SW Legal studies in Business

Derivative Suits Allowed for LLCs in New York
Description New York high court held that while the statute that allowed the creation of LLCs in New York did not specify the ability of individual members to bring derivative suits on behalf of the companies, it is reasonable to assume that that traditional right for shareholders in corporations would extend to members of LLCs.
Topic Business Organization
Key Words LLC; Derivative Suits
C A S E   S U M M A R Y
Facts Pennington Property LLC was the owner of a Manhattan apartment building. Plaintiffs, who own 25 percent of the membership interests in the LLC, sued “individually and in the right and on behalf of” the company (the LLC)—a derivative suit—claiming that those in control of the LLC sold the building for much less than its market value and personally profited from the sweetheart deal they had cooked up. The trial court dismissed the suit, holding that plaintiffs individually could not bring a derivative suit “to redress wrongs suffered by the corporation” because such actions could not be brought for a limited liability company. The appellate court reversed, holding that derivative suits on behalf of LLCs are permitted. That decision was appealed.
Decision Affirmed. When the New York Limited Liability Company Law was enacted in 1994 it did not mention derivative suits. However, the failure to reference such suits in the statute did not imply that such suits were prohibited. Based on the long-recognized importance of the derivative suit in corporate law, it is reasonable to assume that the right applies to LLCs. The purpose is to help ensure that when corporate fiduciaries use corporate assets to enrich themselves, there can be an appropriate remedy to protect the company and its members. That long-standing right that applies to corporations is extended to LLCs.
Citation Tzolis v. Wolff, ---N.E.2d--- (2008 WL 382345, Ct. App, N.Y., 2008)

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