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Current Developments in the Commercial Divisions of the
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Posted: November 27, 2013

Arbitration Provisions in LLC Operating Agreements May Be Enforced by LLCs Even If LLCs Are Not Parties to the Agreements

On November 15, 2013, Justice Kapnick of the New York County Commercial Division issued a decision in Kellman v. Whyte, 2013 NY Slip Op. 32938(U), granting in part and denying in part the defendants’ motion to compel arbitration.

In Kellman, plaintiff asserted claims against her former employer, an affiliate of her former employer and the LLC for which she had served as an officer. Plaintiff’s employment was covered by an offer letter agreement that did not contain an arbitration clause, but which said that certain of its provisions were subject to the execution of an operating agreement for the LLC defendant, which had not been formed when the offer letter was signed.  Plaintiff later signed the operating agreement, which contained an arbitration clause.

Plaintiff eventually quit and sued the defendants for, inter alia, breach of the operating agreement and employment letter agreement. The defendants filed an Answer and then moved to compel arbitration of all claims under the Federal Arbitration Act.

Justice Kapnick granted the motion as to the claims for breach of the operating agreement. In doing so, Justice Kapnick rejected the plaintiff’s argument that the LLC could not compel arbitration because it was not actually a party to the operating agreement.  She held that LLCs have standing to sue to enforce provisions in their own operating agreements even though they are not always parties to those agreements (their members are). Justice Kapnick also held that plaintiff’s claim that the operating agreement had been fraudulently induced was a question for the arbitrator and could not be used as a basis to oppose the motion to compel arbitration.

Justice Kapnick denied the motion to compel arbitration of claims relating to the employment agreement on the grounds that it was signed by a different defendant and that it did not contain an arbitration clause. However, she stayed the action pending the outcome of the arbitration.

The lessons learned from Justice Kapnick’s decision are that parties who enter into multiple agreements with different entities in connection with a single transaction are expected to read and understand the differences between the parties to those agreements and the provisions in those agreements, because New York’s courts will strictly enforce them.

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