Tuesday, January 3, 2012

New York Court Sidesteps Question of Promoter Liability

New York Court Sidesteps Question of Promoter Liability
In a recent decision, the New York Court of Appeals sidestepped the question as to whether the promoters of an LLC, prior to its formation, undertake fiduciary obligations to the investors.  Roni LLC v. Rachel L. Arfa, et al., 2011 WL 6338906.
The promoters of the LLCs in question solicited investments, primarily from Israelis, for the purpose of acquiring residential buildings in the Bronx and Harlem districts of New York for the purpose of renovation and resale.  Those promoters did not disclose to the potential investors that they were paid commissions of up to 15% of the property purchase prices from the sellers and mortgage brokers, payments that had the effect of inflating the purchase prices.  The investors filed a complaint for a variety of causes including breach of fiduciary duty.  In turn, the promoters argued that the fiduciary duty claim should be dismissed “because no fiduciary relationship existed between the promoter defendants and the plaintiffs before the formation of the limited liability companies.”  Slip op. at 2-3.  The decision does not explain the mechanism by which the properties were acquired prior to the formation of the subject LLCs.
On the basis that, with respect to a motion to dismiss, the complaint is to be liberally construed and all allegations contained therein assumed to be true, the Court held that the complaint adequately pled a fiduciary relationship that could not yet be dismissed.
The question as to whether promoters have fiduciary obligation with respect to the investors prior to the LLC’s formation remains to be decided another day.

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