Daniel Marx v. Richard L. Morris
2019 WI 34
Wis.2019Background
- North Star Sand, LLC (an LLC taxed and operated like a partnership) had six LLC members; Fracsand, LLC (Marx) and R&R Management Funds, LLC (Murray) sued member R.L. Co., LLC and its owner Richard Morris alleging Morris (also a North Star manager) caused North Star to sell Westar to an entity he controlled and profited.
- Plaintiffs sued in their individual LLC and personal capacities, alleging statutory duty violations under Wis. Stat. § 183.0402(1) (willful failure to deal fairly where a material conflict exists) and common-law claims: breach of fiduciary duty, breach of fiduciary duty as corporate counsel, unjust enrichment, and breach of implied covenant of good faith and fair dealing.
- Defendants moved for summary judgment arguing plaintiffs lack standing because any primary injury was to North Star (not individual members), that ch. 183 preempts common-law duties, that the operating agreement and a distribution acknowledgement/release bar claims, and that a majority of disinterested members approved the sale.
- The circuit court denied summary judgment; the court of appeals certified two questions to the Wisconsin Supreme Court regarding (1) member standing to assert claims for injuries primarily to the LLC, and (2) whether ch. 183 preempts common-law claims for self-dealing.
- The Wisconsin Supreme Court affirmed denial of summary judgment: (1) LLC members may sue individually for injuries to themselves or to the LLC (corporate derivative standing principles do not automatically apply to LLCs); (2) ch. 183 does not, on its face, displace the asserted common-law claims; and (3) genuine factual disputes exist on § 183.0402(1) and possibly the common-law claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing: may an LLC member assert individual claims for injuries primarily to the LLC? | Marx/Murray: members have a legally protectable interest and may sue individually because North Star operates in pass-through (partnership-like) fashion. | Morris: corporate derivative principles apply; injuries to the LLC belong to the LLC and must be pursued derivatively. | Held: Members have standing to assert individual claims for harm to members or to the LLC; corporate derivative standing rules do not automatically apply to ch. 183 LLCs. |
| Preemption of common-law claims by ch. 183 | Marx/Murray: common-law claims (fiduciary duty, unjust enrichment, covenant) survive unless specifically displaced by statute or the operating agreement. | Morris: ch. 183 and the operating agreement supplant and limit common-law duties. | Held: ch. 183's § 183.1302(2) preserves common-law principles "unless displaced by particular provisions"; on this record the common-law claims are not displaced. |
| Applicability of Operating Agreement "business opportunities" clause | Plaintiffs: clause permits outside dealings but does not authorize unfair conduct; § 183.0402 still applies. | Morris: clause authorizes members to pursue outside business and precludes plaintiffs' claims. | Held: Business opportunities clause does not unambiguously supplant § 183.0402; it permits outside deals but not unfair self-dealing. |
| Summary judgment on § 183.0402(1) claim | Plaintiffs: factual disputes exist (lack of required notice, conflict of interest, false promises, unfair influence) preclude summary judgment. | Morris: approval by disinterested majority, release/acknowledgement, and operating agreement bar claims as a matter of law. | Held: Genuine disputes of material fact exist as to willful failure to deal fairly; summary judgment properly denied. Release and majority-approval arguments did not resolve claims as a matter of law. |
Key Cases Cited
- Gottsacker v. Monnier, 281 Wis. 2d 361 (Wis. 2005) (operating agreement is a contract and LLC may elect partnership-like treatment)
- Rose v. Schantz, 56 Wis. 2d 222 (Wis. 1973) (shareholders cannot sue directly for injuries primarily to the corporation; derivative action principles)
- Notz v. Everett Smith Group, Ltd., 316 Wis. 2d 640 (Wis. 2009) (discussing when shareholder/member injury is direct versus derivative)
- Kalal v. Circuit Court for Dane County, 271 Wis. 2d 633 (Wis. 2004) (statutory interpretation principles)