Decisions on How to Liquidate Made by LLC's Managing Member Reviewed Under Deferential Business Judgment Rule

On April 6, 2021, the First Department issued a decision in Matter of FGLS Equity LLC, 2021 NY Slip Op. 02099, holding that decisions on how to liquidate an LLC made by the LLC's managing member are reviewed under the deferential business judgment rule, explaining:

The decisions of FGLS's managing member and liquidator, Steven Turchin, to forgo litigation against the Estates of Steven and Nancy Mendelow, their counsels, and related parties (together the Mendelow Parties), and to include the Mendelow Family Foundation (MFF) in the distribution of FGLS's assets, are protected by the business judgment rule. Turchin's letter setting forth his proposed Plan of Liquidation detailed the legal advice he received, as well as his consideration of all relevant factors in arriving at his decision. The managing member's decisions are entitled to deference in view of his opinion that it was best to use the funds that FGLS had recovered to pay back its members, who had been waiting since 2008 to recoup any portion of their failed investment, rather than initiate a risky wave of litigation. The record does not support a finding that the managing member lacked disinterestedness and violated his duty of loyalty while managing and liquidating the company, and there is no basis to grant further discovery. The remaining contentions challenging the court's application of the business judgment rule are unavailing.

(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.