Monday, August 27, 2018

Special Litigation Committee For New York LLC Rejected; Standing In The Shadow of Obeid

Special Litigation Committee For New York LLC Rejected;
Standing In The Shadow of Obeid

      In the New York decision, it rejected the appointment of a Special Litigation Committee (“SLC”) made up of an outside attorney. The operating agreement vested managerial authority in a manager, and the controlling operating agreement did not provide for the appointment of outsiders to an SLC. LNYC Loft, LLC v. Hudson Opportunity Fund I, LLC, 154 A.D.3d 109, 57 N.Y.S.3d 479 (2017).
      The underlying dispute involves the complicated facts giving rise to direct claims, which had already been litigated for some five years, and then newly added derivative claims. After the derivative claims were filed, the managing members of the LLC on whose behalf they were brought decided to appoint a Special Litigation Committee comprised of an independent attorney, Mark Zauderer. There is no suggestion that he was biased or unqualified or not independent. Rather, this dispute arose as to whether an outside party could be appointed as the SLC. It was held that Mr. Zauderer may not serve as the SLC because he is neither a member or a manager of these subject companies, and the related operating agreements did not authorize his appointment.
      In substance, the operative operating agreements did not provide for the delegation of decision-making authority either to another member or to an outsider.
            The agreements are explicit that while day-to-day management is vested in the manager, “major decisions” need the consent of the other members. We reject the argument that the appointment of the SLC (as opposed to the ultimate decision as to whether to proceed with the derivative litigation) was not a “Major Decision” within the meaning of the agreements. The SLC was specifically granted the authority to “determine the positions and actions that the Companies should take with respect to the claims, considering, among other things, whether the claims have merit, whether they are likely to prevail, and whether it is in the company’s best interests to pursue them.” 154 A.D.3d at 115, 57 N.Y.S.3d at 483.
       The court went on to note that there is nothing inherently improper in appointing an SLC, and that an operating agreement could provide that an independent third-party would constitute that SLC. In this instance, however, the operating agreement did not so provide.

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