September 20, 2021

Volume XI, Number 263

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September 17, 2021

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Wisconsin Supreme Court Clears the Path to the Courtroom for Member-Driven LLC Litigation

Wisconsin’s Supreme Court issued an important decision last week in Marx v. Morris, 2019 WI 34, holding that “[c]orporate principles of derivative standing do not apply to the distinct business form of an LLC.” Id. ¶ 4.

In a 4-3 decision written by Chief Justice Patience Roggensack, the court explained that the statutory scheme applicable to LLCs does not distinguish between direct and derivate claims and that the court would not “judicially import” one from the corporation statutes. Id. ¶¶ 40-41. The pass-through nature of LLCs also played a role in the decision; the court observed that there is “a much closer financial connection between harm to an LLC and harm to its members than between harm to a corporation and harm to its shareholders.” Id. ¶ 45.

Marx appears to allow LLC members to start litigation in their own name, free from strictures of the derivate procedures for corporations. And, without an equivalent of the special-litigation-committee process for corporations, see Wis. Stat. § 180.0744, LLCs might be left without a mechanism to stop the suit short of full litigation, regardless of where the best interests of the LLC lie. According to a dissent written by Justice Daniel Kelly and joined by Justices Shirley Abrahamson and Rebecca Bradley, the decision “eliminate[s] the LLC’s ability to control litigation,” and “a cause of action [now] belongs to the first person to grab it.” 2019 WI 34, ¶ 87.

Marx also calls into question the continued relevance, at least for inter-company disputes among LLC members, of Wis. Stat. §183.1101, which provides that members can bring actions on behalf of the company only after first receiving an affirmative vote by the members holding at least 50% of the membership interests. After Marx, there would seem to be no need to name the company as a party in the first instance, and, instead, individual members might be left to fight it out, with potentially no one representing the best interests of the company.

Marx could lead to an uptick in litigation by LLC members who wish to challenge company decisions in the courtroom. As a precaution against this, LLC members who want to control litigation by members might consider amending their LLC’s operating agreements to “opt in” to corporate derivative procedures.

© 2021 Foley & Lardner LLPNational Law Review, Volume IX, Number 98
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Megan R. Stelljes Litigation & Dispute Lawyer Foley & Lardner Law Firm
Associate

Megan Stelljes is an associate at Foley & Lardner LLP, where she is a member of the firm’s Business Litigation & Dispute Resolution Practice and Consumer Law, Finance & Class Action Practice. Ms. Stelljes represents clients in complex cases, including the defense of class actions, business disputes, and other high-stakes commercial litigation. She has represented manufacturing clients in a variety of industries in proposed state and nationwide class actions alleging product defects and deceptive trade practices. These cases involved claims for breach of warranty, violation of...

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Stephan J. Nickels Litigation Attorney Foley & Lardner Law Firm
Partner

Stephan J. Nickels is a partner and litigation attorney with Foley & Lardner LLP. Mr. Nickels has significant experience in trust and estate litigation, shareholder disputes, securities law and IP litigation. He has tried cases before numerous state and federal courts, as well as the American Arbitration Association, and has argued before the United States Court of Appeals for the Federal and Seventh Circuits. Mr. Nickels is a member of the firm’s Business Litigation & Dispute Resolution and IP Litigation Practices.

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