Marx v. Morris (LLCs)

In Marx v. Morris (2019 WI 34), the Wisconsin Supreme Court decided that members of a limited liability company (LLC) have standing to assert a claim against another member of the LLC as individuals, not on behalf of the LLC. Furthermore, Wisconsin’s LLC law does not pre-empt common law claims.

Plaintiffs Daniel Marx and Michael Murray and defendant Richard Morris all owned LLCs that were members of North Star, LLC. Morris and Murray brought claims against Marx, a manager of North Star, alleging that Morris violated the duty of LLC members and managers to deal fairly in matters in which they have a conflict of interest (Wis. Stat. § 183.0402(1)). Marx and Morris also alleged several common law claims. The plaintiffs brought all the claims as individuals and individual LLCs, not on behalf of North Star.

Morris argued that the court should treat the LLC similar to a corporation, under which structure individual shareholders must bring claims of injury on behalf of the corporation. However, the court held that, since Wisconsin’s LLC statutes (Wis. Stat. Ch. 183) do not specifically prohibit actions brought by individual members against individual members for injuries to the LLC, LLC members can bring individual claims. The court declined to apply corporate principles of derivative standing to LLCs because the structure of LLCs (and specifically North Star’s structure) results in more individual financial harm than the structure of a corporation would. Because the plaintiffs did suffer individual injuries and Wisconsin law does not specifically prohibit bringing individual actions against LLC members, the court ruled the plaintiffs’ claims do have standing.

Morris also argued that the plaintiffs’ common law claims should be displaced by Wis. Stat. § 183.1302(2), which provides that “unless displaced by particular provisions of this chapter, the principles of law and equity supplement this chapter.” The court rejected Morris’s argument, stating that Ch. 183 does not specifically displace the plaintiffs’ common law claims. The court followed other states that have interpreted these types of provisions broadly to allow common law claims unless statutes unambiguously prevent them.

Justice Daniel Kelly (joined by Justices Abrahamson and Kelly) wrote a partial dissent, arguing that Wis. Stat. § 183.035 does provide that members of an LLC do not have the authority to sue on behalf of the LLC, except in limited circumstances. The dissent states that the cause of action here belongs to North Star, not the individual members, because using the “primary injury rule” the individual members did not suffer an injury distinct from other members. Therefore, the claims must be brought by North Star as a whole.

Furthermore, the dissent argues the majority shouldn’t have focused on whether Ch. 183 displaces the common law claims. Instead, Justice Kelly focuses on whether LLC members owe each other a fiduciary duty. The dissent argues that LLC members do not owe each other a fiduciary duty because LLCs do not create a dependence between members in the same way partnerships do – LLCs place obligations and liabilities on the LLC entity. Since there is no fiduciary duty, the plaintiffs’ claims do not stand.

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