552 S.W.3d 342
Tex. App.2018Background
- LoneStar Logos & Signs, LLC (LoneStar 1) was formed by Media Choice and Quorum to operate a TxDOT logo-sign contract (2007–2016); ownership included Media Choice (≈52%), Dunster Live, LLC (30%), and four minority members including relator Vincent Hazen.
- When the 2006 contract ended, Media Choice formed LoneStar 2 and won the 2017 contract; LoneStar 1 ceased operations though remained an entity.
- Dunster alleges the five majority owners improperly used LoneStar 1 assets/efforts to benefit LoneStar 2, excluding Dunster, and brings both direct claims and derivative claims nominally on behalf of LoneStar 1.
- Defendants moved for partial summary judgment arguing (1) Dunster’s member interest was redeemed in October 2016 (pre-suit) and thus it ceased to be a member, and (2) as a non-member Dunster lacks standing to pursue derivative claims. The district court found the redemption effective but held Dunster had standing because it was a member when the derivative claims accrued.
- Relators sought mandamus to require dismissal of Dunster’s derivative claims for lack of standing; the appeals court granted conditional mandamus, directing the trial court to vacate its denial and dismiss derivative claims for lack of standing.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a former (pre-suit) LLC member may prosecute derivative claims on behalf of the LLC | Dunster: Subchapter J §101.463 (closely held LLCs) and §101.451 allow a member of a closely held LLC to bring derivative suits without a present-membership requirement; alternatively, Dunster was a member when claims accrued | Relators: Texas law requires present ownership to maintain derivative suits; Dunster’s October 2016 redemption ended membership and standing | Court: A derivative claimant must be a present member; former-member standing is not authorized by Subchapter J; dismissal required for lack of standing |
| Whether the closely held-LLC exemption in §101.463 eliminates statutory standing requirements (including present ownership) | Dunster: Exemption eases procedural preconditions and eliminates the present-membership requirement for closely held LLCs | Relators: §101.463 does not abrogate the fundamental derivative requirement that plaintiff be a current owner; exemption addresses procedural rules, not justiciability/standing | Court: §101.463 does not eliminate the fundamental present-ownership characteristic of derivative actions; exemption does not permit former members to sue derivatively |
| Whether the district court properly denied summary judgment on standing after ruling redemption was effective | Dunster: Being a member when claims accrued suffices; factual disputes about redemption effectiveness preclude mandamus | Relators: The district court’s ruling that redemption was effective removed membership; legal standing thereby ended as a matter of law | Court: District court abused discretion by denying relief; summary judgment should have been granted dismissing derivative claims for lack of standing |
| Whether mandamus is appropriate remedy | Dunster: Appeal is adequate; interlocutory rulings leave issues for trial | Relators: Allowing trial to proceed would defeat substantive governance rights and cannot be remedied adequately on appeal | Court: Mandamus appropriate because allowing suit to proceed would defeat substantive rights and appellate relief would be inadequate |
Key Cases Cited
- Schilling v. Belcher, 582 F.2d 995 (5th Cir. 1978) (historical equity basis for shareholder-derivative actions)
- Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541 (U.S. 1949) (equitable origin of derivative remedy for shareholders)
- Sneed v. Webre, 465 S.W.3d 169 (Tex. 2015) (discussion of statutory derivative procedures and closely held-corporation rules)
- Zauber v. Murray Sav. Ass'n, 591 S.W.2d 932 (Tex. Civ. App.—Dallas 1979) (former shareholder must remain shareholder to maintain derivative suit absent equitable exception)
- Ritchie v. Rupe, 443 S.W.3d 856 (Tex. 2014) (legislative scheme creating special rules for derivative suits by shareholders of closely held corporations)