LLC Disputes: Supreme Court to Weigh In

March 26, 2018

Does a member of an LLC have standing to personally sue another member of the LLC for self-dealing or other misconduct that primarily causes harm to the LLC?  That is the important question the Wisconsin Supreme Court has been asked to decide by the court of appeals in Marx v. Morris, 2017AP146.

The underlying facts involved a dispute between three members of an LLC, Marx, Morris, and Murray.  Two of the members, Marx and Murray, accused the third member, Morris, of self-dealing in a transaction in which one of the LLC’s subsidiaries was sold to another company partially owned by Morris.  The two members filed suit in their personal capacity against Morris for breach of fiduciary duty and violating Wis. Stat. § 183.0402, for failing to deal fairly with them, and deriving an improper personal benefit from the transaction.

Morris moved for summary judgment, claiming that the two members’ claims belonged solely to the LLC and could not be asserted directly by the individual members.  Morris also claimed that Wis. Stat. ch. 183 preempted the breach of fiduciary duty claims and other common law claims.  The trial court denied the motion for summary judgment.

On appeal, the court of appeals cited long-standing corporate law that individual shareholders of a corporation lack standing to assert legal claims on their own behalf that, in actuality, belong to the corporation.  The court of appeals felt “inclined to agree” with Morris’ argument that principles of corporate law should apply to LLCs and members should be required to bring suit on behalf of the LLC.  The two members disagreed and argued that principles of partnership law should apply to LLCs, which permit individual partners to assert claims against other partners.

Recognizing the importance of these legal issues, the court of appeals requested that the Supreme Court address: (1) whether members of an LLC have standing to assert claims against other members for injuries primarily suffered by the LLC; and (2) whether the Wisconsin LLC law, Wis. Stat. ch. 183, preempts common law claims by one member based on the second member’s alleged self-dealing.

There is no guarantee the Supreme Court will accept review.  However, there is a significant likelihood the Supreme Court will want to be heard on this issue, given the popularity of LLCs and the frequency at which this issue will arise again in the future.  If the Supreme Court agrees with the court of appeals, LLC members will be required, in most cases, to bring suit on behalf of the LLC for claims involving self-dealing. If LLC members fail to follow this requirement, their claims may be subject to dismissal.

We will continue to monitor this case and provide an update when we learn more from the Supreme Court.