Court Insists No Standing In LLC Derivative Actions Without Continuous Ownership

Derivative actions by members of domestic or foreign limited liability companies are governed by Section 17709.02 of the California Corporations Code.  That statutes provides that “[n]o action shall be instituted or maintained in right of any domestic or foreign limited liability company by any member of the limited liability company unless” two conditions are met.   The first of those conditions requires that the plaintiff allege that it was a member of record or beneficially, at the time of the transaction or any part of the transaction of which the plaintiff complains, or that the plaintiff's interest later devolved upon the plaintiff by operation of law from such a member.  If this language sounds familiar, it is derived from the General Corporation Law (Cal. Corp. Code § 800).

In Grosset v. Wenaas, 42 Cal. 4th 1100, 72 Cal. Rptr. 3d 129 (2008), The California Supreme Court held that Section 800 requires both “contemporaneous ownership” and “continuous ownership" on the part of a shareholder wishing to maintain a derivative action.  Yesterday, the California Court of Appeal, noting the nearly identical language in Sections 800 and 17709.02, held that both contemporaneous membership and continuous membership are required for a plaintiff to have standing in a derivative action on behalf of an LLC.  Sirott v. Superior Court,  Cal. Ct. App. Case No. A164037. 

Section 17709.02 also permits a member who does not meet the first condition to maintain an action in the discretion of the court after consideration of five factors.  Based on this provision, the trial court in Sirott determined that it had discretion to allow the plaintiffs to maintain their derivative action even though they had ceased to remain members of the LLC.  The Court of Appeal reversed, holding that a "court’s discretion to permit a derivative action by '[a]ny member who does not meet these requirements' (§ 17709.02(a)(1)) does not include the discretion to confer standing on a plaintiff who is not a member".