644 B.R. 75
Bankr. S.D.N.Y.2022Background
- 305 East 61st Street Group LLC (the Debtor) owned a Manhattan building being converted to condominiums; four members (61 Prime LLC/Prime, Little Hearts, Thaddeus Pollack, Onestone) held membership/assigned-floor rights under an Operating Agreement. Prime (50%) is controlled by Jason Carter; Little Hearts held rights to several floors and a ground-floor lease/sublease with a spa.
- Disputes among members produced parallel state-court actions in 2018; Prime obtained an ex parte TRO removing Little Hearts as manager. The Debtor later filed Chapter 11 in June 2019; Carter formed Lazarus 5, which later purchased the Building at a bankruptcy sale.
- The Chapter 11 Trustee ran a Section 363 sale and confirmed a liquidating plan that transferred all causes of action of the Debtor to a Creditor Trust and vested standing to pursue estate causes of action in the Creditor Trustee.
- Little Hearts filed an action in state court against Carter and Prime alleging breach of fiduciary duty, breach of contract, alter-ego, unjust enrichment, and related claims; defendants removed the action to the bankruptcy court and moved to dismiss for lack of standing under Rule 12(b)(1).
- The bankruptcy court held that almost all claims alleged by Little Hearts were derivative (injuries to the Company/estate affecting all members) and therefore belong to the estate/Creditor Trust; Little Hearts lacked standing and the complaint was dismissed. The plaintiff’s motion to remand/abstain was denied as moot.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Little Hearts has federal standing to pursue the claims | Little Hearts contends its injuries arise from rights in the Marks Units and unique harms (e.g., lease/sublease interference) and are direct and personal | Defendants argue the alleged harms are to the Company/estate and thus derivative; only the trustee/creditor trustee may pursue them | Court: most claims are derivative; Little Hearts lacks standing; complaint dismissed for lack of subject-matter jurisdiction |
| Whether the Operating Agreement rights (Marks Units) are separable property giving direct claims | Little Hearts: Marks Units rights confer distinct, personal injury and recovery would flow to Little Hearts | Defendants: Marks Units reflect equity/membership interests; proceeds flow first to Company per Operating Agreement, so injury is to the Company | Court: Marks Units were membership interests tied to the Debtor; harms flow from injury to Company and are derivative |
| Whether Lease/Sublease or wrongful removal as manager give independent direct claims | Little Hearts: Lease/Sublease interference and removal as manager are individualized harms | Defendants: Those allegations are embedded in the same mismanagement narrative and benefit all members; largely derivative | Court: Lease/Sublease and manager-removal may contain narrow individualized elements, but claims as pled are conflated with derivative harms; only removal-as-manager claims narrowly pleaded as individual may survive in principle; otherwise derivative |
| Whether the case should be remanded/abstained to state court | Little Hearts sought remand/abstention arguing claims are purely state-law direct claims | Defendants: Removal was proper; court should decide threshold standing; if dismissed, remand motion is moot | Court: Because complaint dismissed for lack of standing, remand/abstention motion denied as moot |
Key Cases Cited
- In re Gucci, 126 F.3d 380 (2d Cir. 1997) (standing is a threshold question in federal cases)
- Steel Co. v. Citizens for a Better Env't, 523 U.S. 83 (U.S. 1998) (court must address jurisdictional issues before merits)
- St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688 (2d Cir. 1989) (turn to state law to determine whether claims belong to estate; trustee stands in debtor’s shoes)
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (two-part test for direct vs. derivative claims: who suffered harm and who receives recovery)
- Yudell v. Gilbert, 949 N.Y.S.2d 380 (N.Y. App. Div. 2012) (New York applies Tooley framework to distinguish direct and derivative claims)
- Serino v. Lipper, 994 N.Y.S.2d 64 (N.Y. App. Div. 2014) (claims that affect all shareholders proportionally are derivative)
- In re Granite Partners, L.P., 194 B.R. 318 (Bankr. S.D.N.Y. 1996) (trustee has exclusive standing to pursue estate causes of action)