Court Allows Derivative Claims To Proceed On The Basis Of Alleged “Oral LLC Agreement”

On July 11, 2024, Justice Andrea Masley allowed a plaintiff to add derivative claims to his complaint despite the plaintiff’s failure to provide any written proof that he was a member of the LLC that had standing to sue on the LLC’s behalf. In Edward O’Brien, et al., v. Lawrence Kaplan, et al., Index No. 652840/2020, plaintiff Edward O’Brien sought to amend his complaint to add derivative claims on behalf of an LLC named CSG Partners for breach of fiduciary duty and fraudulent conveyance. The defendants opposed the amendment and submitted a written operating agreement showing that O’Brien was not identified as a member. O’Brien responded by pointing to e-mail conversations and allegations suggesting he was essentially promised the status of a member even though he could not provide a written operating agreement to substantiate it. The Court held that O’Brien’s allegations of an “oral LLC agreement” sufficed. It explained:

Although plaintiffs do not proffer a written operating agreement evidencing O’Brien’s membership in CSG Partners, such an agreement may be oral or implied. . . . Here, plaintiffs allege that “O’Brien raised the topic of equity ownership of the entities receiving fees from 1042 Transactions in order to make his rights more transparent” and that “Kaplan agreed.” . . . While defendants submit a written Operating Agreement of CSG Partners dated July 31, 2018, identifying Kaplan and nonparties George Thacker Ill and Alex Mumblat as members . . . this only raises further issues of fact that cannot be resolved on this motion, especially in light of the Written Consent. Accordingly, on this record, the court cannot determine as a matter of law whether O’Brien is a member of CSG Partners and has standing to assert the derivative claims.

The attorneys at Schlam Stone & Dolan frequently counsel clients concerning derivative actions and LLC operating agreements. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning such issues.