Merits decisions typically get the limelight. But day-to-day the federal judiciary deals with countless interstitial issues between pleadings and final judgment that, although perhaps not as eye-catching, can be just as consequential and far-reaching in impact. The U.S. Court of Appeals for the Second Circuit recently addressed three such issues likely to reverberate in cases to come:
- The distinction between direct and derivative claims under New York law;
- The contours of the “irreparable harm” showing needed to attain preliminary injunctive relief; and
- The arbitrability of insurance disputes where applicable state law on its face precludes arbitration.
Direct and Derivative Claims
In In re 305 E 61st Street Group LLC, 130 F.4th 272 (2025), the Second Circuit clarified the test for determining, under New York law, whether a claim is “derivative” (and may only be brought by a corporate entity or in a representative capacity on its behalf) or “direct” such that the claim may be asserted by a stakeholder individually. The case concerned a New York limited liability company (LLC) organized to develop a Manhattan warehouse into a multi-story condominium. An investor alleged that the LLC's manager breached its fiduciary duties, as well as contractual commitments granting the investor development rights, by engineering a bankruptcy allegedly designed to strip the investor of its interest. The Southern District of New York bankruptcy court (Judge Sean H. Lane) dismissed the investor's claims, holding that its alleged injuries all derived from harm to the bankrupt LLC and could only be asserted by a creditor trust empowered to assert claims on its behalf.
The Second Circuit (Judges Steven J. Menashi, Gerald E. Lynch, and Susan L. Carney) reversed in part. Whether the investor's claims belonged to the bankruptcy estate, or to the investor, depended on whether they were “direct” or “derivative” in nature. The court gleaned that New York courts would follow Delaware's approach, embodied in the so-called “Tooley” test, under which fiduciary duty claims can only be brought directly if the injury suffered is independent of any injury to the corporate entity. That is, the investor must be able to prevail without showing any injury at all to the entity. The “Tooley” test, however, does not apply to claims based on an investor's own personal rights, as in the case of a breach of contract.
The court agreed with Judge Lane that the investor's fiduciary duty claims were derivative because the manager's alleged malfeasance necessarily harmed the LLC, not just the investor. The ability to assert claims based on contractual breaches, however, was the investor's personal right, available regardless of any concomitant harm to the LLC. The court thus allowed the contract claims (but not the fiduciary duty claims) to proceed.
Injunctive Relief
In St. Joseph's Hospital Health Center v. American Anesthesiology of Syracuse, 131 F.4th 102 (2025), the court issued impactful guidance on the requirements for a preliminary injunction – ubiquitously sought in Second Circuit trial courts. At issue was an exclusivity agreement between a provider of anesthesia services and a Syracuse-based hospital. The hospital sought a declaration in the U.S. District Court for the Northern District of New York that a non-solicitation clause in the agreement, barring the hospital from soliciting or hiring the anesthesia provider's employees for two years after termination, was unenforceable because it violated antitrust laws. The provider, in turn, moved for a preliminary injunction to preclude the hospital from soliciting the provider's employees after the hospital issued notice of non-renewal.
The Second Circuit (Chief Judge Debra Ann Livingston, with Judges Lynch and Beth Robinson) affirmed the district court's (Judge Brenda K. Sannes) denial of the motion. To warrant the “extraordinary” and “drastic” remedy of a preliminary injunction, a movant must carry its burden of persuasion by a “clear showing.” The “single most important prerequisite” is a showing of irreparable harm, i.e., injury that is not “remote” or “speculative,” but that is “actual and imminent” and “cannot be remedied” with monetary damages. The court approved of the district court's assessment that the requisite showing was not made here. Money damages, the court observed, would suffice as compensation for any impairment to the anesthesia provider's relationships with medical providers. The movant's assertions that it would be forced to breach contracts and suffer reputational harm, moreover, were deemed conclusory, speculative, and lacking in evidentiary support.
Arbitrability
Certain Underwriters at Lloyds, London v. 3131 Veterans Blvd LLC, 136 F.4th 404 (2025), involved insurance policies between foreign insurers and owners of Louisiana property damaged by Hurricane Ida in 2021. The policies contained a clause requiring that “[a]ll matters in difference” relating to the insurance be referred to arbitration in New York.
Dissatisfied with the insurers' offer of coverage, the owners filed suit in Louisiana. The insurers then countersued in the Southern District of New York to compel arbitration and stay the Louisiana suit. In response, the owners argued that Louisiana state law, which generally prohibits arbitration clauses in insurance agreements, “reverse preempted” both: (1) the Federal Arbitration Act (FAA), which generally provides for the enforcement of valid contractual agreements to arbitrate, and (2) Article II Section 3 of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), a treaty provision requiring signatory nations to enforce written agreements to submit disputes to foreign arbitration. Two Southern District of New York judges (Loretta A. Preska and Ronnie Abrams) sided with the owners and denied the insurers' request to arbitrate.
The Second Circuit (Judges Lynch, Robinson, and Sarah A.L. Merriam) reversed. The McCarren Ferguson Act (MFA), 15 U.S.C. § 102(b), allows state insurance laws to “reverse preempt” any “Act of Congress” that does not “specifically relate[] to the business of insurance.” The FAA – although decidedly pro-arbitration in bent – does not specifically relate to insurance. Therefore, as between the FAA and Louisiana state law barring enforcement of arbitration provisions, the latter controls.
The MFA, however, does not specifically address treaties. So state law can only reverse preempt a treaty provision when it relies on an “Act of Congress” to take effect – not when the provision is “self-executing.” Joining the U.S. Courts of Appeals for the First and Ninth Circuits, the Second Circuit held that Article II Section 3, although codified by statute, was self-executing, including because its text expressly provides that, when presented with an arbitration agreement, a contracting nation's court “shall . . . refer the parties to arbitration.” That instruction, the court explained, is a binding “directive,” not merely a hortatory call for Congress to act. State law cannot reverse preempt it.
Conclusions
Procedural questions matter. In re 305 E 61st Street's endorsement of Delaware's approach to the derivative/direct distinction paves a clear path for stakeholders in New York business entities to assert contract claims directly (not derivatively, with all the procedural hurdles that accompany a derivative claim) moving forward. St. Joseph's tightens standards for the “irreparable harm” prong of the test for a preliminary injunction, making the road for such “extraordinary” and “drastic” relief even more treacherous. And under 3131 Veterans Blvd, a party may evade insurance-related arbitration on state law grounds, but not necessarily if a foreign insurer, to which the New York Convention or another self-executing treaty applies, is involved. The Second Circuit's task to elucidate the law in its endless permutations, at every stage of an action, continues on.
Originally published by Federal Bar Council Quarterly.
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