Business Divorce Cases of 2025

For the third consecutive year, this column features an important appellate decision—this time by the First Department—rejecting treatment of an estate fiduciary of a deceased member of a limited liability company as an assignee, holding only an economic interest, and instead recognizing the fiduciary’s right to assert the decedent’s
full membership rights including the right to seek judicial dissolution.

Last year also witnessed several other novel rulings involving LLCs in which courts applied the demand-futility exception to an equitable accounting claim, invalidated a capital call on the ground of estoppel, and opened the door a crack to enforcement of anti-dissolution provisions in operating agreements.

Also highlighted in this year’s column is a case demonstrating the lurking power of the “except as otherwise provided herein” proviso in owner agreements.

Estate Representatives of Deceased LLC Members Gain Management Rights

Cases concerning the scope and extent of statutory and contractual management rights of estate representatives of deceased owners in closely-held businesses are no stranger to this long-standing annual column, particularly in the context of limited liability companies.

On the one hand, LLC Law §603’s default rule provides that a transferee of an assigned membership interest holds an interest that is strictly economic in nature, entitling the “assignee” to receive “the distributions and allocations of profits and losses to which the assignor would be entitled,” while at the same time prohibiting the transferee from “participat[ing] in the management and affairs of the…company or to become or to exercise any rights or powers of a member.”

On the other hand, under LLC Law §608—which does not include the “except as provided in the operating agreement” proviso identifying it as a default rule—an executor or administrator of a deceased member’s estate “may exercise all of the member’s rights for the purpose of settling his or her estate or administering his or her property, including any power under the operating agreement of an assignee to become a member” (italics added).

Two Appellate Division, Second Department decisions previously featured in this column broke new ground in different procedural contexts, the first by permitting a non-member estate fiduciary to pursue judicial dissolution of an LLC under LLC Law §702 (Andris v. 1376 Forest Realty, LLC, 213 AD3d 923 [2d Dept. 2023]), and the second by upholding the voting rights of a non-member estate fiduciary based on provision in the operating agreement tracking the language of §608 (Weinstein v. Wallace, 231 AD3d 187 [2d Dept. 2024]). Neither decision offered any analysis beyond reference to §608’s terms.

Last year, in Matter of Bodenchak (242 AD3d 592 [1st Dept. 2025]), the First Department offered guidance missing from the Second Department precedents. There, a member of a real-estate holding company petitioned for dissolution of the company under LLC Law §702. When the member died during the pendency of the proceeding, his wife as executor of his estate moved to be substituted as petitioner in place of her late husband.

The motion court granted the wife’s motion, and the respondents appealed, arguing both that under LLC Law §603 an estate fiduciary is an “assignee” without standing under §702 and that the authority granted an estate fiduciary to exercise member rights “for the purpose of settling [the estate]” does not extent to the power to seek judicial dissolution.

The First Department made short work of the respondents’ arguments on appeal. In rejecting the argument that only a member has standing to seek dissolution under LLCL §702, the court pointed to the plain language of the statute, holding that §702 “provides that a dissolution action may be brought ‘on application by or for a member,’” and that “Petitioner’s application was made for decedent, a member of respondent [company]” (italics added).

The court further clarified that under §608, “[d]ecedent’s right to pursue dissolution passed to his estate upon his death, and the dissolution proceeding is necessary to settle his estate and distribute the proceeds from the sale of the apartment owned by [LLC].”

Future cases will test if the breadth of the court’s holding in the context of an existential dissolution proceeding augurs well for enforcement of estate fiduciary rights in non-existential circumstances, such as proceedings to inspect books and records under LLC Law §1102 and prosecution of derivative claims, and whether such matters surpass the outer limits of “for the purpose of settling the estate.”

Voting Rights of Deceased Majority Shareholder’s Estate Fiduciary Fall Prey to Shareholders Agreement

Standing to assert management rights of the holder of a deceased business owner’s interest also took center stage in P.J. Restaurant Inc. v. Dauber (2025 NY Slip Op 32569[U] Sup Ct, NY County 2025]). Dauber involved a close corporation that operated in a famous red-sauce Italian restaurant opened in 1908. Under a 2017 shareholders agreement, the restaurant business was controlled by 55% shareholder Paul Dauber as sole director, president, and treasurer.

Following Dauber’s death in 2023, the minority shareholders signed a “Written Consent of Board and Shareholders” appointing themselves director/ officers, and admitting Dauber’s widow “as a nonvoting shareholder of the company,” the latter in reliance on Section 8.2 of the shareholders agreement stripping deceased shareholders of voting rights.

They then sued in the corporation’s name against Dauber’s widow as administrator of her late husband’s estate, asserting claims against the decedent for self-dealing, managerial abuse, failure to make distributions, and the like. The estate moved to dismiss on the ground the written consent was invalid and the corporation therefore lacked capacity to sue. The estate relied on Section 5.1 of the shareholders agreement, requiring “the affirmative vote of the holders of the majority of the shares issued by the company to appoint a new director,” and argued that because the estate administrator was excluded from voting, there was no board of directors.

The company countered by pointing to Section 8.2 of the shareholders agreement providing that “no voting right or management authority in the company shall pass with the deceased shareholder’s interest,” and arguing that the company did not need the estate’s vote or authorization to bring the case. The corporation also highlighted the fact that Section 5.1 was prefaced by the proviso, “except as otherwise set forth in the agreement,” and therefore was subordinated to Section 8.2.

The court sided with the corporation’s “better reading of the two provisions,” finding that Section 5.1’s proviso rendered it “subject to modification by other provisions”—namely, §8.2, which “removed any voting right [the estate] may have received from [the decedent],” thereby allowing the corporation to “validly [choose] a new director and ha[ve] the capacity to bring this action.”

Rulings on Equitable-Accounting Claims and Other Novel Issues

In yet another squabble over the management of food establishments, in Tarro v. Amadei (238 AD3d 552 [1st Dept. 2025]), the First Department issued a novel ruling on the requirements of a claim for an equitable accounting brought by an outside minority member in an LLC that operated a SoHo deli.

Tarro involved allegations like those in Dauber, in which the minority owner asserted that the “inside majority owners” misappropriated company profits, took bonuses and other payments when the company was operating in the red, and refused to disclose company financial and tax records. These and other allegations of wrongdoing formed the basis of the minority’s claim for an accounting—an equitable claim essentially requiring a business partner to demonstrate in detail how they managed money or property belonging to the business—which is conditioned upon the existence of an underlying fiduciary relationship between the parties and a pre-suit demand for the relief requested.

The minority owner ultimately sought summary judgment on his claim. The motion court granted the motion despite the absence of a pre-suit demand, finding that the minority was excused from making such a demand under the theory of “demand futility.”

The demand-futility rule, more commonly associated with derivative actions under BCL §626, generally excuses non-control owners from, and allows them to plead around, the requirement that they “secure the initiation of such action by the board” when the adversary nature of the parties’ relationship would render such demand futile.

On the majority owners’ appeal, the First Department affirmed, upholding the motion court’s extrapolation of the demand-futility rule from the BCL §626 context to the equitable-accounting context, and finding that the motion court “properly rejected defendants’ argument that plaintiff was obligated to submit a pre-suit demand for an
accounting, as plaintiff’s substantiated allegations sufficiently establish demand futility.” Put another way, a minority owner’s “allegations of self-dealing and misconduct are sufficient to negate the necessity of a pre-suit demand” in support of a claim for an equitable accounting.

In another novel ruling last year, the court in Gurewitsch v. Korff (2025 Slip Op 32431[U] [Sup Ct, NY County 2025]) sua sponte applied an estoppel theory to a manager’s efforts to enforce a capital call provision in an LLC agreement governing a major real-estate development.

Gurewitsch involved the acquisition and development of a multi-unit condominium in the Riverdale section of the Bronx over the course of 20-plus years, which, according to the complaint filed by the minority-member plaintiffs in 2020 ultimately failed because of self-dealing and other mismanagement by the majority-member entities controlled by the “non-member manager” defendant.

The non-member manager counterclaimed, alleging among other things, that his entities were forced to loan the project more than $16 million between 2007 and 2018, more than half of which remained outstanding in early 2024 when he issued a capital call to the minority members under the parties’ operating agreement seeking reimbursement of the minorities’ share of the balance.

Among other counterclaims, the non-member manager asserted a claim for “breach of contract against the minority members for their alleged failure to make capital contributions under the operating agreement.”

The operating agreement’s capital-call provision on which the Non-Member Manager relied provided that “[t]he members shall make such capital contributions…to the company as the non-member manager deems appropriate from time to time”; that “the members shall, upon written notice from the non-member manager, make additional capital contributions pro rata in accordance with their membership interests”; and that in the event any member fails to do so, “one or more of the remaining
members may advance the sums needed, and such sums shall be considered a loan to the company…and shall be repaid.”

The minority members moved to dismiss the non-member manager’s counterclaim based on a separate provision in the operating agreement providing that “the members are not liable for the debts of the company.” The court granted the minority members’ motion and dismissed the nonmember manager’s counterclaim based on his belated capital call, acknowledging the provision of the operating agreement cited by the minorities but sua sponte advancing its own rationale for dismissal based on an estoppel theory:

Years later, [the Non-Member Manager] made a hindsight asymmetrical demand for reflective payment. At this later date and for this purpose, this simply can no longer be said to be a legitimate capital call made pursuant to the terms of the operating agreement. At this later date, the “capital call” was to share the loss of his unilateral investment decision. As such, it is impermissible.

Finally, in what may prove to be the most consequential ruling in the business-divorce space from last year, the Second Department in TZ Vista, LLC v. Helmer (235 AD3d 691 [2d Dept. 2025]), arguably put an appellate stamp of imprimatur on the enforceability of an anti-dissolution provision in an operating agreement. Or did it?

TZ Vista involved another real-estate development venture gone awry, resulting in litigation between two member-managers in a three-member LLC in which one manager sued the other on behalf of the company seeking to enforce a purchase option in the parties’ operating agreement, and the other countersued for dissolution under LLCL §702 based on various allegations of “frustration of purpose” and “disagreement and deadlock between the parties.” The operating agreement contained two
anti-dissolution provisions in which the members “specifically” and “irrevocably” waived any right to seek or otherwise cause the judicial dissolution of the company.

At the summary-judgment stage, the motion court found for the plaintiffs on their claim for specific performance and rejected the defendant-manager’s bid for dissolution as conclusory and lacking in evidentiary support. The court made no mention of the anti-dissolution provisions in the operating agreement.

On appeal, the Second Department affirmed, expressly referencing in a short, two-sentence paragraph at the outset of its discussion of the defendant-manager’s dissolution claim one of the two anti-dissolution provisions in the operating agreement: “[T]he members of [the company] waived their right to seek judicial dissolution of
[the company]. Specifically, they waived their right to ‘file a complaint, or to institute any proceeding at law or in equity, to cause the termination, dissolution, or liquidation of [the company].”

Had the court concluded its discussion there, perhaps there would be less of a question about the precedential nature of its holding regarding the enforcement of anti-dissolution provisions in an operating agreement.

Instead, the court went on at greater length to offer its affirmance under the statutory and case-law standards of LLC dissolution found in Matter of 1545 Ocean Ave., LLC (72 AD3d 121 [2d Dept. 2010]), and its progeny. “In any event,” concluded the court, “even if the members of [the LLC] had not waived their right to seek dissolution of [the LLC], the defendants failed to demonstrate, prima facie, that the purpose of [the LLC] had been frustrated or that continuing [the LLC] had become financially feasible.”

Given prior court precedent regarding public policy concerns with contractual anti-dissolution provisions, including in the Second Department (see, e.g., Matter of Validation Review Associates, Inc. (223 AD2d 134 [2d Dept. 1996]) and Schimel v. Berkun, 264 AD2d 725 [2d Dept. 1999]), TZ Vista’s apparent hedge on the ultimate enforceability of such provisions is understandable. The importance of the issue for LLC members, the lower courts, and those who draft LLC agreements begs more definitive appellate guidance.

Reprinted with permission from the March 18, 2026 edition of The New York Law Journal © 2026 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.