KCI Restaurant Management LLC v. Holm Wright Hyde & Hays PLC, et al. – 12/16/2014
Arizona Court of Appeals Division One holds that a member cannot as a matter of law maintain a derivative action on behalf of a limited liability company under A.R.S. § 29-831 when ousted as member before the derivative action is filed.
This case concerns a derivative action brought on behalf of a limited liability company by an ousted member of the company. KCI Restaurant Management LLC (KCI) was expelled as a member of SVP Restaurant Financing LLC after a final judgment was entered against it for wrongfully converting SVP funds. KCI unsuccessfully sought a temporary restraining order to prevent its ouster as a member, and later filed this separate derivative action against SVP’s lawyers (“Holm”) for professional negligence.
Holm moved for judgment on the pleadings, arguing that KCI did not have standing to bring the derivative action under A.R.S. § 29-831. The superior court granted the motion and KCI appealed.
The Court of Appeals affirmed the judgment. A.R.S. § 29-831 gives a member the right to bring a derivative action on behalf of a limited liability company subject to certain statutory conditions. The statute requires that the member be “a member of the limited liability company at the time the action is brought and was a member of the limited liability company at the time of the transaction of which he complains[.]” A.R.S. § 29-831(4). Because KCI admitted in a pleading in the underlying litigation that it had been expelled as a member of SVP, and because KCI was ousted as a member before it filed its derivative action, KCI could not as a matter of law file the derivative lawsuit. The Court rejected KCI’s argument that A.R.S. § 29-831(4) required membership status only when the demand was made, explaining that this reading is contrary to the plain language of the statute.
In affirming the judgment, the Court of Appeals noted that the trial court erred by not converting the motion for judgment on the pleadings into a motion for summary judgment. Because the trial court received and considered documents outside the pleadings, the court should have treated the motion as one for summary judgment. Ariz. R. Civ. P. 12(c).
The Court awarded Holm its attorneys’ fees on appeal.
Judge Portley authored the opinion; Judges Orozco and Howe concurred.