Commercial Division Blog

Posted: August 17, 2017 / Categories Commercial, Business Divorce

Court Should Not Have Removed Member from LLC Management Without Hearing

On August 15, 2017, the First Department issued a decision in Crabapple Corp. v. Elberg, 2017 NY Slip Op. 06144, holding that an LLC member should not have been removed from management without a hearing, explaining:

Elberg asserts that he is the sole managing member of the LLCs. His sister, nonparty Tamara Pewzner (Pewzner), asserts that their father, Jacob Elberg (Jacob), deceased, was the sole owner of the LLCs and that she is the LLCs co-manager by virtue of her status as the co-executor, along with Elberg, of Jacob's estate. By virtue of that authority, Pewzner moved in the name of the LLCs to remove Ruben as a co-manager of the defendant entities, asserting, inter alia, that he had breached his fiduciary duties.

Contrary to his contention, Elberg was not removed as the sole "managing member" of the LLCs. The record demonstrates that he was a 40% minority member, not a managing member with the power to act unilaterally on the LLCs' behalf. The relevant agreements contained no provision regarding the succession of management of the LLCs in the event of the death of Jacob, the majority member. Thus, Jacob's controlling interest in the LLCs passed to his estate upon his death, and Elberg and Pewzner, the co-executors of the estate, had the authority to act as co-managers of the LLCs. LLC § 608 provides that the executor of a deceased member may exercise all of the member's rights for the purpose of settling his or her estate.

In view of the foregoing, Elberg's reliance on the business judgment rule is misplaced. As he was never the sole manager of the LLCs, the business judgment of the LLCs was never his to exercise unilaterally. However, given the conflicting submissions as to the rights of the parties vis-a-vis the LLCs and LPs, as well as whether completing the project or accepting the buyout was the best course of action, the motion court acted prematurely when it granted the motion to remove Elberg as co-manager without holding an evidentiary hearing. Questions of fact exist as to whether movants are entitled to the relief they seek.

(Internal quotations and citations omitted).