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?

shutterstock_121625548It’s not that I get nostalgic about derivative lawsuits (or Oldsmobiles), it’s just that it feels like we’re in a brave new world when it comes to adapting hoary corporate doctrine to that unincorporated upstart known as the limited liability company.

The clash between old and new looms in a derivative action concerning an LLC pending before Erie County Commercial Division Presiding Justice Timothy J. Walker called Univest I Corp. v Skydeck Corp., Index No. 2014-811644. The case stems from a dispute between the 50% managing member (BDC) and 50% non-managing member (Univest) of 470 Pearl Street, LLC, which was formed in 2004 for the purpose of acquiring for future development a parking lot in Buffalo, New York. Pending the development, BDC and Univest agreed to lease the parking lot to a BDC affiliate known as Skydeck Corp. The lease granted 470 Pearl the right to terminate the lease on 60-days notice.

In 2014, Univest, acting in 470 Pearl’s name, issued a termination notice to Skydeck under authority of an unusual provision in 470 Pearl’s operating agreement that gave either member the unilateral right “to cause 470 Pearl to terminate” the Skydeck lease. Two lawsuits followed Skydeck’s refusal to vacate. In the first, Justice Walker granted Univest a declaratory judgment upholding its termination notice and ordering Skydeck, pending further order, to pay an increased monthly rent (read amended complaint here and the court’s order here).

Shortly afterward, Univest commenced a derivative summary eviction proceeding on behalf of 470 Pearl, naming both Skydeck and BDC as respondents (read petition here). Now, let me pause the story for a moment. I’m not a landlord-tenant lawyer. If you’d asked me, before I looked into the Univest case, whether a non-controlling, non-managing corporation shareholder or LLC member could bring an eviction proceeding against the corporation’s or LLC’s tenant, I’m sure I would have guessed “no” for at least two reasons. First, I would have assumed the governing statute in Article 7 of the Real Property Actions and Proceedings Law somehow limits standing to seek relief to the owner or its authorized agent. Second, evicting a third-party tenant strikes me as quintessential management action. Imagine the chaos if any minority owner of a real estate operating company could take it upon themselves to launch eviction proceedings. But I would have guessed wrong. Gorbrook Associates, Inc. v Silverstein, 40 Misc 3d 425 [Dist. Ct. Nassau County 2013], a case of apparent first impression, held that a non-controlling, minority shareholder may bring derivatively an eviction proceeding.  Continue Reading Not Your Father’s Derivative Action

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