Plaintiffs' own language supports this point as they allege,
"The . . . acts by the defendants have caused, and continue to
cause, a decline in the Company's revenues, an increase in its
expenses and have prevented and continue to prevent the Company
from selling its Southampton store or otherwise raising money for
use in its operations." Compl. ¶ 25 (emphasis added). Plaintiffs
further demonstrate the vicarious nature of their claims by
alleging that as a result of Defendants' action, "the value of
their Units . . . has been, and continues to be, diminished."
Compl. ¶ 26. Plaintiffs have no property interest in the assets
of the company, but only a right to share in its profits.*fn6 If
the Company's assets are threatened by the Additional Defendants'
picketing, only the Company has standing to challenge such a
threat. Because the protection of the Company's interests lie at
the core of this action and, as stated above, none of the parties
before the Court can adequately represent the Company's
interests, the Company would be prejudiced if this action were to
proceed without joinder. See, e.g., Smith v. Bader, 458 F. Supp. 1184,
1187 (S.D.N.Y. 1978) (finding limited partnership
indispensable where its interests were not adequately represented
by presence of partners since "both the plaintiffs and defendants
are necessarily primarily concerned with protecting their own
interests, which may not, in all instances, coincide with those
of the Partnership").
Additionally, Defendants may also suffer prejudice as a result
of the failure to join the Company because the Company may bring
a separate suit against Defendants on many of the same claims
presented here, thus subjecting them to multiple potentially
inconsistent verdicts. See, e.g., Smith v. Kessner, 183 F.R.D.
373, 376 (S.D.N.Y. 1998) (finding limited partnership
indispensable where "defendants face a substantial risk of
incurring multiple obligations on the same claim").
Finally, Plaintiffs still have an adequate remedy if we
dismissed this action. As noted above, there is a pending state
court action addressing many of the same issues involved here.
See, e.g., Greater Miami Baseball Club Limited Partnership v.
Selig, 171 F.R.D. 73, 78 (S.D.N.Y. 1997) (finding party
indispensable where a related action in which such party could be
joined was filed in state court). Any claims or parties not
currently present in the state court action may be added or named
by counter-claim or joinder. See, e.g., Smith v. Kessner, 183
F.R.D. at 376 (finding limited partnership indispensable where
plaintiff was able to join all parties in federal action as
parties in state action). Litigation in this court of matters
that are currently being litigated, or may be litigated, in state
court is not in furtherance of the "complete, consistent, and
efficient settlement of controversies." Envirotech, 729 F.2d at
73. Indeed, the state court is the only forum in which adequate
relief can be afforded among all the parties in a single action.
We therefore find that the Company is an indispensable party
and that the Court cannot resolve the claims before it in `equity
and good conscience' without the joinder of the Company.
Defendants have suggested an alternative basis for finding that
the Company is an indispensable party. They argue that were this
action classified as a derivative claim on behalf of the Company,
the Company would be required to be joined as an indispensable
party. Several legal and factual steps are required to arrive at
such a conclusion.
The first question is whether, under New York Limited Liability
Company law, a member of an LLC may sue derivatively on behalf of
The LLC is considered a "cross-breeding of the corporate form
and the partnership form". NYLLCL, Practice Commentaries, 1(A).
As noted earlier, the LLC shares the feature of limited liability
protection for its members with the corporate form.*fn7 LLCs are
similar to the partnership form, however, in that they provide
members with a greater degree of operating flexibility than do
corporations; members of an LLC are free to directly manage the
business, while corporations are managed by their directors. The
LLC, in short, borrows features from both the corporate and
partnership forms and members of an LLC have been analogized to
corporate shareholders and limited partners. Under both
frameworks, shareholders or limited partners are permitted by
statute to bring a suit derivatively on behalf of the corporation
Given such uniformity, it seems peculiar that in drafting New
York's Limited Liability Company Law, the New York State
legislature chose not to include a provision expressly permitting
derivative lawsuits by members of an LLC on behalf of the LLC.
This conundrum is addressed by the Practice Commentaries which
"In the initial draft [Article IX] had covered the
rights of members to institute derivative actions.
Because some legislators raised questions as to the
derivative rights provisions, to avoid jeopardizing
passage of the Law, Article IX was excised. . . . The
battle to include derivative rights in the LLCL may
be fought at some future date."
See Practice Commentaries to NYLLCL, (1)(F).
We do not believe that the legislature's failure to include a
derivative action provision in the LLCL prevents us from
recognizing such a right at common law. See, e.g., J. William
Callison & Maureen A. Sullivan, Limited Liability Companies: A
State by State Guide to Law and Practice at § 4.7 (West 1994)
("courts may recognize a common law right for members [of LLCs]
to sue derivatively"). Indeed, in Klebanow v. New York Produce
Exchange, 344 F.2d 294 (2d Cir. 1965), the Second Circuit
recognized a right of limited partners to sue derivatively on
behalf of a partnership prior to the passage of Section 115-a of
the New York Partnership Law which provides limited partners the
statutory right to sue derivatively on behalf of the partnership.
See note 6 supra. In deciding to grant limited partners the
right to sue on behalf of the partnership, the court relied
heavily on an analogy of limited partners to corporate
shareholders, finding that limited partners share key traits with
corporate shareholders, including: an expectation of a "share of
the profits" and "[immunity from] personal liability for
partnership debts save for [their] original investment . . ."
Klebanow, 344 F.2d at 297. Additionally, a limited partner
is like a shareholder in that he is "not thought to be an `owner'
of partnership property . . ." Klebanow, 344 F.2d at 297. As we
noted above, these traits also describe members of an LLC.*fn9
We therefore find, on the facts of this case, that Plaintiffs
may commence a suit on behalf of the Company.
Having determined that Plaintiffs may commence a derivative
action on behalf of the Company, we must now determine whether at
least some of the claims asserted here are appropriately
characterized as derivative.*fn10 In order to distinguish
between direct and derivative claims, courts examine the source
of the claim of right:
If the right flows from the breach of a duty owed by
the defendants to the corporation, the harm to the
investor flows through the corporation, and a suit
brought by the shareholder to redress the harm is one
"derivative" of the right retained by the
corporation. If the right flows from the breach of a
duty owed directly to the plaintiff independent of
the plaintiff's status as a shareholder, investor, or
creditor of the corporation, the suit is direct.
Branch v. Ernst & Young, No. 93-10024, 1995 WL 791941 at *4
(D.Mass. Dec.22, 1995).