Many, if not most, legal claims of an LLC must be filed directly by the LLC itself and cannot be filed by someone acting on its behalf. The Tennessee Revised Limited Liability Company Act, however, permits a member of an LLC, in certain circumstances, to bring a derivative action on behalf of the LLC. Very generally speaking, derivative actions are permitted when the LLC has a valid cause of action, but is not likely to pursue it itself because its current management will not do so.
Before a member or holder of financial rights of a limited liability company may bring a derivative action in Tennessee, the member or financial rights holder must establish that a demand has been made on the LLC’s management to take the necessary action to address the conduct at issue, and that the demand was denied. In some cases, a member bringing a derivative action may be excused from having made a demand on the LLC’s management before filing the derivative action. In so-called “demand excused” cases, a plaintiff bringing a derivative action on behalf of the LLC may be excused from having made a demand on management if the plaintiff ‘s complaint alleges, “with particularity,” facts that establish that a demand would have been futile.
A derivative action may be dismissed if the complaint filed by the plaintiff does not establish either, that a demand was made and denied, or that it should be excused because it would have been futile. Therefore, ensuring that there are adequate grounds to support a claim of demand futility is important where the plaintiff has proceeded with filing a derivative case without making demand on the LLC’s management.
A recent LLC derivative case is illustrative of what type of allegations in a derivative action complaint are insufficient to prove demand futility. Here are the key facts of the case:
- Gary Miller was a member of an LLC (the “LLC”)
- There were six members of the LLC
- The opinion does not state whether the LLC was member-managed or director- managed, but it was apparently member-managed
- Barbara Miller was another member of the LLC
- Gary Miller alleged that Barbara Miller sold and leased real properties owned by the LLC and kept the proceeds
- In his Complaint against Barbara Miller, the only allegations Gary Miller made to support a position that demand on the LLC’s management would have been futile were that: (1) He and Barbara Miller had been engaged in other legal disputes and were not on speaking terms; and, (2) that he was involved in other legal disputes with other members of the LLC.