Summer Shorts: Judicial Dissolution Meets The Dead Man’s Statute, And Other Recent Decisions Of Interest

Welcome to this 16th annual edition of Summer Shorts. This year’s edition features brief commentary on a trio of recent decisions by New York courts in business divorce cases, including:

• in the Bodenchak case’s latest round, finding that the Dead Man’s Statute does not bar the executor’s reliance on the decedent’s verified dissolution petition;
• an otherwise meritorious derivative claim dismissed for inadequate proof of damages; and
• a predictably unsuccessful attempt to tag non-managing LLC members with breaches of fiduciary duty.

Bodenchak Redux

This is the second appearance on this blog of Bodenchak v 5178 Holdings LLC. As explained in greater detail in my prior post, in Bodenchak a one-third member who petitioned for judicial dissolution of an LLC died shortly after filing his petition. His widow subsequently moved to be substituted as the named petitioner in her capacity as executor of her late husband’s estate. The respondent members opposed on the ground that the decedent’s membership terminated upon his death and that the executor of his estate, as an “assignee” holding only an economic interest, lacked standing to seek judicial dissolution under LLC Law 702. The trial court granted the executor’s motion to be substituted and, upon the respondents’ appeal, last year the Appellate Division, First Department affirmed, citing LLC Law § 608 and holding that “the dissolution proceeding is necessary to settle [the decedent’s] estate and distribute the proceeds from the sale of the apartment owned by [the LLC].”

While the appeal was pending, the respondents moved to dismiss the petition on various grounds. First up, they argued that the executor/wife’s only evidence in support of her claims is the decedent’s verified petition which, under the Dead Man’s Statute (DMS), became inadmissible hearsay upon his death. The DMS, codified in CPLR § 4519, makes testimony by an interested witness concerning a personal transaction or communication between the witness and a deceased person or mentally ill person excludable upon the trial of an action or the hearing upon the merits of a special proceeding.

The motion court’s decision issued in early 2026 ruled that the DMS is inapplicable on four grounds:

• First, the petition is based on personal knowledge and verified by the decedent himself, and not testimony of any transactions or communications with him.
• Second, the motion court cited caselaw for the proposition that in a summary proceeding for judicial dissolution, the court may make a summary determination upon the pleadings, papers and admissions to the extent no triable issues of fact are raised. Relatedly, the motion court noted that hearsay evidence is admissible to defeat a motion for summary judgment provided it is not the only evidence, citing the executor/wife’s own affirmation and other submissions.
• Third, the court noted that CPLR § 1015, which in general provides that a lawsuit does not end when a party dies but proceeds with the proper parties in place, “would be significantly undermined if the executor of an estate substituting for a deceased litigant could not rely on the decedent’s pleadings and sworn statements.”
• Finally, the court found that the decedent’s verified petition fell within the non-codified “residual” hearsay exception insofar as “it accurately and authentically set forth the decedent’s allegations” and is more probative on the point for which it’s offered than any other evidence that his executor/wife could obtain through reasonable efforts.

The court next addressed respondents’ remaining arguments for dismissal of the petition’s basis for dissolution, namely, that the managing member refused to monetize the LLC’s sole realty asset either by selling or renting it. The motion court rejected the respondents’ arguments that the petition failed to state viable claims for judicial dissolution and breach of fiduciary duty.

As to the former, respondents argued that the LLC was operating in conformity with its stated purpose in the operating agreement, “to purchase, own, and develop” the single-asset LLC’s realty. Wrote the court, “[w]hile the operating agreement does not explicitly state that the property was intended to be sold or rented upon completing development, such a purpose can be reasonably inferred from the circumstances.”

As to the latter, the court held that the petition’s allegations of the managing member’s rejection of petitioner’s buy-out offer, his “low-ball” counteroffer, his lack of communication with the decedent, his failure to consider third-party offers of sale, and his allegedly collusive secret agreement with another member to gain majority control, “taken as a whole and accepted as true on the instant motion to dismiss,” suffice to state a direct claim for breach of fiduciary duty.

“Strong Showing on Liability” But, Alas, No Proof of Derivative Damages

Silverstein v Borukhin, decided earlier this year by Manhattan Commercial Division Justice Jennifer G. Schecter after a four-day trial, involves derivative and direct claims by a 50% member of an LLC (Cyan) that developed an online travel booking platform. The plaintiff claimed that the defendant 50% member conspired with a Russia-based third-party software provider to “steal” Cyan’s software. The plaintiff alleged that the plaintiff originally represented that the Russian company was a Cyan subsidiary and then told a “fake story for the first time on summary judgment” that the Russian company was a stand-alone Russian company owned by a non-party who testified at the trial.

In her decision, Justice Schecter accepted the plaintiff’s version of events, finding that the defendant and non-party witness “were not credible witnesses.” At the same time, while writing that the plaintiff made “a strong showing on liability,” he “ultimately failed to submit admissible, persuasive evidence supporting a valid award of damages 0n his derivative claim.”

Specifically, the plaintiff “did not submit an expert valuation report or meaningfully analyze the financial records in evidence” in support of his $1 million demand. The LLC’s single sale transaction with a Russian bank that the plaintiff cited was a “one-off transaction” and not “a reliable indicator of value.” As Justice Schecter summed up:

The $1,000,000 amount is not properly tethered to credible evidence permitting such a damages award. It is not based on any lay or expert methodology other than plaintiff’s counsel proffering a nice round number a bit higher than the contract price and unpersuasive arguments about how to calculate a reasonable royalty. This is not a credible way to prove damages.

However, the plaintiff did not walk away empty handed. On his direct claim for an accounting, Justice Schecter awarded the plaintiff approximately $337,000 plus 9% interest from January 2021. After the court rejected a number of adjustments upward and downward advocated by both sides, the award consisted of 50% of a $131,000 license fee earned by Cyan plus 50% of a 75/25 split with the Russian company of approximately $730,000 sale proceeds from the same transaction with a Russian bank.

Repeat After Me: Non-Managing LLC Members Don’t Owe Fiduciary Duties

Back in 2014, I wrote about Kalikow v Shalik, a case of first impression in which Justice Vito DeStefano held that non-managing members of LLCs owe no fiduciary duties to the LLC or the other members. Justice Stefano drew his conclusion from LLC Law § 409 which imposes fiduciary duties on LLC managers only, writing:

Given the Legislature’s intent to specifically omit any duty of good faith or loyalty on behalf of a non-managing member of an LLC, coupled with the fact that the operating agreement gives Kalikow the sole discretion to manage the business and affairs of the LLC, the court concludes that the second cause of action asserting that Shalik, as a non-managing member, breached his fiduciary duty to the LLC and to Kalikow fails to state a cause of action and, therefore, must be dismissed.

A number of court decisions since then have agreed with Justice DeStefano, albeit courts also have recognized an exception to the general rule when a non-managing member nonetheless shares or takes control of management duties, as highlighted in Justice Andrea Masley’s 2023 decision reported by Frank McRoberts here.

Fighting against the tide of court opinion, the plaintiff in Rizzi Holdings LLV v Nassau John Investors LLC brought suit against the LLC in which he invested $100,000 and against two non-managing members for breach of fiduciary duty arising from a failed real estate investment. The complaint primarily alleged that the individual defendants failed to secure financing for the project before making a down payment on the property. The complaint did not name the entity designated both in the plaintiff’s subscription agreement and in the operating agreement as the sole managing member.

Justice Nicholas Moyne readily disposed of the claims against the two non-managing members, writing:

Under Limited Liability Company Law (LLCL) § 412(b)(1), in a manager managed LLC, a non-managing member owes no fiduciary duty to the LLC or its members solely by reason of being a member (see Kalikow v. Shalik, 43 Misc. 3d 817, 825 [Sup. Ct. Nassau Cnty. 2014]). Noticeably absent from the Limited Liability Company Law, which expressly imposes a duty of good faith upon managers of an LLC, is any concomitant duty on a non-managing member (see Karon S. Walker, New York Limited Liability Companies and Partnerships § 1:8 [West’s NY Prac Series] [“(a) member who is not a manager does not owe a duty to the LLC or its members, except to the extent he or it participates in the management of the LLC”]; 51 Am Jur 2d, Limited Liability Companies § 11 [“members of a limited liability company are like shareholders in a corporation in that they do not owe a fiduciary duty to each other or to the company, and that as long as members of a limited liability company are not acting in a managerial capacity, they do not have fiduciary duties to one another unless such fiduciary duties are set forth in the operating agreement”]). Because the individual defendants were not managers, they owed no fiduciary duty to Plaintiff as a matter of law.

It’s unclear to me why Justice Moyne cited LLC Law § 412 (Agency of Members or Managers) rather than § 409 (Duties of Managers). Section 412(b)(1) applies only when the LLC is designated as manager-managed in its articles of organization and limits the circumstances under which a non-managing member can be deemed an “agent” of the LLC. Section 409 is inward looking, addressing relations and duties among the members and managers, whereas Section 412 is outward looking, addressing the reliance of counterparties on the authority of those acting on the LLCs behalf.