Summary
The Supreme Court of Virginia held that a limited liability company that is the subject of a derivative action must be joined as a necessary party. The Court rejected the argument that nonjoinder deprives the court of subject matter jurisdiction, but concluded that it would not entertain the appeal on the merits because Motel Investments of Christiansburg, LLC had not been joined. The judgment was reversed and the case remanded.
Topics
Practice areas
Questions Presented
- Whether the absence of a necessary party in a Virginia action implicates subject matter jurisdiction.
- Whether a limited liability company that is the subject of a derivative action must be joined as a party.
- Whether the appeal could proceed on the merits without Motel Investments of Christiansburg, LLC joined as a party.
Holdings
- The necessary-party doctrine does not implicate subject matter jurisdiction. Nonjoinder of a necessary party is a procedural defect that may be addressed through joinder, discretionary refusal to proceed, or other measures under Virginia law and the Rules of Court.
- A limited liability company that is the subject of a derivative action must be joined as a party to the suit.
Key quotations
“Accordingly, we hold that the necessary party doctrine does not implicate subject matter jurisdiction, and we reject Milestone's argument that it does.” (27)
“A limited liability company that is the subject of a derivative action must be a party to the suit.” (27-28)
“In accordance with our prior treatment of the failure to join necessary parties, we will not entertain this appeal on the merits because MIC is a necessary party to this proceeding and has not been joined.” (28)
Factual background
Motel Investments of Christiansburg, LLC was formed to build and operate a hotel, and the Trust was one of its members. After an arbitration determined the parties' membership interests, Thomas and Jane Dowdy transferred MIC's assets to Milestone Development, LLC without the Trust's involvement. The Trust brought a derivative action under Code § 13.1-1042 alleging multiple fiduciary, contractual, statutory, and tort claims, but it did not join MIC as a party.
Procedural history
The Trust filed an amended derivative complaint on behalf of Motel Investments of Christiansburg, LLC against Milestone and the individual defendants concerning the transfer of the LLC's assets. The circuit court dismissed the complaint after finding that the Trust could not fairly represent the interests of the LLC's members. The Supreme Court of Virginia declined to reach the merits because the LLC had not been joined, reversed the circuit court's judgment, and remanded.
Remand instructions
The circuit court must conduct further proceedings consistent with the opinion, including addressing the nonjoinder of Motel Investments of Christiansburg, LLC.