In addition to blooming trees and longer days, spring in New York has ushered in a fresh crop of noteworthy decisions on intra-LLC disputes. Headliners include a boost to members' rights to compel an accounting courtesy of the First Department, a procedural refresher on LLC dissolution and the applicable standard, and a winding dispute over membership bequests in the Surrogate's Court. Members and their counsel take note.
First Department Officially Grafts "Demand Futility" Onto the Accounting Claim.
We have previously discussed the resurgence—particularly in the First Department—of the accounting claim in business divorce litigation. Different from a books and records demand, the accounting claim requires the individuals to whom funds are entrusted to produce records, "demonstrate how money was expended[,] and return pilfered funds in his or her possession." (Sigalit v Kahlon, 21-cv-08921 [SDNY Aug. 30, 2023]).
Even through that resurgence, courts generally hold that prior to bringing a claim for an accounting, the would-be plaintiff must make a pre-suit demand for one (Mawere v Landau, 130 AD3d 986 [2d Dept 2015]).
I have at times been tempted to try pleading around that pre-suit demand requirement. In shareholder derivative actions, which also require a pre-suit demand, a party can satisfy the demand requirement by pleading facts showing that a demand would be futile. Could the same be done to satisfy the pre-suit demand requirement for an accounting?
Tempting as it is, I have mostly avoided that urge because I'm not sure that the demand futility principle carries over so easily. As I see it, the pre-suit demand requirement in derivative actions is designed to provide the company with a chance to consider the allegations and determine whether to sue in its own name. A demand, therefore, can be futile when those engaged in the alleged wrongdoing control the company. The pre-suit demand requirement in accounting claims, by contrast, stems from the maxim that equitable relief is a measure of last resort.
Perhaps for that reason, I am not aware of any cases applying the demand futility concept to an equitable accounting claim . . . until now.
In Tarro v Amadei, 2024-00958 (1st Dept May 15, 2025), Justice Reed granted summary judgment on the accounting claim brought by the plaintiff, a 10% member of 245 Deli LLC, which operated a restaurant in Manhattan.
On appeal, the defendants in control of the LLC argued that the accounting claim should have been dismissed because the plaintiff did not satisfy the pre-suit demand requirement; all plaintiff did was repeatedly request (and according to the defendants, repeatedly receive) various books and records of the LLC.
Citing exclusively to cases considering demand futility in the context of derivative actions, the First Department affirmed Justice Reed's grant of summary judgment on the accounting claim, finding that the pre-suit demand requirement was excused due to demand futility:
The court properly rejected defendants' argument that plaintiff was obligated to submit a pre-suit demand for an accounting, as plaintiff's substantiated allegations sufficiently establish demand futility. . . . Plaintiff alleged, among other things, that defendants are insider majority owners who control the Company; that they attempted to amend the operating agreement to allow them to solicit additional loans from members; that they breached their fiduciary duties to plaintiff and other minority shareholders by appropriating Company profits without repaying their investments . . . These allegations of self-dealing and misconduct are sufficient to negate the necessity of a pre-suit demand."
Another boost to the accounting claim in business divorce litigation.
50% Member's Deadlock Dissolution Petition Dismissed Without a Hearing or Motion.
Some recent posts might suggest that LLC dissolution litigation is at a crossroads: will courts Stick to the Script of the 1545 Ocean Avenue standard for LLC dissolution, or offer a Lifeline Toward Dissolution of Deadlocked LLCs?
New York County's newest commercial division Justice Anar Rathod Patel's recent decision, Lignel v Butler, No. 650791/2025 (Sup Ct, New York County 2025), holds the line: deadlock (and allegations of member oppression) are insufficient to state a claim for dissolution of an LLC that is operating in accordance with its stated purpose.
The petitioner, Jean Lingel is a 50% member of Canada LLC, a New York LLC that operates a SoHo art gallery. The LLC's operating agreement states that its purpose is the "exhibition and sales of artwork."
Lingel sought judicial dissolution on the grounds that the other members had systematically excluded him from management decisions, denied him access to financial information, and frozen him out of company operations. He also alleged that the remaining members violated the operating agreement by making unauthorized "guaranteed payments" totaling over $3 million. Lingel claimed that the relationship among members had irretrievably broken down, making it no longer practicable to carry on the business of the LLC.
While the remaining members filed an "Answer" to Lingel's petition, apparently intending to defend the case on the merits, Justice Patel went one further. The Court dismissed—without necessity of a motion—Lingel's dissolution petition. Quickly wading through each of Lingel's claimed acts of misconduct, Justice Patel held that:
Petitioner has failed to provide any allegation supporting a determination that it is no longer practicable for the gallery to continue operations in conformity with the Operating Agreement. Although the Court acknowledges the discord between Petitioner and Respondents, the gallery continues to fulfill the stated purpose as set forth in the Operating Agreement of exhibiting and selling art.
For the procedurally minded, the case is significant. Unlike in corporations, where dissolution actions must be commenced as a special proceeding (see BCL 1103, 1104, 1104-a), an LLC member may seek dissolution either in a Plenary Action or a Special Proceeding. Here, Lingel chose to commence a special proceeding, which the Court properly (and efficiently) resolved without further motion practice. Had he commenced a Plenary Action, Lingel would have at least forced the remaining members to actually move to dismiss the complaint, and that motion (while it might not have changed the outcome) would have been resolved under the traditional rules of CPLR 3211. A welcome reminder that procedural decisions should not be made lightly.
Surrogate's Court Transfers Decedent's LLC Interest to Permitted Transferees Despite Will's Instructions Otherwise.
Maybe its recency bias talking, but New York's laws concerning what happens when an LLC member dies seem to shift more than other areas of members' rights. We can catch up with a few principles du jour (some courtesy of Frank McRoberts' Post):
- LLC membership interests become property of the deceased shareholder's estate immediately upon death pursuant to EPTL § 13-1.1, which provides: "For purposes of the administration of an estate, . . . every . . . species of personal property pass[es] to the personal representative . . . ."
- Under recent caselaw and LLC Law 608, the estate of a deceased member "shall have all the rights of a member for the purpose of settling or managing its estate, which would include a member's voting rights" (Weinstein v Wallace, 231 AD3d 1187, 1189 [2d Dept 2024])
- Where an attempted specific bequest fails because of some legal obstacle, impediment, or impossibility—such as a conflicting transfer restriction in the operating agreement—the transfer is deemed "ineffective" or "lapsed," and the interest passes as if the decedent died without a will pursuant to EPTL § 4-1.1 (In re Endell's Estate, 192 Misc 503 [Sur Ct, NY County 1948], aff'd 275 AD 1029 [1st Dept 1949]).
A recent decision from the Ulster County Surrogate, In re Stephen Schaffer (Sur Ct, Ulster County 2025), stands as a noteworthy application of those principles when a testamentary bequest meets a conflicting transfer restriction meets a careful executor.
Stephen Schaffer's Will was admitted to probate in May of 2016. The Will made no specific bequests, and it divided his residuary estate among 8 beneficiaries, including several non-family members. The largest asset in the residuary estate was Schaffer's 4.1667% membership interest in 17-18 Management Company LLC, which owns a building in Manhattan.
The executor quickly concluded that the membership interests in the Company could not be distributed to the non-family beneficiaries because the Company's Operating Agreement contained a provision restricting transfers of membership interests to direct descendants of Schaffer.
For years, the executor sought to engineer a buyout of sorts between the beneficiaries, whereby those beneficiaries who were permitted transferees under the Operating Agreement would receive the entirety of Schaffer's membership interest in exchange for payment to the non-family beneficiaries. When those efforts failed, the executor sought to close Schaffer's estate after assigning a "zero value," to the non-family beneficiaries' interest in the LLC.
One of the non-family beneficiaries objected, arguing that even though he could not become a member, he should receive his share of the LLC's economic interest. Under his reading of the Operating Agreement, a non-family member could become an "economic interest holder" with the right to receive distributions only.
Ulster County Surrogate McGinty overruled the non-family beneficiary's objection. Surrogate McGinty held that under the Operating Agreement, any assignments—even assignments of economic rights only—in violation of the transfer restrictions in the Operating Agreement were void. Thus, held the Surrogate, the non-family beneficiaries could not take even an economic interest in the LLC.
Finding the Court nonetheless "duty-bound to find a way to effectuate the bequest," Surrogate McGinty directed that the interests in the LLC be reallocated to the beneficiaries that were qualified to receive them: the family beneficiaries all got an increased share of the LLC, while the non-family beneficiaries received nothing. As we've concluded before, transfer restrictions trump testamentary bequests.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
