The Colorado Court of Appeals issued its opinion in Young v. Bush on March 15, 2012.
Derivative Action—Dismissal—Independent—Inquiry—Direct Claim—Breach of Settlement.
Plaintiff Daniel E. Young, as an individual and on behalf of Cutthroat Ranch LLC, Quebec Plaza LLC, University Park Place, LLC, and Leetsdale Self Storage, LLC (the LLCs), appealed the trial court’s summary judgment dismissing his claims against defendants Eric Bush, Bush Development, Inc., and the LLCs. The judgment was affirmed in part and reversed in part, and the case was remanded for further proceedings.
Eric Bush is the founder and president of Bush Development. Bush also was the founder and sole manager of the LLCs, which were formed to acquire and develop real estate. The LLCs had between four and seven members each, including plaintiff. In 2008, plaintiff began questioning Bush’s management of the LLCs and subsequently filed an action against Bush, Bush Development, and the LLCs on behalf of himself and the other LLC members. The trial court entered summary judgment for defendants, dismissing the derivative action.
Plaintiff contended that the trial court erred in dismissing his derivative claims. CRS § 7-80-716 requires a court to dismiss a derivative action against an LLC if any of the individuals or entities described in subsection (2) has determined “in good faith, after conducting an inquiry upon which the determination is based,” that maintenance of the derivative action is not in the best interests of the LLC. The best interests determination must be made by independent members and based on an adequate inquiry producing facts sufficient to enable LLC members to make an informed and good-faith decision on whether maintenance of the derivative action is in the LLC’s best interests. The facts set forth in plaintiff’s affidavit showed business and family relationships sufficient to create a material question of fact as to the independence of the LLC members who made the best interests determination. The record did not indicate whether their inquiry was adequate. Because there was insufficient evidence in the record, the case was returned to the trial court to allow plaintiff to conduct discovery on the issues of independence and adequate inquiry, and to allow the court to assess whether the derivative claims should be dismissed under CRS § 7-80-716.
Plaintiff also contended that his third claim for relief (for breach of his settlement agreement with Eric Bush), twelfth claim (for access to records of Quebec Plaza LLC), and thirteenth claim (for an accounting with respect to Quebec Plaza) were direct claims, not derivative claims. He argued that he should have been allowed to pursue them notwithstanding the trial court’s dismissal of the derivative claims on defendants’ motion. Only plaintiff’s breach of settlement claim is a direct claim, because it alleged an injury separate and distinct from any injury suffered by the LLCs or the other LLC members and any relief would go to him personally rather than to the LLCs. Plaintiff did not allege that he was asserting claims twelve and thirteen solely in his individual capacity, nor did he provide further factual allegations suggesting that that was his intent. Therefore, the court did not err in dismissing those claims as direct claims.