Imagine you are a 13% owner of an LLC. The other two members own 60% and 27% of the LLC interests, respectively. Your LLC owns and operates a restaurant. You learn much to your dismay that two new restaurants open in surrounding communities. Curious, you drop in for a meal at these establishments. Lo and behold, the menus look surprisingly similar to your restaurant. You dig a little further and discover that the owners of these new restaurants are also the members of your LLC. Not only do the menu ideas appear derivative, you believe some of the assets and trade secrets from your restaurant are being used by the new ones. Not happy, you bring a direct claim against your business colleagues. They in turn move to dismiss because you lack standing to sue them directly. Will their motion be successful?
In Ward v. Gamble, (2009 Conn. Super. LEXIS 2091) the court faced with these facts (I indulged in a little artistic license in my recounting of them) granted the motion to dismiss. Unlike Iowa law, which I will get to in a minute, the Connecticut LLC Act does not address derivative actions so the court had to rely on a statute regarding corporate and unincorporated associations derivative actions. The court recited well-settled Connecticut law that in order to have standing the plaintiff must "demonstrate a specific, personal and legal interest in [the subject matter of the challenged action], as distinguished from a general interest" and this interest has been adversely affected by the actions of the defendants.
It then applied the general derivative statute to conclude that the plaintiff must bring a derivative action because the alleged injuries are not separate and distinct from those suffered by the LLC and its other members, even though the only other members of the LLC were the alleged wrong-doers.
Iowa Code 489.901 addresses direct actions by LLC members. A member may bring a direct action against another member, manager or LLC "to enforce the member's rights and otherwise protect the member's interests. The member must plead and prove injury that is not solely the result of an injury suffered by the LLC.
-Marc Ward
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