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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: March 27, 2019

Claims Relating to Injury to LLC Permissible Direct Claims When They Also Relate to Separate Injury to Plaintiff

On March 12, 2019, Justice Schecter of the New York County Commercial Division issued a decision inĀ Beatrice Invs., LLC v. 940 Realty LLC, 2019 NY Slip Op. 30605(U), holding that claims relating to injury to an LLC were permissible direct claims when they also related to a separate injury to the plaintiff, explaining:

Defendants argue that plaintiffs direct (third and fourth) causes of action for breach of fiduciary duty must be dismissed as duplicative, comingled and confused with plaintiffs’ derivative causes of action for breach of fiduciary duty (the first and second causes of action). A cause of action asserting harm to the LLC is derivative; recovery will typically accrue to the LLC. A cause of action asserting that certain LLC members incurred independent harms-not confused with or embedded in the harm to the corporation-is direct, and recovery will accrue to the members who suffered such harms.

The plaintiffs permissibly seek a direct recovery, on the third and fourth causes of action, to the extent that the preferred equity grants to Assa and his associates diluted, deprioritized and prejudiced” plaintiffs’ equity interests. Defendants complain that the derivative causes of action also seek a recovery for the LLC based on the preferred equity grants.

The causes of action are not duplicative, however, because the alleged harms are independent.

First, defendants allegedly harmed the Companies by improperly (i.e., in bad faith) granting valuable privileges to non-plaintiff members, which may entitle the Companies to repayment from defendants for the value of those privileges.

Second, defendants allegedly harmed plaintiffs by improperly (i.e., in bad faith) revoking privileges from plaintiffs-such as rights to pari passu distributions from the Companies. This may entitle plaintiffs to monetary damages from defendants for plaintiffs’ resultant losses, such as the loss of any distributions to which plaintiffs would have been otherwise entitled. Such a recovery does not, as defendants assert, belong to the Companies, nor are such harms confused or embedded with harm to the Companies. To the contrary, favoring one set of members with distributions or dividends over another set of members would not harm the Companies in any discernable way. Concerns that plaintiffs’ potential recovery may overlap with that of the corporation does not warrant outright dismissal where plaintiffs have alleged independent harms.

(Internal quotations and citations omitted).

This decision relates to something common in complex commercial litigation–the question of whether a claim can be brought by an individual on his or her own behalf or must be brought on behalf of a corporation or other entity in which the plaintiff has an ownership stake (that is, derivatively). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding bringing an action on behalf of a corporation or other business entity.

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