Seesaw

Some NYBD posts have staying power.  Of the hundreds of posts on this site, my practice brings me back, over and over again, to a handful of familiar favorites.  This 2018 post from Peter Mahler is one to which I find myself returning, because it sheds light on a familiar question: 

When an LLC operating agreement permits certain action upon less-than-unanimous consent of the members, can a complaining member nonetheless challenge that action as a breach of the majority’s fiduciary duties? 

As Peter showed in 2018, the law addressing that question has evolved in a distinctly seesawing fashion. A recent Fourth Department decision, Capicotto v W. New York Med. Mgt., LLC, 2026 NY Slip Op 01647 (4th Dept Mar. 20, 2026), continues the trend.  A new decision, together with all of the prior back-and-forth, make a fine enough reason to revisit that question in this week’s post. 

Competing Principles from the Court of Appeals.

In 1975, the Court of Appeals considered a challenge to corporate action that although formally authorized, was allegedly done in breach of the majority’s fiduciary duties (Schwartz v Marien, 37 NY2d 487, 492 [1975]).  The Schwartz Court established a framework for dilutive corporate actions that—although technically authorized—were alleged to unfairly prejudice certain owners, discussed here.  Essentially, even where governing documents authorize corporate action by less-than-unanimous consent, courts may intervene if the action appears designed to shift control or extract value from minority owners rather than advance legitimate business purposes.

About a decade later, the Court of Appeals decided Clark-Fitzpatrick, Inc. v Long Island R.R. Co., 70 NY2d 382 (1987), which held that a tort claim (including breach of fiduciary duty) cannot be maintained where it is duplicative of a breach of contract claim, unless the plaintiff alleges a violation of a legal duty independent of the contract.  Courts since Fitzpatrick cite it for the proposition that a breach of fiduciary duty claim cannot stand where there exists “a formal written agreement covering the precise subject matter of the alleged fiduciary duty” (see, e.g., Pane v Citibank, N.A., 19 AD3d 278, 278 [1st Dept 2005]).

Migrating those concepts to LLCs invites an obvious tension. Majority LLC owners can abuse their majority power just as much as majority shareholders (suggesting that the Schwartz framework has a place), but operating agreements are, fundamentally, “formal written agreements” (favoring application of Clark-Fitzpatrick).

To Shapiro, to Yu.

Those principles later clashed in challenges to technically authorized, but allegedly predatory member actions focused on non-unanimous amendments to an LLC’s operating agreement.

In Shapiro v Ettenson, 146 AD3d 650 (1st Dept 2017), the First Department affirmed the lower court’s order holding that under LLC Law 402(c)(3), a majority of the members can adopt (or amend) an already-formed LLC’s operating agreement without the consent of a minority owner.  Thus, the minority member could not state a cause of action for breach of fiduciary duty arising from the allegedly predatory “amendments” to the operating agreement.

Next came Yu v Guard Hill Estates, LLC, 2018 NY Slip Op 32466(U) (NY County Sept 28, 2018), where then-Manhattan Commercial Division Justice Saliann Scarpulla held that a non-unanimous amendment to an operating agreement—even if expressly permitted by the agreement—could in the right circumstances be a breach of fiduciary duty.  The Yu Court reasoned as follows:

Using that framework, the Yu Court sustained the minority member’s breach of fiduciary duty claims premised upon the majority’s amending the operating agreement to add a punitive capital call provision, then exercising that provision to dilute the minority member.

Along Comes Capicotto.

The latest intersection between LLC members’ majority rights under the operating agreement and their fiduciary duties to minority members focuses on a challenge to a non-unanimous consent removing a complaining manager.

The Contested Removal.

Capicotto features a dispute between the five members of WNY Medical Management LLC, which operates several outpatient surgical centers in Western New York.

Capicotto was one of five equal members in WNY, serving on the Company’s Board of Managers beginning in early 2021.

By September of 2022, Capicotto explains, he discovered egregious and rampant self-dealing between WNY and the other members, including misconduct in relation to leasing WNY’s premises, WNY’s payment of certain nurses and administrative professionals, and other members’ improperly increasing the surgical procedures performed at WNY solely to generate related referrals to their other entities.

When Capicotto raised these concerns to the remaining members, they exercised their rights under WNY’s Operating Agreement to remove him as a manager.  Section 5.13 of the Operating Agreement provides that a “member of the Board of Managers shall be removed . . . by vote of two-thirds (2/3) of the Board of Managers.” 

Capicotto’s Claim.

When Capicotto commenced suit in 2024, he attempted to state a cause of action arising from his removal from the Board of Managers.  While acknowledging that his removal might have been procedurally proper, Capicotto alleged that the other members removed him solely to maintain their control over WNY and frustrate his attempts to hold them accountable for their misconduct.  With a self-interested goal in mind (entrenching their control and forestalling his investigation), and absent a bona fide business purpose for his removal, Capicotto argued, the remaining members breached their fiduciary duties when they removed him as a manager.

The trial court dismissed Capicotto’s breach of fiduciary duty claim premised upon his removal from the Board of Managers.  The Court found that because the Operating Agreement expressly contemplates manager removal by a two-thirds vote, Capicotto’s cause of action was “fatally flawed.”

Capicotto’s Appeal.

Capicotto’s appeal crystallized his theory: Capicotto argued that formal compliance with the operating agreement should not insulate conduct undertaken to disadvantage a co-owner or consolidate control. While not citing either case, Capicotto implicitly invoked the principles reflected in Schwartz and Yu: majority owners may not wield otherwise valid contractual rights in a manner designed primarily to shift economic or governance power unfairly, rather than to advance legitimate company interests. 

The Decision.

The Fourth Department again sided with WNY, slamming the door to Capicotto’s breach of fiduciary duty claim. 

“Section 5.13 of the WNYMM operating agreement,” held the Court, “provides that ‘[a] member of the Board of Managers shall be removed or replaced automatically and without further action in the event the member of the Board of Managers is no longer a Member, or by vote of two-thirds (2/3) of the Board of Managers.’  We conclude that the removal of Capicotto from the Board of Managers cannot be ‘deemed a breach of fiduciary duty given a formal written agreement covering the precise subject matter of the alleged fiduciary duty.’ ” 

Where the parties’ written agreement squarely addressed the mechanism for removal, the Court declined to entertain the argument that the majority’s exercise of that contractual right could itself constitute a breach of fiduciary duty. 

Perhaps unsurprisingly, the Fourth Department cited to Clark-Fitzpatrick, Inc. v Long Island R.R. Co., 70 NY2d 382 (1987), bringing us back where we started in the interplay between authorized action and fiduciary duties.

Where Does Capicotto Leave Us?

For now, Capicotto suggests the seesaw has tipped back toward enforcing operating agreements as written, with less willingness to allow fiduciary duty claims to second-guess conduct expressly authorized by contract.

But the question is far from settled.  Other courts continue to apply the Schwartz framework, recognizing that formally authorized conduct may still be subject to fiduciary scrutiny when used to disadvantage minority owners without legitimate business justification.  

And so the seesaw remains in motion.  The back-and-forth between contractual primacy and fiduciary constraint remains a defining feature in this line of cases.