WisBar News: Does the Derivative Claim Principle of Corporate Law Apply to LLCs?:

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    Does the Derivative Claim Principle of Corporate Law Apply to LLCs?

    Joe Forward

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    March 13, 2018 – The Wisconsin Supreme Court may decide whether a member of a liability company (LLC) has standing to sue another member of the LLC based on injuries to the LLC, rather than the individual member who is asserting the claim.

    The Wisconsin Appeals Court recently asked the supreme court to decide the issue, as well as whether Wisconsin’s LLC law preempts “common law claims by one member of an LLC against another member based on the second member’s alleged self-dealing.”

    The case involves a dispute between three members of North Star Sand, LLC (North Star). Two of North Star’s members alleged that a third member engaged in self-dealing when North Star sold its subsidiary to a company the third member partially owned.

    The complaining members, Daniel Marx and Michael Murray, did not assert claims on North Star’s behalf. They asserted claims on behalf of themselves and their own LLCs.

    They alleged that Richard Morris violated Wisconsin LLC law, Wis. Stat. ch. 183, because he derived an improper personal profit from the transaction at issue.

    They also alleged that Morris breached common law fiduciary duties owed to them and claimed Morris breached an implied covenant of good faith and fair dealing.

    But Morris moved for summary judgment, arguing that Marx and Murray lacked standing – it was Northstar’s claim and could not be asserted by individual members. The circuit court rejected Morris’s argument, concluding members have duties to each other.

    The appeals court granted an immediate appeal. But the appeals court recently certified the case to the state supreme court, noting “there is no binding authority” on the questions presented, including whether Marx and Murray had standing to sue.

    “Given the importance of the issues raised in this appeal, the unsettled state of the law, and the high likelihood that these issues will recur in future cases, we believe this is a case in which it would be appropriate for the supreme court, rather than the court of appeals, to render a decision,” the appeals court wrote in its certification.

    Morris argues that LLC members cannot assert claims on their own behalf, just as individual shareholders of a corporation lack standing to sue as individuals when – as the supreme court previously ruled in Rose v. Schantz, 56 Wis.2d 222 (1972) – the “primary injury set forth is to the corporation, not the individual stockholder.”

    In the certification, the appeals court said it was “inclined to agree with Morris,” assuming the same principles of corporate law apply to LLCs.

    “[T]he record in this case indicates that Marx and Murray have not sustained any individual injury as a result of Morris’s alleged self-dealing,” the certification notes.

    “The question [is] whether Morris is correct that, based on corporate law principles, Marx and Murray were required to demonstrate individual injuries in order to assert individual claims against him, as opposed to derivative claims on behalf of the LLC.”