Business Litigation: Wisconsin Supreme Court Clarifies LLC Member Standing to Sue For Harm to the LLC or its Members
On April 2, 2019, the Wisconsin Supreme Court issued a decision in a closely-followed appeal involving the rights of members of a Wisconsin Limited Liability Company (“LLC”) to sue LLC managers or other members, in the matter of Daniel Marx, et al. v. Richard L. Morris, et al. 2019 WI 34.
Significantly, the Court held that the members of an LLC have standing to assert individual claims against other members of the LLC, as well as the LLC’s managers, based on harm to the members or the LLC, itself. Prior to this decision, there was uncertainty in this regard because, under Wisconsin law, individual shareholders of Wisconsin corporations do not have standing to assert claims relating to damage solely to the corporation, which claims belong to the corporation, itself. Accordingly, in most circumstances aggrieved shareholders are required to pursue litigation on behalf of the corporation solely through a proceeding called a “derivative action,” which is subject to certain procedural and substantive requirements contained in Wisconsin Statutes. Unlike the Wisconsin Statutes governing corporations (Chapter 180), the Wisconsin LLC Statute (Chapter 183) contains no similar provisions governing derivative actions on behalf of LLCs.
A panel of the Wisconsin Court of Appeals, in certifying the case for review and determination by the Wisconsin Supreme Court, noted that under existing case law relating to corporations, if such principles applied to LLCs as some Wisconsin case law might suggest, they were “inclined to agree” that individual members could not bring an action against members for harm to the LLC or its members unless the members could show that they sustained a unique injury not suffered by other members. 2017AP146.
The underlying case involves allegations that Morris and his single-member LLC—itself a member of a six-member LLC, North Star Sand LLC—engaged in improper self-dealing in a transaction in which assets of North Star were sold to a separate entity partially owned by Morris. Two of the other members of North Star—themselves single-member LLCs—brought suit against Morris alleging violation of Wisconsin LLC statutes, common law claims, and breach of contract claims relating to the alleged improper self-dealing.
In addition to confirming LLC members’ individual standing to sue other members or managers for alleged harm to members or the LLC, the Court also concluded that certain common law duties—including relating to LLC member fiduciary duties—are not abrogated by the statutory duties provided in the Wisconsin LLC Statute, and may apply to LLC members or managers if not expressly excepted or limited by the governing LLC operating agreement entered into among the LLC members.
A separate opinion authored by Justice Daniel Kelly, and joined by Justices Shirley Abrahamson and Rebecca Bradley, concurring in part and dissenting in part, suggests that there may be additional propositions established by the majority decision; however, many of these propositions were not discussed or expressly determined in the majority opinion.
Such fiduciary duty disputes are, unfortunately, not uncommon among LLC members, and generally do not surface until long after the LLC has been formed and the governing operating agreement has been established. LLC operating agreements should be carefully drafted in order to ensure that the members’ intentions are incorporated in their duties to each other and the LLC with respect to engaging in related businesses or operating the LLC. The Court’s recent decision also clarifies aggrieved LLC members’ rights to pursue legal action in the event that fellow LLC members or managers engage in improper transactions or other activity that damage the LLC or individual members’ interests.