New York Court Had Jurisdiction to Decide Derivative Claims Despite Operating Agreement's Delaware Choice of Law Clause

On March 3, 2020, the First Department issued a decision in Favourite Ltd. v. Cico, 2020 NY Slip Op. 01463, holding that New York courts have jurisdiction to decide derivative actions regarding entities whose operating agreements are governed by Delaware law, explaining:

Contrary to defendants' contention, New York courts have subject matter jurisdiction over the amended complaint, which was supposed to contain only derivative claims. The fact that the operating agreement of Upper East Side Suites, LLC (the Company) chooses Delaware law is of no moment, since choice of law and choice of forum are altogether separate matters. Furthermore, section 18-1001 of the Delaware Limited Liability Company Act (the Act), which provides that a member or an assignee of a limited liability company interest may bring an action in the Court of Chancery, is permissive, not mandatory.

(Internal citations omitted).

This decision relates to a significant part of our practice: business divorce (a break-up between the owners of a closely-held business). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a business divorce.