RPAPL Broad Standing Rules Inapplicable Where Claim Really About Ownership of LLC

On August 26, 2021, the First Department issued a decision in FGP 1, LLC v Dubrovsky, 2021 NY Slip Op 04789, affirming dismissal of a counterclaim for lack of standing holding that counterclaim plaintiffs mischaracterize their claim as one for a declaration to quiet title when it really involves ownership of a Delaware LLC, explaining:

M Parties mischaracterize their claim as one for a declaration to quiet title. RPAPL 1501(1) contains broad standing rules authorizing a person who "claims an estate or interest in real property" to "maintain any action against any other person . . . to compel the determination of any claim adverse to that of the plaintiff." The statute is not subject to the same standing principles that are applicable to contract law (see Wellington v Financial Freedom Acquisition LLC, 132 AD3d 506, 507 [1st Dept 2015] ["Defendant's reliance on the principle of contract law that a person who was not a party to the contract or a third-party beneficiary thereof cannot assert a claim for breach of that contract . . . is misplaced since plaintiffs' claim seeking to determine adverse claims to real property is expressly authorized by statute (RPAPL 1501)"]). M Parties have not asserted a claim under RPAPL 1501, presumably because this dispute involves ownership of a Delaware limited liability company. Accordingly, M Parties are subject to the standing principles that are applicable to contract law and lack standing to invalidate the FGP Assignment.

The First Department further explained that counterclaim plaintiffs

Lack standing to assert this challenge, since they do not claim to be third-party beneficiaries of the above-mentioned contracts, and they did not suffer direct harm flowing therefrom (see Decolator, Cohen & DiPrisco v Lysaght, Lysaght & Kramer, 304 AD2d 86, 90 [1st Dept 2003] ["[i]t is well settled that in order to have standing to challenge a contract, a nonparty to the contract must either suffer direct harm flowing from the contract or be a third-party beneficiary thereof"]). Rather, [they] were harmed because [counterclaim defendant] sold the same interest in 172 Holding twice . . . .

The First Department noted that while they do not have standing for a declaration that the assignment and operating agreement are null and void, counterclaim plaintiffs/defendants do have standing to assert the validity of their own contract.

The attorneys at Schlam Stone & Dolan regularly litigate business disputes about assignment of rights and ownership of interests.

Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions about standing or ownership rights.