Members of a Limited Liability Company May Bring Derivative Suits

New York’s Limited Liability Company Law contains no provision allowing for derivative suits by members of the LLC. Nevertheless, today the Court of Appeals in Tzolis v Wolff, 2008 NY Slip Op 01260 held that members of a LLC  may bring derivative suits on the LLC’s behalf.

In that case, Pennington Property Co. LLC was the owner of a Manhattan apartment building. The plaintiffs owned 25% of the membership interests in the LLC. The plaintiffs claim that those in control of the LLC, and others acting in concert with them, arranged first to lease and then to sell the LLC’s principal asset for sums below market value; that the lease was unlawfully assigned; and that company fiduciaries benefited personally from the sale. The plaintiffs thus brought an action “individually and in the right and on behalf of” the company seeking to declare the sale void, and to terminate the lease.

In upholding the right of LLC members to bring derivative suits, the Court of Appeals noted that the derivative suit was well recognized as part of the general corporate law of the state since 1832, even though it was not codified until much later in Business Corporation Law § 626 [a]. The Court thus noted that even though the Limited Liability Company Law did not expressly provide for such derivative suits, it could also find no clear mandate in the Legislative history barring derivative suits, and that to eliminate derivative suits by LLC members would be a radical step.

Leave a Reply

Your email address will not be published. Required fields are marked *