30-2013-00678501Demurrer to 1st Amended Complaint:

Plaintiff describes this case in its opposition as a “garden-variety business to business debt collection matter.” It may be, but there is really no “garden-variety” to any case from the court’s point of view. If it’s a lawsuit it demands serious attention.
Defendant raises interesting issues that, at a minimum, call for Plaintiff to provide more facts that explain how & why it can legally do what it is doing despite the apparent prohibition in Corp. Code section 17701.04(e).

(a) Defendants Ghods Law Firm and Mohammed Kent Ghods’ request for judicial notice is granted as to Exs. 1 – 5, denied for Ex. 6.

(b) Defendants’ demurrer to the first amended complaint of plaintiff Hutchings Court Reporters, LLC is sustained with 21 days leave to amend.

(i) The Moscone-Knox Professional Corporation Act was enacted in 1968 to permit the formation of corporations in California to render professional services. Marsh’s California Corporation Law (Aspen Publishers 2013) §2.03 [G]. The Beverly-Killea Limited Liability Company Act was enacted in 1994. This act provided for the creation in California of limited liability corporations. Despite the broad grants of power and authority for LLCs in the Beverly Killea LLC Act, the use of LLCs in California is prohibited for businesses that render professional services. See Corp. Code § 17701.04(e) (“nothing in this title shall be construed to permit a domestic or foreign limited liability company to render professional services, as defined in subdivision (a) of Section 13401 and Section 13401.3, in this state.” (effective 1/1/14; previously, same language was at Corp. Code § 17375).

(ii) The rationale for the exclusion of professional services from the various businesses that an LLC may undertake was that service providers who harm others by their misconduct, incompetence, or negligence should not be able to limit their liability by operating as an LLC and thus potentially becoming judgment proof. Marsh’s California Corporation Law (Aspen Publishers 2013) §2.03 [H]. Section 17002 was amended in 2010 to authorize an LLC to render professional services rendered pursuant to license, certificate or registration under the Business & Professions Code if the provisions of that code authorize an LLC to hold that license, certificate or registration. Id.

(iii) The California Attorney General has issued an opinion that LLCs may render nonprofessional services that require a license, certification, or registration under the Business & Professions Code.87 Ops. Cal. Atty. Gen. 109 (7/23/2004). Professional services may be rendered by a professional corporation. Id. One commentator has noted, however, that it is not entirely clear which services are deemed “nonprofessional” and which “professional” and that the fact that the Secretary of State has accepted bylaws for an LLC rendering certain services does not define what is in fact permitted by the law. Cal. Transactions, Ch: 1: Choice of Business Entity, § 1:77, Practice Tip.

(iv) Shorthand reporters are required to be licensed under the Business & Professions Code. B&P Code § 8020. They are regulated by the Court Reporters Board of California. Id.§ 8040. They may form professional corporations. B&P Code §§ 8040, 13401. It is unprofessional conduct and a violation of the chapter to seek to violate the provisions governing court reporters, including the Moscone-Knox Professional Corporation Act. Id. § 8042.

(c) Plaintiff takes the position that it essentially just makes the arrangements between the clients and the licensed court reporters it is affiliated with, and otherwise providing administrative and billing services, so that the bar against LLC’s rendering professional services not implicated by its activities and does not bar collections.

(i) Plaintiff likens itself to a temp agency, but on the current record there is no information about how, and under what authorization, such agencies operate and whether that is similar to how Plaintiff operates. (ii) Also, there is no information about the terms of the agreement or arrangements between Plaintiff and Defendant, or between Plaintiff and the certified court reporters. (iii) Nor does Plaintiff’s distinction between “perform” and “provide” answer the question whether the statute barring LLCs from “rendering” professional services applies here: for the most part, dictionary definitions for “render,” include “provide” as a synonym for render.

As indicated in (b) above, Defendants’ demurrer to the first amended complaint of plaintiff Hutchings Court Reporters, LLC is sustained with 21 days leave to amend.

Moving Party shall give Notice.