130 F.4th 272
2d Cir.2025Background
- Little Hearts Marks Family II L.P. ("Little Hearts") was a minority member of 305 East 61st Street Group LLC, formed to purchase and develop a Manhattan building into condominiums.
- 61 Prime LLC ("Prime"), managed by Jason D. Carter, was the majority member and ultimately took over management of the company.
- After management disputes, Prime sued to remove Little Hearts as manager; soon after, the company filed for bankruptcy, eventually selling the building to a Carter-controlled entity.
- The bankruptcy liquidation plan created a creditor trust with exclusive rights to pursue legal claims belonging to the estate.
- Little Hearts subsequently sued Prime and Carter for breach of fiduciary duty, aiding and abetting, breach of contract, breach of implied covenant, and unjust enrichment, seeking damages for lost investments and rights under the Operating Agreement.
- The lower courts dismissed all claims, finding them derivative and thus belonging to the estate; Little Hearts appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are breach of fiduciary duty and aiding/abetting claims derivative estate property? | Little Hearts claims direct harm due to loss of contractual rights and ouster as manager. | Prime and Carter argue these are derivative, relating to harm to the company as a whole. | The claims are derivative and may only be brought by the creditor trustee. |
| Can Little Hearts assert breach of contract and implied covenant claims directly? | Little Hearts claims these rights are individual contractual rights under the LLC Operating Agreement. | Defendants argue all injuries stem from company-wide harm and thus are derivative. | These claims are direct; Little Hearts may pursue them. |
| Is the unjust enrichment claim valid alongside contract claims? | Little Hearts asserts unjust enrichment as an alternative theory for the harm. | Defendants argue it is duplicative of the contract claims. | The claim is duplicative and must be dismissed. |
| Should direct claims proceed in bankruptcy or state court? | Little Hearts argues bankruptcy court lacks jurisdiction over direct claims. | Defendants suggest the claims are related and should stay in bankruptcy court. | Remanded for bankruptcy court to determine jurisdiction and consider abstention. |
Key Cases Cited
- St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688 (2d Cir. 1989) (distinguishes derivative vs. direct claims in bankruptcy context)
- Brightstar Asia, Ltd. v. NAF Holdings, LLC, 43 F.4th 112 (2d Cir. 2022) (explains treatment of breach of contract as a direct claim)
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (articulates test for derivative vs. direct actions)
- Citigroup Inc. v. AHW Inv. P’ship, 140 A.3d 1125 (Del. 2016) (clarifies Tooley test does not apply to contract claims)
- NAF Holdings, LLC v. Li & Fung (Trading) Ltd., 772 F.3d 740 (2d Cir. 2014) (emphasizes initial question of whether plaintiff sues for individual or corporate right)
- Corsello v. Verizon New York, Inc., 18 N.Y.3d 777 (N.Y. 2012) (bars unjust enrichment claims duplicative of contract claims)
- Serino v. Lipper, 994 N.Y.S.2d 64 (1st Dep’t 2014) (addresses when direct claims are improperly conflated with derivative claims)