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 also Carter G. Bishop and Daniel S. Kleinberger, Bishop & Kleinberger on Limited Liability Companies ¶ 10.07[2] (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 nature.”)


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 claims.”);


·         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. See Del. Code Ann. tit. 6, §§ 18-1001 through 18-1004.  See also Revised 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).


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