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Hague v. Rica

A-1083-0372 (N.J. Super. App. Div. 2008) (Unpublished)

LIMITED LIABILITY COMPANIES; DERIVATIVE ACTIONS — A member of a limited liability company may not bring an action against a party based upon that party’s dealings with the limited liability company if the claim is not based on a specific injury that was only suffered by that one member.

A derivative action was brought against two real estate development companies, each organized as a limited liability company, on claims that included fraud, mismanagement, and conversion. A member of both companies, who was named in the action, brought a third-party action against two accountants for the companies. The lower court appointed a receiver who reached settlement agreements with both accountants. According to the settlements, both accountants were to pay back some of the monies that had wrongfully been diverted to them. The member also entered into a settlement with one of the accountants over certain accounting matters, but maintained his claim for the full amount of money that was diverted to her according to claims asserted in the derivative action. The lower court approved the settlements between the accountants and the receiver and dismissed the member’s third-party claim against the accountants as derivative.

On appeal, the Appellate Division disagreed with the member’s argument that he suffered prejudice as a result of the receiver’s attorney having previously served as a mediator in the matter, and found that the member did not establish how he was negatively affected as a result. It noted that the member did not show up for a deposition and was ordered by the lower court to attend a rescheduled deposition and to pay the counsel fees incurred by the other attorneys who attended the first deposition. It was also noted that the lower court judge refused to recuse herself at the request of the member’s attorney, who accused her of conducting the proceedings unfairly. The Court pointed out that an action brought by a shareholder (or, in this case, a member of a limited liability company), as an individual, has to be based on claims of a specific injury that was only suffered by that one shareholder or member. The member’s claims were found to be derivative because they asserted harm that came to the companies and members as a whole. The lower court’s dismissal of the member’s claims against the accountants as derivative was affirmed.

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