Search results for: kalikow

This important question of whether non-manager, minority limited liability company owners owe fiduciary duties continues to bedevil New York litigants and courts.

The prevailing state of the law remains unsettled, with no explicit appeals court guidance to be found. Peter Mahler has written about this unresolved legal question a number of times, with three articles on the subject available here.

In Doeblin v MacArthur (2023 NY Slip Op 30133(U) [Sup Ct, NY County 2023]), Manhattan Commercial Division Justice Andrea J. Masley considered a variation of the question. Do minority LLC owners owe fiduciary duties to their co-members and to the company, at least for purposes of surviving a pre-answer motion to dismiss, where the complaint alleges that the defendant, although not an official manager, in some respects “acted in a ‘managerial capacity?’”

Continue Reading Do Non-Manager, Minority LLC Owners Owe Fiduciary Duties?

Consider the following hypothetical: The operating agreement of an LLC vests management authority in its two members. In practice, and by informal mutual consent, only one of the members actively manages the LLC’s business and financial affairs. (Not an altogether unusual arrangement, by the way.) When things go awry between the two members, and the active member accuses the inactive member of engaging in misconduct violating fiduciary duties owed to the LLC and to the active member, can the inactive member disclaim those fiduciary duties on the ground he owes no such duty as a de facto non-managing member?

A disclaimer of the sort was raised and rejected in a ruling earlier this month by Manhattan Commercial Division Justice Barry Ostrager in Marcus v Antell, 2018 NY Slip Op 32527(U) [Sup Ct NY County Oct. 5, 2018], where the court relied on a strict application of New York’s LLC Law § 401 (b) (ii) providing that any member of a member-managed LLC “shall have and be subject to all of the duties and liabilities of a manager provided in this chapter.”

It’s not quite as simple as it sounds. Continue Reading Does an Inactive Member of a Member-Managed LLC Owe Fiduciary Duties?

ExitI wish I could tell you this post will answer the question posed by its title, but it won’t. Let’s start with a few basic, non-controversial propositions concerning the default duties of LLC members and managers under the laws of New York and, I would hazard a guess, most if not all other states:

  • Managers of a manager-managed LLC owe fiduciary duties of care and loyalty to the LLC and its members.
  • Non-managing members of a manager-managed LLC do not owe fiduciary duties of care and loyalty to the LLC and its members.
  • Members of a member-managed LLC owe fiduciary duties of care and loyalty to the LLC and its members.

Now let’s tamper with the last of the above default rules. Assume the Acme company is a two-member, 50/50, New York LLC whose articles of organization do not designate it as manager-managed hence its management is “vested” in its members subject to provision otherwise in its operating agreement as authorized by LLC Law § 401 (a). Further assume Acme’s operating agreement expressly vests sole management authority in one of the two members. Does Acme’s other, non-managing member owe fiduciary duties? About two years ago, in Kalikow v Shalik which I wrote about here, Nassau County Commercial Division Justice Vito M. DeStefano answered that question in the negative, reasoning that § 401 (a)’s vesting of management powers in the members is made subject to the operating agreement, and that LLC Law § 409 (a) imposes duties on LLC “managers” with no mention of non-managing members. So far so good. Now let’s try another, stickier variation. Assume Acme has no operating agreement, that from inception its two 50/50 members jointly managed it, but there came a time when one member announces to the other that he “withdraws” from all management responsibility — but still maintaining his membership interest and entitlement to his pro rata share of Acme’s profits — following which he forms and operates a competing business. Has the “withdrawn” member taken on the status of a non-managing member and successfully shed his fiduciary duties, thereby permitting him to compete freely against his own company? Continue Reading Can LLC Members Walk Away From Fiduciary Duties?

If you Google the names Edward Kalikow and Eugene Shalik, you’ll notice a distinct pattern in the search results dating before and after 2006. Before that date, you’ll come across numerous trade publications trumpeting significant real estate development projects across the country involving Messrs. Kalikow and Shalik as longtime, successful, Long Island-based business partners. But after 2006, pretty much all you’ll find are numerous court decisions in multiple, nasty lawsuits between the two gentlemen and their affiliated entities fighting over all sorts of matters big and small. So what happened in 2006?

As best as I can glean from the public record, that’s the year Kalikow’s mother died, leaving behind a will naming Shalik as executor and apparently giving a good portion if not the bulk of her estate, including valuable real estate partnership interests left to her by her late husband, to a charitable foundation of which Shalik is trustee. Kalikow’s subsequent challenge to the will’s disposition of the partnership interests, alongside a host of other business disputes precipitated by the poisonous atmosphere, evolved into a litigation juggernaut still going strong after eight years of zigzagging through surrogate’s court, civil court, tax court, arbitration and appellate tribunals.

One of the more recent legal spats, involving a single-asset realty company owned by the two of them 50/50, led to an interesting decision earlier this year by Nassau County Commercial Division Justice Vito M. DeStefano in which the court addressed the question whether the non-managing member of a New York limited liability company owes any fiduciary duty to the LLC or its other members. The court’s decision in Kalikow v. Shalik, 2014 NY Slip Op 24099 [Sup Ct, Nassau County Feb. 26, 2014], also considered whether a common-law claim for contribution exists when one of two LLC members, both of whom personally guaranteed the LLC’s mortgage debt, voluntarily pays down a portion of the debt to avoid a default.  Continue Reading Court Dismisses Fiduciary Breach, Contribution Claims Against Non-Managing LLC Member