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Daniel Marx, Fracsand, LLC v. Morris

Supreme Court of Wisconsin

April 2, 2019

Daniel Marx, Fracsand, LLC, Michael Murray and R&R Management Funds, LLC, Plaintiffs-Respondents,
v.
Richard L. Morris and R.L. Co., LLC, Defendants-Appellants.

          ORAL ARGUMENT: November 7, 2018

         ON CERTIFICATION FROM THE COURT OF APPEALS

          APPEAL from an order of the Circuit Court for Eau Claire County L.C. No. 2015CV213 William M. Gabler, Sr. Judge. Affirmed and cause remanded.

          For the defendants-appellants, there were briefs filed by Eric J. Magnuson and Robins Kaplan, LLP, Minneapolis, Minnesota, with whom on the briefs were J. Drew Ryberg and Ryberg Law Firm, Eau Claire, and Scott A. Johnson and Johnson & Johnson Law, LLP, Minnetonka, Minnesota. There was an oral argument by Eric J. Magnuson.

          For the plaintiffs-respondents, there was a brief filed by Patrick G. Heaney, James A. Pelish, and Thrasher, Pelish & Heaney, Ltd., Rice Lake. There was an oral argument by Patrick G. Heaney.

          PATIENCE DRAKE ROGGENSACK, C.J.

         ¶1 This appeal comes before us on certification from the court of appeals[1] pursuant to Wis.Stat. § (Rule) 809.61 (2015-16).[2] Two members of a limited liability company (LLC), Fracsand, LLC by Daniel Marx (Marx) and Management Funds, LLC by Michael Murray (Murray), brought an action against another member, Richard Morris (Morris) and his LLC, R.L. Co., LLC, after North Star Sand, LLC (North Star) sold valuable assets to a company owned by Morris. At the time of the sale, Morris was a manager of North Star.

         ¶2 Marx and Murray alleged that Morris willfully failed to deal fairly with them while having a material conflict of interest in the transaction, in violation of Wis.Stat. § 183.0402(1). They also alleged a number of common-law claims involving improper self-dealing. Marx and Murray brought all their claims in their individual LLC and personal capacities rather than in the name of North Star.

         ¶3 Morris moved for summary judgment. The circuit court denied Morris's motion, [3] and the court of appeals certified the appeal to this court to answer two questions:

1. Does a member of a limited liability company (LLC) have standing to assert a claim against another member of the same LLC based on an injury suffered primarily by the LLC, rather than the individual member asserting the claim?
2. Does the Wisconsin Limited Liability Company Law, Wis.Stat. ch. 183, preempt common law claims by one member of an LLC against another member based on the second member's alleged self-dealing?

Marx v. Morris, No. 2017AP146, unpublished certification (Wis. Ct. App. Mar. 6, 2018).

         ¶4 We accepted certification of the appeal and now conclude the following: first, the members of an LLC have standing to assert individual claims against other members and managers of the LLC based on harm to the members or harm to the LLC. Corporate principles of derivative standing do not apply to the distinct business form of an LLC.

         ¶5 Second, Marx and Murray's common law claims survive because they have not been displaced at this point in the litigation by particular provisions of North Star's Operating Agreement or by Wis.Stat. ch. 183. Third, there are genuine issues of material fact as to whether Morris violated Wis.Stat. § 183.0402(1) by dealing unfairly with Marx and Murray, and potentially with regard to the common law claims. For these reasons, we affirm the decision of the circuit court and remand for further proceedings consistent with this opinion.

         I. BACKGROUND

         ¶6 North Star is a limited liability company formed under Wisconsin law in November 2011. The company's goal was to own and mine land containing silica sand, a type of sand used in tracking operations.

         ¶7 North Star's membership consisted of six limited liability companies, which in turn were owned by six individuals. Fracsand, LLC was owned by Marx; R&R Management Funds, LLC owned by Murray; R.L. Co., LLC owned by Morris; Hub Investments, LLC owned by Brian Johnson (Johnson); Glorvigen Investment Group, LLC owned by Rick Glorvigen (Glorvigen); and C&T Sand, LLC owned by R. Thomas Toy (Toy) .[4] Morris, an attorney, had previously represented both Murray and Johnson. Glorvigen, an accountant, had prepared Morris's personal taxes for at least 20 years.

         ¶8 Morris assisted in drafting North Star's Operating Agreement, and drafted two of the Amendments to the Operating Agreement. According to Marx and Murray, Morris was North Star's attorney. They allege that he was paid by North Star for his legal work on behalf of the company, and some of his equity in North Star was received in compensation for his legal work. Morris disputes this. However, it is undisputed that he was a manager of North Star in his capacity as a North Star director.[5]

         ¶9 North Star's Operating Agreement reflected an understanding that the members would be free to pursue outside business opportunities. Transacting business with companies who had business relationships with North Star was permitted:

The individuals serving as Directors, as well as the Members and their respective officers, board of directors, directors, shareholders, partners, and affiliates, may engage independently or with others in other business ventures of every nature and description. Nothing in this Agreement shall be deemed to prohibit any Director, or the Members or their respective officers, board of directors, directors, shareholders, partners, and affiliates, from dealing or otherwise engaging in business with Persons transacting business with the Company. Neither the Company, any Director, or any Member shall have any right by virtue of this Agreement, or the relationship created by this Agreement, in or to such other ventures or activities, or to the income or proceeds derived from such other ventures or activities, and the pursuit of such ventures shall not be deemed wrongful or improper.[6]

         ¶10 The Operating Agreement also required that members have prior notice of any vote that may occur during a meeting of members:

No matter shall be voted upon at a meeting of Members unless at least 5 days' notice of the matter to be voted on is given or such notice is waived by any Member who is entitled to vote and who has not received notice. [7]

         Further, it required that prior notice be given of any matter to be voted upon at a directors' meeting:

No matter shall be voted upon at a meeting of the Directors unless at least 24 hours' notice of the matter to be voted on is given or such notice is waived by any Director not receiving it.[8]

         However, directors did not have the authority to: "Possess Company property, or assign rights in specific Company property, for other than a purpose of the Company."[9]

         ¶11 North Star eventually hired an engineering firm to help it identify potential silica sand reserves, and entered into a number of option agreements for the purchase of land in Jackson County, Wisconsin. North Star also entered into a lease for a property that could be used as a railhead to transport silica sand from the Jackson County properties. The members decided to create a separate entity to control the purchase agreements for certain properties, called the Pine Creek Reserves, that contained substantial silica sand reserves. This entity became Westar Proppants, LLC (Westar), a wholly owned subsidiary of North Star. North Star assigned its Pine Creek purchase options to Westar on the same day Westar was formed.

         ¶12 Many of Westar's purchase options were set to expire on December 31, 2013. Concern was expressed that North Star and Westar had too much land under option contracts. The members began to discuss the possible cancellation of some of their options. On December 31, 2013, the same day Westar's purchase options were set to expire, the members of North Star met by telephone to discuss Westar's future.

         ¶13 During this meeting, Morris informed the other members that he and two other people, Gerald Green (Green) and Scott Wesch (Wesch), had formed an entity called DSJ Holdings, LLC (DSJ) . Morris also informed the group that he had an ownership interest in DSJ. He stated that DSJ was interested in purchasing Westar and was willing to pay $70, 000. At this time, Glorvigen made a motion for North Star to keep Westar. Marx seconded the motion, and it passed by vote of 4-2. Marx, Murray, Glorvigen, and Toy all voted in favor of the motion to keep Westar, while Morris and Johnson voted against it.

         ¶14 Immediately after the vote, Morris indicated that he may withdraw from North Star. Marx and Murray allege that Morris became "very aggressive" and told Toy that "you're going to lose your million bucks." After a brief discussion, Morris made a motion for North Star to sell Westar to DSJ for $70, 000. Murray immediately objected to Morris's motion, arguing that there had been insufficient notice, that a vote had already occurred, and that Morris was conflicted. Despite these objections, a second vote occurred, and Morris's motion passed 4-2. Morris, Johnson, Glorvigen, and Toy voted for North Star to sell Westar to DSJ, while Marx and Murray voted against the sale.

         ¶15 DSJ subsequently assigned Westar's membership units to R.L. Co., LLC (Morris's LLC) and to Wesch. Morris and Green then formed Hixton Trans-load Facility, LLC (Hixton Trans-load) for the purpose of securing purchase agreements for a new rail head site specifically for the Pine Creek Reserves property. Westar, along with Hixton Trans-load, was sold to Unimin Corporation in early 2015 for what has been alleged to be a substantial sum.[10]

         ¶16 In August 2014, North Star unanimously voted to sell its remaining silica sand land assets to Badger Silica. The members signed a "Member Distribution Receipt and Acknowledgement" as part of this transaction, which memorialized the amount each member would receive from the transaction. The receipt also contained the following language:

As of the date hereof, none of the undersigned members have a claim against North Star or against any of the other members of the Company other than for the amount of the distribution set forth on Exhibit A. or for their pro rata share of any retained amounts.

         Morris later asked Marx and Murray to sign a different, all-encompassing release, which they refused to do.

         ¶17 Marx and Murray alleged five causes of action against Morris and his LLC: violation of Wis.Stat. § 183.0402, breach of fiduciary duty, breach of fiduciary duty as corporate counsel, unjust enrichment, and breach of implied covenant of good faith and fair dealing. They also requested punitive damages. Morris moved for summary judgment on all claims. He argued, among other things, that Marx and Morris's claims belonged only to North Star, and that Wis.Stat. ch. 183 supersedes and replaces any common law duties of LLC members.

         ¶18 The circuit court denied the motion for summary judgment. It held that there were disputed issues of material fact on the Wis.Stat. § 183.0402 claim, and decided to "wait until the conclusion of the evidence to determine if there are sufficient facts to enable a jury to make findings of fact with respect to [Marx and Murray's other claims]."

         ¶19 The court of appeals certified the appeal to us. Marx, No. 2017AP146, unpublished certification. We accepted the certification, and now affirm the circuit court's order denying the Defendants-Appellants' motion for summary judgment.

         II. DISCUSSION

         A. Standard of Review

         ¶20 This case requires us to interpret an LLC's operating agreement, interpret a statute, determine whether a party has standing, and review a denial of summary judgment. An LLC's operating agreement is a contract. See, e.g., Gottsacker v. Monnier, 2005 WI 69, ¶22, 281 Wis.2d 361, 697 N.W.2d 436. "Contract interpretation presents a question of law that we review independently of previous decisions of the circuit court . . . but benefitting from [its] discussions." Estate of Kriefall v. Sizzler USA, 2012 WI 70, ¶14, 342 Wis.2d 29, 816 N.W.2d 853.

         ¶21 "Statutory interpretation and the application of a statute to a given set of facts are questions of law that we review independently, but benefiting from" the analysis of the circuit court. Marder v. Bd. of Regents of Univ. of Wis. Sys., 2005 WI 159, ¶19, 286 Wis.2d 252, 706 N.W.2d 110. Whether a party has standing is similarly a question of law for our independent review. McConkey v. Van Hollen, 2010 WI 57, ¶12, 326 Wis.2d 1, 783 N.W.2d 855. Finally, we review decisions on summary judgment motions independently, applying the same methodology as the circuit court while once again benefitting from its analysis. Dufour v. Progressive Classic Ins. Co., 2016 WI 59, ¶12, 370 Wis.2d 313, 881 N.W.2d 678. "The standards set forth in Wis.Stat. § 802.08 are our guides." Id.

         B. Overview of Limited Liability Companies

         ¶22 We begin with a brief overview of the history and general principles of limited liability companies. An LLC is "an unincorporated association of investors, members in LLC parlance, whose personal liability for obligations of the venture is limited to the amount the member has invested." Joseph W. Boucher et al., LLCs and LLPs: A Wisconsin Handbook § 1.4 (6th ed. 2018) . LLCs combine desirable features of two other business forms, partnerships and corporations.

         ¶23 Similar to a partnership, an LLC allows for "informality and flexibility of organization and operation, internal governance by contract, direct participation by members in the business, and no taxation at the entity level." Id. Similar to a corporation, however, an LLC grants its investors limited liability such that a member "is not personally liable for any debt, obligation or liability of the limited liability company, except that a member or manager may become personally liable by his or her acts or conduct other than as a member." Wis.Stat. § 183.0304(1). Therefore, as with a shareholder in a corporation, each LLC member's potential liability to third parties is limited to the amount the member chose to invest in the LLC.

         ¶24 The first LLC act was passed by Wyoming in 1977[11] upon a request from an oil company. Larry E. Ribstein & Robert R. Keatinge, Ribstein & Keatinge on Limited Liability Companies § 1.2 (June 2018 ed., West 2018) . The oil company wanted a business form that could offer it limited liability without subjecting it to the "double taxation" applicable to corporations.[12] Id. Florida similarly enacted its own LLC act in 1982.[13] These acts did not immediately lead to a surge in the creation of LLCs, nor did other states soon enact their own LLC statutes, perhaps due to uncertainty regarding how LLCs would be taxed. Id.

         ¶25 In 1988, however, the Internal Revenue Service issued Rev. Rul. 88-76, 1988-2 C.B. 360, which made clear that properly organized LLCs would be treated as partnerships for tax purposes. See id. The Revenue Ruling examined the tax treatment of a Wyoming LLC. According to the Revenue Ruling, the LLC's tax treatment depended on whether it possessed corporate characteristics such as "continuity of life, centralization of management, limited liability, and free transferability of interests." Rev. Rul. 88-76, 1988-2 C.B. 360. The IRS determined that because the LLC "lack[ed] a preponderance" of the major corporate characteristics, it would be classified as a partnership for tax purposes. Id. This decision has been facilitated by the "check-the-box" regulations, under which even single member LLCs may now choose to be taxed as a partnership. Treas. Reg. § 301.7701-3 (a) . After that Revenue Ruling, all 50 states and the District of Columbia enacted their own LLC statutes, [14] including Wisconsin in 1994.[15]

         ¶26 In Wisconsin, one or more persons may form an LLC by filing articles of organization (essentially a notice document) with the Department of Financial Institutions. Wis.Stat. § 183.0201; LLCs and LLPs: A Wisconsin Handbook, supra, at § 1.6. Members generally draft a contract known as an operating agreement, which becomes the LLC's principle governing document and its main source of "law" regarding the company's ownership and management. LLCs and LLPs: A Wisconsin Handbook, supra, at §§ 1.6, 3.60; Wis.Stat. ch. 183.

         ¶27 Wisconsin's LLC statute reflects the importance of flexibility and freedom of contract in organizing an LLC. LLCs and LLPs: A Wisconsin Handbook, supra, at §§1.6, 1.10. For this reason, many of the provisions of ch. 183 furnish default rather than mandatory rules. Id. at § 4.31. The default rules are designed to structure LLCs in a way that average businesspeople would view as reasonable; the members of an LLC are free to alter these rules in their operating agreement if they prefer a different arrangement. Id. at §§1.6, 3.63. However, all the default rules apply unless an operating agreement unambiguously states otherwise: "if an operating agreement is ambiguous as to whether the members intended to override a particular statutory default term, the statutory default term governs." Lenticular Europe, LLC v. Cunnally, 2005 WI.App. 33, ¶18, 279 Wis.2d 385, 693 N.W.2d 302.

         ¶28 The members of an LLC make contributions to the LLC in exchange for their interest in the company. LLCs and LLPs: A Wisconsin Handbook, supra, at § 4.8. The value of each member's contribution determines that member's percentage ownership interest. Under the default rules, each member's economic rights are proportional to his or her percentage of the members' total contributions to the LLC.[16] Wis.Stat. § 183.0503. A member whose contributions represent 40 percent of the total contributions is therefore entitled to 40 percent of any distributions.

         ¶29 The relationship among members of an LLC in terms of governance depends, to some extent, on whether the LLC is member-managed or manager-managed. In a member-managed LLC, the default rule is that voting rights regarding company business are allocated according to each member's percentage ownership interest, and a vote representing over 50 percent of the total value of contributions is required to authorize an action. Wis.Stat. § 183.0404(1) (a) . A member whose contributions represent 40 percent of the total contributions would thus hold 40 percent of the voting power. Generally, each member of a member-managed LLC is considered an agent of the LLC, and each such member has apparent authority to bind the LLC in the ordinary course of business.[17] Wis.Stat. § 183.0301 (1) (a) & (b) . An LLC is considered member-managed unless its articles of organization specifically designate it as manager-managed. Wis.Stat. § 183.0401(1); LLCs and LLPs: A Wisconsin Handbook, supra, at § 4.33.

         ¶30 If an LLC is manager-managed, each manager gets one vote on matters relating to the LLC's business, with a majority vote required to take an action.[18] Wis.Stat. § 183.0404(1) (b) . Unlike a member-managed LLC, the members of a manager-managed LLC are not agents of the LLC simply by virtue of being members. Wis.Stat. § 183.0301(2) (a). Members of a manager-managed LLC therefore do not have apparent authority to bind the LLC in the ordinary course of business simply by being members. See § 183.0301(2) (a) & (b) . Regardless of whether an LLC is member-managed or manager-managed, however, there are certain actions such as amending the operating agreement or issuing an ownership interest that require the consent of all the members. § 183.0404(2).

         ¶31 A member's ownership interest in the LLC is personal property. Wis.Stat. § 183.0703. Wisconsin's LLC act applies the entity theory[19] of property rights, so a member has no interest in any specific property of the LLC. See LLCs and LLPs: A Wisconsin Handbook, supra, at § 4.4. For example, if a member of an LLC transfers real estate to the LLC in exchange for an ownership interest in the LLC, that member no longer has any ownership interest in the real estate. Instead, the LLC owns the real estate, and the member owns personal property in the form of an ownership interest in the LLC. Wis.Stat. § 183.0701(1); LLCs and LLPs: A Wisconsin Handbook, supra, at § 4.4. As it is personal property, a member's economic interest in an LLC is generally freely transferable. In contrast to the corporate model, however, the transfer of a member's economic interest does not make the transferee a member of the LLC, nor does it give the transferee any management or voting rights. J. William Callison & Maureen A. Sullivan, Partnership Law and Practice: General and Limited Partnerships, § 4.1 (2018-19 ed., West 2018); Wis.Stat. § 183.0704.

         ¶32 Unlike corporations, LLCs generally are not taxed at the entity level.[20] 26 U.S.C. § 701 (2016).[21] "Instead, the LLC's gains, losses, income, deductions, and credits will pass through to the members and be allocated among the members in proportion to their interests in the LLC." LLCs and LLPs: A Wisconsin Handbook, supra, at § 5.33. Each member's share of the LLC's gains, losses, income, deductions, and credits will then appear on the member's individual tax return as if the member had realized them directly. Ribstein & Keatinge on LLCs, supra, at § 17.2; 26 U.S.C. § 702(b). For example, if a member owns a 30 percent interest in an LLC, that member will realize 30 percent of the LLC's gains, losses, income, deductions, and credits on the member's individual tax return.

         ¶33 Although we could describe many interesting hypotheticals about the financial choices that LLCs may elect, we choose not to do so because such hypotheticals have absolutely no relevance to the case before us. Biasing v. Zurich Am. Ins. Co., 2014 WI 73, ¶73, 356 Wis.2d 63, 850 N.W.2d 138 (concluding that "[t]his court does not issue advisory opinions based on non-existent facts."). As we explained earlier, North Star is governed by its Operating Agreement. That Agreement unambiguously elected that North Star is to be treated as a partnership where all the losses and gains of the LLC flow through to its individual members.

         ¶34 For example, Article 3.1(b)(3) of the Operating Agreement states that its "foregoing provisions relating to the maintenance of Capital Accounts are intended to comply with Regulations § 1.704-1(b), and shall be interpreted and applied in a manner consistent with such Regulations." Regulations § 1.704-1(b) assures a partner's distributive share is affected within that partner's capital account.[22] Stated otherwise, compliance with Regulation § 1.704-1(b) was chosen for North Star so that its income, gain, loss and deductions would pass through to its individual members, just as they would if North Star were a partnership. Therefore, as we explain more fully below, an injury to North Star is not the same as an injury to a corporation, and concluding that it is, demonstrates a lack of understanding of basic principles that control North Star, LLC. Accordingly, we analyze the issues presented with principles that are relevant to the case now before us.

         C. Standing

         ¶35 We first consider whether Marx and Murray have standing to assert individual claims against Morris for injuries that are alleged to have occurred here.[23] In order to have standing to sue, a party must have a personal stake in the outcome of the controversy. City of Madison v. Town of Fitchburg, 112 Wis.2d 224, 228, 332 N.W.2d 782 (1983) . "Being damaged, however, without more, does not automatically confer standing." Krier v. Vilione, 2009 WI 45, ¶20, 317 Wis.2d 288, 766 N.W.2d 517. Instead, "plaintiffs must show that they suffered or were threatened with an injury to an interest that is legally protectable." Id.

         ¶36 Wisconsin Stat. ch. 180, which governs corporations, sets forth a detailed list of procedures and requirements for corporate shareholders seeking to bring claims on behalf of the corporation, i.e., as derivative actions. The provisions of Wis.Stat. §§ 180.0740 through 180.0747 set out details such as when a shareholder has standing to maintain a derivative action, procedures the shareholder must follow, and when a court must dismiss a derivative action. See Wis.Stat. §§ 180.0741, 180.0742, 180.0744. These procedures evince a recognition of the long history of derivative action principles in Wisconsin corporate law. See, e.g., Cook v. Berlin Woolen Mill Co., 43 Wis. 433, 447-48 (1877) .

         ¶37 In the corporate context, we have long held that individual shareholders cannot directly sue a corporation's directors or officers when the "primary injury" resulting from the actor's wrong is to the corporation itself. See, e.g., Rose v. Schantz, 56 Wis.2d 222, 229-30, 201 N.W.2d 593 (1972) . Instead, a shareholder who wishes to seek redress for an injury "primarily" to the corporation must bring a derivative action on behalf of the corporation. See id.; Notz v. Everett Smith Grp., Ltd., 2009 WI 30, ¶20, 316 Wis.2d 640, 764 N.W.2d 904.

         ¶38 Morris encourages us to read corporate principles of derivative standing into ch. 183 and hold that Marx and Murray's claims belong exclusively to North Star. We decline to do so. An LLC is a "creature of statute," Lenticular, 279 Wis.2d 385, ¶17; therefore, the absence of statutory procedures that limit actions against others for injuries to the LLC is significant. Additionally, as we have explained earlier, North Star, LLC is a distinct business form that differs significantly from a corporation. Accordingly, we decline to import corporate principles of derivative standing into ch. 183 to preempt claims by individual North Star members. This conclusion is not driven by who "owns" the claim, but rather, by Wis.Stat. § 183.0402 and the partnership-like mode of operation North Star, LLC selected in its Operating Agreement.

         ¶39 In contrast to the statutes that limit standing to bring derivative actions in ch. 180, the only provision of ch. 183 relating to suits in the name of an LLC is Wis.Stat. § 183.1101. That section states in relevant part:

(1) Unless otherwise provided in an operating agreement, an action on behalf of a limited liability company may be brought in the name of the limited liability company by one or more members of the limited liability company, whether or not the management of the limited liability company is vested in one or more managers, if the members are authorized to sue by the affirmative vote as described in s. 183.0404(1)(a).

         ¶40 Wisconsin Stat. § 183.1101 does not require that claims against LLC members be brought in the name of the LLC, nor does it otherwise limit a member's ability to sue other members or managers in their individual capacities. It merely requires that if an action of any kind is to be brought in the name of the LLC, against anyone, it must be authorized by a majority vote of disinterested members. Section 183.1101, which is silent on a member's right to sue on his own behalf, does not abrogate the plain language of Wis.Stat. § 183.0402(1)(a), which prohibits the "willful failure to deal fairly with the limited liability company or its members" by a member or manager.

         ¶41 As we have explained, an LLC is a business form created by statute. Other states have written standing rules that apply to corporations into their LLC statutes, including who may maintain an action for an injury to an LLC, demand requirements, and the role of the court. See, e.g., Mich. Comp. Laws § 450.4510; Conn. Gen. Stat. § 34-271e. Wisconsin's legislature has not chosen to enact such statutes. We will not judicially import ch. 180's corporate derivative standing provisions into the LLC context where the legislature has not done so.

         ¶42 Morris argues that Wis.Stat. § 183.0402(2) denies the members of an LLC standing to assert individual claims under § 183.0402(1). Section 183.0402(2) states in relevant part:

Every member and manager shall account to the limited liability company and hold as trustee for it any improper personal profit derived by that member or manager without the consent of a majority of the disinterested members or managers, or other persons participating in the management of the limited liability company, from any of the following:
(a) A transaction connected with the organization, conduct or winding up of the limited liability company.

         Morris argues that because this section requires improper personal profits to be held in trust for the LLC, but not for the individual members, it modifies § 183.0402(1) by clarifying that a § 183.0402 injury is to the LLC rather than to individual members.

         ¶43 Morris's argument assumes that injuries to North Star, LLC and injuries to individual members are mutually exclusive. As discussed above, however, corporate principles of standing do not apply to LLCs. Specifically, in the matter before us, injuries to North Star and to its members are not mutually exclusive because financial injury to North Star flows through to its members just as an injury would if North Star were a partnership rather than an LLC. Therefore, the question is not whether the alleged injury is to the LLC or to its individual members. Rather, the question is simply whether the individual member bringing the action has suffered an injury to a legally protected interest.

         ¶44 Furthermore, in addition to the lack of statutory support for applying statutory corporate principles of derivative standing to an LLC, in a corporation, gains and losses do not flow through to the individual shareholders. Instead, the corporation's income is first taxed at the entity level. 26 U.S.C. § 11. Shareholders do not claim a corporation's gains and losses on their individual tax returns. Ribstein and Keatinge on LLCs, supra, at § 16.2. They pay taxes only on the dividends, if any, they receive from the corporation, and are not taxed on capital gains and losses unless and until they choose to sell their corporate shares.[24] William Meade Fletcher, Fletcher Cyclopedia of the Law of Corporations § 6972.50 (West 2018).

         ¶45 In contrast, North Star has elected to be taxed as a partnership.[25] This is the usual form of operation for an LLC. See Rev. Rul. 88-76, 1988-2 C.B. 360; 26 U.S.C. § 701. When treated as a partnership, the company's gains and losses flow through to individual members and are realized directly by each member, each year, on that member's individual tax return.[26]See id.; Gottsacker, 281 Wis.2d 361, ¶19. North Star operates such that its gains and losses are directly credited to or deducted from each member's capital account, flowing through to each member's individual tax return.[27] This is a concept used in partnership law that is not present in the corporate context. Each member's interest in North Star, LLC is that member's personal property, and includes the right to a share of the profits and losses of the LLC.[28] Wis.Stat. §§ 183.0703, 183.0102(11); see also Gottsacker, 281 Wis.2d 361, ΒΆ50 (Roggensack, J., concurring). For these reasons, there is generally a much closer financial connection between harm to an LLC and harm to its members than between harm to a ...


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