Sunday, February 24, 2013

Tzolis v. Wolff case brief

Tzolis v. Wolff case brief summary
39 A.D.3d 138

SYNOPSIS: In a derivative action, plaintiffs, members of a limited liability company (LLC), sought review of an order of the Supreme Court, New York County (New York), which dismissed the first and second causes of action in their first amended complaint. Defendants, other members of the LLC and others, cross-appealed from an order granting the motion of defendants, another LLC and a corporation, to dismiss the second cause of action.

-Plaintiffs and defendant members had originally created a general partnership, which was later converted into the LLC, to own and operate a hotel.
-A dispute arose when the LLC secretly granted a new 30-year lease to the corporation at a rent below market value.
-Defendant individual later purported to execute a contract to sell the property to the other LLC for a price below market value.
-Defendant members executed a consent form to the transaction. In plaintiffs' first and second causes of action, they sought a declaration that the sale of the premises and the execution of the second (secret) lease was unauthorized and void.

-While the Second Department had found that the omission of express language in Limited Liability Company Law § 101 et seq. indicated that an LLC member had no standing to bring a derivative action, the court declined to follow that decision as historically the judiciary had recognized a similar common-law right to bring a derivative action on behalf of a corporation or a limited partnership and most states provided a statutory right to an LLC member to bring a derivative claim.
-Thus, the court reversed the dismissal of the first and second causes of action.

Even when right to bring a derivative claim is not available under the Limited Liability Company statute, a court may recognize common law right for members to sue derivatively

HOLDING: The court modified the order dismissing the first and second causes of action and reinstated both causes of action against the appropriate defendants. The court reinstated the notice of pendency and otherwise affirmed that order. The court reversed the order granting the other LLC and the corporation's motion to dismiss the second cause of action, denied the motion, and reinstated the second cause of action.

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