BUSINESS PARTNERSHIP LAWSUITS – DISPUTES BETWEEN LLC MEMBERS, SHAREHOLDERS, GENERAL PARTNERS OR LIMITED PARTNERS
BUSINESS PARTNERSHIP LAWSUITS – DISPUTES BETWEEN LLC MEMBERS, SHAREHOLDERS, GENERAL PARTNERS OR LIMITED PARTNERS
By Faisal Moghul
Depending on the nature of your entity – LLC, S Corp, C Corp, LP or GP – a different statute applies, if there is no governing document establishing the rights and relationship among the members, shareholders or partners.
The Virginia Limited Liability Company Act, Virginia Stock Corporation Act, and the Virginia Revised Uniform Partnership Act. If you do not have an internal governing document, then your entity will be governed by the applicable default statutes under Virginia law. For example, if you are a Member in a two-member LLC, then you may want to look at Virginia Code § 13.1-1040.1, which spells out some scenarios dealing with member dissociation.
Derivative Lawsuits. One of the most important points to recognize with respect to LLC and Corporate disputes is that these lawsuits are derivative in nature. In other words, these lawsuits have a string of pre-filing requirements that must be satisfied before a lawsuit is filed with the court. Failure to do so risks dismissal and the plaintiff being held liable for any attorneys fees incurred by the defendant. For example, the Virginia LLC Act section 13.1-1042 states:
- No member may commence a derivative proceeding until:
- A written demand has been made on the limited liability company to take suitable action; and
- Ninety days have expired from the date delivery of the demand was made unless (i) the member has been notified before the expiration of 90 days that the demand has been rejected by the limited liability company or (ii) irreparable injury to the limited liability company would result by waiting until the end of the 90-day period.
- If the limited liability company commences a review and evaluation of the allegations made in the demand or complaint, the court may stay any derivative proceeding for such period as the court deems appropriate.
Some of the most common scenarios that these types of disputes occur under are as follows:
- Your business partner is unwilling or unable to expend the required time to manage the business.
- Your business partner is not providing you with an accounting of the finances of the business, or worse, stealing money from the business
- Your business partner has locked you out of the business
- Your business partner is reckless in managing the business
- Your business partner is diverting business from your company to another company owned by him
Nature of Damages. The nature of damages to be recovered in such suits typically goes to the corporation. Court’s tend to use some variant of the famous Tooley test, to distinguish whether the damages go to the individual member or shareholder or the corporation. In this analysis, for a shareholder to assert a direct claim, he must demonstrate: (i) an injury to the shareholder independent of any injury to the corporation; and (ii) the duty breached was owed to the shareholder, and that he can prevail without showing an injury to the corporation. Cattano v. Bragg, 727 S.E.2d 625 (Va. 2012) (suits for breach of fiduciary duty against officers and directors must be brought derivatively on behalf of the corporation and not as individual shareholder claims) (“The remedy sought—the return of funds, misappropriated by an officer, to the corporation—is highly appropriate for a derivative claim”).
The attorneys at Fox & Moghul are published in this area of the law and frequently teach other lawyers and legal practitioners the nuances of this complex area. Please contact Fox & Moghul for a consult at 703-652-5506
