Arizona Court of Appeals Division One Holds That (1) a Dissolved LLC Has the Capacity to Sue to Collect Its Assets as Part of Its Efforts to Wind Up Its Business and Affairs, and (2) Before a Member of an LLC Can File a Derivative Suit on Behalf of the LLC, the Member Must Make an Unambiguous Demand That the LLC File Suit.

This case arose out of a dispute among the members and managers of an LLC called Abel Commercial Ventures (“Abel”), which was formed to develop real property.  Rose Goodyear Properties, LLC (“Rose”), one of Abel’s members, sued the other members, managers, and related parties on various theories, including direct claims and derivative claims on behalf of Abel.  After it filed suit, Rose was dissolved by the Arizona Corporation Commission for failure to maintain a statutory agent.

The superior court dismissed the derivative claims because Rose had failed to make a proper demand on Abel’s manager to file suit.  The court granted summary judgment on the direct claims, agreeing with the defendants that Rose lacked the capacity to sue because it had been dissolved.

On appeal, the Court of Appeals reversed the grant of summary judgment on Rose’s direct claims, holding that Rose has the capacity to sue as a dissolved LLC in the process of winding up.  Rose’s suit against the defendants was an attempt to collect its assets so that it could liquidate its business, which a dissolved LLC is permitted to do under A.R.S. § 29-782(B).

The court affirmed, however, the superior court’s dismissal of the derivative claims.  (The Court of Appeals reviewed this ruling under the summary judgment standard because the superior court had considered matters outside the pleadings, including the letters that Rose claimed constituted proper demands.)  Under A.R.S. § 29-831(2), an LLC member seeking to bring a derivative action first must make a demand on the manager requesting that the manager “cause the limited liability company to sue in its own right.”  The court rejected Rose’s argument that its letters demanding that the manager collect on loans owed to Abel satisfied the statutory demand requirement because the letters did not contain “unambiguous demands that [the manager] take action to cause Abel to sue in its own right.”  The court also rejected Rose’s argument that it should have been allowed to amend its complaint to satisfy the statutory demand requirement with a letter written after the suit was filed invoking and quoting A.R.S. § 29-831(2).  The after-the-fact demand letter could not satisfy the statutory requirement because “[t]he purpose of a demand letter is to allow an LLC’s manager the opportunity to address an alleged wrong to the LLC before an LLC’s member takes matters into its own hands.”

Rose also challenged the dismissal of some of its claims as derivative claims because it argued, those claims were also direct claims.  The court rejected this argument also.  It first noted that a claim is derivative “if it alleges injury to the LLC or to its property as a whole, or seeks the recovery of the LLC’s assets or the prevention of dissipation of its assets.”  One of the counts at issue in this argument related to Abel’s failure to pursue collection of debts others owed to it and the resulting loss of its property, an injury to Abel and not a direct injury to Rose.  The other count at issue alleged that the defendants injured Abel by hiring counsel for Abel with conflicts of interest, also with no direct injury to Rose.

Judge Howe authored the opinion; Judges Swann and Johnsen concurred.