January 19, 2021

Volume XI, Number 19


January 18, 2021

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LLC's Failure To File Cross-Complaint Dooms Derivative Action

Although the members of a limited liability may file a derivative action, the right of action belongs to the LLC and not to the members themselves.  This fundamental principle had real consequences for the plaintiffs in Heshejin v. Rostami, 2020 Cal. App. LEXIS 887.  

The case involved the plaintiffs' "double derivative" claims on behalf of an LLC that had been sued by another company in a prior action.  The plaintiffs' derivative claims admittedly existed at the time of the prior lawsuit and were related to the cause of action against the LLC.  Nonetheless, the LLC failed to file any cross-complaint in that prior action despite California's compulsory cross-complaint statute.  Cal. Code Civ. Proc. § 426.30.  This failure barred the LLC from asserting its claims against the plaintiff in the prior action in a new action.  This in turn debarred the claims:

"Because the right of action belongs to the corporation, not its shareholders or members, it may be forfeited, waived, or adjudicated by the direct actions of the corporation."

What made this a "double derivative" action?  The plaintiffs were minority owners of a limited partnership that wholly-owned the LLC.  A "double derivative" action is an action brought by a shareholder of a parent company to enforce a cause of action by a subsidiary company.  

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...