An Experienced LLC Lawyer Offers Advice on Lawsuits Among LLC Members
At Wagenseller Law Firm we handle numerous lawsuits relating to limited liability companies (or LLCs). Our litigation attorneys have handled a variety of situations where LLC members are fighting each other and so this article is intended to address some of the common issues that arise and what you can do about them. For business litigation attorneys in Los Angeles this is also a good checklist to review when representing LLC members in partnership lawsuits against the other members.
- Read The LLC Operating Agreement.
A limited liability company usually has an Operating Agreement. This is essentially the partnership agreement agreed to by the members at the time of formation of the LLC. The whole point of the Operating Agreement is to direct the members in the event of various eventualities. We find that many members have not read the Operating Agreement since it was first signed and have not used it to direct how they act. Read your Operating Agreement.
- Consult An Experienced Business Attorney For Big Decisions.
Consult a business attorney when making big decisions or when there is disagreement among the members as to how to proceed. An ounce of prevention is much cheaper than a partnership lawsuit. The business attorney can help the parties make sense of the Operating Agreement, can insure that the rules of the Operating Agreement are being followed and can document the big decisions in the proper way.
- Keep The Corporate Documents In Order and Up To Date.
An issue that continues to arise in the LLC litigation that we handle is whether the members agreed on a certain cause of action. It may be that the partners went out to lunch and agreed on how they would handle a big decision—the disposition or refinancing of a property, for example. But it never gets documented. Once the deal is done, a dissatisfied member will sue, often for breach of fiduciary duty and fraud, alleging that the other member or members were self-dealing. Without proper documentation, the lawsuit becomes one of he said, she said.
- Determine Who The Injured Party Is.
Your business litigation lawyer will have to determine whether you have individual claims against the LLC or against the other members. This is an important distinction that many inexperienced lawyers don’t recognize. Some causes of action belong to the entity (the LLC) rather than to an individual member. For example, in a lawsuit where a property was taken out of the name of the LLC, one of the individual members sued, in his individual name, to quiet title to the property in his name. This is improper. The property should go back in the name of the LLC, not to him personally since he was never an owner of the property and never entitled to ownership. Make sure that you engage an experienced corporate litigation lawyer who regularly handles corporate, partnership and LLC disputes and is knowledgeable about these complex legal issues.
- Establish The Correct Legal Representation for a LLC Lawsuit
Who the trial lawyer represents is another important issue in corporate litigation. Oftentimes, if the case is considered to be a derivative lawsuit, the LLC must have a separate attorney from the members. Oftentimes the LLC or corporation is a nominal defendant in a lawsuit that is essentially between the members. Therefore, the LLC’s lawyer must not have a conflict of interest by representing the supposedly neutral LLC and one of the partisan members. Again, this is a legal nicety that experienced business lawyers will pick up on right away but less experienced lawyers often miss.
- Ask Your Lawyer For A Cost-Benefit Analysis of the Litigation
Lastly, but not least important, you should understand how much your attorneys’ fees will be in relation to what you could possibly collect from the litigation. This is especially important in limited liability company lawsuits since the attorneys’ fees can often eat up the equity in the property or the money of the partnership. Like most partnership lawsuits, LLC litigation often eats up both sides’ money. To make matters worse, attorneys’ fees may not be recoverable even if you win. Don’t spend more money on lawyers and legal fees than your dispute is worth.
Limited Liability Company lawsuits are a complex area of law that involve numerous statutes and sophisticated legal concepts. The most important lesson we have gleaned from many years of representing partners in LLC lawsuits is to get advice before the problems arises. A small outlay on an experienced business lawyer will save untold amounts of money if litigation ensues. If, however, you end up in a lawsuit relating to your LLC, engage an experienced corporate litigation lawyer. Notice the difference: The preventative attorney is a business transactional attorney who can help formulate the necessary documents and document the key decisions of the company. The litigation attorney is the one who has courtroom experience and has handled company disputes.
Limited Liability Company attorney Laine T. Wagenseller is the founder of Wagenseller Law Firm in downtown Los Angeles. The lawyers at Wagenseller Law Firm have extensive experience in handling LLC lawsuits among members as well as litigation among partners and corporate shareholders. For more information, please give us a call at (213) 805-7445.