Connecticut Supreme Court Clarifies Law on "Adverse" Members of an LLC

July 13, 2012

Connecticut Supreme Court Clarifies Law on "Adverse" Members of an LLC

Operating agreements for limited liability companies can be complicated legal documents that involve multiple ownership groups and correspondingly complicated interactions between them. This can complicate matters in many ways, especially when deciding whether to file a lawsuit on behalf of the LLC. For example, an LLC can have multiple owners, and an owner may have an interest in multiple LLCs. Another example is if one owner has a relative involved with another corporation doing business with the LLC, that could make it difficult for the owner to remain impartial when deciding whether to file a lawsuit against the other corporation.

That is why a Connecticut statute denies "adverse" members of an LLC the right to decide whether to bring a lawsuit if the outcome of the lawsuit may be contrary to the LLC's interest in outcome of thelitigation.

Of course, the law is never so simple. What outcomes may be contrary to the LLC's interest? What exactly constitutes an "adverse" member of an LLC? A recent opinion by the Connecticut Supreme Court sheds light on this question.

The Business Dispute

In Meadow St. Associates v. Clean Air Partners, the plaintiffs were a three-member LLC, with two plaintiffs owning 50 percent of the interest and the third, Barbara Levine, owning the other 50 percent. The LLC leased office space to the defendant, and Barbara Levine's husband, Stephen, owned 20 percent of the defendant company that was renting the office space.

Eventually, a dispute arose between Barbara Levine's LLC and the defendant lessee over rent and other terms of the lease. The two other owners of the LLC wanted to bring a lawsuit against the lessee, but Barbara Levine expressly disagreed about bringing the claim. The two other owners filed suit anyway. In court, the defendant (the renters) argued that the plaintiffs (the building owners) could not bring the claim because they did not have corporate authorization because of Barbara Levine's disagreement with the plaintiffs. The trial and appellate courts agreed that the plaintiffs could not sue the defendant without the agreement of the third member of the LLC. The Supreme Court then agreed to review the case.

The Connecticut Supreme Court's Opinion

The court ultimately reversed the two lower courts' decisions. In doing so, it issued a blanket ruling that "when a member's spouse holds an interest or maintains a position of control in a defendant company, that member's interest is considered adverse to the outcome of a lawsuit that the LLC brings against the defendant company." In laymen's terms, this means Barbara Levine's LLC could sue the defendant because the statute prohibits adverse members from deciding whether to bring a lawsuit.

However, the court went on to note that the statute in this case is merely a default rule; an LLC's operating agreement can agree to ignore or contradict the statute if it chooses.

This case not only provides an interesting example of recent law governing LLCs in Connecticut, it is also a great example of how a knowledgeable attorney may have prevented years of costly litigation by anticipating this potential pitfall and using appropriate language to address the issue in the LLC's operating agreement.

If you are involved in the formation of an LLC or anticipate potential litigation, contact an experienced business litigation attorney to discuss your situation.

Article provided by Tinley, Nastri, Renehan & Dost, LLP
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