LLCs and Derivative Actions – Tzolis v Wolff
What can a member of an LLC do if managers or members of the LLC engage in conduct that harms the LLC?
A New York Appellate Court has held (Tzolis v Wolff, 2007 NY Slip Opinion, Appellate Division, First Department) that a member of an LLC has standing to bring a so called "derivative action."
Derivative actions are typically brought by shareholders on behalf of a corporation to demand that the corporation take action against directors, officers, or others for actions that have harmed the corporation. Some LLC statutes of other states also give LLC members the right to bring such actions.
The decision of the New York court is remarkable, since the New York LLC statute does not provide for such right and the First Department declined to follow prior rulings of the Second Department which stated that members of an LLC did not have the right to bring a derivative action.
From the decision:
We respectfully decline to follow the Second Department given 1) the
historic judicial recognition of the common-law right to bring a
derivative action on behalf of a corporation or a limited partnership,
both of which share many of a limited liability company’s
characteristics; 2) the principles of statutory construction, which
provide that only a clear statement of legislative intent
may override the common law; 3) the fact that most states provide a
statutory right to bring a derivative claim and 4) the unpersuasive
rationale of those decisions which have rejected derivative claims for
limited liability company members.