Is a limited liability company a party to and bound by its own operating agreement?

Many folks would say, “Yes, of course.” But it turns out the answer varies depending upon the law of the company’s state of incorporation.

In Delaware, an LLC is bound by its operating agreement regardless of whether the company itself executed the contract. 6 Del. Code § 18-101 (9) provides than an LLC is “not required to execute its limited liability company agreement,” and that it is “bound” by the contract “whether or not” it “executes the limited liability company agreement.”

In a recent decision about the binding effect – or lack thereof – of an arbitration provision in an operating agreement upon the LLC itself, Manhattan’s Appellate Division – First Department announced that New York follows the opposite rule: an LLC is not bound by its operating agreement unless it signs the agreement separately from the members themselves.

Wythe Berry LLC v Goldman (230 AD3d 1081 [1st Dept 2024]), offers an unambiguous lesson to corporate transactional lawyers: in New York, if you wish to bind the LLC to its own operating agreement, including an arbitration provision, the LLC must sign the contract. If it does not, the members will be bound by the arbitration agreement, but the LLC will not, leading to potential litigation before two separate tribunals, undermining the conventional rationales favoring alternative dispute resolution – efficiency, speed, and reduced legal cost.

The Troubled Hotel Development Project

Wythe Berry was a litigation between two real estate entrepreneurs, Yoel Goldman (“Goldman”) and Zelig Weiss (“Weiss”), over their development of The William Vale hotel in Williamsburg, New York.

In Section 11 of the Fifth Amendment to Operating Agreement (the “Fifth Amendment”) of Wythe Berry LLC (the “Company”), Goldman and Weiss agreed that “any dispute arising under this agreement . . . shall be determined by the American Arbitration Association, New York, New York, in accordance with its rules then governing.” In the signature block, Goldman and Weiss executed in their capacity as members, but no one executed on behalf of the Company itself. That omission – possibly intentional, possibly not – became rather consequential.

The massive development project experienced financial difficulties, each side blaming the other for causing them. Goldman commenced arbitration, originally naming only Weiss individually, but later filing an Amended Demand for Arbitration naming as nominal defendants four of Goldman and Weiss’s entities, including the Company.

The Proceeding to Stay Arbitration

The Company and its affiliates swiftly filed a special proceeding by order to show cause and petition to stay the arbitration under CPLR § 7503 (b), a statute empowering courts to “stay arbitration on the ground that a valid agreement was not made” to arbitrate.

Goldman opposed the petition with a Hebrew-to-English translated contract denominated a “Deed of Acknowledgment, Undertaking, and Clarification,” but which the parties referred to as a “Side Agreement.” In the Side Agreement, Goldman and Weiss wrote, “The main and principal agreement that shall be determinative and dispositive between us in any case of doubt, dispute, or . . . conflict that may perhaps arise between us shall be only and solely . . . the contract that is known and called by the title ‘Fifth Amendment’”.

In the Side Agreement, Goldman and Weiss inartfully expressed a desire to bind their entities – including the Company – to the Side Agreement, writing that they “hereby acknowledge, both on our own behalf and on that of all the corporations registered under our names, whether in whole or in part, and that have any relevance or connection to the [The William Vale hotel project], without exception – fully acknowledge . . . everything that is written” in the Side Agreement. But like the Fifth Amendment, the Company did not execute the Side Agreement.

The Stay Decision

On the eve of his retirement from the bench, in a brief Decision and Order, Manhattan Commercial Division Justice Barry R. Ostrager denied the petition. The Court ruled that the Company and its affiliates validly agreed to arbitrate because the “preface” of the Side Agreement stated that the parties were “acting on behalf of petitioners in signing the ‘Side Agreement’ which incorporated the Fifth Amendment . . . with its broad arbitration clause.”

The Stay Pending Appeal

The Company and its affiliates swiftly appealed, moving in the Appellate Division for a stay pending appeal under CPLR § 5519 (c). In an encouraging sign for the appeal’s future on the merits, the appellate court issued a coveted, seldom-granted stay pending appeal.

The Company perfected its appeal shortly after, briefing the dichotomy between Delaware and New York law mentioned at the outset of this article, the latter of which provides that the LLC is legally independent from its members, and not a party to an operating agreement between the members, unless the contract says so expressly. All three briefs are available here, here, and here.

The Appellate Decision

Reversing the motion court, the Appellate Division ruled: “Because Wythe Berry LLC did not execute the Fifth Amendment, and neither Goldman nor Weiss signed on its behalf, there is no clear and explicit evidence that Wythe Berry LLC intended to be bound by the Fifth Amendment, and it is therefore not bound by the arbitration provision contained therein” (quotations and brackets omitted).

The Court explained:

New York’s Limited Liability Company Act Law does not dictate that nonsignatory LLCs are always bound by the terms of their operating agreements. The Revised Uniform Limited Liability Company Act provides that an LLC is bound by the operating agreement, whether or not the company has itself manifested assent to the operating agreement, but ‘New York has not adopted the Uniform Act’ (LNYC Loft, LLC v Hudson Opportunity Fund I, LLC, 154 AD3d 109 [1st Dept 2017]). The LLC Law defines ‘operating agreement’ as ‘any written agreement of the [LLC’s] members concerning the business of a[n] [LLC] and the conduct of its affairs’ (LLC Law § 102 [u]). Because an LLC ‘shall be a separate legal entity’ (LLC Law § 203 [d]) from its members, a nonsignatory LLC is a nonparty to an agreement among its members only.

The Court concluded:

Petitioners’ ‘acknowledge[ment]’ of the Side Agreement does not explicitly manifest intent to be bound by the Fifth Amendment’s arbitration clause. The phrase ‘between us,’ as used in the Side Agreement, does not unambiguously include petitioners. The Side Agreement incorporates ‘the contract that is known and called by the title ‘Fifth Amendment’ . . . which was signed by us on the said date.’ The Fifth Amendment was ‘signed by’ only Goldman, Weiss, and other individuals—it was not signed by any of the petitioner LLCs. . . . Accordingly, petitioners cannot be forced to arbitrate. (quotations omitted).

The unfortunate end result for Goldman is that because of a modest drafting technicality – quite possibly an unintentional one – he may be forced to litigate before two separate tribunals.

Bottom line: if you’re an attorney draftsperson, or someone contemplating ownership in a New York LLC, and you want the company to be bound by the same set of contractual rights and duties as the members themselves, make sure the company is a signatory to the operating agreement.

For members of New York LLCs with operating agreements to which the LLC is not a signatory, or for attorneys who represent them, the solution should be simple: have the LLC sign a joinder agreement.