Commercial Division Blog

Posted: February 6, 2017 / Categories Commercial, Fiduciary Duties

LLC Member Does Not Owe Fiduciary Duty To Managing Member Or To The LLC Itself

On January 31, Justice Singh of the New York County Commercial Division issued a decision in Landes v. Provident Realty Partners II, L.P., 2017 NY Slip Op. 30196(U), denying and granting summary judgment motions made by the parties.

The underlying dispute involves the relationship between several LPs and LLCs holding indirect interests in real property. In brief, 303 BRG-IMICO LLC ("303 LLC") owned the real property located at 303 East 46th Street, in Manhattan. And 303 LLP was in turn owned 50% by Provident Realty Partners II, L.P. ("PRP") and 50% by IMICO UN Rental LLC ("IMICO"), with PRP designated the Managing Member. IMICO decided to sell its 50% interest, and offered it to the managing member of PRP LP, who accepted. IMICO's 50% interest was purchased by a new entity created by PRP LP's managing partner. When several limited partners of PRP LP learned of the transaction, they sued, claiming that the opportunity to purchase IMICO's 50% interest was a corporate opportunity of PRP LP, and should have been offered to PRP LP before being sold to a different entity. The plaintiffs alleged breach of fiduciary duty and various related claims against their managing member—essentially, that he had cut them out of the deal. They also alleged that IMICO had aided and abetted the breach of duty.

Plaintiffs moved for summary judgment, and IMICO cross-moved for summary judgment dismissing all claims asserted against it.

The court denied Plaintiffs' motion for summary judgment on the grounds that, inter alia, they had not established that a corporate opportunity existed—a statement to that effect in a prior First Department decision was dicta, and was not the law of the case because the First Department was considering a motion to dismiss, not a motion for summary judgment.

As to IMICO, the court explained that a claim for aiding and abetting breach of fiduciary duty required both (a) actual knowledge of the underlying breach by, and (b) substantial assistance from, the defendant. The court rejected Plaintiffs' reliance on authority from the S.D.N.Y. suggesting that a "willful blindness" standard could substitute for actual knowledge, because "not only is this court not bound by federal law, but the First Department has made it clear that in New York, in order to survive a motion for summary judgment on a claim for aiding and abetting a breach of fiduciary duty, plaintiff must establish that IMICO had actual knowledge of any breach of fiduciary duty." And the court held that actual knowledge had not been established—Plaintiffs' allegation that IMICO "should have obtained assurances" that PRP LP's limited partners consented to the sale was insufficient.

The court also found that substantial assistance had not been shown—"the mere inaction of an alleged aider and abettor constitutes substantial assistance only if the defendant owes a fiduciary duty directly to the plaintiff," and IMICO did not owe a fiduciary duty to PRP LP. In the absence of Appellate Division authority on the question, the court followed the reasoning of a case from the Nassau County Supreme Court and held that, like corporations but unlike partnerships, non-managing members of LLCs do not owe fiduciary duties to the LLC or its managing member:

A non-managing member of an LLC who has a 50% interest in the LLC, such as IMICO does not owe a fiduciary duty to a managing member of the LLC or directly to the LLC. Although not binding, the court's ruling in Kalikow v. Shalik, 43 Misc.3d 817 (Sup.Ct. Nassau Co. Feb. 26, 2014), is persuasive. In Kalikow, two sole members of an LLC had a 50% interest, with only one of the members identified as the managing member. The court held that based upon the language of New York L.L.C. Law § 409, and the absence of language related to the duty of good faith or loyalty on behalf of a non-managing member of an LLC, that non-managing members do not owe a fiduciary duty to managing members of the LLC or to the LLC itself.

Accordingly, because the record supported a finding of neither actual knowledge nor substantial assistance, Plaintiffs' motion for summary judgment was denied, and IMICO's cross-motion was granted. An unpleaded claim for breach of fiduciary duty—on the theory that IMICO owed a direct fiduciary duty to PRP LP as its co-member, was dismissed on the same grounds.

This case is of interest because it clarifies the elements of an aiding and abetting claim by rejecting the S.D.N.Y.'s alternative "willful blindness" standard, and is only the second Commercial Division case holding that non-managing LLC members do not owe fiduciary duties to the LLC or to their managing member.

(Schlam Stone & Dolan LLP is counsel of record to IMICO in this action.)