Often, a member of a limited liability company can sue another member for a breach of an operating agreement in a corporate “derivative action” rather than in a “direct action” against the other member. This is because the victim is often the limited liability company, not the individual member. Aggrieved members of limited liability companies sometimes try to sue directly because the remedies allow them to recover from the wrongdoing instead of the corporation. Thus, whether a lawsuit is properly a “direct action” or “derivative action” can be a critical strategic issue. Peter Mavrick is a Miami business litigation lawyer, and also represents clients in business litigation in Fort Lauderdale, Boca Raton, and Palm Beach. The Mavrick Law Firm represents clients in breach of contract litigation, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, and other legal disputes in federal and state courts and in arbitration.
Whether the business litigation is a “direct action” or “derivative action” can have significant repercussions as to the recovery. A member of an LLC who successfully sues the company directly can generally recover all their damages. By contrast, a member suing derivatively generally can benefit only from the proportionate increase in value that the derivative lawsuit brings. This is because the company is the real plaintiff in a derivative lawsuit, even though it may be controlled by an individual member. Miami’s Third District Court of Appeal explained in pertinent part: “[w]hether a particular action may be brought as a direct suit or must be maintained as a derivative suit can be a confusing inquiry. After all, a member or shareholder with a personal stake in a company or corporation necessarily sustains a loss when the company loses value, and determining which types of loss are directly compensable by direct suit requires fine lines to be drawn. These distinctions are even more difficult to draw for closely held corporations and LLCs, which typically have fewer individuals that possess an ownership interest, because claims of mismanagement or self-dealing become a zero-sum game in which one party profits from the company’s loss, while the other is harmed due to the company’s reduced value.” Dinuro Investments, LLC v. Camacho, 141 So. 3d 731 (Fla. 3d DCA 2014).
A previous article discussed how the law governing whether the lawsuit properly qualifies as a “derivative action” or a “direct action” is usually based on the law of the state of incorporation. In the State of Florida, whether a member of a limited liability company can sue directly is determined under the Florida Revised Limited Liability Company Act. A member can directly sue a LLC for “[a]n actual or threatened injury that is not solely the result of an injury suffered or threatened to be suffered by the limited liability company” § 605.0801(2)(a), Fla. Stat. Additionally, a member can sue for “[a]n actual or threatened injury resulting from a violation of a separate statutory or contractual duty owed by the alleged wrongdoer to the member, even if the injury is in whole or in part the same as the injury suffered or threatened to be suffered by the limited liability company.” § 605.0801(2)(b), Fla. Stat.
In addition, under Florida law a limited liability company’s operating agreement can provide for a method for an aggrieved member to sue another member directly, even when such a suit would otherwise necessarily be derivative. Limited liability companies are legal “persons” in that they have rights separate and distinct from their members. They can own property, sue, and be sued. The members’ respective rights in the limited liability company are derived from the members’ Operating Agreement and the Florida Revised Limited Liability Company Act. § 605.0101 et seq., Florida Statutes. In Ferk Family, LP v. Frank, 240 So. 3d 826, 838 (Fla. 3d DCA 2018), reh’g denied (Apr. 18, 2018), the Third District Court of Appeal decided whether the plaintiff had properly brought a business litigation “direct action” for breach of contract against the other members of a limited liability company. The Ferk Family plaintiff sued for an injury arising from a breach of the operating agreement. This type of action normally should be derivative, because the injury is derived through the company. However, in Ferk Family, the operating agreement contained the provision that “nothing herein contained is intended to, nor shall it limit or affect, any other rights in equity or any rights at law or by statute or otherwise of any Member aggrieved as against the other Members, for breach or threatened breach of any provision thereof.” The appellate court in Ferk Family decided that the plaintiff was able to sue directly because of this provision. Thus, the plaintiff would be able to recover from the other members directly, instead of the diluted recovery it would have received had it sued derivatively.
Peter Mavrick is a Miami-Dade business litigation attorney who also practices business litigation in Fort Lauderdale, Boca Raton, and Palm Beach. This article does not serve as a substitute for legal advice tailored to a particular situation.