LLCs are legal entities and can sue and be sued. But a recent case from Connecticut shows that if an LLC does not properly authorize the filing of a suit, the defendant can defend on the ground that the LLC lacked standing to bring the lawsuit. 418 Meadow Street Assocs. LLC v. Clean Air Partners, LLC, 123 Conn. App. 416, 2010 Conn. App. LEXIS 369 (Aug. 24, 2010).
Wynnick and Weinshel owned 50% of 418 Meadow Street Associates LLC. Levine owned the other 50%. Wynnick and Weinshel brought suit in the name of the LLC to enforce a lease agreement against Clean Air Partners. Levine’s husband owned 20% of Clean Air Partners, and Levine was not a party to the decision to commence the lawsuit.
Clean Air Partners contended that Meadow Street did not have standing to pursue the action because Wynnick and Weinshel failed to secure the necessary LLC approval. Meadow Street, 2010 Conn. App. LEXIS at **4.
Wynnick and Weinshel conceded that the LLC’s operating agreement required a majority vote to launch a lawsuit and that only a 50% vote approved the suit. They argued, however, that Levine had an interest in the outcome of the suit that was adverse to the LLC, and that therefore under Conn. Gen. Stat. § 34-187(b) her vote could be excluded from the votes required to approve the suit. They asserted that Levine’s interest was adverse both because of her husband’s 20% ownership interest in the defendant and because, in a separate lawsuit by Levine to dissolve Meadow Street, Wynnick and Weinshel had counterclaimed against her for mismanagement and breach of fiduciary duty. Meadow Street, 2010 Conn. App. LEXIS at **5.
The court didn’t see it that way. The court’s view was that her husband’s ownership interest in the defendant was not owned by her, and that the dissolution lawsuit was separate and not sufficiently connected to the lease claim against Clean Air Partners. Id. at **9-11. The court therefore affirmed the trial court and ordered dismissal of the action.
An interesting aspect of Meadow Street is the Connecticut statute, Section 34‑187(b). This statute allows an LLC to exclude from the approval process the vote of a member or manager who has an adverse interest in the outcome of a proposed lawsuit. Neither the Delaware nor the Washington LLC Act has a similar provision. In a state without such a rule, if an LLC agreement requires a majority vote to initiate a lawsuit, a 50% member would be able to block a suit even if it was a part owner of the defendant. It’s possible, though, that in such a case the members trying to start the lawsuit might be able to maintain a claim of breach of fiduciary duty against the blocking member, especially if it was voting as a manager or as a managing member.
In Washington or in any of the other community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Wisconsin), the outcome in Meadow Street would likely have been different. In those states, property owned by one spouse is presumed to be owned by the community, which means that each spouse has a one-half undivided ownership interest in their community property. In a community property state, Levine’s husband’s 20% interest in the defendant likely would have been treated as her property, through the community. In that event, her vote would not have been included because of her adverse interest, and the lawsuit would have been duly approved and could have proceeded.