On August 2, 2022, the First Department issued a decision in Mohinani v. Charney, 2022 NY Slip Op. 04782, holding that LLC members could not prevail on direct claims for breach of fiduciary duty against the LLC’s manager because the injury they alleged was to the LLC, and thus their claims were derivative, explaining:
While the trial court correctly acknowledged that Charney owed a fiduciary duty to plaintiffs (as this Court held on a prior appeal), the court properly concluded that plaintiffs failed to establish a valid claim for breach of fiduciary duty against Charney at trial. Damages are an essential element of a cause of action for breach of fiduciary duty. In this case, all of the damages plaintiffs sought to prove and to recover upon a theory of breach of fiduciary duty — the $1.5 million in special distributions and the $1 million acquisition fee that Charney (rather than LHC) allegedly received at the closing, and the $850,000 in management fees that his company allegedly thereafter received from the LLCs — would have been losses directly suffered by LHC (the special distributions and the acquisition fee) or by the LLCs (the management fees). Therefore, plaintiffs cannot validly assert a claim to recover such damages in their own names. Rather, as the trial court recognized, such claims must be asserted as derivative claims on behalf of LHC, or as double derivative claims on behalf of the LLCs. The fact that plaintiffs were the only other members of LHC does not obviate the requirement that a claim of misappropriation of funds owed to LHC be brought derivatively. Any injury is to LHC, and any damages must be recovered by LHC. For the same reasons, regarding the fee of $850,000 paid by the LLCs in which LHC had a partial stake, plaintiffs lack standing to bring a direct claim for any breach of fiduciary duty, as Charney did not directly owe plaintiffs any duty in connection with the charging or payment of those fees, and the claim must be brought as a double derivative claim.
We reject plaintiffs’ argument that any defense based on the derivative nature of the claims at issue was waived because the defense of lack of standing was not raised under CPLR 3211(a)(3) in Charney’s answer or by a pre-answer motion to dismiss. Throughout this decade-long litigation, through their posttrial submissions, plaintiffs consistently asserted these causes of action as direct claims on their own behalf, not as derivative or double-derivative claims. It is only now, upon appeal, after the trial court has dismissed the claims for lack of the element of an injury directly suffered by plaintiffs, that plaintiffs argue that they should be permitted to pursue the claims as derivative or double-derivative claims, and to amend their complaint accordingly. Indeed, when the court and defense counsel sought clarification of the nature of plaintiffs’ claims in the months preceding trial, plaintiffs never moved to amend the complaint to plead derivative claims and argued only that Charney’s duties to plaintiffs, rather than to LHC, were breached. Plaintiffs never sought leave to replead their claims as derivative claims and thus waived their argument that they should be able to do so now.
(Internal citations omitted).