New York Applies Business Judgment Rule in LLCs

 New York Applies Business Judgment Rule in LLCs

The New York Appellate Division, in Levine v. Levine, 590 N.Y.S.2d 439 (1^st Dept. 1992), held that the deferential standard of the business judgment rule as applied to corporate directors and officers (Matter of Kenneth Cole Prods., Inc. Shareholder Litigation, 32 N.Y.S.3d 551 (2016)) would apply equally to “partners acting as fiduciaries.”

Recently, in Pokoik v. Steinberg, 2026 N.Y. Slip. Op, 246 A.D.3d 597 (1^st Dept. Feb. 19, 2026), affirmed the application of the business judgment rule in the context of the managers of an LLC. The blessedly short opinion provides:

The business judgment rule “provides that[ ] where corporate officers or directors exercise unbiased judgment in determining that certain actions will promote the corporation’s interests, courts will defer to those determinations if they were made in good faith”). As relevant here, partners acting as fiduciaries are entitled to the same protections as corporate directors. The deference afforded by the business judgment rule is not applicable where the challenged transaction is affected by an inherent conflict of interest, in which case the burden shifts to the defendant to prove the fairness of the challenged transaction.

Here, Supreme Court properly applied the business judgment rule where the shareholders, including plaintiffs, held roughly equal interests in the tripartite ownership structure made up of three entities holding their interests in the property, and no individual held a controlling position in nominal defendant Norsel Realties. Plaintiffs fail to submit credible evidence that defendants received any profit or other financial benefit that was not received by other shareholders in connection with their proportional ownership interest, nor that defendants were controlled or dominated by an interested party.

The setting of the ground rent at issue here was properly ratified under Norsel’s articles of partnership, which provide that partnership decisions only require a simple majority. The eighth amendment to the ground lease specifically contained the option for three lease extensions, including the first renewal embodied in the ninth amendment. It is undisputed that plaintiff Leon Pokoik was involved in the management of the three entities when the eighth amendment was executed in 1995, without any objection from him. Further, he financially benefitted from his interest in the three entities before and after the contemplated April 30, 2016 expiration date of the partnership. Thus, Norsel is not precluded from abiding by the terms of the ninth amendment and continuing the business of the partnership, at least through the expiration of the ninth amendment. Based on the foregoing, plaintiffs’ reliance on for the proposition that unanimous consent was required to extend the Norsel partnership past April 30, 2016, before executing the ninth amendment, is misplaced.

Because the business judgment rule applies here, it is unnecessary to reach the parties’ arguments as to entire fairness review.

(citations omitted).

The Silva decision from Nevada (Silva v. Clay, 2025 WL 2085356 (Nev. Dist. Ct. 2025).in which the BJR was applied is on appeal.  The decision of Judge Gall is reviewed in  "Miller and Rutledge Are Right," a posting here from last June.  No doubt more to follow.

Beware Greeks Bearing Gifts

 Beware Greeks Bearing Gifts

      Today marks the anniversary of the traditional Fall of Troy in 1184 B.C., as calculated by Eratosthenes, thereby bringing to its culmination the Trojan War.  

      The Fall of Troy is not recounted in Homer’s Iliad, the iconic epic, it rather covering only a period of ten days to two weeks within the supposed ten-year span of the war.  The Fall of Troy through the subterfuge of the Trojan Horse is briefly mentioned in the Odyssey and is referenced in several other Greek sources. (a/k/a The Homeric Cycle).  Keep in mind that Homer lived in the 8^th century Before the Common Era, so his stories were crafted hundreds of years after their supposed historical happenings.

But come now, change the theme, and sing of the building of the horse of wood, which Epeius made with Athena's help, the horse which once Odysseus led up into the citadel as a thing of guile, when he had filled it with the men who sacked Ilios. 

Homer, Odyssey, Book 8, Line469.

The story would not find, however, its full development until book II of Virgil’s Aeneid, it written just before the Common Era.

      Some modern historians have attempted to explain the story as an allegory, suggesting that an earthquake – Poseidon, whose portfolio included horses, was as well the god of earthquakes – was the reason for the fall of Troy’s walls.  Others have suggested the “sea horse” was a disguised tribute ship left at Troy with the same effect.  I, for one, would rather retain the literal interpretation as it affords more credit to Odysseus, said to be the wisest of the Greeks and according to certain legends the son of Sisyphus.  FYI, a new movie on Odysseus is in the works for release in 2026, and a new translation of the Odyssey, it by Daniel Memnelsohn, was released last year.

      Regardless it is a great story, especially the fall of Achilles to Paris after the former killed Hector after he killed Patroclus.  Speaking of which, the movie Troy misstated the story, likely because they wanted to keep Brad Pitt on the screen.  Achilles was killed before the fall of Troy; he never entered the city.  That is not the biggest problem with the movie vis-a-vis the books, but it is a big one.

            Some might consider the Trojan War to be ancient history.  It’s all matter of perspective.  At the time of the Fall of Troy the Egyptian civilization had been flourishing already for 2000 years, and the Great Pyramid of Cheops was nearly 1400 years old.

The Transformation of LLC Interests at Death

 The Transformation of LLC Interests at Death

A recent decision from Virginia highlights the transformation that happens to an LLC interest at death, in this case vacating a decision as to a post-death redemption.  Paul A. Galiotos v. Stavros P. Galiotos, 2026 WL 932636 (Va. App. April 7, 2026).

Irene Galiotos, mother of Paul and Stravos as well as a third brother Tasos, passed away. Her will provided that her 35.8% interest in Executive Cove, LLC (Tasos was the only other member with 64.2%) to her revocable trust for which all three brothers were beneficiaries. Tasos, seeking to interrupt that transfer, sought to affect a redemption by Executive Cove of Irene’s interest in Executive Cove, replying upon section 10.4 of the LLC’s operating agreement, it providing:

A Member who wishes to Transfer his or her Company Interest, in whole or in part, to a person who is not already a Member, or who has reason to believe that an involuntary Transfer or a Transfer by operation of law is reasonably foreseeable (an “Offering Member”), shall first offer such Company Interest (the “Offered Interest”) to the Company and the other Members on the terms set forth below. 2026 WL 932636, *3.

While the trial court held that Tasos redemption pursuant to this provision was valid, it was reversed on appeal.

 Parsing the language of the operating agreement, the Court of Appeals noted that upon Irene’s death her interest became that of an assignee, a bare economic right stripped of the right to participate in the LLC’s management.  To that end:

Prior to her death, Irene held a 35.8% company interest in the LLC, as shown on the schedule. But at the time of her death, Irene’s interest was only that of a membership interest with assignee rights rather than a company interest. Pursuant to the Virginia Limited Liability Company Act (“the LLC Act”), Irene was dissociated from Executive Cove upon her death. See Code § 13.1-1040.1(7)(a) (providing that “a member is dissociated from a limited liability company upon ... [t]he member’s death”). Further, under the LLC Act, “the dissociation of a member shall not affect the membership interest held by ... the former member’s successor in interest. The ... successor in interest shall continue to hold a membership interest and shall have the same rights that an assignee of the membership interest would have under subsection A of [Code] § 13.1-1039.” Code § 13.1-1040.2(A). In turn, subsection A of Code § 13.1-1039 provides limitations on the rights given to the holder of an assignment of an interest: an assignee is not entitled “to participate in the management and affairs of the limited liability company,” but is entitled “to receive, to the extent assigned, ... any share of profits and losses and distributions to which the assignor would be entitled.” Id. (footnote omitted).

And here is why that matters; section 10.4 of the operating agreement triggered a ROFR upon a transfer of a “Company Interest,” and upon Irene’s death what had been her “Company Interest” became an assignee interest; there was no ROFR as to an assignee interest so Tasos’ redemption was invalid and set aside.

Broadly speaking, operating agreements need to be precise in the terminology employed, especially with bespoke defined terms, and to the extent a right of redemption of the interest of a former member is to be provided for, the transformation of the character of an LLC interest upon death or other event of disassociation needs to be addressed.