Daniel Marx v. Richard L. Morris
386 Wis. 2d 122, 925 N.W.2d 112, 2019 WI 34 (2019)
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Rule of Law:
Members of a limited liability company (LLC) have standing to assert direct, individual claims against other members or managers for harm to the LLC itself, as the corporate law principle requiring derivative actions does not apply to this distinct business form. Furthermore, common law claims are not displaced by the Wisconsin LLC statute unless a particular statutory provision specifically abrogates them.
Facts:
- Six individuals, through their respective LLCs including Daniel Marx (Fracsand, LLC), Michael Murray (R&R Management Funds, LLC), and Richard Morris (R.L. Co., LLC), formed North Star Sand, LLC to mine silica sand.
- Morris, an attorney and a manager of North Star, helped draft the company's Operating Agreement.
- North Star formed a wholly-owned subsidiary, Westar Proppants, LLC (Westar), which held valuable options to purchase land containing silica sand reserves.
- On December 31, 2013, the day Westar's purchase options were set to expire, North Star's members held a telephonic meeting.
- During the meeting, the members first voted 4-2 to retain ownership of Westar.
- Immediately after this vote, Morris, who had an ownership interest in another entity called DSJ Holdings, LLC (DSJ), proposed that North Star sell Westar to his company, DSJ, for $70,000.
- Despite Murray's objections about lack of notice and Morris's conflict of interest, a second vote was held, and the motion to sell Westar to DSJ passed 4-2.
- DSJ later sold Westar and a related entity to Unimin Corporation for what was alleged to be a substantial sum.
Procedural Posture:
- Daniel Marx, Fracsand, LLC, Michael Murray, and R&R Management Funds, LLC sued Richard L. Morris and R.L. Co., LLC in the Circuit Court for Eau Claire County (trial court).
- The defendants moved for summary judgment, arguing the plaintiffs lacked standing to bring direct claims for an injury to the LLC.
- The circuit court denied the defendants' motion for summary judgment.
- The defendants, as appellants, appealed the circuit court's non-final order to the Wisconsin Court of Appeals (intermediate appellate court).
- The Court of Appeals certified the appeal to the Wisconsin Supreme Court to resolve the questions of LLC member standing and preemption of common law claims.
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Issue:
Does a member of a limited liability company (LLC) have standing to assert a direct, individual claim against another member or manager for an injury that primarily harms the LLC?
Opinions:
Majority - Chief Justice Roggensack
Yes. A member of an LLC has standing to assert individual claims against other members and managers based on harm to the members or harm to the LLC because corporate principles of derivative standing do not apply to the distinct business form of an LLC. The court reasoned that LLCs are a unique statutory creation, and Wisconsin's legislature did not import the detailed derivative action requirements from corporate law (ch. 180) into the LLC statute (ch. 183). Unlike a corporation, an LLC like North Star, which is taxed as a partnership, has a direct financial connection to its members; any financial harm to the LLC flows directly through to the members' capital accounts and individual tax returns. Therefore, an injury to the LLC is also a direct injury to its members, giving them a legally protectable interest to sue individually. The court also held that Wis. Stat. § 183.0402(1)(a), which protects against unfair dealing with the LLC 'or its members,' explicitly creates a basis for individual member claims.
Dissenting - Justice Kelly
No. Claims for an injury primarily suffered by an LLC belong to the entity itself and must be brought through a derivative action, not by individual members directly. The majority's decision is incompatible with the legal structure of LLCs as distinct juridical entities, separate from their members. The 'primary injury' rule is a necessary analytical tool to determine claim ownership for any distinct legal entity, not just corporations. The majority ignored Wis. Stat. § 183.0305, which limits a member's ability to be a party in a suit involving the LLC, indicating the legislature intended to maintain the entity's separateness. Furthermore, the majority's focus on tax status is misguided, as tax elections are choices, not fundamental structural differences. This ruling creates a chaotic paradigm where a few members can sue and potentially recover damages that rightfully belong to the entire LLC and all its members.
Analysis:
This decision carves out a significant exception to the traditional distinction between direct and derivative lawsuits, creating a unique rule for Wisconsin LLCs. By rejecting the corporate derivative standing model, the court emphasizes the partnership-like qualities of LLCs, particularly the direct pass-through of financial consequences to members. This holding lowers the procedural barriers for LLC members seeking redress for mismanagement or self-dealing but may also lead to an increase in intra-member litigation and undermine the LLC's autonomy as a legal entity by allowing individual members to litigate claims that affect the entire company.
