Co-Director Removal And The Business Judgment Rule

Last week, Becky Baek wrote a fine piece about LLC manager removal. Her case, Homapour v 3M Props., LLC, (___ AD3d ___, 2026 NY Slip Op 04371 [1st Dept July 9, 2026]), alluded to, without mentioning explicitly, the LLC manager removal statute, Section 414 of the Limited Liability Company Law (the “LLC Law”).

Homapour ruled that when an operating agreement is “silent” about “whether and when a manager may be removed,” the “majority of courts” conclude that they may not look to the default statute, LLC Law § 414, to infer a statutory right to remove managers not found in the operating agreement itself.

Under Homapour and the handful of non-appellate cases cited therein, unless the operating agreement expressly contemplates manager removal, the members simply “do not have the power to remove an LLC manager.”

Some might argue that the Homapour line of case law judicially rewrites the presumptive removal-right language found in LLC Law § 414 from its current text – “Except as provided in the operating agreement, any or all managers of a limited liability company may be removed . . .” – to say the reverse – “Unless provided in the operating agreement, none of the managers of a limited liability company may be removed . . .” What a blast it would be to take up an appeal of that issue.

This week, we turn from LLC manager removal to corporation director removal under Section 706 of the Business Corporation Law (the “BCL”). An analogous statute, BCL § 716, governs corporation officer removal.

In Kaye v Merchant Factors Corp. (___ AD3d ___, 2026 NY Slip Op 03732 [1st Dept June 11, 2026]), the board of directors of a family-founded, privately-held financial services firm involuntarily removed their estranged longtime co-director and co-shareholder, Russell Kaye, for “cause.”

Kaye sued to judicially invalidate his firing in the New York County Commercial Division before Justice Margaret A. Chan, lost at the motion court level when the Court dismissed his lawsuit, then appealed to the Appellate Division – First Department.

Fully adjudicated appeals of BCL § 706 corporation director removal decisions are as rare as hen’s teeth.

Kaye is just the ninth time in the past 25 years a New York appeals court even cited BCL § 706.

Kaye is just the sixth time in the past 25 years a New York appeals court devoted any discussion – even of the slightest sort – to the correct application of the director removal statute (see Wynkoop v 622A President St. Owners Corp., 169 AD3d 1100 [2d Dept 2019]; Colucci v Canastra, 130 AD3d 1268 [3d Dept 2015]; Benedict v Whitman Breed Abbott & Morgan, 110 AD3d 935 [2d Dept 2013]; Chaudhry v Vital Holding Co. of NY, Inc., 51 AD3d 844 [2d Dept 2008]; Spencer v Petrone, 297 AD2d 730 [2d Dept 2002]).

And Kaye seems to be the very first New York appellate decision to ever apply the highly deferential business judgment rule to a decision of a corporation’s directors to remove one of their own for “cause.” So naturally, Kaye piqued our interest.

Kaye raised two issues on appeal.

The first was whether his purported removal by the board was “ultra vires” and “void” where the shareholders never voted to approve the amended bylaw provision under which the board claimed to have removed Kaye. This issue was critical because Kaye personally owned 11% of the corporation’s stock and was co-trustee of a trust that owned another 42% of the corporation’s stock. With voting rights over a majority of shares, Kaye’s removal at the shareholder level likely would not have been possible.

But BCL § 706 permits director removal at either level – shareholder or board. Under BCL § 706 (a), a director may be removed for “cause” either [1] “by vote of the shareholders” or [2] “by action of the board” so long as authorized either in the “certificate of incorporation” or “a by-law adopted by the shareholders.”

Article III, Section 4 of the corporation’s amended bylaws – freshly adopted by board resolution but no shareholder vote to replace the corporation’s original bylaws from the 1980s – permitted removal of a director by the board for “cause,” which included “inappropriate behavior or misconduct that is detrimental to the corporation and/or the proper functioning of the Board,” including:

• “threats and/or personal attacks on other directors, whether verbal, written, by email or in social media”;

• “continual disruption of Board meetings”; or

• “engaging in persistent inappropriate, abusive, or destructive behavior.”

The rub? The amended bylaws expressly made the board’s co-director removal power “[s]ubject to the approval of these bylaws by shareholder vote.” But the shareholders never voted to approve the amended bylaws, so the removal power in Article III, Section 4 of the corporation’s amended bylaws never took effect.

Under the original bylaws from decades earlier, Article III, Section 5 permitted removal much more generally – tracking the language of BCL § 706 (a), permitting “by [1] vote of the shareholders or [2] by action of the board.”

Despite the board’s obvious blunder by attempting to remove Kaye under an amended bylaw which never took effect, the Court forgave the error entirely:

Although the individual defendants serving on the corporation’s board purported to remove plaintiff under a set of amended by-laws, the express text of article III, section 4 of the amended by-laws states that those provisions became effective ‘[s]ubject to the approval of these by-laws by Shareholder Vote,’ and the parties agree that no shareholder vote ever took place. However, as Supreme Court properly concluded, the failure to obtain shareholder approval of the amended by-laws left the original by-laws in effect, permitting defendants to remove plaintiff for cause under the terms of the original by-laws.

That the notice of special meeting referred to the amended by-laws, instead of the original by-laws, did not render plaintiff’s removal improper. Whether under the original or amended by-laws, the notice set forth several examples of plaintiff’s objectionable behavior underlying defendants’ determination to remove plaintiff for ‘cause,’ which is not defined in the original by-laws. The removal provision in article III, section 5 of the original by-laws is more expansive than the specifically tailored definition of cause in article III, section 4 of the amended by-laws because the definition of ‘cause’ is left open in the original by-laws. Thus, because the cause for plaintiff’s removal is clearly stated in the notice of special meeting, Supreme Court correctly found that removal under the original by-laws was proper.

For this holding, the First Department cited – nothing. Not one case.

The second issue was whether Kaye pled in his amended complaint absence of “cause” for his removal sufficient to survive pre-answer dismissal.

This issue squarely presented the court with an important question of first impression: should courts reviewing the majority directors’ removal of a co-director for “cause” evaluate the decision under the deferential standard ordinarily applicable to board decisions – the business judgment rule – or some more stringent standard – like entire fairness? You can read the appellate briefing on this issue here, here, and here.

Apparently Kaye made himself quite a nuisance as a board member. Before the vote on Kaye’s ouster, the board sent an extraordinary notice of special meeting of the board attaching 100 pages of fiery emails from Kaye as alleged proof of his “inappropriate, abusive and destructive behavior.” In the notice, the board wrote that “for the last several years,” “on numerous occasions,” Kaye “threatened and verbally attacked each and every other director.”

Based entirely upon this material, the Court adopted, and then applied for the board’s benefit, the most deferential standard of review:

The gravity of the ‘cause’ here falls within the corporation’s business judgment, requiring judicial deference in the absence of bad faith or tortious conduct by the board (see Matter of In re Kenneth Cole Prods., Inc. Shareholder Litig., 27 NY3d 268 [2016]). The notice of special meeting provides ample allegations, supported by emails, reflecting the reasons justifying plaintiff’s removal. Plaintiff did not specifically plead any bad faith acts or tortious conduct by defendants, and there is no basis to infer bad faith on defendants’ part based on plaintiff’s documented conduct (see e.g. Barbour v. Knecht, 296 AD2d 218 [1st Dept 2002]).

With these twin holdings – and some additional ones you can read in the decision itself – the First Department declined to restore Kaye to director status.

The most recent substantive appellate guidance one can find about corporation fiduciary removal is a decision from a couple of years ago, Gam v Dvir (223 AD3d 706 [2d Dept 2024]), addressing the “cause” standard for removal of officers under the analogous removal statute, BCL § 716, about which we wrote on the blog. Gam ruled that “wrongful taking” of corporate funds most certainly supplies “cause” for officer removal.

Kaye takes one giant step further, placing directors’ for “cause” removal decisions within the protective envelope of the business judgment rule. Under the business judgment rule, pre-answer dismissals are quite common (see e.g. Matter of Avangrid, Inc., Shareholder Litig., ___ AD3d ___, 2026 NY Slip Op 04141 [1st Dept June 30, 2026] [“Under the business judgment rule, the Unaffiliated Committee’s determinations were entitled to deference and dismissal of the complaint was warranted”]; Tartell v Klein, 248 AD3d 632 [1st Dept 2026] [“Because the complaint is dismissed under the business judgment rule, it is unnecessary to reach defendants’ arguments regarding plaintiffs’ standing and the sufficiency of the pleadings”]).

After Kaye, if you or your client is an officer or director suing to challenge involuntary removal from service by the board under BCL §§ 706 or 716, be preparedto plead your way out of business judgment rule territory with specific, particularized, evidentiary facts that the board’s decision was corrupted by “fraud,” “conflict of interest,” “unequal treatment,” “self-dealing,” “bad faith,” commission of an “independent tortious act,” or some combination of these exceptions to the business judgment rule. Bare legal conclusions just won’t cut it. On that requirement, Kaye’s pleading fell far short, generically reciting the phrase “bad faith” exactly one time, in just a single paragraph, with no factual meat on the bones.

Bottom line: under Kaye, whether there is, or is not, “cause” for the board to fire one of its members is a matter falling comfortably within the board’s business judgment, even for incivility. So behave on that board. Otherwise, your colleagues may hand you a pink slip.

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