Breach of Covenant of Good Faith and Fair Dealing – Improper Self Dealing

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WI Supreme Court

Case Name: Daniel Marx, et al. v. Richard L. Morris and R.L. Co., LLC,

Case No.: 2019 WI 34

Focus: Breach of Covenant of Good Faith and Fair Dealing – Improper Self Dealing

This appeal comes before us on certification from the court of appeals pursuant to Wis. Stat. § (Rule) 809.61 (2015-16). Two members of a limited liability company (LLC), Fracsand, LLC by Daniel Marx (Marx) and Management Funds, LLC by Michael Murray (Murray), brought an action against another member, Richard Morris (Morris) and his LLC, R.L. Co., LLC, after North Star Sand, LLC (North Star) sold valuable assets to a company owned by Morris. At the time of the sale, Morris was a manager of North Star.

Marx and Murray alleged that Morris willfully failed to deal fairly with them while having a material conflict of interest in the transaction, in violation of Wis. Stat. § 183.0402(1). They also alleged a number of common-law claims involving improper self-dealing. Marx and Murray brought all their claims in their individual LLC and personal capacities rather than in the name of North Star.

We accepted certification of the appeal and now conclude the following: first, the members of an LLC have standing to assert individual claims against other members and managers of the LLC based on harm to the members or harm to the LLC. Corporate principles of derivative standing do not apply to the distinct business form of an LLC.

Second, Marx and Murray’s common law claims survive because they have not been displaced at this point in the litigation by particular provisions of North Star’s Operating Agreement or by Wis. Stat. ch. 183. Third, there are genuine issues of material fact as to whether Morris violated Wis. Stat. § 183.0402(1) by dealing unfairly with Marx and Murray, and potentially with regard to the common law claims. For these reasons, we affirm the decision of the circuit court and remand for further proceedings consistent with this opinion.

Affirmed in part. Remanded in part.

Concur:

Dissent: KELLY, J. concurs and dissents, joined by ABRAHAMSON, J. and R.G. BRADLEY, J. (opinion filed).

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Derek A Hawkins is trademark corporate counsel for Harley-Davidson. Hawkins oversees the prosecution and maintenance of the Harley-Davidson’s international trademark portfolio in emerging markets.