10 N.Y.3d 100 (2008)

Members of a limited liability company (LLC) may bring derivative suits on the LLC’s behalf, even though the Limited Liability Company Law doesn’t explicitly authorize such suits.

Summary

This case addresses whether members of an LLC can bring derivative suits on behalf of the LLC when the LLC’s management fails to act. The Court of Appeals held that members can bring such suits, emphasizing the historical importance of derivative suits and the absence of a clear legislative intent to abolish this remedy when the Limited Liability Company Law was enacted. The Court reasoned that barring derivative suits would leave LLC members without recourse against faithless fiduciaries, an unacceptable outcome with potentially far-reaching and negative consequences for the business environment.

Facts

Plaintiffs, owning 25% of Pennington Property Co. LLC, sued derivatively on behalf of the LLC. They alleged that the individuals controlling the LLC arranged to lease and sell the company’s primary asset (a Manhattan apartment building) below market value, and that fiduciaries personally profited from these transactions. The plaintiffs sought to declare the sale void and terminate the lease.

Procedural History

The Supreme Court dismissed the derivative causes of action, holding that New York law doesn’t allow members to bring derivative actions on behalf of an LLC. The Appellate Division reversed, concluding that derivative suits on behalf of LLCs are permissible. The Court of Appeals granted permission to appeal, leading to this decision.

Issue(s)

Whether members of a limited liability company (LLC) are permitted to bring derivative suits on behalf of the LLC in the absence of explicit statutory authorization.

Holding

Yes, because the omission of a provision authorizing derivative suits in the Limited Liability Company Law does not indicate a legislative intent to prohibit them. The Court relied on the established importance of derivative suits in corporate law and the lack of clear evidence that the legislature intended to eliminate this remedy when passing the LLC law.

Court’s Reasoning

The Court reasoned that derivative suits are a long-standing, essential remedy in corporate law, originating in case law to protect shareholders from breaches of fiduciary duty. Analogizing to trust law, the Court noted that beneficiaries can sue on behalf of a trust when trustees fail to act. While the legislature omitted an explicit provision for derivative suits when enacting the Limited Liability Company Law, this omission does not equal prohibition. The Court found no legislative intent to abolish derivative suits for LLCs, a move that would require devising substitute remedies and potentially lead to double liability. The court cited past instances where derivative suits were recognized without express statutory authorization. The dissent argued that the legislative history demonstrated a conscious decision to exclude derivative suits for LLCs as a compromise. However, the majority found the legislative history too ambiguous to support such a conclusion. The Court stated, “Finding no clear legislative mandate to the contrary, we follow Robinson, Klebanow and Riviera in concluding that derivative suits should be recognized even though no statute provides for them.”