The Virginia Supreme Court held that an arbitration provision in the operating agreement for a limited liability company (LLC) required members of the LLC to arbitrate, but not the LLC itself. Accordingly, the arbitration provision did not apply to a derivative claim brought on behalf of the LLC by one LLC member against another member.

In Mission Residential, LLC v. Triple Net Properties, LLC, Record No. 062250, 2008 WL 108954 (Va. Jan. 11, 2008), Mission and Triple formed an LLC called Holdings for the purpose of purchasing, managing, and selling real estate properties as securities investments. The operating agreement contained an arbitration provision.

When Triple initiated arbitration, claiming a derivative action against Mission on behalf of Holdings, Mission filed a declaratory judgment action seeking a determination that there was no arbitration agreement between Mission and Holdings. The circuit court declined to stay arbitration.

On appeal, the Court held that the arbitration provision in the operating agreement applied only to disputes between the members of the LLC and not to disputes with the LLC itself. As the Court noted, Holdings was a separate legal entity, the true holder of the derivative claim, and not party to the arbitration agreement. Accordingly, the Court reversed the lower court ruling.