The function of the corporate when its homeowners compete in opposition to one another

Related party owners or LLCs often fight over control of their “business”. If this happens, which side of the label is the company on? What role should it play? And should one of the warring factions have access to the company’s assets to fund that side’s litigation costs?

If derivative claims are made, the company must be a party[1] But if nothing is sought in the name or by the company and all owners are on trial, should the company be a plaintiff or a defendant, or should it be left out of the heading altogether? If not named as a party, the court may require the company to become a party in order for it to be subject to the court’s orders.

If the company is named in the complaint as a nominal defendant, the plaintiff runs the risk that the defendants’ owners will keep a lawyer to represent them and the company, and the lawyer’s guardian (and ultimately much more) even from the treasury Paying Society In practice, however, the lawyer will advance one side’s position in litigation against the other side. In addition to the question of whether this is fair, joint representation raises ethical questions.[2] The result is that attorney choice, attorney choice, and use of corporate funds to pay the attorney become problems in an early plaintiff petition for relief.[3]

These issues were raised but not definitively resolved in a Texas Supreme Court case on pre-trial motions to disqualify the defendant’s attorney.[4] The underlying dispute, which had not yet been resolved by the lower court, was between twelve LLC owners and six “rulers” who were divided into two factions. The difference of opinion resulted from the dismissal of the previously unanimously elected president and executive member by the majority, who asserted with his supporters that a unanimous vote was required for the dismissal. The minority complaint, which made both derivatives and direct claims, included the LLC as the named plaintiff. The defendant majority hired a law firm that had previously represented the LLC, financed its legal costs from the state treasury and asserted counterclaims.

Late in the litigation, the minority moved to disqualify the defendants’ attorney by claiming (1) that the law firm, which had previously been plaintiff’s LLC attorney, could not stand up against their former client, and (2) the Defendant faction had no authority to hire a law firm to act for the LLC.

The court found that the core issue of the litigation was who had the right to control the LLC’s management. In relation to this issue, each faction’s position was that the other side’s position was wrong and detrimental to the LLC. The court found that the company’s label’s orientation was irrelevant to this issue when the derivative tag baggage was removed.[C]Companies involved in derivative litigation are both “plaintiffs” and “defendants,” whichever way you see it. “[5]

The court considered decisions from other jurisdictions that challenged joint representation and did not find a categorical rule.[6] Based on Texas law and the Texas Rule that will serve as the basis for any of the petitions below, and given the timing of disqualification petitions, the Texas Supreme Court upheld the lower court’s discretion not to grant disqualification. The core issue of control has been able to be negotiated fairly by the factions and lawyers on both sides currently on trial.

Whether the defendants were authorized to hire an attorney at the company’s expense was not determined at this stage of the proceedings. The authority to appoint an attorney for an LLC often depends on whether the decision is “important” or “material” or “exceptional” or “out of normal business” that requires unanimity under law or company agreement or requires high voices.

Regarding the inequality of one side’s use of company funds to cover legal costs, the court found that there are “reasonable remedies” for subsequent recovery of legal costs that may prove improper from the other group’s interests in the LLC have paid out.

“Appropriate remedial action” can be useful after the fact, when the personal resources of both parties fighting for control are so high that each can easily finance their litigation costs. This may have been the case in Texas. If one or both of the litigation has limited resources, one side’s rights to post-litigation remedies are of little use when the other side has the real-time benefit of funding their position in the litigation with corporate funds. Courts provide relief in such situations if a timely application is made.[7]

[1] Meyer v. Fleming, 327, US 161 (1946); Liddy v. Urbanek, 707 F.2d 1222 (11th Cir. 1983).

[2] See, for example, In re Conduct of Kinsey, 680 P.2d 660 (Or. 1983).

[3] If the court orders the company to be represented by a separate attorney, both parties will incur additional indirect costs. However, the company’s lawyer, if he appears as a neutral person, can support the court like a guardian and possibly facilitate an amicable solution.

[4] In re Murrin Brothers 1885, Ltd., 603 SW3d 53 (Tex. 2019).

[5] I would. at 58.

[6] In addition to the cited cases, Rosenfeld v Metals Selling Corp., 643 A.2d 1253, 1264 (Conn. 1994) and Messing v FDI, Inc., 439 F. Supp. 776 (DNJ 1977) are also instructive.

[7] In Ehlinger v. Hauser, 785 NW2d 328 (Wis. 2010), the court acknowledged that the dispute was indeed between the two shareholders and cited Clemente Bros., Inc., 239 NYS2d 703 (App. Div. 1963). , aff’d ob 13 NY2d 963 (1963), stating that “the company may not” adopt “a militant stance on the side of either of the same, inconsistent shareholders, prohibited the company from bearing the costs, the one of the two arise the shareholders. Similarly, Matter of Penetent Corp., 605 NYS2d 691 (App. Div. 1993) confirmed that the court granted the petitioner’s motion to prevent the interviewee from using company funds to pay for professional services incurred in the process .

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