Derivative Suits by LLC Members in New York: Tzolis v. Wolff
On February 14, 2008, the New York Court of Appeals held that members of limited liability companies ("LLC") may bring derivative suits on behalf of their LLCs, just as shareholders and partners may bring such suits on behalf of their corporations and limited partnerships respectively. The majority's decision is controversial because New York's limited liability statute does not specifically authorize derivative suits by LLC members. Indeed, the New York State legislature removed a provision from the LLC bill prior to enactment that would have expressly provided for derivative suits. The dissent described the decision as "unique in the annals of the Court of Appeals" because, they allege, "never before has a majority of the Court read into a statute provisions or policy choices that the enacting Legislature unquestionably considered and rejected."
Mr. Wilson writes: An LLC has attributes of a corporation and a partnership. An LLC is like a corporation in that it provides limitations on personal liability, like a shareholder of a corporation. For tax purposes, an LLC generally is treated like a partnership. New York has specifically recognized LLCs by statute since enacting legislation in 1994.
A derivative suit is brought by existing equity owners of a company, in the case of a corporation, the shareholders, to seek legal redress on behalf of the company against the officers and directors of the company for breaches of fiduciary duty.
The lower New York courts had split as to whether LLC members could bring a derivative suit for wrongs committed against the company. The Appellate Division for the Second Department had held that LLC members have no right to bring a derivative action, “[l]imited liability companies seem to be the one exception thus far to judicial recognition of the authority to bring a derivative action . . . a member of a limited liability company has no right to bring a derivative action on behalf of the company.” Some courts had held that LLC members have their own direct claim against fiduciaries for conduct that injured the LLC, which effectively eliminated the distinction between direct and derivative claims. [citations omitted]