If you’re looking for persuasive authority as to what constitutes an LLC derivative action under Iowa law, consider Weihs v. Carver et al., LACV 018772 (Shelby County). In Weihs, former Iowa Supreme Court Justice Jeffrey L. Larson, who currently hears cases in the Fourth Judicial District in Western Iowa, dismissed a suit which purported to be a suit brought by LLC unit holders as individuals, but which was, in reality, a derivative suit in which the plaintiffs had failed to satisfy the statutory requirements to proceed derivatively.
Plaintiffs sought injunctive relief, declaratory relief and damages for breach of the duty of good faith and fair dealing and breach of fiduciary duties of loyalty and care. Three unit holders brought the suit, naming as Defendants the Directors of the LLC.
Plaintiffs argued that they could bring the action against the Directors as individuals, because Plaintiffs claimed that they were owed a special duty and that they had injuries which were separate and distinct from those suffered by other unit holders in the LLC. Specifically, Plaintiffs claimed that the Defendants owed the Plaintiffs a duty under the LLC Operating Agreement, and that the Directors had breached their duty by failing to call a requested meeting to remove the Defendants as directors. Plaintiffs argued that because they were the only three members calling the special meeting and were ignored, that they suffered an injury separate and distinct from the other members. Plaintiffs also argued that additional ownership interests that had been issued at a board meeting by the Defendant Directors negatively affected the Plaintiffs’ majority control of the LLC’s voting interest, such that the Plaintiffs had suffered a separate injury.
Judge Larson held that the Plaintiffs had failed to show that they were owed a special duty, or that they had suffered an injury separate and distinct from the other unit holders. First, the Operating Agreement did not create any special duty running to the Plaintiffs, even if the Plaintiffs were the only unit holders requesting the meeting. Moreover, dilution was an injury felt by all unit holders. The Court also rejected Plaintiffs’ reliance upon language in the Operating Agreement which said that the Company and the non-breaching Members were entitled to injunctive relief in certain instances, as the Court held that the language did not create any right in the Plaintiffs as individual unit holders.
-Mollie Pawlosky
