<p>Modern: Case Problem with Sample Answer Chapter 17: Sole Proprietorships, Partnerships, and Limited Liability Companies </p><p>17–5. Case Problem with Sample Answer: Limited Liability Companies.</p><p>A limited liability company (LLC) sold a Manhattan apartment building that it owned. The owners of 25 percent of the membership interests in the LLC filed a lawsuit on behalf of the LLC—called a derivative suit—claiming that those in majority control of the LLC had sold the building for less than its market value and had personally profited from the deal. The trial court dismissed the suit, holding that the plaintiffs individually could not bring a derivative suit “to redress wrongs suffered by the corporation” because such actions were permitted only for corporations and could not be brought for an LLC. An intermediate appellate court reversed, holding that derivative suits on behalf of LLCs are permitted. That decision was appealed. A key problem for the court was that the state law governing LLCs did not address the issue. How should such matters logically be resolved? Are the minority owners in an LLC at the mercy of the decisions of the majority owners? [Tzolis v. Wolff, 10 N.Y.3d 100, 884 N.E.2d 1005 (2008)]</p><p>Sample Answer:</p><p>The reviewing court affirmed the decision of the state appellate court. When the </p><p>New York Limited Liability Company Law was enacted in 1994 it did not mention derivative suits. Nevertheless, the failure to reference such suits in the statute did not imply that they were prohibited. Based on the long-recognized importance of the derivative suit in corporate law, it is reasonable to assume that the right applies to LLCs. The purpose is to help ensure that when corporate fiduciaries use corporate assets to enrich themselves, there can be an appropriate remedy to protect the company and its members. That long-standing right that applies to corporations should be extended to LLCs. Applying this principle to LLCs protects those with a minority interest in an LLC from being at the mercy of the majority members.</p>