This blog, written by Thomas E. Rutledge, focuses primarily on business entity law in Kentucky. Postings on contract law, contractual and statutory construction, and the entity law of other jurisdictions appear as well. There may as well be some random discussions of classical, medieval and renaissance history.
Wednesday, March 11, 2015
Derivative Actions in Kentucky LLCs
Derivative Actions in Kentucky LLCs
In its current form, the Kentucky LLC Act is silent as to derivative
actions.That silence does not equate,
however, to a determination that there are not derivative actions in Kentucky
organized LLCs. Rather, as derivative actions are a question of equitable
standing, they exist independent of an enabling statute. See alsoCarter G. Bishop and
Daniel S. Kleinberger, Bishop & Kleinberger on Limited Liability Companies
¶ 10.07 (2012 and 2014-2 cum. supp.)(“Many LLC statutes expressly authorize
derivative actions, but some do not. This distinction should make little
difference. Derivative litigation began in the corporate context over 150 years
ago without the benefit of statutes, and remains essentially equitable in
Numerous courts, with respect to LLCs organized in Kentucky, have
entertained actions that are either expressly characterized as derivative or in
which the rules applicable to derivative actions, including the direct versus
derivative distinction, have been applied.For example:
·Pixler v. Huff, Civ. Act. No.
3:11-CF-000207-JHM, 2012 WL 3109492 (W.D. Ky. July 31, 2012) (in the context of
an LLC, applied the test traditionally applied in corporations as to the direct
versus derivative distinction and determined whether certain claims brought by
a member could be brought only on a derivative basis);
·id., 2012 WL 3109492, *3 (“Therefore, Plaintiff may
maintain her claims against the Defendants only where she has suffered an
injury that is separate and distinct from that which would be suffered by other
members or the LLC as an entity.”);
·R.C. Tway Co. v. High Tech Performance Trailers, LLC, No. 3:2012-CV-00122, 2013 WL 842577, *3 (W.D. Ky. Mar. 5, 2013) (“Each
of the claims identified above clearly alleges that High Tech or Hanusosky
violated some duty it owed directly to [Performance Trailers], thus causing
[Performance Trailers] injury.As
[Performance Trailers] is the allegedly injured party for each of these claims,
it is the one that is entitled to enforce the rights granted by substantive
law.Accordingly, [Performance Trailers]
is not a nominal party, but instead is a real party in interest as to those
·Chou v. Chilton, __ S.W.3d ___, Nos.
2009-CA-002198-MR, 2009-CA-002284-MR, 2014 WL 2154087 Ky. App. May 23, 2014) (“[The
LLC] and not Chou himself would benefit from any recovery for breach of the
operating agreement, fraud, misappropriation, breach of fiduciary duty or gains
taken by the defendants.While Chou may
or may not receive funds from [the LLC] on dissolution of that company, any
wrongs for breach of the operating agreement, fraud, misappropriate, breach of
fiduciary duty or gains taken by the defendants perpetrated by any of the
[defendants] or possibly [a separate LLC controlled by the defendants] would be
wrongs against [the LLC] and not Chou individually.”); and
·Turner v. Andrews,
413 S.W.3d 272 (Ky. 2013) (rejecting
effort by the sole member of an LLC to bring on his own behalf (rather than on
behalf of the LLC), a claim for lost profits.).
It bears noting that the Kentucky LLC act is atypical in not
expressly addressing derivative actions in LLCs. The vast majority of the
states, including Delaware, have an express derivative action statute. SeeDel.
Code Ann. tit. 6, §§ 18-1001 through 18-1004.See
alsoRevised Prototype LLC Act,
67 Bus. Law. 117, 194-198 (Nov.
2011) (providing for LLC derivative actions at §§ 901-908); 1 Ribstein & Keatinge on Limited Liability
Companies, appendix 10-2 (listing derivative action and related provisions
of the various LLC Acts).