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Posted: February 16, 2020

Deceased Partner’s Estate Does Not Have Standing to Seek Limited Partnership’s Dissolution

On February 5, 2020, Justice Borrok of the New York County Commercial Division issued a decision in Weinstein v RAS Prop. Mgt. LLC, 2020 NY Slip Op. 20028, holding that a deceased partner’s estate did not have standing to seek the partnership’s dissolution, explaining:

In support of their position, the respondents rely on Salter v Columbia Concerts, Inc. and Pappas v 38-40 LLC.

In Salter, the plaintiff, a stockholder, commenced a shareholder derivative action and then died, leaving a will that bequeathed his capital stock in the corporate defendant to his executor. The corporate defendants opposed the substitution of the executor and argued that the action could not be continued under the Business Corporation Law because the executor lacked standing as she was not a stockholder at the time of the transaction complained of and/or because the stock did not devolve upon her by operation of law. The court in Salter disagreed, holding that when stock is acquired by a personal representative under a will, it passes by operation of law and therefore substitution of a personal representative for the decedent in a stockholder derivative action may be made. Putting aside that Salter does not support the respondents’ position, inasmuch as Salter involved a corporation, and not a limited partnership, it simply bears no application to the case at nisi prius. As the court held in Salter, upon the death of a shareholder, the estate by operation of law becomes not only the owner of the economic rights of being a shareholder but also a successor shareholder without further action by either the other shareholders or the corporation itself. And, it is beyond cavil that being an owner of stock provides the necessary currency of standing to assert stockholder rights in the corporation.

Pappas v 38-40 LLC, however, which involved a limited liability company, is more instructive. In Pappas, a personal representative of the estate of a decedent brought an action individually and derivatively on behalf of 38-40 LLC (the LLC) seeking declaratory and injunctive relief for breach of contract, breach of fiduciary duty, waste, unjust enrichment, breach of the implied covenant of good faith and fair dealing, and conversion. The representative filed a motion for a preliminary injunction and for the appointment of a temporary receiver, and the LLC moved to dismiss the complaint. The terms of the LLC agreement in Pappas expressly provided that a upon a member’s death, the personal representative of the estate is a successor in interest only and is entitled only to allocations and distributions but does not automatically become a member in the LLC. New York State Supreme Court Justice Saliann Scarpulla denied the representative’s motion and dismissed the derivative claims holding that the personal representative lacked standing because to pursue a derivative claim, a plaintiff must be a member of the limited liability company at the time of the alleged wrong, at the commencement of the lawsuit, and throughout the litigation. Justice Scarpulla also dismissed the direct claims as inextricably intertwined with the derivative claims. The First Department affirmed, reasoning that the plaintiff held an interest only in the decedent’s estate, and was not a member in the LLC and therefore lacked standing to pursue the derivative claims on behalf of the LLC, citing Estate of Calderwood v Ace Group Intl. LLC.

In Estate of Calderwood, the estate of Alexander Calderwood, a deceased member of a Delaware limited liability company, brought an action seeking certain declaratory relief including that the estate had stepped into the shoes of Mr. Calderwood and succeeded to all of the rights and privileges of a member under the limited liability company operating agreement, an accounting, the imposition of a constructive trust and for access to the books and records of that limited liability company. The limited liability company moved to dismiss pursuant to CPLR ยง 3211(a)(7), arguing that pursuant to the express terms of the operating agreement, upon the occurrence of Mr. Calderwood’s death, he became a withdrawing member and he ceased to be a member in the company. In its opposition papers, the estate argued that notwithstanding any limitation set forth in the operating agreement, under Section 18-705 of the Delaware Limited Liability Company Act (the Act) which provides that the personal representative may exercise all of the member’s rights, the personal representative succeeded to the rights of being a member. New York State Supreme Court Justice Shirley Werner Kornreich, among other things, dismissed the claim for a declaration that the estate was a member of the limited liability company because conflicts between the Act and an operating agreement are resolved in favor of the operating agreement or to otherwise fill gaps if an in the limited liability company agreement.The First Department affirmed this ruling holding that the terms of the operating agreement governed and pursuant to the terms of the operating agreement, the estate was a successor-in-interest only, with rights to distributions, but was not a member and, thus, not entitled to exercise all of the rights previously possessed by Mr. Calderwood.

Although the case at nisi prius involves a New York limited partnership and not a New York or Delaware limited liability company, the principles underlying the distinction between Salter, on the one hand, and Pappas and Estate of Calderwood, on the other, compel the result. Here, like in Pappas and in Estate of Calderwood, and unlike in Salter, pursuant to the terms of the governing documents of the company, the personal representative succeeds to owning the equity interest in the business without becoming a substitute limited partner in the partnership. It is of no moment that Ms. Keller and Ms. Shields acquired their interest in the partnership by operation of law. In this respect, this action is not analogous to a corporate stockholder derivative suit where the issue of contemporaneous ownership may be satisfied through, e.g., a will. Put another way, unlike in a corporation where the estate becomes a stockholder by operation of law, the personal representative in the limited partnership may never become a successor limited partner under the terms of the Partnership Agreement. As such, Ms. Shields and Ms. Keller simply lack standing to maintain this lawsuit and cannot be substituted for Ms. Weinstein.

(Internal quotations and citations omitted).

This decision relates to a significant part of our practice: business divorce (a break-up between the owners of a closely-held business). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a business divorce.

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