To prevail on a cause of action in a business divorce lawsuit, the plaintiff has many essential boxes to check. Pleading requirements vary from one claim to another, but all business divorce cases have one thing in common. The first box any pleader must check – and the one often challenged at the outset – is standing to sue.

Standing is well-suited for pre-answer dismissal motions, so courts often resolve standing disputes early. But sometimes, a lawsuit will go all the way, including though trial and judgment, only for the plaintiff to get the rug pulled out from underneath at the appellate level. Such was the painful outcome of Talking Capital Windup LLC v Omanoff (___ AD3d ___, 2024 NY Slip Op 06283 [1st Dept Dec. 12, 2024]).

Peter Mahler wrote about Talking Capital years ago. In his piece from 2018, Peter wrote about a decision from now-retired Commercial Division Justice Shirley Werner Kornreich denying pre-answer dismissal for lack of standing under Delaware law of an LLC derivative suit where one of the LLC’s three managers sued on behalf of the entity without consent of the other two managers, despite the operating agreement’s requirement of unanimity of the managers for all actions on behalf of the LLC.

Talking Capital was a lawsuit for misappropriation of business opportunity by a factoring business, Talking Capital LLC (“Talking Capital”), which provided financing to telecommunications firms. In the decision Peter featured in his article, Justice Kornreich wrote that the lawsuit was derivative in nature because it sought to recover damages from two of the principals of Talking Capital, for the benefit of the company, which “must necessarily be prosecuted by” Forefront Partners LLC (“Forefront”), the only non-accused principal.

Heeding Justice Kornreich, Forefront filed a Second Amended Complaint with Forefront suing derivatively on behalf of Talking Capital and its affiliates. The events leading to the Appellate Division’s reversal began three years later, in 2021, when, after Talking Capital’s remaining managers and members resigned / withdrew from the entity, Bradley Riefler (“Riefler”), sole member of Forefront, the sole remaining member of the apparently-now-defunct Talking Capital, caused Forefront’s counsel to move, by Order to Show Cause for leave to amend the complaint to change the lawsuit from derivative to direct, with Talking Capital Windup LLC (“Talking Capital Windup”) as the lead plaintiff.

There were a couple of problems with this move.

First, Riefler was in ongoing personal Chapter 7 bankruptcy proceeding. Under the operating agreements of both Forefront and Talking Capital, any manager automatically ceased to be manager upon filing for “bankruptcy.” Riefler attempted to solve this problem by, on the eve of the amendment motion, purporting to adopt written consents of both entities, including to change the definition of “bankruptcy” to mean the final adjudication of a bankruptcy case, but not the pendency of an existing one.

Second, in opposition to the amendment motion, defendants pointed out that the State of Delaware cancelled the incorporation status for both Talking Capital and Forefront for failure to pay tax.

Before the Court decided the motion, Riefler paid Talking Capital and Forefront’s tax arrears and restored the entities to active status in Delaware. As a result, in a Decision and Order, Manhattan Commercial Division Justice Jennifer G. Schecter ruled that the two entities “may proceed with this action.” The Court wrote that “derivative claims belong to the company and if during the pendency of a derivative action the company seeks to take over the action to pursue it directly the court will ordinarily permit it to do so.” Accordingly, Justice Schecter granted leave to amend, and Talking Capital Windup filed, and proceeded for the rest of the case upon, a Third Amended Complaint.

Ultimately, Justice Schecter granted Talking Capital Windup partial summary judgment on liability, after which the Court held a two-day jury trial on damages, resulting in a goliath money judgment against former Talking Capital member Rodney Omanoff (“Omanoff”) and certain Omanoff affiliated entities for $36 million.

A huge final money judgment is a beautiful thing. But it can also be dangerous. Under New York’s rules of appellate procedure, a final judgment brings up for review by the intermediate appeals court any prior order in the case which “necessarily affects” the final judgment – in this case, Justice Schecter’s amendment decision from three years prior.

In its Decision and Order, the Appellate Division address four standing related defenses, two of which it held were preserved for appellate review, two of which it held were not because defendants did not raise them below

As to the two unpreserved arguments, the Court ruled:

• “Defendants’ argument that former plaintiff Forefront . . . lacked standing to commence and pursue this action because it sought to assert derivative claims on behalf of inactive or canceled entities should not be considered by this Court because it is not purely legal in nature and was raised for the first time on appeal”; and

• “Defendants’ argument that Forefront lacked standing because it was not an adequate representative of the Talking Capital entities’ interests insofar as it had no manager due to Bradley Reifler’s bankruptcy should also not be considered for the same reason.”

As to the preserved lack-of-standing points, the Court first ruled:

“Defendants’ argument that Forefront lacked standing because it was not an adequate representative of the Talking Capital entities’ interests due to its purported dishonesty, spoliation, and disloyalty is properly considered but unavailing (see generally Matter of Fuqua Indus., Inc., 752 A2d 126, 129-130 [Del Ch 1999]). Forefront was the only member who could have brought this derivative suit, as the other two members were controlled by persons alleged to have participated in the alleged wrongdoing. Forefront was an adequate plaintiff to represent what essentially amounted to its own interests.”

Turning to the amendment motion, the Court ruled that it was error to grant leave to amend because Riefler’s personal bankruptcy filing stripped him of power to act on behalf of the companies:

“The motion to amend to substitute the Talking Capital entities as plaintiffs should have been denied. At the time the motion was made, the Talking Capital entities and Forefront had all been canceled. Although their good tax status was subsequently restored, Bradley Reifler did not have the authority to revive them and direct their actions, having lost his managerial title under the terms of both the Forefront and Talking Capital operating agreements by filing for bankruptcy (see Favourite Ltd. v Cico, 181 AD3d 426, 426-27 [1st Dept 2020]). . . .”

The Court continued:

“Reifler subsequently executed written consents purporting to amend the Forefront and Talking Capital operating agreements to allow him to continue as manager notwithstanding his bankruptcy. However, these consents are not valid. . . . Reifler was no longer either a manager (because his bankruptcy terminated his managerial role under the terms of the operating agreements) or a member (because his membership interest was property that passed to his bankruptcy estate) of either entity. Nor did Forefront or Talking Capital have any other managers or members. As such, neither Reifler, nor anyone else apart from the bankruptcy trustee or his designees, had the authority to adopt the written consents on behalf of either Forefront or Talking Capital, and they were therefore without legal effect (see Favourite, 181 AD3d at 426-27; AGR Halifax Fund, Inc. v Fiscina, 743 A2d 1188, 1194-1195 [Del Ch 1999]). . . .” (citations omitted).

Based upon these holdings, the Appellate Division “unanimously reversed, on the law,” the $36 million judgment, “vacate[d] the prior grant of summary judgment on liability in favor of Talking Capital as against defendants, because Talking Capital is no longer the proper plaintiff in this action based on our determination that the motion to amend should not have been granted,” and “remanded for further proceedings in accordance with this order.”

Imagine winning a $36 million judgment only for it to be vacated on appeal for lack of standing. Woof.

What “further proceeding” can one expect on remand? Plenty of them. By vacating both the final judgment and the summary judgment liability decision which preceded it, the Appellate Division essentially gave Omanoff a second chance to relitigate all liability and damages issues. Back to the drawing board!

Happy New Year, everyone. We wish all our readers a wonderful 2025!