Manager of LLC Satisfied Contractual Obligation to Provide Annual Financial Statements by Providing Tax Returns

On March 28, 2022, in BCI Fin. Holdings LLC v. RT Two LLC, Index No. 653394/2020, Justice Margaret Chan of the New York County Commercial Division granted summary judgment dismissing defendant and counterclaim-plaintiff’s counterclaim for breach of the operating agreement based on the manager’s failure to provide the annual financial statements as expressly required finding that the tax returns that were provided could serve as financial statements because they contain the required information and adopt the required accounting standard. The Court explained:

As to the financial statements, the movants submit evidentiary support for their assertion that RT2 was provided copies of BCIFH's annual financial statements when it received copies of BCIFH's tax returns each year, since each tax return contains all the information required in section 5.9 (NYSCEF # 57 at 14, 15). Besides, the movants have shown that RT2 separately received a copy of BCIFH's 2019 Management Report containing financial statements of that year (id.; NYSCEF #'s 47, 55).

In response, RT2 fails to provide evidence rebutting this proof. RT2 argues, however, that the tax returns cannot be considered "financial statements" under section 5.9 because "tax returns and annual financial statements feature different information" and the provision specifies that the requirement is "in addition to the tax returns, or summaries thereof, required to be provided under section 4.6" (NYSCEF # 69 at 6, 7). This argument is belied by the terms of the Operating Agreement and the movants' documentary evidence. Specifically, while section 5.9 does not define what constitutes "financial statements," it specifies what information the financial statements should consist of and what accounting standard they should apply (NYSCEF # 48, § 5.9). In particular, section 5.9 requires that the annual statements "contain[] a balance sheet as of the end of such Fiscal Year, statements of income, Interest Holders equity, and changes in financial position, and a cash flow statement"—and the documentary evidence shows that all these categories of information are included though reformatted in BCIFH's tax returns sent to RT2.

Section 5.9 also requires the financial statements to be made on "a Federal income tax basis," which unlike the commonly adopted GAAP standard, is the same basis of accounting that a company is required to use for filing its federal tax return. Thus, the tax returns could serve as "financial statements" since they contain all the required information and adopt the required accounting standard. Even if the court were to accept RT2's contention that tax returns and financial statements feature different information, RT2 fails to point out what information was not available in the tax returns and how such defects resulted in RT2's alleged damages such that would raise a material issue of fact. Also, for the reasons stated in connection with section 4.6, the conclusory assertions in the Lein affidavit are insufficient to defeat summary judgment.

The attorneys at Schlam Stone & Dolan frequently litigate claims regarding breach of an operating agreement. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning such issues.