Does the closely-held corporation exception apply to limited liability companies? Banyan Investment Company, LLC v. Evans Explained

In Banyan Investment Company, LLC v. Evans, the Utah Court of Appeals addressed whether the closely-held corporation exception, which allows minority shareholders to bring derivative claims directly, applies to limited liability companies. This decision clarifies important procedural rights for minority members of closely-held LLCs in Utah.

Background and Facts

Banyan Investment Company owned a twenty percent membership interest in Aspen Press Company, LLC, but was not involved in management. The other five members managed the day-to-day operations. Banyan alleged that these defendants engaged in conduct using Aspen Press for personal profit and limited Banyan’s access to company records. Banyan filed direct claims for breach of fiduciary duty and unjust enrichment, seeking an accounting. The defendants moved to dismiss, arguing these were derivative claims that must comply with Rule 23A procedures.

Key Legal Issues

The case presented two critical issues: whether filing an amended complaint waives the right to appeal dismissal of the original complaint, and whether the closely-held corporation exception from Aurora Credit Services applies to limited liability companies. The exception permits minority shareholders to bring derivative claims directly under certain circumstances in closely-held entities.

Court’s Analysis and Holding

The Court of Appeals first determined that Banyan did not waive its appeal rights by filing an amended complaint because the dismissal was on the merits rather than for technical defects. Adopting the majority federal rule, the court held that when claims are dismissed for legal inadequacy rather than pleading deficiencies, amendment does not waive appeal rights. On the substantive issue, the court concluded that the closely-held corporation exception applies equally to LLCs and corporations, noting that Utah already applies corporate derivative action principles to LLCs under Rule 23A. The court emphasized that closely-held LLCs face the same vulnerabilities to malfeasance as closely-held corporations.

Practice Implications

This decision provides significant protection for minority members of closely-held LLCs who face misconduct by majority members. Practitioners should note that the exception requires showing the minority member suffered unique injury distinct from other members, not just injury distinct from the LLC itself. The ruling also clarifies important appellate procedure regarding when amended pleadings waive appeal rights—only technical dismissals, not merits-based dismissals, create such waiver.