On September 7, 2011, in Waxman Real Estate LLC v. Sacks, Index No. 652057-2010, 2011 N.Y. Slip Op. 51667 (N.Y. Sup. Ct. N.Y. County Sept. 7, 2011) (Fried, J.), the Supreme Court, New York County held that a member of a limited liability company (an “LLC”) in New York State may not, within the same causes of action, combine derivative claims, brought on behalf of the LLC, with the member’s individual claims.
A derivative claim is one that a plaintiff brings as a stockholder on behalf of the corporation or limited liability company. In contrast, an individual claim is one that the plaintiff brings to vindicate his personal rights as an individual.
In Tzolis v. Wolff, 10 N.Y.3d 100, 102, 884 N.E.2d 1005, 1005, 855 N.Y.S.2d 6 (N.Y. 2008), the New York Court of Appeals held that “members of a limited liability company (LLC) may bring derivative suits on the LLC’s behalf . . . .” Tzolis, 10 N.Y.3d at 102, 884 N.E.2d at 1005.
In the Waxman Real Estate LLC case, two members of an LLC engaged in the business of real estate investment sued two principals and managers of the LLC, both individually and derivatively on behalf of the LLC, for breach of contract, unjust enrichment, fraud in the inducement, breach of fiduciary duties, and injunctive relief based on, among other things, the alleged distribution, by the defendant principals and managers of the LLC, of false and misleading progress reports to investors. The plaintiff members mixed together, within the same counts of their Complaint, derivative claims, brought on the LLC’s behalf, with the member’s individual claims. See, e.g., Complaint ¶ 35 (alleging that “Plaintiffs and the [limited liability] Company have been irreparably injured and damaged by the foregoing wrongful acts and conduct of [the defendant principals and managers of the LLC]”).
The Waxman Real Estate LLC Court dismissed without prejudice, for failure to state a cause of action, the plaintiff members’ derivative claims. The Supreme Court, New York County (Fried, J.) found that dismissal, without prejudice to serving and filing an amended complaint, was warranted because “plaintiffs have improperly mingled their individual claims with their derivative claims” within the same causes of action.
The Waxman Court acknowledged that “there is indeed ‘limited case law’ on whether derivative claims brought on behalf of LLCs may be intermingled with individual claims . . . .” However, the New York County Supreme Court reasoned that, because a shareholder or a partner may not blend together, within the same causes of action, his or her individual claims with derivative claims brought on behalf of a corporation or a partnership, so too an LLC member may not conflate, within the same counts of a Complaint, his or her individual claims with derivative claims brought on behalf of the LLC.
Aggrieved members of limited liability companies in Manhattan, NYC, and LLC members’ lawyers, should learn, from the Waxman Real Estate LLC case, the following lessons:
David S. Rich is the founding member of the Law Offices of David S. Rich, LLC,
a Manhattan Employment and Business Litigation Law Firm, in New
York City and in Englewood Cliffs, New Jersey...View Profile