David Feldman's book, Reverse Mergers: Taking a Company
Public Without an IPO, now in its third printing, was published in 2006
by Bloomberg Press (available on http://www.amazon.com).
View David Feldman's reverse merger blog at www.reversemergerblog.com.
Joseph Smith and David Feldman are coauthors of PIPES:
Revised and Updated Edition - A Guide to Private Investments in Public Equity
(Bloomberg Press, 2005) available on http://www.amazon.com.
In the News
Eric
Weinstein referenced in an article on
the Appellate Division Panel's approval
of LLC actions in the New York Law Journal
on Friday, February 9, 2007.
Despite
Absence of Statutory Authority, Panel
Approves LLC Derivative Actions
By
Daniel Wise
Breaking
with its sister court across the East
River, the Appellate Division, First
Department, ruled yesterday that members
of limited liability corporations have
standing to bring derivative actions
on behalf of their companies even though
no New York statute expressly authorizes
such lawsuits.
Writing for a unanimous panel, Justice
George D. Marlow held that minority
members have standing to sue even though
a provision that would have given minority
members standing apparently was purposefully
dropped to win passage of the Limited
Liability Law in 1992.
The ruling allows minority members of
a limited liability corporation, which
owned a 184-room single occupancy hotel
on Manhattan's Upper West Side, to pursue
claims that title to the building at
316 W. 95th Street should be restored
to their limited liability company,
Pennington Property Company LLC.
Holders of a majority interest
in the 95th Street hotel approved a
sale of the property in 2005 for $1.9
million, "a price considerably below
fair market value," according to Eric
S. Weinstein, the minority plaintiffs'
lawyer.
Both the trial judge, Justice Herman
Cahn, and the First Department panel
sustained plaintiffs' claims for damages
on a breach of fiduciary duty. But to
pursue a claim for the return of the
property, Mr. Weinstein, of Feldman
Weinstein & Smith, said the minority
members had to bring a derivative action
because the deed was in the name of
the limited liability corporation.
The panel in Tzolis v. Wolff,
108353/05, which consisted of Justices
Marlow, Peter Tom, Milton L. Williams,
James M. Catterson and Bernard J. Malone,
overturned Justice Cahn's ruling dismissing
the derivative claims.
Kenneth M. Block of Thelen Reid Brown
Raysman & Steiner, who represents
the largest shareholder in the corporation,
said he could not comment because he
had not yet reviewed the decision with
his clients.
Tackling the question of whether limited
liability corporation members have standing
to bring derivative actions for the
first time in the First Department,
Justice Marlow concluded that there
is "no reason" to deprive members of
limited liability companies of that
"important right." The right to bring
derivative lawsuits is unquestionably
held by members of limited partnerships
and corporations, he noted.
Limited Liability corporations are a
blend of two other business structures,
he reasoned, and there is "nothing inherent"
in the nature of a limited liability
corporation which would justify treating
its members differently.
Because the right to bring a derivative
action was recognized in the common
law, Justice Marlow wrote, the absence
of a "specific statutory grant is not
fatal to plaintiffs' derivative claims."
The panel recognized that the Legislature
"apparently purposefully dropped a
provision from the limited liability
corporation law that would have authorized
derivative actions.
Justice Marlow called commentary that
the provision was dropped to win passage
of the statute a "seductive" basis for
concluding, as the Second Department
did in Hoffman v. Unterberg,
9AD3d 386 (2004), that limited liability
corporation members are not authorized
to bring derivative suits.
But he concluded that the common law
right to bring derivative suits is too
deeply rooted to be trumped by inferences
drawn from the legislative history.
A finding that the legislative history
withdrew a pre-existing common law right,
he wrote, would be "at odds with the
long-standing rules of statutory construction
requiring a clear expression of legislative
intent to overrule a common law principle."
