The Texas Business Court continues to reinforce and incorporate fundamental principles of Texas law in its ever-growing body of case law. In its recent decision in Michael D. Crain v. William Northern, Cause No. 25-BC08A-0014, 2026 Tex. Bus. 11, the Texas Business Court’s Eighth Division (Fort Worth) addressed a fundamental question regarding standing for claimants in derivative actions—namely, whether a former member of a limited liability company (LLC) can pursue derivative claims on behalf of the company after their membership interest has terminated. The answer, according to the court, is no. As the court confirmed, a plaintiff seeking to bring a derivative claim must hold a present membership interest in the entity at the time suit is filed.
Background and Key Facts
The case, which was filed by Crain on June 20, 2025, arose from a broader dispute between Crain and Northern involving three related LLCs. Prior to its ruling on the derivative standing issue, the court had granted Northern’s motion for summary judgment on a specific performance claim relating to a buy-sell agreement, ordering Crain to tender irrevocable assignments of his membership interests in the LLCs, with an assignment date effective Dec. 19, 2024. Following that ruling, Northern filed a motion to dismiss and plea to the jurisdiction as to Crain’s derivative claims, arguing Crain no longer had standing to sue derivatively on behalf of entities in which he no longer held a membership interest.
The Legal Issue: Standing to Bring Derivative Claims
Northern argued that, under Section 101.463 of the Texas Business Organizations Code (TBOC), only a member of an LLC can bring a derivative proceeding on the company’s behalf. In this case, because Crain’s membership interest terminated effective as of December 2024, and he filed his lawsuit in June 2025, Crain no longer had standing to bring the derivative claims.
In response, rather than directly addressing his membership status, Crain asked the court to reconsider its prior valuation of his membership interests in connection with the summary judgment, arguing such reconsideration should precede any ruling on standing. The court disagreed and rejected Crain’s attempt to reopen the substantive merits of the summary judgment issues on the buy-sell agreement for purposes of addressing Northern’s jurisdictional challenge. As the court clarified, threshold questions of jurisdiction “should be decided without delving into the merits of the case.”
The Court’s Analysis
The court’s analysis centered on well-established Texas law regarding standing and derivative proceedings:
- Standing as a Jurisdictional Prerequisite: Standing is a constitutional requirement for filing suit. As the court reiterated, if a plaintiff lacks standing to bring a certain cause of action, the court lacks jurisdiction over that claim and must dismiss it.
- Statutory Requirements for LLC Derivative Suits:A derivative proceeding is a civil suit brought on behalf of a domestic corporation or LLC. As the court explained, Section 101.452 of the Texas Business Organizations Code establishes the standing requirements for LLC members bringing derivative suits, and Texas courts have consistently held that membership status at the time of filing is required to have standing. See In re LoneStar Logo & Signs, LLC, 552 S.W.3d 342, 347 (Tex. App.— Austin 2018, no pet.).
- Application to Crain’s Claims:Because the court previously held that Crain’s membership interests had terminated in December 2024, he was not a member when he filed his derivative claims in June 2025. Without a current membership interest, Crain had no stake in the outcome of the derivative suit and thus lacked standing to pursue it.
Accordingly, the court granted Northern’s plea to the jurisdiction and dismissed Crain’s derivative claims for lack of subject-matter jurisdiction.
Practical Takeaways for Texas Businesses and Practitioners
- Timing Is Critical: The effective date of a membership interest transfer may have important consequences beyond the immediate transaction, particularly with respect to potential future disputes.
- Buy-Sell Agreements May Have Ripple Effects: When structuring or enforcing buy-sell provisions, parties should consider how the timing, mechanics, and official effective date of membership transfers may affect pending or anticipated litigation.
- Derivative Standing Is Strictly Enforced: Texas courts, including the Texas Business Court, apply statutory standing requirements rigorously.
- Address Jurisdictional Challenges Head-On: When facing a plea to the jurisdiction or motion to dismiss for lack of jurisdiction, parties should directly address the standing and/or jurisdiction questions head-on rather than attempting to (re)litigate substantive questions that go to the merits.
- Courts Analyze Derivative Claims and Individual Claims Separately for Standing Purposes: The court dismissed Crain’s derivative claims but left his separately asserted individual claims intact for further proceedings, reinforcing that courts assess standing on a claim-by-claim basis.
Conclusion
The Crain v. Northern decision illustrates how membership status, transaction timing, and statutory requirements can intersect in LLC litigation. For business owners involved in internal disputes or contemplating buy-sell transactions, this case reveals the importance of considering the litigation implications of any membership transfer.
