In a recent case, the Wisconsin Supreme Court made the distinction between the recourse available to LLC members and corporate shareholders. Previously, courts used a corporate statue for LLCs as well.

Case Background

Richard Morris was the sole manager of North Star LLC, a company that owns and mines land for silica production. Morris was also the sole member of R.L. Co. LLC, which a member of North Star. After North Star sold assets to another company Morris partially owned, several members sued him and R.L. Co. LLC. The other members accused Morris of self-dealing and conflict of interest.

In Wisconsin, shareholders must file a derivative lawsuit when the corporation is harmed. (See our blog post on derivative v. direct lawsuits). According to Chapter 180, the requirements for a derivative claim are a notice period and the corporation has dismissal rights upon a majority vote of independent directors.

However, the Wisconsin Supreme Court made the distinction between LLCs and corporations. It declined to apply Chapter 180 derivative provisions. Instead, the Wisconsin Supreme Court applied the only provision relating to LLC’s.

Implications

Before this decision, members effectively needed permission from 50% or more interest holders in the LLC prior to bringing this type of claim. The Marx decision does not require members to bring claims on behalf of the LLC. Rather, members can sue other members individually and bypass the previous majority vote requirement.

Interestingly, the court did not address a section that limits member lawsuits. This section states that a member is not a proper party to bring a claim against an LLC unless they are enforcing their rights against the LLC. This leaves unanswered questions about the viability of such lawsuits, which will almost certainly be addressed through future litigation.

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