Illegal Pete's restaurant in the Sugar Building in Denver. Photo: Jeffrey Beall/Wikipedia Commons

Restaurant group Illegal Pete's Inc. has sued two state officials in federal court over their refusal to convert the Colorado-based company to a Delaware limited liability company, arguing they based their decision on the notion that its “name has a negative connotation.”

The lawsuit, filed Monday, accused Deputy Secretary of State Kristopher Knight and Margaret Magnusen, the corporations section manager of the state division of corporations, of violating its constitutional rights with the decision late last year. The filing was first reported by the Associated Press on Tuesday.

According to the complaint, officials took issue with the company's name and cited a provision of Delaware's corporation law that allows the state to reject certificates for businesses that “might cause harm to the interests of the public.”

In a Nov. 9 voicemail, Knight told Illegal Pete's that the state had provided the company with the reasoning behind its decision and ”will not be changing an opinion that the name filing requested has not been accepted,” the filing said.

Illegal Pete's argued in its complaint that the statute cited by the state only referred to banks and was not applicable to its request. The company's name, it said, was chosen to honor the founder's father, who was described on Illegal Pete's website as “a bit of a good-natured hell-raiser in his day.”

The lawsuit seeks injunctive relief, as well as attorney fees and costs from the state.

“Defendants' sole basis for refusal, that plaintiff's name 'has a negative connotation' that 'might cause harm to the interests of the public or the state' is unconstitutionally vague and standardless,” the company's attorney's wrote in the eight-page complaint. “Defendants' decision to deprive plaintiff of its liberty interest of expression and free speech is arbitrary and capricious, in violation of plaintiff's right to due process under the Fourteenth Amendment.”

A spokesman for Delaware's Division of Corporations declined to comment Wednesday, saying the agency does not comment on pending litigation.

The filing comes as Delaware is facing increasing scrutiny for its oversight of alternative entities, which have been linked to a series of abuses and illegal activity. In January, the Division of Corporations said that it would require additional screening for registered agents acting on behalf of companies and LLCs to ensure that they have not been sanctioned by federal authorities or otherwise barred from doing business in the United States.

Meanwhile, an open government group has argued that the changed don't go far enough and earlier this year called on Delaware's congressional delegation to sponsor legislation to create a national database that would track information on beneficial owners of the entities.

Delaware LLCs in recent years have been associated with money laundering schemes and sex trafficking conspiracies, and critics have argued that the state's lenient formation system enables criminal conduct among a small population of the more than 974,000 active LLCs in the First State.

Illegal Pete's is represented in the suit by Duane A. Bosworth of Davis Wright Tremaine in Portland, Oregon, and David L. Finger of Finger & Slanina in Wilmington. The company, founded in 1995, operates in Colorado and Arizona.

An online docket tracking service Wednesday did not list counsel for the state officials, who were sued in their official capacity.

The case, captioned Illegal Pete's v. Knight, has not yet been assigned to a judge.