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The Tennessee Business Court Further Defines LLC Law

The Tennessee Business Court continued its prolific promulgation of rulings affecting the resolution of internecine disputes between LLC members. In Terrell K. Raley, et al. v. Cees Brinkman, et al., Case No. 16-0196-BC, the Business Court denied the Defendant’s motion for partial dismissal of the complaint.

Defendant argued that the complaint, which asserted both direct and derivative claims for the LLC, was, in and of itself, an unauthorized, ulta vires act and/or without standing. The LLC was neither a plaintiff nor defendant. Defendant argued that the engagement of counsel and filing of the suit for the LLC was outside the Plaintiff’s contractual authority (specified in the Operating Agreement) to manage the affairs of the LLC. Moreover, the Defendant sought an order requiring Plaintiff to reimburse the LLC for legal fees paid by it for the lawsuit and to enjoin further use of LLC funds to support Plaintiff’s claims.

The Business Court denied the dismissal motion, finding that the claims for the LLC were not ulta vires and that Plaintiff had standing. In addition to the Operating Agreement, “there are overriding powers vested in an LLC by case law and statute … to redress and recover for alleged wrongful conduct of a member injurious to an LLC.” The Business Court held that the Operating Agreement cannot abrogate or waive the statutory and case law authority for an LLC to address such wrongs.

The Business Court detailed the statutory and case law authority for the holdings. In so doing, the Court noted that it was possible for LLC members, in litigation, to assert both individual and either direct or derivative claims for the LLC, against each other. Judicial economy and protection of LLC creditors were considerations for the ruling.

Consistent with the declared intention of the Business Court to efficiently deal with the issues in commercial litigation, the Court did not immediately deal with Defendant’s request to limit Plaintiff’s access to LLC funds for legal costs, but signaled that it would deal with the issue “in the near future.” It offered a potential result: “In the event that both parties assert a derivative action on behalf of [the LLC], a possible procedure is that the attorneys on each side bill/invoice the LLC separately from the individual parties.” But, in a follow-up order a few weeks later, the Business Court denied the use of LLC’s funds to either member during the litigation, reserving allocation and assessment of legal fees to the end of the case.

William R. O'Bryan, Jr.

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