Court Opinion

ID: 4104130
Source: CourtListenerOpinion
Date Created: 2016-12-02 19:01:10.024045+00
Date Added: 2024-06-11T07:45:42.387248
License: Public Domain

Case: 16-60417      Document: 00513781692         Page: 1    Date Filed: 12/02/2016

           IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT
                                                                        United States Court of Appeals
                                                                                 Fifth Circuit

                                                                               FILED
                                    No. 16-60417                        December 2, 2016
                                  Summary Calendar
                                                                          Lyle W. Cayce
                                                                               Clerk
SCARLETT DALTON, Individually, and as Executrix of the Estate of Larry
Brooks, Deceased,

              Plaintiff - Appellant

v.

RICHARD HUGH MCLARTY,

              Defendant - Appellee

                   Appeal from the United States District Court
                     for the Northern District of Mississippi
                             USDC No. 3:15-CV-134

Before KING, DENNIS, and COSTA, Circuit Judges.
PER CURIAM:*
       Scarlett Dalton appeals the district court’s dismissal of her suit against
Richard McLarty for lack of standing. Dalton is the Executrix of the Estate of
Larry Brooks. Brooks owned approximately eleven percent of Equity Capital
Management LLC, a Mississippi limited liability company.                        Equity was
established as a vehicle for distributing payouts from a promissory note

       * Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
    Case: 16-60417     Document: 00513781692     Page: 2   Date Filed: 12/02/2016

                                 No. 16-60417
executed by Albany Industries, Inc., a furniture manufacturer based in
Mississippi. McLarty is both the Chief Executive Officer of Albany and the
former managing member of Equity. At its founding, Equity was managed by
McLarty and was comprised of nine members: McLarty, three of his family
members, four Albany employees, and Brooks (succeeded in interest by
Dalton). Albany began to fall behind on its note to Equity in 2012. McLarty,
as Chief Executive Officer of Albany, failed to increase the note’s interest rate
as required under its terms. In response to Dalton’s criticism of these actions,
McLarty called a special meeting of Equity’s board, which ratified McLarty’s
actions relating to the promissory note.       In 2015, Albany ceased making
payments to Equity.
      Dalton commenced a direct action against McLarty for a breach of his
fiduciary duties to Equity. Dalton argued that McLarty’s actions constituted
a clear conflict of interest between his responsibilities as Chief Executive
Officer of Albany and his duties as manager of Equity. McLarty averred that
he had been acting in Equity’s best interests because attempted enforcement
of the promissory note would have further threatened Equity’s future receipt
of payments from Albany. During the course of litigation, the district court,
sua sponte, raised the issue of whether Dalton had standing under Mississippi
law, to pursue her claim directly against McLarty, as opposed to derivatively
on behalf of Equity.
      Under Mississippi law, a member of a LLC suing for injuries sustained
by the LLC only possesses derivative rights and lacks standing to proceed on
their own behalf. Mathis v. ERA Franchise Sys., Inc., 25 So. 3d 298, 301 (Miss.
2009). However, because Equity is a closely held entity, an exception known
as the Derouen doctrine permits a direct action by a member as long as it does
not “(i) unfairly expose the corporation or the defendants to a multiplicity of
actions, (ii) materially prejudice the interests of the creditors of the
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    Case: 16-60417     Document: 00513781692     Page: 3   Date Filed: 12/02/2016

                                  No. 16-60417
corporation, or (iii) interfere with a fair distribution of the recovery among all
interested parties.” Derouen v. Murray, 604 So. 2d 1086, 1091 n. 2 (Miss. 1992)
(quoting American Law Institute, Principles of Corporate Governance: Analysis
and Recommendations § 7.01(d) (1992)) (internal quotations omitted). After
briefing by the parties, the district court determined that because not all
members of Equity were parties to the lawsuit, it could expose McLarty to
multiple suits and result in inequitable distribution of recovery. The district
court thus held that the Derouen exceptions did not apply and dismissed,
without prejudice, Dalton’s suit for lack of standing.
      A careful review of the record in this case, a full consideration of the
parties’ briefs on appeal, and a thorough analysis of the district court’s ruling
lead us to conclude that the district court’s judgment was correct. The district
court properly determined that Dalton lacked standing under Mississippi law
to pursue her direct claim against McLarty.        Therefore, we AFFIRM the
district court’s decision, essentially for the reasons articulated in its
memorandum opinion and order.

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