The derivative suit concept so familiar in the corporate context has been grafted onto the limited liability form. The contractual nature of limited liability companies and their often closely-held membership can pose significant pleading challenges, however, when a member feels aggrieved by the alleged misconduct of another LLC member or manager and must decide whether the asserted claims are derivative or direct. In the recent Delaware Court of Chancery decision in Clifford Paper v. WPP Investors, C.A. No. 2020-0448-JRS (Del. Ch. 6/1/21), the court dismissed claims that a former LLC member attempted to bring directly because they were in fact derivative claims that the plaintiff lacked standing to assert. Applying the traditional Tooley analysis used to distinguish direct from derivative claims in the corporate context, the court concluded that claims alleging a breach of the plaintiff’s voting and other contract rights were not direct because the resulting injury allegedly damaged the entity directly and the plaintiff only indirectly.
Plaintiff Clifford Paper Inc. (CPI) and defendants WPP Investors LLC (investors) and its owners Edgar Smith and Richard Baptiste formed a Delaware LLC, World Pac Paper (WPP) to provide paper, packaging, printing, warehousing and shipping services to commercial and retail clients. CPI owned 45%; Investors owned 55%. Under the company’s operating agreement Smith, Baptiste and CPI’s president John Clifford were designated as the company’s managers.