Limited Liability Company Law Archives - New York Appellate Digest

THE LIMITED RELIEF AVAILABLE TO A DISSENTING MEMBER AFTER THE MERGER OF TWO LIMITED LIABILITY COMPANIES (SECOND DEPT).

The Second Department, reversing (modifying) Supreme Court, addressed the relief available to a dissenting member after the merger of two limited liability companies:

Limited Liability Company Law § 1002(f) provides that, subsequent to a merger, a dissenting member possesses no interest in the surviving or resulting business entity, but is instead entitled only to a cash payment of the fair value of his or her membership as of the close of the business day prior to the merger. Moreover, Limited Liability Company Law § 1005 provides for the payment of the value of that interest or, in the event of a dispute, sets forth the procedure for determining the value of that interest.

… Farro’s [plaintiff’s] membership in the subject businesses was terminated by the merger, and he subsequently sought appraisal of the value of his interest in order to be fairly compensated therefor. Under these circumstances, his exclusive remedy was appraisal and payment, and he was precluded from maintaining any derivative claims on behalf of the subject businesses … .

… [A] member of a merged company who has a right to demand payment for his membership interest “shall not have any right at law or in equity . . . to attack the validity of the merger . . . or to have the merger . . . set aside or rescinded.” Moreover, the language of the statute makes clear that an appraisal proceeding is the member’s “sole remedy,” and no exception exists for alleged fraud or illegality in the procurement of the merger … . Farro v Schochet, 2021 NY Slip Op 00150, Second Dept 1-13-21

January 13, 2021/by Bruce Freeman

ACTION TO ENFORCE A FOREIGN JUDGMENT AGAINST A DELAWARE DISSOLVED LIMITED LIABILITY COMPANY COULD NOT BE MAINTAINED BECAUSE THE CERTIFICATE OF CANCELLATION HAS NOT BEEN NULLIFIED (FIRST DEPT).

The First Department, reversing Supreme Court, determined the action to domesticate and enforce a foreign judgment after defendant corporation had been dissolved could not be maintained:

Plaintiff commenced this action against defendant, a Delaware limited liability company, to domesticate and enforce a foreign judgment in its favor several months after defendant had been dissolved and a certificate of cancellation filed (see 6 Del C § 18-203[a]). As the certificate of cancellation has not been nullified and plaintiff does not seek nullification, plaintiff cannot maintain this action (6 Del C § 18-803[b]) … . Epie v Herakles Farms, LLC, 2020 NY Slip Op 05283, First Dept 10-1-20

October 1, 2020/by Bruce Freeman

Appeals, Attorneys, Contract Law, Corporation Law, Fiduciary Duty, Limited Liability Company Law

NO APPEAL LIES FROM A NONFINAL ORDER, HERE ORDERS WHICH DID NOT RESOLVE THE AWARD OF ATTORNEY’S FEES; IN A SUCCESSFUL SHAREHOLDERS’ DERIVATIVE ACTION ATTORNEY’S FEES ARE PAID BY THE CORPORATION (FOURTH DEPT).

The Fourth Department determined no appeal lies from a nonfinal order and, in a successful shareholders’ derivative action, the corporation is liable for attorney’s fees. The facts of the case are too complex to fairly summarize here. Defendant limited liability company was formed to develop a residential subdivision. The action alleged breach of contract and breach of fiduciary duty and sought dissolution of the LLC:

… “[A]lthough all of the substantive issues between the parties were resolved, the order was facially nonfinal, since it left pending the assessment of attorneys’ fees—a matter that plainly required further judicial action of a nonministerial nature” … . Further, plaintiffs’ “request for attorneys’ fees was an integral part of each of the asserted causes of action rather than a separate cause of action of its own,” and therefore that issue cannot be implicitly severed from the other issues … . Thus, the order … does not constitute a ” final order’ ” within the meaning of CPLR 5501 (a) (1) and does not bring up for our review any prior non-final order … . * * *

… [W]e agree with defendant that the court erred in determining that plaintiff is entitled to attorneys’ fees and disbursements in his status as a derivative plaintiff acting on the LLC’s behalf and in awarding such fees and disbursements … . “The basis for an award of attorneys’ fees in a shareholders’ derivative suit is to reimburse the plaintiff for expenses incurred on the corporation’s behalf . . . . Those costs should be paid by the corporation, which has benefited from the plaintiff’s efforts and which would have borne the costs had it sued in its own right” … . Thus, plaintiff’s success as a derivative plaintiff is not an acceptable basis for an award of attorneys’ fees and disbursements against defendant individually. Howard v Pooler, 2020 NY Slip Op 03347, Fourth Dept 6-12-20

June 12, 2020/by Bruce Freeman

Civil Procedure, Limited Liability Company Law

DEFENDANT LIMITED LIABILITY COMPANY FAILED TO FILE ITS CURRENT ADDRESS WITH THE SECRETARY OF STATE SINCE 2011; DEFENDANT’S MOTION TO VACATE THE DEFAULT JUDGMENT ALLEGING IT WAS NOT SERVED WITH THE SUMMONS AND COMPLAINT SHOULD NOT HAVE BEEN GRANTED (SECOND DEPT).

The Second Department, reversing Supreme Court, determined defendant limited liability company’s motion to vacate a default judgment pursuant to CPLR 317 should not have been granted. Defendant had not filed its current address with the Secretary of State since 2011:

Pursuant to CPLR 317, a defaulting defendant who was served with a summons other than by personal delivery may be permitted to defend the action upon a finding by the court that the defendant did not personally receive notice of the summons in time to defend and has a potentially meritorious defense … . Here, the defendant was not entitled to vacatur of its default pursuant to CPLR 317. The record reflects that, since September 2011, the defendant had not filed, with the Secretary of State, the required biennial form that would have apprised the Secretary of State of its current address (see Limited Liability Company Law § 301[e]), thus raising an inference that the defendant deliberately attempted to avoid notice of actions commenced against it … .

“In contrast to a motion pursuant to CPLR 317, on a motion pursuant to CPLR 5015(a)(1), the movant is required to establish a reasonable excuse for his or her default” … . Under the circumstances of this case, the defendant’s failure to keep the Secretary of State apprised of its current address over a significant period of time did not constitute a reasonable excuse … . Bookman v 816 Belmont Realty, LLC, 2020 NY Slip Op 01318, Second Dept 2-26-20

February 26, 2020/by Bruce Freeman

Corporation Law, Environmental Law, Limited Liability Company Law

MEMBER OF LLC WHICH OWNED A MOBILE HOME PARK IS PERSONALLY LIABLE, PURSUANT TO THE RESPONSIBLE CORPORATE OFFICER DOCTRINE, FOR AN $800,000 PENALTY IMPOSED FOR FAILING TO COMPLY WITH AN ORDER ISSUED BY THE DEPARTMENT OF ENVIRONMENTAL PROTECTION REQUIRING SEWAGE-TREATMENT MEASURES (THIRD DEPT).

The Third Department determined Burr, one of two members of a limited liability company, C & J, was properly held personally liable for the violation of an administrative order issued by the Department of Environmental Conservation (DEP). C & J owned a mobile home park and the administrative order concerned the treatment of waste from the park. The penalty was more than $800,000.00:

Under Limited Liability Company Law § 609, a member of a limited liability company is generally not liable for the contractual obligations of the company. The 2008 order on consent, however, is not merely a contractual obligation. It is also an administrative order, the violation of which is subject to statutory enforcement (see ECL 71-1929). This Court has recognized that a responsible corporate officer may be held personally liable for violations of consent orders issued by DEC that implicate public health and safety … . Individual liability may be imposed where the corporate officer has the knowledge of and ability to prevent or remedy a violation that presents a public health hazard … . …

There can be little dispute that Burr was well aware of the ongoing sewage violations at the park, and, as managing member, he held a position of authority to address the problem. … [T]he 2008 consent order, which Burr signed on C & J’s behalf, expressly provided for stipulated penalties in the event that C & J “fail[ed] to strictly and timely comply.” The order further specified that it was binding on C & J and its officers. …

… [W]e conclude that Supreme Court did not err in holding Burr personally liable under the responsible corporate officer doctrine. State of New York v C & J Enters., LLC, 2020 NY Slip Op 00024, Third Dept 1-2-20

January 2, 2020/by Bruce Freeman

Civil Procedure, Evidence, Limited Liability Company Law

PLAINTIFF DID NOT SUBMIT SUFFICIENT PROOF OF COMPLIANCE WITH THE SERVICE OF PROCESS REQUIREMENTS OF THE LIMITED LIABILITY COMPANY LAW (SERVICE UPON THE SECRETARY OF STATE) (THIRD DEPT).

The Third Department, reversing Supreme Court, determined plaintiffs did not demonstrate compliance with the service of process requirements of the Limited Liability Company Law:

“The plaintiff bears the ultimate burden of proving by a preponderance of the evidence that jurisdiction over the defendant was obtained by proper service of process” … . Proof of service, often in the form of an affidavit of service (see CPLR 306 [d]), must include “the papers served, the person who was served and the date, time [and] address [of such service], . . . and set forth facts showing that the service was made by an authorized person and in an authorized manner” … . Additionally, “[b]ecause service of process is necessary to obtain personal jurisdiction over defendants, courts require strict compliance with the statutory methods of service” … . As relevant here, “[s]ervice of process on the secretary of state as agent of a domestic limited liability company . . . shall be made by personally delivering to and leaving with the secretary of state or his or her deputy, or with any person authorized by the secretary of state to receive such service, . . . duplicate copies of such process together with the statutory fee” … . …

Although plaintiffs proffered an unsigned receipt of service purportedly generated by the Office of the Secretary of State, that receipt did not set forth the papers served, whether duplicate copies of those papers were delivered to the Secretary of State, the time of service or facts showing that service was made by an authorized person (see Limited Liability Company Law § 303 [a]; CPLR 306 [a], [d]). Cedar Run Homeowners’ Assn., Inc. v Adirondack Dev. Group, LLC, 2019 NY Slip Op 04528, Third Dept 6-6-19

June 6, 2019/by Bruce Freeman

Corporation Law, Labor Law-Construction Law, Limited Liability Company Law

PLAINTIFF DID NOT SUBMIT EVIDENCE SUFFICIENT TO PIERCE THE CORPORATE VEIL AND HOLD A MEMBER OF DEFENDANT LLC PERSONALLY LIABLE, PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT AGAINST THE LLC MEMBER PERSONALLY SHOULD HAVE BEEN DENIED (SECOND DEPT).

The Second Department, reversing Supreme Court, determined that the motion for summary judgment in this construction accident case against a member of defendant LLC should not have been granted. The motion papers did not support piercing the corporate veil to reach the LLC member (Albaliya) personally:

As a limited liability company, Nadlan is a separate legal entity from its members (see Limited Liability Company Law § 609). “A member of a limited liability company cannot be held liable for the company’s obligations by virtue of his [or her] status as a member thereof'” … .

“However, a party may seek to hold a member of an LLC individually liable despite this statutory proscription by application of the doctrine of piercing the corporate veil” … . “Generally, . . . piercing the corporate veil requires a showing that: (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff’s injury” … . Singh v Nadlan, LLC, 2019 NY Slip Op 03100, Second Dept 4-24-19

April 24, 2019/by Bruce Freeman

Civil Procedure, Debtor-Creditor, Fraud, Limited Liability Company Law

COMPLAINT STATED A CAUSE OF ACTION FOR CONSTRUCTIVE FRAUD BUT THE HEIGHTENED PLEADING REQUIREMENTS FOR ACTUAL FRAUD WERE NOT MET (FIRST DEPT).

The First Department, in an action alleging members of defendant liability company fraudulently transferred funds from the LLC to the defendant members to render the LLC insolvent. The First Department determined the constructive fraud cause of action was sufficiently pled but the allegations did not support an actual fraud cause of action:

… [T]he complaint implicitly alleges that a necessary element of fair consideration, i.e., good faith, was lacking when the transfers were made. …

However, the complaint fails to state a cause of action for actual fraud under Debtor and Creditor Law §§ 276 and 276-a. … [U]nlike the allegations supporting the constructive fraud claim, the allegations supporting the actual fraud claim are subject to the heightened pleading standard of CPLR 3016(b), and the allegations about fair consideration do not meet that standard, because they were made upon information and belief, and the source of the information was not disclosed … .

Nor does the complaint allege any other badges of fraud. Brennan v 3250 Rawlins Ave. Partners, LLC, 2019 NY Slip Op 03002, First Dept 4-23-19

April 23, 2019/by Bruce Freeman

Contract Law, Limited Liability Company Law

PLAINTIFF WAS A NONMEMBER PURCHASER OF A MEMBER’S INTEREST IN THE LIMITED LIABILITY COMPANY (LLC) AND THEREFORE COULD NOT BRING DERIVATIVE CAUSES OF ACTION ON BEHALF OF THE LLC (SECOND DEPT).

The Second Department, reversing Supreme Court, determined plaintiff, who was a nonmember purchaser of a member’s interest in the limited liability company (LLC), could not bring derivative causes of action on behalf of the LLC:

A “[m]ember” is a person who has been admitted as a member of a limited liability company in accordance with the terms and provisions of the Limited Liability Company Law and the limited liability company’s operating agreement, and who has a membership interest in the limited liability company with the rights, obligations, preferences, and limitations specified under the Limited Liability Company Law and the operating agreement (Limited Liability Company Law § 102[q]). A “[m]embership interest” means “a member’s aggregate rights in a limited liability company, including, without limitation: (i) the member’s right to a share of the profits and losses of the limited liability company; (ii) the member’s right to receive distributions from the limited liability company; and (iii) the member’s right to vote and participate in the management of the limited liability company” (Limited Liability Company Law § 102[r]).

Here, the plaintiff does not dispute that she failed to obtain the consent of the nonselling members to be admitted as a member of the LLC when she acquired her membership interest. Paragraph 8 of the LLC’s operating agreement provides that “[n]ew members may be admitted only upon the unanimous consent of the Members and upon compliance with the provisions of this agreement,” and paragraph 32(e) of the operating agreement provides that “[a] non-member purchaser of a member’s interest cannot exercise any rights of a Member unless, by unanimous vote, the non-selling Members consent to him becoming a Member” (see Limited Liability Company Law § 602). Therefore, contrary to the Supreme Court’s determination, the plaintiff, as a nonmember purchaser who had not been admitted as a member of the LLC, lacks standing to pursue derivative causes of action on behalf of the LLC … . Kaminski v Sirera, 2019 NY Slip Op 01067, Second Dept 2-13-19

February 13, 2019/by Bruce Freeman

Contract Law, Corporation Law, Landlord-Tenant, Limited Liability Company Law

ALTHOUGH THE PLAINTIFF LIMITED LIABILITY COMPANY DID NOT EXIST AT THE TIME THE LEASE WAS SIGNED, DEFENDANT TOOK POSSESSION OF THE PROPERTY, UNDER THE DOCTRINE OF INCORPORATION BY ESTOPPEL, DEFENDANT CANNOT ESCAPE LIABILITY FOR BREACH OF THE LEASE (SECOND DEPT).

The Second Department determined that the doctrine of incorporation by estoppel was properly applied in this breach of contract (lease) case. Although plaintiff limited liability company did not exist at the time the lease was signed, defendant took possession of the property. Defendant was therefore estopped from escaping liability under the lease based on the nonexistence of plaintiff limited liability company:

“Since a nonexistent entity cannot acquire rights or assume liabilities, a corporation which has not yet been formed normally lacks capacity to enter into a contract”… . However, a corporation may be deemed to exist and possess the capacity to contract pursuant to the doctrine of incorporation by estoppel … . The doctrine of incorporation by estoppel, or corporation by estoppel, is based on the principle that “one who has recognized the organization as a corporation in business dealings should not be allowed to quibble or raise immaterial issues on matters which do not concern him [or her] in the slightest degree or affect his [or her] substantial rights” … . TY Bldrs. II, Inc. v 55 Day Spa, Inc., 2018 NY Slip Op 08345, Second Dept 12-5-18

CORPORATION LAW (INCORPORATION BY ESTOPPEL, ALTHOUGH THE PLAINTIFF LIMITED LIABILITY COMPANY DID NOT EXIST AT THE TIME THE LEASE WAS SIGNED, DEFENDANT TOOK POSSESSION OF THE PROPERTY, UNDER THE DOCTRINE OF INCORPORATION BY ESTOPPEL, DEFENDANT CANNOT ESCAPE LIABILITY FOR BREACH OF THE LEASE (SECOND DEPT))/LIMITED LIABILITY COMPANY LAW (INCORPORATION BY ESTOPPEL, ALTHOUGH THE PLAINTIFF LIMITED LIABILITY COMPANY DID NOT EXIST AT THE TIME THE LEASE WAS SIGNED, DEFENDANT TOOK POSSESSION OF THE PROPERTY, UNDER THE DOCTRINE OF INCORPORATION BY ESTOPPEL, DEFENDANT CANNOT ESCAPE LIABILITY FOR BREACH OF THE LEASE (SECOND DEPT))/CONTRACT LAW (INCORPORATION BY ESTOPPEL, ALTHOUGH THE PLAINTIFF LIMITED LIABILITY COMPANY DID NOT EXIST AT THE TIME THE LEASE WAS SIGNED, DEFENDANT TOOK POSSESSION OF THE PROPERTY, UNDER THE DOCTRINE OF INCORPORATION BY ESTOPPEL, DEFENDANT CANNOT ESCAPE LIABILITY FOR BREACH OF THE LEASE (SECOND DEPT))/LANDLORD-TENANT (INCORPORATION BY ESTOPPEL, ALTHOUGH THE PLAINTIFF LIMITED LIABILITY COMPANY DID NOT EXIST AT THE TIME THE LEASE WAS SIGNED, DEFENDANT TOOK POSSESSION OF THE PROPERTY, UNDER THE DOCTRINE OF INCORPORATION BY ESTOPPEL, DEFENDANT CANNOT ESCAPE LIABILITY FOR BREACH OF THE LEASE (SECOND DEPT))/ESTOPPEL (INCORPORATION BY ESTOPPEL, ALTHOUGH THE PLAINTIFF LIMITED LIABILITY COMPANY DID NOT EXIST AT THE TIME THE LEASE WAS SIGNED, DEFENDANT TOOK POSSESSION OF THE PROPERTY, UNDER THE DOCTRINE OF INCORPORATION BY ESTOPPEL, DEFENDANT CANNOT ESCAPE LIABILITY FOR BREACH OF THE LEASE (SECOND DEPT))

December 5, 2018/by Bruce Freeman