In Castle Restoration & Constr., Inc. v Castle Restoration, LLC, Suffolk County Commercial Division Justice Elizabeth H. Emerson refused to enforce an oral agreement that allegedly modified a prior written agreement between the parties. In this blog post, we see how the Court applied a variety of contractual principals to determine the validity of the oral agreement.

In the Castle litigation, , plaintiff Castle Restoration & Construction, Inc.  (“Castle Inc.”) entered into an asset-sale agreement with defendant Castle Restoration LLC (“Castle LLC”) that included the transfer of equipment and a list of clients from Castle Inc. to Castle LLC (the “Agreement”). The purchase price of the deal was $1.2 million.  Castle LLC paid Castle Inc. $100,000 at closing and gave Castle Inc. a promissory note for the remaining amount due under the Agreement (the “Note”). Castle LLC defaulted on the Note.

Prior Litigation by Castle Inc.

As a result of Castle LLC’s default, Castle Inc. commenced an action and moved for summary judgment in lieu of complaint. Nassau County Commercial Division Justice Stephen A. Bucaria denied Castle Inc.’s motion. On appeal, Castle LLC hung its hat on a subsequent oral agreement allegedly entered into by the parties in which Castle LLC agreed to provide Castle Inc. with labor and materials for additional construction projects, the value of which would be used to offset Castle LLC’s obligations under the Note (the “Oral Agreement”).

The Second Department reversed Justice Bucaria’s decision, granting Castle Inc.’s motion for summary judgment and holding that the “breach of a related contract cannot defeat a motion for summary judgment on instrument for the payment of money only” unless the two contracts are “inextricably intertwined.” The Second Department held that the Agreement and the subsequent Oral Agreement were not inextricably intertwined and reversed the lower court’s decision.

No-Oral Modification Provision

After its defeat in the Second Department, Castle LLC brought an action against Castle Inc. alleging claims for breach of contract, fraud in the inducement, and unjust enrichment. Castle Inc. moved for summary judgment. Justice Elizabeth H. Emerson granted the motion, dismissing all but two breach of contract claims against Castle Inc.

First, Castle LLC alleged that Castle Inc. breached the Agreement by failing to perform the work-in-progress, which remained unfinished at the time of the closing. Second, Castle LLC alleged that Castle Inc. breached the Oral Agreement in which Castle LLC agreed to complete Castle Inc.’s work-in-progress in exchange for a reduction in its obligation under the Note. Specifically, Castle LLC alleges that Castle Inc. failed to pay Castle LLC for the work it performed under the Oral Agreement.

Although it denied summary judgment on the breach of contract claims, the court noted that if the Oral Agreement was valid, it would have relieved Castle Inc.’s obligation under the Agreement to complete the work-in progress, thus precluding Castle LLC from prevailing on its breach of the Agreement claims against Castle Inc.

The case went to trial.  The court recognized that the Agreement contained a no-oral-modification provision. Contracts that contain such provisions are typically protected by the Statute of Frauds and therefore must be in writing (see General Obligations Law § 15-301[1] [“A written agreement or other written instrument which contains a provision to the effect that it cannot be changed orally, cannot be changed by an executory agreement unless such executory agreement is in writing and signed by the party against whom enforcement of the change is sought or by his agent”]). Accordingly, an oral agreement alone is not enough to modify the terms of an agreement.

“A party’s admission of the existence and essential terms of an oral agreement is sufficient to take the agreement out of the statute of frauds” (Camhi v Tedesco Realty, LLC, 105 AD3d 795 [2d Dept 2013]). However, the statute of frauds applies when the parties dispute the terms and conditions of the agreement (Komlossy v Faruqi & Faruqi, LLP, 714 Fed Appx 11, 14 [2nd Cir 2017]).  Although both Castle LLC and Castle Inc. acknowledged that they entered into the Oral Agreement by which Castle LLC agreed to complete Castle Inc.’s work-in progress, the parties disagreed as to the terms of the Oral Agreement, i.e., how Castle LLC was to be compensated for its work.  The court ultimately determined that the Oral Agreement was unenforceable.

Breach of Contract Claims

In analyzing the court’s decision with respect to Castle LLC’s breach of contract claims against Castle Inc., we must recall the essential elements of a breach of contract claim: (1) the existence of a contract; (2) the plaintiff’s performance pursuant to the contract; (3) the defendant’s breach of his or her contractual obligations; and (4) damages resulting from the breach (Canzona v Atanasio, 118 AD3d 837, 838 [2d Dept 2014]).  An element often overlooked is the plaintiff’s own performance under the contract.

“A party will not be able to prevail on a breach-of-contract claim unless it proves, by a preponderance of the evidence, that it performed its own obligations under the contract” (Innovative Biodefense, Inc. v VSP Tech., Inc., 176 F Supp 3d 305, 317 [SD NY 2016]). “Thus, a party is relieved of its duty to perform under a contract when the other party has committed a material breach” (Franklin Pavkov Constr. Co. v Ultra Roof, Inc., 51 F Supp 2d 204, 215 [ND NY]). A breach is considered “material” if it goes to the root of the agreement between the parties.  When, a party fails to make payment pursuant to the terms of a contract, the party is in material breach of the agreement, thus relieving the other party’s obligation to perform under the contract.

Because the court determined that the Oral Agreement was unenforceable, Castle LLC was unable to offset its obligations to Castle Inc. under the Agreement. Thus, since Castle LLC failed to make payment on the Note, the court determined that Castle LLC was in material breach of the Agreement. Castle Inc. was therefore discharged of its duty to perform under the Agreement. The Court ultimately found in favor of Castle Inc. with respect to both breach of contract claims.


Although oral modifications to contracts are common, they may not always be enforced. When analyzing whether an oral modification is enforceable you have to consider, among other things, whether the written agreement has a no-oral-modification provision; whether the parties acknowledge that an oral agreement exists; and whether the parties agree with respect to the terms of the oral agreement. Otherwise, the oral agreement may be barred by the statute of frauds.

A recent decision from the First Department reminds us that New York courts are not sympathetic to duress claims when the alleged acts or threatened acts fall within the ambit of the defendant’s rights under a valid agreement.

In Zhang Chang v Phillips Auctioneers LLC, the First Department affirmed Manhattan Commercial Division Justice Jennifer G. Schecter’s Decision and Order dismissing plaintiff’s causes of action for breach of contract, unjust enrichment, and declaratory judgment.

Defendant Phillips is a world-renowned auction house, catering to international collectors for the purchase and sale of 20th-century and contemporary works of art, among other things. As taken from the Complaint, Phillips and the Plaintiff-art collector entered into a standard Guaranty Agreement, in which Plaintiff committed to a minimum bid guarantee in the amount of $27.13 million for the scheduled auction of a painting by Gerhard Richter entitled, “Düsenjäger.” Per the Guaranty Agreement, if no bid was received at auction in excess of the guaranteed minimum price, Plaintiff was required to purchase the painting for the $27.13 million guarantee amount.

Following the auction (in which the Düsenjäger received no higher bids), Phillips sought to enforce the terms of the Guaranty Agreement, but Plaintiff resisted. Ultimately, the parties settled their dispute, as captured by a Settlement Agreement requiring Plaintiff to pay $26 million in exchange for title to the Düsenjäger and to consign to Phillips a diptych (in which Plaintiff retained an interest) by the artist Francis Bacon as collateral for the settlement amount.

Plaintiff failed to make timely and complete settlement payments, with $23 million outstanding at the end of the payment term. Accordingly, Phillips listed the Düsenjäger for auction, with the proceeds to be applied to the outstanding sums owed by Plaintiff. Plaintiff was advised that he could either pay the entire outstanding amount under the settlement in exchange for title of the painting, or he would be permitted to participate in the auction in which, on top of any winning bid, he would be charged a standard “buyer’s premium” fee.

Plaintiff elected to bid on and acquire the painting at auction and signed an Acknowledgment stating the total amount of his remaining debt to defendant, including the buyer’s premium. Plaintiff paid the entire amounts acknowledged and took possession of both the Düsenjäger and the Bacon artwork.

Plaintiff then commenced litigation claiming that he overpaid the “buyer’s premium” in excess of the amounts owed under the Settlement Agreement, claiming that he only signed and ratified the Acknowledgment under duress for fear of losing the Düsenjäger and the Bacon artwork in a threatened “fire sale” by Phillips.

The First Department affirmed Justice Schecter’s decision and order granting dismissal of Plaintiff’s claims in their entirety. The Appellate Court held that that the parties’ agreements unambiguously provided that Phillips—not Plaintiff—retained title and possession of the Düsenjäger until Plaintiff paid off the debt by a certain specified date, which Plaintiff failed to do. Phillips was, therefore, entitled to list the artwork at auction for which Plaintiff was liable for the costs incurred and for the “buyer’s premium.” This act could not constitute duress as a matter of law, as Phillips was simply exercising its rights under the parties’ agreements.

Furthermore, the Appellate Court held that no further consideration was required in exchange for Plaintiff’s countersignature on the Acknowledgement because the Acknowledgement merely restated Plaintiff’s obligations under the parties’ prior agreements. Indeed, the Acknowledgment was ratified, not voided, by Plaintiff as Plaintiff countersigned the Acknowledgement, paid the entire amount listed in the Acknowledgment, and took possession of the artworks thus accepting the benefit of the bargain.

Finally, the Appellate Court held that the unjust enrichment claim was properly dismissed as duplicative of the breach of contract claim.

Key Takeaway

At the end of the day, Plaintiff’s own actions in defaulting under the Guaranty Agreement, defaulting under the Settlement Agreement, and countersigning and ratifying the Acknowledgement proved fatal to his duress claim. It goes without saying that litigants would be well advised to carefully consider the terms of any agreement they enter into before they sign; once you sign and act, it is hard to walk it back.

It’s no secret to anyone litigating in the Commercial Division over the past couple years during the COVID era that the judges of the Commercial Division have been particularly keen on lightening their dockets by encouraging, and even participating in, the settlement of cases that come before them.  That trend is sure to continue in 2022 (and beyond) with a recent amendment to Commercial Division Rule 30 (“Settlement and Pretrial Conferences”), which provides for a mandatory settlement conference in every Commercial Division case that’s been certified ready for trial.  The amendment became effective earlier this month on February 1, 2022.

Subpart “a” of Rule 30 still allows ComDiv judges the discretion to schedule a settlement conference in a case anytime after the discovery cut-off date.  But new subpart “b” shifts from the permissive to the mandatory, requiring that “the parties in every case pending in the Commercial Division must participate in a court-ordered mandatory settlement conference (MSC) following the filing of a Note of Issue.”

The amended rule offers the parties four “tracks” on which they can put their case toward the prospect of settlement:

  1. They can have the judge already assigned to their case conduct the settlement conference, or they can request that another judge oversee the matter;
  2. they can have the court assign a Judicial Hearing Officer or Special Referee to conduct the settlement conference;
  3. they can have the court refer their case to the court’s ADR program for selection from the roster of neutrals; or
  4. they can hire a private neutral from JAMS, NAMS, AAA, etc.

As noted by the Commercial Division Advisory Council, which proposed the amendment back in September of 2020, “one of the principal goals of the Commercial Rules is to make the business litigation process in New York more cost-effective, predictable, and expeditious, and to thereby provide a more hospitable and attractive environment for business litigation in New York State.”  According to the Council, “business clients will find attractive the improvement, enhancement, and institutionalization of the settlement process.”

To be sure, incentives and opportunities for settlement already are baked into the ComDiv Rules.  For example, Rule 3 allows the court to direct the parties to mediation at any time during the case.  Rule 8 requires the parties to “meet and confer” about the prospects of settlement and/or ADR prior to the Preliminary Conference.  And Rule 10 requires counsel to submit a certification prior to every conference thereafter, certifying that they have discussed ADR with their respective clients.

But as the Advisory Council pointed out in its September 2020 proposal, parties may be reluctant to settle for any number of reasons.  They may believe that initiating or even engaging in settlement negotiations is a sign of weakness — an admission that their case has holes or that they are without the financial wherewithal to go the distance.  Others may believe that the process is a costly waste of time and distraction from having their case properly adjudicated.  Still others may be wary — despite the broad confidentiality provisions expressly set forth in the amended rule — of having a judge assess the merits of their claims or defenses before trial, particularly if it’s the judge assigned to their case.

Whether justified or not, these excuses no longer are available to litigants post-Note of Issue.  Hence, a new opportunity to settle your case quickly with your adversary on the way to court.

In an earlier post, I offered a broader-than-usual overview of certain key rights that a minority owner holds in a closely-held business: the right to vote on company action, the right to inspect books and records, the right to prosecute derivative actions, and the right to seek judicial dissolution, to name a few.

While those rights often provide minority owners with a valuable means to understand the condition of the company, influence company action, and protect their investment, they are subject to some substantial limitations.  Despite all the statutory and common law protection, minority owners remain, in many ways, subject to the whim of the majority.  Those considering investment in a closely-held business, negotiating an owners’ agreement, or contemplating litigation are wise to consider the impact of these notable limitations: Continue Reading Limitations on the Rights of Minority Owners in Closely-Held Businesses

Commercial transactions often involve parties from different states.  When a dispute arises between diverse parties, the question of whether a party can obtain personal jurisdiction over a defendant becomes critical.  This issue becomes even more apparent when the defendant is a foreign corporation that conducts business across the world.  In a recent decision from the Manhattan Commercial Division, Justice Andrew Borrok reminds us that “[t]he hiring of New York based lawyers (and closing out of a firm’s New York office) and funding through New York banks” is simply not enough to obtain jurisdiction over a defendant in New York.

In Haussmann v Baumann, plaintiffs Rebecca R. Haussmann, Trustee of Konstantin S. Haussmann Trust, and Jack E. Cattan (collectively, “Plaintiffs”) are shareholders in defendant Bayer AG (“Bayer”), a German based pharmaceutical corporation, headquartered in Leverkusen, Germany.  In or around 2016, Bayer negotiated and agreed to acquire the Monsanto Company (“Monsanto”), an agricultural-products company incorporated in Delaware and headquartered in Missouri for $66 billion (the “Moonshot Transaction”).  During the due diligence period of the transaction, Bayer retained several banks, including Bank of America  and Credit Suisse Group AG  (collectively, the “Bank Defendants”).  In addition, Bayer hired New York based law firm Wachtell Lipton Rosen & Katz  to complete the transaction. Notably, neither Bayer nor the Bank Defendants were present at the closing, and none of Bayer’s board meetings took place in New York in connection with authorizing the transaction.

Following the completion of the Moonshot Transaction, Bayer was “crushed by a tsunami of Monsanto legacy tort suits and legacy liabilities” causing a loss of $12 billon.  As a result, on or about December 9, 2020, Plaintiffs filed a Second Amended Complaint (the “Complaint”) in the form of a shareholder derivative action in the Manhattan Commercial Division against Bayer, the Bank Defendants, and members of Bayer’s Board of Management or Supervisory Board (collectively, the “Individual Defendants”).  Plaintiffs alleged causes of action for breach of fiduciary duty under Section 117 of the German Stock Corporation Act (“GSCA”), aiding and abetting in the alleged breaches of fiduciary duties, and civil conspiracy in connection with the Moonshot Transaction.  In response, Bayer, the Bank Defendants, and the Individual Defendants, each filed three separate motions to dismiss, seeking to dismiss the Complaint on multiple grounds, including lack of personal jurisdiction, forum non conveniens, and lack of standing under German law.

First, on the issue of forum non conveniens, both the Individual Defendants and the Bank Defendants argued that Germany was a more appropriate forum for this lawsuit based on the fact that (a) Plaintiffs were pursuing claims under German law, not New York law; (b) the decisions leading to the alleged breaches of fiduciary duties took place in Germany; and (c) all of the Individual Defendants resided in Europe.  In opposition, Plaintiffs asserted that New York courts frequently adjudicate shareholder derivative lawsuits involving foreign corporations and foreign laws, and that Germany’s pre-suit court procedures would “create impossible pre-discovery proof barriers and expose plaintiffs to mandatory fee-shifting.”  In its decision, the Court held that although the Commercial Division was capable of handling this matter, Germany was a more suitable forum since it “has a significant interest in adjudicating a dispute involving an old and major German company, and the activities and judgments of individual directors all located in Germany and operating under German law.”

Second, on the issue of personal jurisdiction, the Individual Defendants argued that meager allegations that Bayer engaged advisors, such as banks and law firms, with New York offices to help close the Moonshot Transaction do not constitute the transaction of business under CPLR § 302(a)(1).  In support of their motion, the Individual Defendants relied on the fact that Plaintiffs failed to allege (a) that any members of the Board of Management or Supervisory Board made any business decision in New York; and (b) that Bayer has any employees or offices in New York.  In opposition, Plaintiffs argued that jurisdiction was proper here based on the fact that the heart of lawsuit surrounds Bayer and the Individual Defendants’ decision to engage New York law firms and banking institutions to help with the due diligence and closing of the Moonshot Transaction.  The Court rejected Plaintiffs’ arguments and dismissed the Complaint against the Individual Defendants for lack of personal jurisdiction, finding that engaging New York based attorneys and arranging funding through New York institutions was too tenuous of a connection to New York.

Third, the Court found that Plaintiffs lacked standing under GSCA § 148 to bring this lawsuit against Bayer, as Plaintiffs failed to allege that “they own a sufficient number of shares to assert their claims, that they made a demand upon the company to take legal action, or that they have sought permission from a German court to assert their claims.”


The Haussmann case is a helpful decision for foreign defendants that are forced to defend a lawsuit in New York where they have no connection to the state.  Further, this dismissal should serve as a cautionary tale to plaintiffs who rely on a party’s use of legal counsel and financial institutions as a ground for personal jurisdiction when the defendant has no other contacts or presence in New York.

Most New York practitioners are aware that certain causes of action are triable by a jury, while other claims are triable only by the court.  For example, causes of action for money damages, such as tort claims, contract claims, and certain statutory claims, are triable by a jury, while equitable claims, such as claims for rescission or reformation of a contract, are triable by the court.

But what if a litigant defending an action for money damages asserts an equitable defense or counterclaim?  CPLR § 4101 specifically addresses that situation, providing that “equitable defenses and equitable counterclaims shall be tried by the court.” Consequently, where a plaintiff brings a legal claim triable by a jury and the defendant interposes equitable defenses or counterclaims arising from the same transaction, the defendant waives its right to a jury trial, even on the main, legal claim.

A defendant’s waiver of its right to a jury trial was recently addressed by the Albany County Commercial Division (Platkin, J.) in Real Estate Webmasters, Inc. v Rodeo Realty, Inc. (2022 NY Slip Op 50037(U) [Sup Ct, Albany County, Jan. 24, 2022]). In that case, plaintiff Real Estate Webmasters, Inc. (“REW”) commenced an action against defendant Rodeo Realty, Inc. (“Rodeo”), seeking damages for Rodeo’s alleged anticipatory breach of an agreement (“Service Agreement”), pursuant to which REW was to develop a custom website for Rodeo.  After issue was joined, REW moved for partial summary judgment on liability on its sole claim against Rodeo for anticipatory repudiation, and sought dismissal of Rodeo’s affirmative defenses and counterclaims (the “SJ Motion”).

The Court dismissed most of Rodeo’s affirmative defenses and counterclaims, but found triable issues of fact as to Rodeo’s counterclaim for fraudulent inducement and its affirmative defense alleging rescission and/or restitution based upon REW’s alleged fraud.  Following discovery, REW filed a note of issue requesting a trial without jury.  Rodeo responded by serving a jury demand.  REW moved to strike the demand.

Justice Richard M. Platkin of the Albany County Commercial Division struck Rodeo’s jury demand, concluding Rodeo was not entitled to a jury trial under CPLR § 4101 because its remaining affirmative defense and counterclaim alleging fraudulent inducement were equitable in nature.

The Court first explained that a defendant waives its right to a jury trial when it asserts an equitable counterclaim arising from the same set of facts as the plaintiff’s main claim – even if the plaintiff’s main claim is legal in nature.  The Court then noted that whether a fraudulent inducement counterclaim is “equitable” or “legal” depends on whether the defrauded party disaffirmed the contract by prompt rescission (thus giving rise to an equitable claim or defense), or affirmed the contract and later pursued a legal claim for damages arising from the fraud.

Based on the position taken by Rodeo in opposition to the SJ Motion, the Court concluded Rodeo “unequivocally elected to disaffirm the Service Agreement after allegedly learning of the falsity of certain pre-contractual representations made by REW.”  Specifically, the Court noted that:

  • Rodeo’s principal represented the Service Agreement “was rescinded” upon learning of REW’s allegedly false representations;
  • Rodeo’s principal stated he personally “terminated Rodeo’s relationship with [REW]” due to its “false representations” and “lying”;
  • Rodeo did not deny REW’s allegation that it had repudiated the Service Agreement. Rather, Rodeo argued the repudiation was “not wrongful” because it possessed “a valid rescission defense based on fraud”; and
  • Rodeo’s counsel affirmed Rodeo “justifiably rescinded the Service Agreement based upon fraudulent misrepresentations.”

Having elected to disaffirm the Service Agreement and defend against REW’s claim of anticipatory repudiation on the basis of the equitable defense of rescission, the Court concluded Rodeo’s counterclaim for fraudulent inducement was equitable, not legal, and Rodeo therefore waived its right to a jury trial.

Critically, the Court held that Rodeo’s fraudulent inducement counterclaim was equitable even though Rodeo expressly sought money damages in the counterclaim and in its prayer for relief.  According to the Court, “the only damages identified in Rodeo’s counterclaim is the sum of $21,160, which represents the initial payment made by Rodeo to REW under the Service Agreement.”  These alleged damages, in the Court’s view, were “restitutionary in nature” and “incidental to the equitable remedy of rescission” sought by Rodeo under its remaining affirmative defense.  As the Court explained,

[F]ollowing its binding election to disaffirm the Agreement, Rodeo is limited to pursuing damages incidental or collateral to its equitable defense of rescission, including the recovery of the funds necessary to unwind the transaction and restore the parties to the status quo.  This is a claim of an equitable nature.

The Court therefore concluded that Rodeo waived its right to a jury trial by interposing an equitable defense and counterclaim arising from the same transaction as REW’s claim of anticipatory repudiation.


There are three main takeaways from the Court’s decision in Real Estate Webmasters:

  • First, equitable defenses and counterclaims (such as rescission or reformation of contract, or restitution) are triable by the court only – even if the plaintiff’s claim is legal in nature;
  • Second, a party who disaffirms a contract by seeking prompt rescission (as opposed to affirming the contract and later seeking damages) asserts an equitable – not a legal – claim; and
  • Third, an explicit demand for money damages will not transform an otherwise equitable counterclaim into a legal one, especially where, as in Real Estate Webmasters, the only damages alleged were “restitutionary” or incidental to the equitable relief.

Attorneys and their clients do not always determine at the outset of a litigation whether the case should be tried by a jury or a judge.  Indeed, that is often a determination made as the case progresses, discovery is obtained, and witness credibility is assessed.  However, litigants should be particularly mindful of the relief sought in their pleadings (i.e., whether it seeks equitable or legal relief), and strategic positions taken throughout the course of the litigation (including in motion practice), as these factors could later determine their right to a jury trial.

The pages of this blog are filled with cases pitting a minority owner of a closely-held business—most often a corporation or an LLC—against the majority.  Books and records proceedings, derivative actions brought on behalf of the company, bids for dissolution, and cases seeking to enforce the terms of the owners’ agreement, are all different litigation strategies in the minority owner’s playbook.

As these and other posts make clear, the law in the area of minority owners’ rights is incrementally evolving with each new case and decision.  Every so often, however, we must take a step back and consider the body of minority owners’ rights more generally.  Otherwise, we risk losing sight of the forest among all those trees.

This post and a webinar in which I recently spoke (available here) seek to provide a broader-than-usual overview of the rights of minority owners in New York corporations and LLCs.  A potential investor, a nascent company choosing its structure, or a minority owner crafting her litigation strategy would be wise to peruse this refresher.

Depending on the nature of the closely-held company—most often, a corporation or an LLC—and subject to the terms and rights set forth in the owners’ agreement, the rights of a minority owner are established both by New York’s statutory regime (for corporations, the Business Corporation Law; for LLCs, the LLC Law) and the common law.  Significant minority rights include:

The Right to Vote on Company Action / Participate in Management

Minority shareholders’ rights to participate in the management of a corporation are limited.  They can vote to elect the Board of Directors (BCL 614), vote on a merger or consolidation of the corporation (BCL 903), vote on an amendment to the Certificate of Incorporation (BCL 803), and vote on items requiring shareholder approval in the shareholders’ agreement.  Beyond those voting rights, however, minority shareholders do not have a right to be involved in the day-to-day operations of the business.

A minority member in an LLC may have more substantial management rights, depending on the nature of the LLC.  In a member-managed LLC (the default under New York law [LLC Law 401]), the members are vested with the right and ability to run the company.  Thus, a minority member in a member-managed LLC may have the independent authority to hire and fire employees, manage accounts, make payments and enter into contracts on behalf of the company.  A manager-managed LLC is more like a corporation; the members simply elect the managers, and the managers have day-to-day authority over the company.

The Right to Inspect Books and Records

Minority shareholders are entitled to inspect the books and records of corporation under both BCL 624 and the common law right of inspection.  BCL 624 allows a minority shareholder to inspect (i) annual balance sheets and income statements and, (ii) upon a proper showing, a record of shareholders and minutes of shareholder meetings.  The common law right of inspection is generally broader than the inspection rights under BCL 624—including things like company tax returns, account books, and records of subsidiaries—but it also requires a greater showing: shareholders seeking to access records under their common law rights must demonstrate that they seek them for a “proper purpose” (see this recent post discussing the proper purpose requirement).

LLC members may access an LLC’s books and records under LLC Law 1102—which allows for the inspection of member information, articles of organization, tax returns—and their common law right of inspection, which is analogous to the common law governing shareholders’ inspection rights.

The Right to Purchase Shares to Avoid Dilution

What rights does a minority owner have when a potential new investment in the company threatens to dilute the minority owner’s interest?  In pre-1997 companies, BCL 622 provides that a minority shareholder shall have the right to purchase additional shares to avoid dilution of his interest when the corporation intends to issue new shares that would adversely affect either the dividend rights or the voting rights of that shareholder.  In post-1997 companies, the BCL expressly states that a shareholder does not have preemptive rights unless they are provided for in the corporation’s certificate of incorporation.

New York’s LLC Law does not contain an analogue for BCL 622, so minority LLC owners do not have preemptive rights unless their operating agreement provides for them.

The Right to Prosecute Derivative Actions

A hallmark right of the minority owner is the right to prosecute legal actions on behalf of the company when those in control of the corporation refuse to do so.  For corporations, BCL 626 authorizes minority shareholders to commence an action on behalf of the corporation for injury to the corporation.  While the LLC law does not have an analogue to BCL 626, the New York Court of Appeals in 2008 held that an LLC member has a common-law right to sue derivative for injury to the LLC in Tzolis v. Wolff, 884 N.E.2d 1005 (2008).

A minority owner suing the majority must clearly state whether she is bringing her claims directly in her capacity as an owner or derivatively on behalf of the company; a suit that mixes or confuses direct and derivative claims is likely to be dismissed.  Whether a claim should be pled derivatively or directly depends on (1) who suffered the alleged harm (the corporation or the stockholders); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders individually.  Derivative claims include claims against management for waste, misuse of company funds, claims against management for self-dealing, breach of fiduciary duty, and claims that the company wrongly advanced legal fees.

While an indispensable tool for minority owners, the derivative action is subject to some notable limitations.  Those include the requirement of a particularized pre-suit demand, ownership of an interest throughout the litigation, and certain standing requirements.  Additionally, any recovery in a derivative suit goes to the company, not directly to the minority shareholder.  This means that many times, the economics of a derivative suit weigh sharply against minority owners.  Derivative claims are also subject to superior claims against others held by the company, and a derivative plaintiff has no right to a jury trial on her claims.

The Right to Petition for Involuntary Dissolution

A minority shareholder seeking to have the corporation dissolved has a few potential options under the BCL.  First, BCL 1104 allows a 50% owner or owners to petition for dissolution on the grounds of director deadlock precluding board action, shareholder deadlock precluding an election of directors, or because “there is internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders.”  Second, BCL 1104-a allows the holders of shares representing at least 20% of all voting shares to petition for dissolution when, inter alia: (i) the directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholders; or (ii) the property or assets of the corporation are being looted, wasted, or diverted for non-corporate purposes by its directors, officers or those in control of the corporation.  A minority shareholder holding less than 20% of the shares entitled to vote seeking to petition for dissolution must rely on the common law.  Common law dissolution requires showing that the corporation exists solely to enrich the majority at the expense of the minority, as discussed here.

If a minority shareholder seeks dissolution under BCL 1104-a, the majority has the right, pursuant to BCL 1118 to purchase all of the petitioning shareholder’s shares for fair value.

New York’s LLC law, by contrast, does not provide for dissolution in the event of deadlock or minority owner oppression.  Rather, a minority member seeking to have an LLC dissolved must show that “it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.” (LLC Law 702; Matter of 1545 Ocean Avenue, LLC, 72 AD3d 121 [2d Dept Jan. 26, 2010] [its influence on dissolution of LLCs discussed here]).  So as long as the company is (i) operating–i.e., generating revenue–and (ii) acting in accordance with its stated purpose, dissolution of an LLC is difficult to obtain.  Notably, many LLCs state in their governing documents that the LLC “is formed for any valid business purpose.”  In those cases, as discussed here, a revenue-generating LLC is exceedingly difficult to involuntarily dissolve.

Additional Limitations of Minority Owners’ Rights

A minority owner’s interest is subject to several other critical limitations, including the majority’s power to dilute ownership interests, make capital calls, expel minority owners in certain circumstances, and cash out the minority’s interest in a freeze-out merger.  We’ll unpack those and other limitations on a minority owner’s interest in a subsequent post.  For those that can’t wait, we cover all these limitations and their import in this webinar.

When a party to a contract repudiates, the non-repudiating party is faced with two options: (1) treat the repudiation as an anticipatory breach, terminate the contract and seek damages; or (2) continue to treat the contract as valid and await the time for performance before bringing suit. In a recent decision from the Suffolk County Commercial Division, Justice Elizabeth H. Emerson reminds us that a non-repudiating party must choose one or the other—a plaintiff cannot assert simultaneously a cause of action for breach of contract and anticipatory breach.

In Contract Pharmacal Corp. v Air Industries Group, Plaintiff Contract Pharmacal Corp., as sublessor, and Defendant Air Industries Group, as sublessee, entered into a sublease on May 21, 2018, for approximately 81,000 square feet of space in a large warehouse building (“Sublease Agreement”). About a month later, Defendant informed Plaintiff that it was unable to immediately deliver the entire 81,000 square foot warehouse and instead offered to deliver 31,500 square feet of “back space” with the promise of delivering the remainder of the space by the “4th quarter” of 2018. Defendant assured Plaintiff the “back space” would be available by August 3, 2018, and offered to construct a wall for the purpose of separating the “back space” from the rest of the warehouse.

Plaintiff alleges in its Complaint that based on the Sublease Agreement, it proceeded with purchasing substantial equipment and merchandise, and although Plaintiff objected to any changes to the Sublease Agreement, it needed the “back space” to store its newly purchased equipment. On August 3, 2018, Plaintiff advised Defendant that it was in breach of the Sublease Agreement and expressly reserved its rights and remedies under the Sublease Agreement, but also accepted Defendant’s offer to construct a wall to separate the “back space” under the condition that the wall was constructed at Defendant’s sole cost and expense. Plaintiff built the wall, and Defendant moved in.

Shortly after, on September 10, 2018, Defendant informed Plaintiff that “the deal has now changed” and requested the Plaintiff enter a new sublease agreement for the “back space” only, replacing the original Sublease Agreement. Frustrated by Defendant’s failure to deliver the agreed upon space, Plaintiff went elsewhere and entered into a lease in another warehouse building for approximately 50,000 square feet of space.

Plaintiff then commenced an action in the Suffolk County Commercial Division against Defendant alleging causes of action for breach of contract, specific performance, and promissory estoppel. Plaintiff subsequently sought to amend its Complaint to add a cause of action for anticipatory breach of contract, which the Court denied. Plaintiff then sought reargument.

Upon reargument, Justice Emerson adhered to her prior determination that

“a plaintiff who brings a claim for breach of contract cannot simultaneously pursue a claim for anticipatory breach.”

The Court instructed that when confronted with an anticipatory repudiation, the non-repudiating party has two options: (1) treat the repudiation as an anticipatory breach and seek damages for breach of contract, thereby terminating the contractual relation between the parties; or (2) continue to treat the contract as valid and await the designated time for performance before bringing suit. The non-repudiating party must, however, affirmatively choose between these two exclusive options; it cannot “treat the contract as broken and subsisting at the same time.” The operative factor is whether the non-breaching party has taken an action (or failed to take an action) as to indicate to the breaching party that it has made an election between his options.

In Contract Pharmacal, the Court determined that Defendant repudiated the Sublease Agreement when it advised Plaintiff it could not immediately deliver the entire premise. At that point, Plaintiff could have terminated the parties’ contractual relationship and sought damages for breach of contract. Plaintiff, however, did not take that course of action. Instead, Plaintiff accepted Defendant’s offer to build a wall and moved into the “back space.” By doing so, Plaintiff indicated to the Defendant that it was electing to treat the Sublease Agreement as valid and to await the Defendant’s performance under it. The Court held that once Plaintiff made this choice, its decision was binding with respect to that breach, could not be changed, and thus Plaintiff’s claim for anticipatory breach was barred as a matter of law.


A complaint which asserts both a cause of action for breach of contract and anticipatory breach will likely not survive the pleading stage. A non-repudiating party’s decision to either terminate a contract upon repudiation and assert a cause of action for anticipatory breach or wait until the time of performance before bringing a cause of action for breach of contract is both exclusive and binding.

What can you do when the parties you are suing are effectively judgment-proof? Oftentimes, plaintiffs will try to go after a defendant’s family member or related entity. However, as we see in a recent case from the courtroom of Manhattan Commercial Division Justice Robert R. Reed, New York courts require more than just a family connection to hold such attenuated actors liable.

The pertinent allegations in Lanaras v. Premium Ocean LLC, et al (as taken from the Complaint) are as follows: Sometime in 2013, the principal Defendant is alleged to have convinced her longtime friend (the Plaintiff) into “loaning” substantial sums to assist her and her business associates in establishing and operating a shrimp import business. Between 2013 and 2017, Plaintiff loaned a total of $3.4 million to the venture, and Defendant expanded the business into wholesale fish and retail sectors (creating two new entities, respectively).

Due, in part, to the longstanding friendship between Plaintiff and Defendant and certain oral assurances made, the parties never put the terms of the “loan” in writing.

In a twist that will surprise none of the readers of this blog, the businesses are now struggling and Plaintiff has not received repayment of any portion of the principal or interest on her loan to date. Equally unsurprisingly, Plaintiff sued her former friend, the business associates, and the corporations for various breaches of contract, fiduciary duties, unjust enrichment, and fraud-based claims.

The motion to dismiss before Justice Reed, however, concerns Defendant’s Husband, who is the principal of several successful businesses unrelated to the claims in the action. Plaintiff alleged that Defendant issued regular distributions of company assets into joint accounts shared with her Husband, and therefore, the Husband was a beneficiary of his wife’s alleged fraudulent conveyances by virtue of their joint property holdings and joint bank accounts. Plaintiff thus named Husband for unjust enrichment, fraudulent conveyances under NY DCL §273, and constructive trust.

Justice Reed granted dismissal of all three claims against the Husband.

On the unjust enrichment claim, the Court first noted the Departmental split on whether a three-year statute of limitations (Second Department) or six-year statute of limitations (First Department) should apply. The Court opted to follow the rule in the First Department and applied a six-year statute of limitations, rendering the claim timely.

But timeliness was not enough to salvage it. The Court held that while the allegations need not establish privity between Plaintiff and the Husband, they must at least “assert a connection between the parties that [is] not too attenuated” (quoting Georgia Malone & Co.). In other words, the fact that the Husband is married to Plaintiff’s longtime friend (i.e. the Defendant), alone, is not enough to establish the requisite relationship between Plaintiff and the Husband sufficient to cause reliance or inducement, warranting dismissal of the unjust enrichment claim.

The Court likewise dismissed the constructive trust claim on similar grounds. The claim requires “a confidential or fiduciary relationship, a promise, a transfer in reliance thereon, and unjust enrichment.” Again, being a “family friend”, alone, is not enough to satisfy the elements of the claim.

As for the constructive fraudulent conveyance claim under NY DCL §273, Plaintiff argued that Defendant issued regular distributions of company assets that rendered the companies insolvent (as the companies were apparently floating along on Plaintiff’s cash infusions), and transferred these distributions into joint accounts shared with her Husband. The Court found this argument unpersuasive. Even if the Husband was a beneficiary of the conveyances (assuming the alleged facts as true for the purposes of the motion), Plaintiff still failed to demonstrate that the conveyances were fraudulent. The Husband is not an officer nor holds any role in the businesses, so the conveyances cannot be viewed as “presumptively fraudulent”. Nor was it alleged that the conveyances were made for no consideration, as the Plaintiff herself acknowledged that the Husband previously made loans to the businesses.

Accordingly, the Court dismissed all claims against the Husband.

Key Takeaway

It can be tempting for a plaintiff to go after the “deep pocket”, especially when the “deep pocket” is a family member of the true targets who are effectively judgment-proof. However, courts in the Commercial Division will not allow such a claim to skate through unless there is some relationship between the “deep pocket” and the plaintiff, as well as an articulable nexus between the “deep pocket” and the alleged fraud, regardless of the legal theory under which it is framed.

Much ink has been spilled over the last couple of years, including here at New York Commercial Division Practice, on the topic of practicing law remotely in the COVID (and likely post-COVID) era.  As we all brace for the coming wave of Omicron, which may well be the fastest spreading virus in human history, let’s take a quick look at the newest ComDiv rule on the topic — Rule 37 Remote Depositions — which went into effect on December 15, 2021.

We’ve reported on the recent trend of remote depositions on at least three occasions over the last year or so, including the ComDiv Advisory Council’s September 2020 proposal for, and request for public comment on, the new rule.  As noted in the memo supporting the recommendation, in light of COVID, whereas “remote depositions were previously the exception, they are now the rule.”

But more than that, “[t]here is good reason . . . to encourage their continued use . . . after the pandemic is brought under control.”  Why?  Because, as we all have learned from experience over the last couple years, “remote depositions can be quicker, easier, less costly, and more efficient than in-person depositions.”

New ComDiv Rule 37 — which generally permits courts, “upon the consent of the parties or upon a motion showing good cause, [to] order oral depositions by remote electronic means — is accompanied at new Appendix G by a fulsome template stipulation setting forth a remote depo protocol that addresses common practical concerns regarding technology, security, private communications, and the use of exhibits.  Some key excerpts:

  • Administration of Remote Depo Services.  “An employee . . . of the [court reporting] service provider shall . . . be available at each remote deposition to record the deposition, troubleshoot any technological issues that may arise, and administer the virtual breakout rooms.”
  • Audio and Video Clarity.  “Each person attending a deposition shall be clearly visible to all other participants, their statements shall be audible to all participants, and they should each use best efforts to ensure their environment is free from noise and distractions.”
  • Communications During Questioning.  “Deponents shall shut off electronic devices . . . and shall refrain from all private communication during questioning on the record.”
  • Use of Virtual Breakout Rooms.  “Parties may use a breakout-room feature, which simulates a live breakout room through videoconference[, but c]onversations in the breakout rooms shall not be recorded . . . [and] shall be established by . . . and controlled by the [court reporting] service provider.”
  • Collaboration and Advance Troubleshooting.  “The parties agree to work collaboratively and in good faith with the court reporting [service provider] to assess each deponent’s technological abilities and to troubleshoot any issues at least 48 hours in advance of the deposition . . . [and] also agree to work collaboratively to address and troubleshoot technological issues  that arise during a deposition.”
  • Sufficient Technology.  “Counsel shall use best efforts to ensure that they have sufficient technology to participate in a [remote] deposition . . . [and] shall likewise use best efforts to ensure that the deponent has such sufficient technology.”

To be sure, given the ominosity of Omicron, the new ComDiv rule concerning remote depositions comes to us at an appropriate time.  But given the efficiencies associated with the practice that we all have discovered along the way, and with essential safeguards now in place at Appendix G, one can expect frequent and ongoing invocation of Rule 37 long after the infection curve has flattened.