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Davis v. MKR Development, LLC

Supreme Court of Virginia

May 31, 2018

DOROTHY C. DAVIS, DERIVATIVELY ON BEHALF OF WOODSIDE PROPERTIES, LLC
v.
MKR DEVELOPMENT, LLC, ET AL.

          FROM THE CIRCUIT COURT OF THE CITY OF HOPEWELL James F. D'Alton, Jr., Judge. [1]

          OPINION

          STEPHEN R. McCULLOUGH JUSTICE.

         The circuit court dismissed without prejudice this derivative action on the ground that the plaintiff had failed to first make a demand for the limited liability company to take action. The plaintiff appeals from this ruling, arguing that the law does not require such a demand when doing so would be futile. The applicable statute, Code § 13.1-1042, and related provisions present us with a conundrum because competing canons of statutory construction point in opposite directions. We resolve this conundrum by concluding that the 2011 amendments to Code § 13.1-1042 did not abolish the futility exception to the demand requirement as established in case law preceding enactment of the statute. Consequently, we reverse and remand the case for further proceedings.

         BACKGROUND

         According to the allegations in the amended complaint, Melvin Davis Sr., the husband of Dorothy and the father of Kaye, Melvin Jr. and Rex, founded and owned Melvin L. Davis Oil Company. He sold the company stock to his three children. Melvin and Dorothy also owned real estate that the oil company leased. Melvin and Dorothy formed Woodside Properties as a limited liability company to take ownership of this real estate. Melvin and Dorothy intended to establish a vehicle through which they would receive income from Davis Oil's rental of these properties. The operating agreement for Woodside Properties appoints MKR Development, LLC as the manager of Woodside Properties. Under MKR's operating agreement, Rex, Melvin Jr., and Kaye are its managers.

         Dorothy, who presently owns 72 percent of Woodside Properties, alleges that as of December 31, 2011, Woodside Properties should have received $1, 374, 147 in rent under the lease. Instead, she alleges, the bank account established for Woodside Properties had a balance of $35, 000. She also asserts that funds that should have gone to Woodside Properties were used for improper purposes. When she asked Melvin Jr. and Rex for payment of funds due, they refused.[2] They also refused to provide an accounting.

         On May 13, 2014, Dorothy filed a complaint, which she later amended, against MKR Development, LLC and her two sons, Melvin Jr. and Rex, as well as Woodside Properties, LLC. She alleges inter alia that MKR and her sons, as managers, had breached their fiduciary duties towards Woodside Properties, were wasting corporate assets, and unjustly enriching themselves. She asked for MKR to be removed as manager of Woodside Properties, and for a decree imposing a constructive trust and requiring an accounting.

         Significantly, the amended complaint states that

Mrs. Davis did not make demand on MKR, Mel, and/or Rex to bring this action on behalf of Woodside Properties because such demand would have been a futile, wasteful, and useless act as they were the parties who authorized and ratified the alleged wrongful conduct complained of herein and were the direct beneficiaries thereof, and are incapable of making an independent and disinterested decision to institute and vigorously prosecute this action.

         In response, the defendants filed a plea in bar and demurrer, alleging, among other things, that the complaint was barred because Dorothy had not made a "proper demand as required by" Code § 13.1-1042. The court agreed, granted the plea in bar, and dismissed the complaint on that basis.[3] Dorothy appeals from this decision.

         ANALYSIS

         The question before us is one of statutory construction, which we review de novo. Perreault v. Free Lance-Star, 276 Va. 375, 384, 666 S.E.2d 352, 357 (2008).

         The derivative form of action permits an individual shareholder to bring "suit to enforce a corporate cause of action against officers, directors, and third parties." Ross v. Bernhard, 396 U.S. 531, 534 (1970). Devised as a suit in equity, the purpose of the derivative action is to place in the hands of the individual shareholder a means to protect the interests of the corporation from the misfeasance and malfeasance of "faithless directors and managers." Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 548 (1949). See also Simmons v. Miller, 261 Va. 561, 573, 544 S.E.2d 666, 674 (2001) ("A derivative action is an equitable proceeding in which a shareholder asserts, on behalf of the corporation, a claim that belongs to the corporation rather than the shareholder.").

         To prevent abuse of this remedy, however, equity courts required the shareholder to "allege and prove that a request or demand has been made upon the board of directors, or other body managing the corporation that they institute proceedings on the part of the corporation against the wrong-doers, and their refusal to do so after reasonable request, or demand." Mountv. Radford Trust Co., ...


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