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Tuesday
Mar262013

Banyan Inv. Co. v. Evans: Court Allows Member of an LLC to Bring Direct Claims Against Other Members

In Banyan Inv. Co. v. Evans, 292 P.3d 698 (Utah Ct. App. 2012), the Utah Court of Appeals reversed the trial court’s dismissal of the plaintiff’s claims.  Banyan Investment Company, LLC (“Plaintiff”), one of six members of Aspen Press Company, LLC (“Aspen”), brought direct claims against the other five members (collectively, “Defendants”).  

Plaintiff alleged Defendants, in managing Aspen, engaged in self-serving conduct to the detriment of Plaintiff.  Defendants moved for dismissal on the grounds that the claims were derivative in nature and could not be brought directly.  The trial court granted the motion.  Plaintiff amended the complaint to include derivative claims but also appealed the dismissal. 

The court first analyzed whether Plaintiff waived the right to appeal the dismissal by filing an amended complaint.  An amended complaint supersedes the original and acts as a waiver of the right to appeal the original dismissed complaint.  However, an exception occurs when a court dismisses the original complaint on the merits, rather than for a technical defect.  Since the trial court dismissed the direct claims on the merits, Plaintiff did not waive the right to appeal. 

The court then looked at the substance of the original complaint.  Generally, shareholders must file claims that involve injury to the entity derivatively.  The closely-held corporation exception, however, allows “minority shareholder[s] in a closely held corporation to proceed directly against corporate officers” instead of bringing derivative claims.  The closely-held corporation exception applies “where a minority shareholder suffers uniquely as a result of majority shareholders engaging in the type of wrongdoing that would ordinarily give rise only to a derivative claim.”  In these circumstances, minority shareholders may bring a “classic” derivative claim directly so long as the claim does not “(i) unfairly expose the corporation or the defendants to a multiplicity of actions, (ii) materially prejudice the interests of creditors of the corporation, or (iii) interfere with a fair distribution of the recovery among all interested persons.” 

Defendants argued the exception was inapplicable to LLCs.  The exception was designed to allow actions involving actions that harmed minority shareholders but benefited majority shareholders.  The court, however, determined an LLC management structure was similar to that of a closely held corporation and that the exception extended to LLCs. 

Defendants also asserted that even if the exception did apply, Plaintiff failed to allege an injury distinct from that suffered by Aspen.  A distinct injury from the corporation was not a requirement of the closely held corporation exception.  The court reasoned that if a distinct injury were required, the exception would be unnecessary since a separate injury already gives rise to a direct cause of action.  Instead, Plaintiff must show an injury that is “distinct from that suffered by other shareholders.”  Since Plaintiff claimed a unique injury from Defendants, its claims were valid. 

Although it was within the discretion of the trial court to insist on a derivative action, the trial court had only dismissed the complaint based on its inaccurate application of the closely held corporation exception.  Therefore, the Utah Court of Appeals reversed the dismissal. 

The primary materials for this case may be found on the DU Corporate Governance website.

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