An LLC and its Members Are Legally Distinct

An LLC and its Members Are Legally Distinct

      In a recent ruling from a trial court in Massachusetts, it was reiterated that an LLC is legally distinct from its members. In this instance, an LLC agreed that it would not bring a legal action absent certain predicate acts. This provision was held not applicable when the LLC’s members brought a similar action. Meunier v. Market Strategies, Inc., 1684CV01546-BLS2, 1684CV03592-BLS2 (Mass. Suffolk Ct. Sup. Ct. Feb. 23, 2017).

      Market Strategies, Inc. (“MSI”) purchased Cogent Research Holdings. In connection therewith, there were certain deferred and Contingent Payments to be made. The owners of Cogent Research apparently organized a holding company as the vehicle to which those new payments would be made, and the purchase agreement so provided. A subordination agreement made the contingent payments subordinate to certain loan obligations to existing lenders to MSI. That subordination agreement went on to provide that HoldCo “shall not … take any Enforcement Action with respect to” those deferred payments absent the prior written consent of the lender’s administrative agent.

      Ultimately, the members of HoldCo would sue MSI in their individual capacities, asserting they were third-party beneficiaries of the agreement pursuant to which Cogent was sold by MSI and that there had been a breach in the making of the Contingent Payments. In response, MSI sued HoldCo for breaching the covenant not to sue. HoldCo was not, however, a party to the suit brought by its members and for that reason a motion to dismiss was granted.

      The court found that:

The plain language of the covenant not to sue bars HoldCo, not its individual members, from filing suit to compel MSI to make the Deferred and Contingent payments. MSI does not allege that HoldCo itself is a refileable lawsuit or taken any other enforcement action in violation of its covenant not to sue. Neither the subordination agreement nor the purchase agreement contain a covenant barring Meunier, White, and the irrevocable trust from bringing suit in an attempt to compel MSI to pay over the Deferred Payment and Contingent Payment amounts to HoldCo.  Presumably, it never occurred to MSI that it needed such a covenant, since the purchase agreement specifies that those payments are owed to HoldCo, and not to the individual owners and members of Holdco. Nevertheless, the only covenant not to sue binds HoldCo. and not Meunier, White or the trust.