On November 6, 2024, Justice Ruchelsman of the Kings County Commercial Division issued a decision in 2351 Bedford Holding, LLC v. Flatbush Funding LLC, 2024 NY Slip Op. 33984(U), holding that where an operating agreement required majority consent of the shareholders to take legal action, a shareholder could block the corporation for answering a lawsuit brought by that shareholder against the corporation, explaining:
In Sterling Industries v. Ball Bearing Pen Corporation, 298 NY 483, 84 NE2d 790 [1949] the corporation was controlled by four members and the by-laws of the corporation required a majority vote to commence any lawsuits. Upon the motion by the president of the corporation to sue the defendant which was a half owner of the corporation, the two board members who owned the defendant declined to approve the lawsuit. The court explained that the circumstances of the organization of plaintiff corporation indicate that the parties intended that the corporation should be managed by its board of directors and that the board should take no affirmative action if not sanctioned by a majority. That is the arrangement the parties intended and there is no basis on which to hold such an arrangement illegal. Had the Legislature intended to eliminate the problem of a deadlock it could have done so by the simple expedient of requiring an odd number of directors. Instead, apparently realizing the desire for equal control in some closely held corporations, it has continued to permit the election of a board of directors with an even number of directors. The fact that a deadlock may result does not necessarily mean that the present law is inadequate and that it should be remedied by the approval of presidential power where none in fact exists thus disregarding fundamental rules of agency law. There is available to the group in favor of instituting suit here the more appropriate remedy of a stockholder’s derivative action. Further, in Crane A.G. v. 206 West 41st Street Hotel Associates L.P., 87 AD3d 174, 926 NYS2d 438 [1st Dept., 2011] the court applied Sterling (supra) to bar a deadlocked corporation from defending an action. The court noted that the unavailability to a shareholder of the- remedy of mounting a defense in the right of the corporation does not require a different conclusion. The court explained that if the decision not to defend a lawsuit is a breach of the fiduciary duty then the other board members can sue for a breach of that duty. Of course, such an action can only be commenced by the board members in their individual capacities and not through their membership in Flatbush.
The defendants argue that Bedford’s refusal to grant consent to defend the action was itself a breach of its fiduciary duty as well as a conflict of interest. However, there is absolutely no support for that argument. Indeed, Sterling (supra) and its progeny specifically rejected that argument.
This conclusion does not mean a default will -necessarily be filed against Flatbush. First, the individual members of Flatbush or HPW may personally defend the action. Moreover, as noted, the individuals may assert breach of fiduciary duty claims against the plaintiff. However, Flatbush cannot defend this action without consent from the plaintiff. Since such consent has been withheld, the answer and third party action filed is unauthorized. Consequently, the motion seeking to strike the answer and third party complaint is granted.
(Internal quotations and citations omitted).