A firm and a partnership are somewhat related in that they are characterized by conducting business jointly. The term firm is traditionally linked to a partnership and to the idea that the partners share equally in the losses or profits unless otherwise specified. The profits and losses of an LLC can be allocated among the members in the manner provided in an operating agreement or organized by ownership share, which could possibly be equally distributed.19 However, unlike LLC members, partners are jointly and severally liable for the debts of the partnership. Thus, an LLC does not fit easily within the definitions of firm and partnership.20
The analysis next turns to whether an LLC is a corporation for the purposes of section 757.30. Chapter 183, governing LLCs, simply defines corporation as including domestic and foreign corporations.21 Wis. Stat. chapter 11, covering campaign finance, defines corporation to include an LLC.22 Similarly, in the conservation chapter, a corporation includes an LLC.23 Moreover, some case law may support this analogy. In several appellate cases, courts have made no explicit distinction between limited liability entities and corporations, yet have relied on Jadair but not explicitly stated that the rules for corporations apply to limited liability entities. For instance, in Carmain, the defendant was a limited liability partnership. Similarly, the defendant was an LLC in Brown v. MR Group LLC.24
Turning to the term person, one may read Jadair to say that an LLC, like a corporation, is a person with its own distinct liability; thus, a nonlawyer cannot appear on behalf of a separate person. In other words, the answer may be more intuitive. Because corporate officers are legally separate from a corporation and cannot represent the corporation, members of an LLC are legally separate from the LLC and cannot represent the LLC. There is statutory evidence to support this interpretation. Under several chapters in the Wisconsin Statutes, person is defined to include an LLC.25
Two possibilities emerge from this close reading. First, perhaps nonlawyers can represent LLCs in large claims matters because there is no clear bar. The second, and more likely, possibility is that when no definition fits well, the legal community is forced into an inference regarding the representation of LLCs. One can infer either that an LLC is a corporation or that it is a person for the purposes of section 757.30. Although inferences are built into legal analysis in nearly every case, inferences are limited in that they do not provide a strong legal foundation. Inferences are not law. They are not always persuasive.
Most lawyers representing a client suing an unrepresented LLC probably know first-hand that members of an LLC unequivocally believe they can represent the LLC in a large claims matter. This author has seen numerous answers filed by members of LLCs. More alarming, the author (in the company of judges) has heard numerous complaints from LLC members who stated that the lawyer who helped them file the LLC’s articles of organization did not caution them about this potential issue. When the members file answers, other lawyers and judges must spend time, effort, and money educating the members about the LLC’s need for representation. When the members disregard this instruction, answers may be stricken and judgment entered against the LLC. The LLC and its new lawyers must spend time and money trying to reopen the case. If they lose the motion to reopen, perhaps they will turn to the lawyer who helped them file the LLC’s articles of organization for relief. Even more disconcerting is the possibility that the forced inference is wrong and there is no impediment.
The specific reason nonlawyers cannot represent LLCs in large claims cases perhaps does not matter much to lawyers. But it should. Frankly, while a bar to self-representation to LLCs benefits lawyers because it creates more clients, the legal community will deal with this potential problem in one way or another as more and more emerging businesses choose the LLC or the limited liability partnership form of organization. Moreover, as the economy worsens, companies are more likely to try to represent themselves rather than pay large retainers.26 If courts, lawyers, and the legislature are not prepared, then statutory loopholes become practical problems not only for clients but also for the legal community at large.
Addressing the Statutory Loophole
With the creation of new business forms, the legislature must keep pace with the law that it writes. Therefore, the more direct solution is to plug the legislative loophole. The first step would be to clarify whether or not there is a barrier in the statutes to nonmembers representing limited liability entities.
As the cross-references to other statutes illustrate, many Wisconsin laws have been revised to account for new business entities; however, the unauthorized practice of law seems to have escaped the legislature’s attention. If a bar exists, the fix to the statute could be as simple as revising the statute to expand the entities subject to it:
Original Statutory Text. “Every person who appears as agent, representative or attorney, for or on behalf of any other person, or any firm, partnership, association or corporation in any action or proceeding in or before any court of record ... shall be deemed to be practicing law within the meaning of this section.”
Suggested Bar-to-Nonlawyer-Representation Version. “Every person who appears as agent, representative or lawyer, for or on behalf of any other person, or any firm, partnership, association, corporation, and entities having limited liability for its individual members, officers, or agents in any action or proceeding in or before any court of record ... shall be deemed to be practicing law within the meaning of this section.”
On the other hand, if there is to be no bar against nonlawyer representation of LLCs, the statute should be revised to limit the entities subject to the statute.
Suggested No-Bar-to-Nonlawyer-Representation Version. “Every person who appears as agent, representative or lawyer, for or on behalf of any other person, firm, partnership, association, and corporation in any action or proceeding in or before any court of record ... shall be deemed to be practicing law within the meaning of this section.”
There probably are countless other (and better) methods of clarifying the law on this issue in keeping with the rules of statutory construction. Until a revision occurs, however, lawyers will have to establish their own ways of dealing with unrepresented LLCs.
What We Can Do as Lawyers
The Initial Advising Lawyer. When starting new businesses, entrepreneurs ask lawyers for advice on how they should go about forming their companies. In this type of representation, an essential part of that initial advice is which business entity should be chosen. Lawyers advise their clients with an eye toward tangible benefits such as taxation and liability. In some ways, this kind of advice assumes that businesses will always be profitable or at least operating. Lawyers, however, should pay the same amount of attention to planning for liabilities as they do to outlining the advantages of certain business forms. In other words, they must tell their clients that although they may not be personally responsible for the LLC’s liabilities, they are responsible for ensuring that the LLC is represented by counsel to protect the LLC’s assets.
The Lawyer Opposing the LLC. The task is more complex for a lawyer suing an unrepresented entity. Once the answer is filed, the lawyer opposing the nonlawyer has two options, and neither one is a panacea.
The first option is really a combination of steps to move the case forward. The intended result is that the LLC has representation and the litigation can actually begin.
The most productive step a lawyer can take after receiving an answer filed by a nonlawyer is to tell the LLC members or agents in writing27 that they need to retain counsel to represent the LLC and to give them a deadline to do so. They might take the advice. If the LLC does not retain counsel and the answer is on the record past the deadline, the lawyer may confidently file a motion asking the court to strike the answer as a legal nullity and enter default judgment. The motion serves the intended goal in two ways: 1) Nonlawyers realize that the lawyer is not tricking them by telling them they need representation; and 2) nonlawyers have the time between when the motion is filed until when it is heard to retain a lawyer. If the nonlawyer still does not retain counsel, the previous step taken shows the court that the lawyer advised the LLC members about the potential problem. The lawyer should attach that initial letter to the affidavit supporting the motion to strike. The judgment is on firm (or at least firmer) ground when granted, because the court does not sacrifice adequate notice to the LLC in exchange for a quick default judgment.
In the second option, the lawyer says nothing to the unrepresented LLC member and lets the answer stand until the time for answering the complaint elapses. Then the lawyer files the motion for default judgment or sends in the default judgment papers, depending on the rules of the county in which the action is filed.28 At the default judgment motion hearing, the judge (probably rightfully) gives the LLC member a window, probably a month, within which to hire a lawyer. More than likely, if the default judgment was granted on the basis of the filing of default judgment pleadings, the defendant will file a motion to reopen, the motion will be granted, and the court will advise the defendant to retain a lawyer. The lawyer is now back at square one with nothing to show to his or her client and has to inform the client that the case – the one the client was told was resolved – has now been reopened. In addition, the lawyer has spent time drafting the motion (which he or she lost) and had to wait for the motion to be heard and now for the defendant to retain a lawyer.
With these considerations in mind, the first option, even if not ideal, appears more attractive. However, the salient point is that unless changes are made to the statutory text and the way attorneys advise limited liability entity members, no one benefits from the current state of confusion.
In every practice area, lawyers face complex questions in dealing with pro se persons. Nonlawyers do not know the rules; lawyers are not sure how much they should tell them without compromising their duty to their clients. By litigating against unrepresented limited liability entities, lawyers face unique challenges. First, the law is not clear on whether and to what extent there is a bar to self-representation of limited liability entities in large claims cases. Second, when dealing with limited liability entities in the real world, common sense conflicts with civil procedure. Undoubtedly, a default judgment is the fastest way to judgment in civil procedure. Yet, when it is neither efficient nor effective to pursue default judgment immediately, lawyers must fashion practical, ethical methods to serve their clients.