Commercial Division Blog

Posted: November 27, 2016 / Categories Commercial, Fiduciary Duties

Party Who Agreed to Be Tie-Breaker Vote for LLC Members Had Fiduciary Duty to Members

On November 21, 2016, Justice Ritholtz of the Queens County Commercial Division issued a decision in Fakiris v. Gusmar Enterprises, LLC, 2016 NY Slip Op. 51665(U), holding that a person who had agreed to be the tie-breaker in votes between two LLC members had a fiduciary duty to those members, explaining:

The second cause of action alleges that a fiduciary relationship exists between defendant Neubauer and plaintiff Marina arising from adoption of an amendment to the operating agreement dated April 25, 2013 which provides in relevant part that "in the event that there [sic: the] company decisions result in a stalemate between the Managing Members, then a third party, namely Donna Neubauer, shall cast the decisive vote to resolve such stalemate."

The plaintiff alleges that the amendment created a fiduciary duty between herself and Neubauer and that Neubauer breached her fiduciary duty by refusing to resolve stalemates between the plaintiff and Kostas, including those that pertain to alleged unauthorized withdrawals and the repayment of loans. A fiduciary relationship exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation.

The Court finds that there was a fiduciary relationship between the plaintiff and Neubauer arising from the operating agreement, and the court further finds that there are issues of fact pertaining to this cause of action as asserted against defendant Neubauer which preclude summary judgment for either side.

The Court also finds that there are issues of fact concerning whether Neubauer owed a fiduciary duty to Gusmar arising from her alleged role in the company and whether she breached that duty. For example, there are conflicting allegations concerning whether defendant Neubauer was ever requested to act a tie-breaker and whether she took improper payments (e.g., tuition payments for her children) from Gusmar.

The Court notes that defendant Neubauer was also an employee of Summit Development, a tenant allegedly not paying fair market rent to Gusmar, and may have had divided loyalties. It is elemental that a fiduciary owes a duty of undivided and undiluted loyalty to those whose interests the fiduciary is to protect.

(Internal quotations and citations omitted).