Corporate – LLC – Standing

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Where defendants have moved to dismiss so much of a plaintiff’s breach of fiduciary duty claim as is brought derivatively on behalf of an LLC, that motion must be allowed because the plaintiff lacks standing to assert derivative claims on behalf of the LLC under G.L.c. 156C.

“Plaintiff Gregory Cohen, who does business as CODA Development (‘CODA’), and defendants Matthew McGovern (‘McGovern’) and Douglas Stephan (‘Stephan’) own 1060 Grove Street, LLC (‘Grove Street’), which was formed to manage a residential development known as Baiting Brook Farm (‘Baiting Brook’ or the ‘Project’). Plaintiff alleges defendants improperly removed him from his role as lead developer of Baiting Brook, breached the contract with CODA for his services, and mismanaged the Project and threatened Grove Street’s continued viability. Defendants move under Mass. R. Civ. P. 12(b)(1) and 12(b)(6) to dismiss so much of plaintiff’s breach of fiduciary duty claim (Count I) as is brought derivatively on behalf of Grove Street. They argue, among other things, that plaintiff has failed to satisfy the requirements of G.L.c. 156C, §56 and therefore may not assert a derivative claim. For the following reasons, the partial motion to dismiss must be allowed. …

“In the Amended Verified Complaint, plaintiff asserts a claim for breach of fiduciary duty (Count I) both in his individual capacity and derivatively on behalf of Grove Street. As the Appeals Court has recognized, G.L.c. 156C, §56 ‘sets out the requirements that must be satisfied before a member of a limited liability company may bring a derivative claim on behalf of the company.’ …

“Plaintiff contends he has standing to bring a claim on behalf of Grove Street under both subsections of G.L.c. 156C, §56. I am not persuaded.

“With respect to G.L.c. 156C, §56(a), plaintiff maintains that because defendants’ adverse interests prevented them from participating in any derivative vote, he was permitted to authorize this suit under §56(a) as the sole disinterested member owning unreturned contributions to Grove Street. In making this argument, plaintiff concedes that he made no unreturned monetary contributions to Grove Street, but asserts that his services as developer constitute non-monetary unreturned contributions to the company. He specifically points to the alleged $10.5 million in revenue he claims he added to the Project by developing a plan to convert an existing structure into multiple condominiums.

“Even assuming defendants’ interests are adverse, plaintiff’s argument is without merit. For a service or property to be treated as an ‘unreturned contribution’ for purposes of G.L.c. 156C, §56(a), ‘an agreed value [must] be placed on [it], and … the value must be set out in the company’s records.’ … The Amended Complaint does not allege, nor has plaintiff otherwise shown, that the parties treated plaintiff’s services as a capital contribution or that Grove Street’s records reflect such treatment. Indeed, Grove Street paid plaintiff a considerable sum for his development efforts, which belies the assertion that the parties viewed those efforts as a form of unreturned capital contribution. Plaintiff lacks standing to assert derivative claims on behalf of Grove Street under G.L.c. 156C, §56(a). …

“With respect to G.L.c. 156C, §56(b), plaintiff argues that because defendants’ adverse interests prevented them from participating in any derivative vote, §56(b) authorized him to file suit as the sole disinterested manager of Grove Street. In putting forth this contention, plaintiff acknowledges that the introductory paragraph and §2.02 of the Operating Agreement identifies McGovern as Grove Street’s sole manager, but challenges whether this is in fact the case based on two public filings that identify all three members as managers of Grove Street — Grove Street’s Certificate of Organization filed on August 2, 2022 and Grove Street’s Annual Report filed on September 12, 2023 under the penalties of perjury by Stephan.8 Plaintiff argues that ‘[w]here the Operating Agreement conflicts with the statutorily required reports, those provisions of the Operating Agreement are unenforceable.’ … Alternatively, plaintiff argues that Schedule C of the Operating Agreement, which contains a signature line identifying him as a manager, at the very least creates an ambiguity in the Operating Agreement as to whether he is a manager, rendering dismissal inappropriate.

“These arguments are without merit. Plaintiff has failed to point to any provision in Chapter 156C or any other authority suggesting that a party to an operating agreement can use inconsistent public filings to challenge the validity of the provisions therein in a dispute among the parties to the agreement. The primary purpose of those filings is to provide information to those outside the organization. … The signature line in Schedule C (titled ‘Further Definitions’) is insufficient to create a reasonable ambiguity as to plaintiff’s role within Grove Street under the Operating Agreement given that the introductory paragraph and §2.02 of the agreement unambiguously provide that McGovern is the sole manager. … Plaintiff lacks standing to assert derivative claims on behalf of Grove Street under G.L.c. 156C, §56(b). …

“The Defendants’ Partial Motion to Dismiss (Docket #18) is allowed. So much of Count I in plaintiff’s Amended Verified Complaint as purports to assert a derivative claim on behalf of 1060 Grove Street, LLC is dismissed.”

Cohen, et al. v. McGovern, et al. (Lawyers Weekly No. 09-066-24) (8 pages) (Krupp, J.) (Suffolk Superior Court) (Civil No. 24-505-BLS1) (May 9, 2024).

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