## Facts

- Duray Development, LLC, a residential developer, hired excavation services for its Copper Corners development in Caledonia Township, Michigan.
- A September 30, 2004 excavation contract named Perrin, Perrin Excavating, and KDM Excavating as contracting parties.
- On October 27, 2004, the parties executed a second contract intended to supersede the first and naming Outlaw Excavating, LLC as the contractor.
- Perrin and a partner represented themselves as owners and operators of Outlaw, and the parties performed as if Outlaw were the contracting entity.
- Outlaw’s articles were not filed until November 29, 2004, after the October 27 contract.
- Duray sued for breach based on allegedly untimely and deficient work; Perrin asserted a counterclaim for nonpayment.
- After a bench trial, the circuit court found Perrin personally liable for breach and awarded Duray $96,637.68, reasoning that Outlaw’s formation defect prevented application of de facto corporation doctrine to an LLC.
- As a discovery sanction, the circuit court barred defendants from calling witnesses at trial.

## Issues

1. Whether the de facto corporation doctrine may apply by analogy to a defectively formed limited liability company so as to limit an organizer’s personal liability.
2. Whether the trial court abused its discretion by precluding defendants from calling any witnesses as a discovery sanction without analyzing the governing factors for severe sanctions.
3. Whether an “LLC by estoppel” theory could support treating the entity as existing when the parties dealt with it as such, and whether that theory was preserved.

## Decision

- The Court of Appeals reversed the ruling that de facto corporation doctrine is categorically inapplicable to LLCs and remanded for reconsideration under the correct legal framework.
- The court held the de facto corporation doctrine can apply to LLCs formed under the Michigan Limited Liability Company Act when the traditional elements are satisfied.
- The court recognized that an LLC-by-estoppel theory may be available in principle but declined to apply it because the argument was not preserved.
- The court reversed the witness-preclusion order, holding the trial court abused its discretion by imposing a sanction equivalent to dismissal without considering required factors or explaining why lesser sanctions were insufficient.
- The case was remanded for further proceedings consistent with these holdings.

## Legal Principles

- A defectively formed business entity may be treated as a de facto entity when: (1) a statute authorizes formation, (2) there is a good-faith attempt to organize under that statute, and (3) the entity exercises the powers of the intended form.
- The de facto corporation doctrine is not limited to corporations; it may extend to LLCs where statutory structure and policy support comparable treatment of good-faith formation defects.
- Corporation-by-estoppel principles may apply by analogy to LLCs to prevent a party that dealt with an entity as an LLC from later denying its existence, subject to preservation and procedural requirements.
- A discovery sanction that bars a party from presenting witnesses is effectively case-dispositive and requires an on-the-record evaluation of factors such as willfulness, prejudice, history of noncompliance, and adequacy of lesser sanctions.

## Conclusion

The Michigan Court of Appeals held that courts may apply the de facto corporation doctrine to LLCs and that the trial court erred by imposing personal liability based on a categorical refusal to recognize a de facto LLC; it also reversed a witness-preclusion discovery sanction for failure to apply the required standards and remanded for reconsideration.


Duray Dev., LLC v. Perrin, 288 Mich. App. 143, 792 N.W.2d 749 (Mich. Ct. App. 2010)