Sajust, LLC v. Mendelow:  Fiduciary Duties in Shareholder and LLC Derivative Suits


Breach of fiduciary duty questions often arise in shareholder derivative actions.  These lawsuits involve a shareholder of a corporation who files suit derivatively—that is, on the corporation’s behalf rather than in her own individual capacity—to recover for some alleged wrong done to the corporation itself.  In such cases, the directors of the corporation often have conflicted interests and may even have participated or acquiesced in the wrongdoing.  The mechanism of a derivative suit allows aggrieved shareholders to bring a lawsuit on the corporation’s behalf that these compromised directors likely would refuse to bring themselves.  These principles are not limited to corporations but also apply to other forms of corporate governance, including limited liability companies. 

The Appellate Division, First Department, recently issued a decision that clarifies when individual shareholders have standing to bring a derivative action.  In Sajust, LLC v. Mendelow, 198 A.D.3d 582 (1st Dep’t 2021), the court affirmed the dismissal of the plaintiff’s complaint on the ground that the plaintiff lacked standing to bring a breach of fiduciary duty claim in its individual capacity where that claim was truly derivative in nature.

The plaintiff, Sajust, LLC (“Sajust”), was a member of FGLS Equity, LLC (the “LLC”), a limited liability company.  Sajust alleged that it sustained damages in its own, individual capacity because of the diminution in value of its capital account with the LLC.  As the court explained, such a capital account is “akin to the value of shares in a corporation.”  Id. at 583.  On this basis, Sajust commenced an action alleging an individual (as opposed to derivative) claim for breach of fiduciary duty.

The Appellate Division rejected Sajust’s position, and upheld the dismissal of its claim.  Specifically, the court held that Sajust lacked standing to bring a claim individually that really belonged to the LLC—and was thus derivative in nature.

The court applied legal standards that govern derivative claims in the context of traditional business corporations.  In so doing, the court endorsed the application of these standards to limited liability companies.  As the court explained: 

Under New York law, a shareholder lacks standing to pursue a direct cause of action to redress wrongs suffered by the corporation. Rather, such claims must be asserted as derivative claims, for the benefit of the corporation. In determining whether a claim is derivative or direct, a court should consider (1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually).

Id. at 582.

Here, Sajust failed to satisfy this test because claims seeking recovery for the loss in value of a capital account in a limited liability company (or shares of a corporation) “are derivative, even if the diminution in value derives from a breach of fiduciary duty.”  Id. (citing Serino v. Lipper, 123 A.D.3d 34, 41 (1st Dep’t 2014) (“The lost value of an investment in a corporation is quintessentially a derivative claim by a shareholder.”)).  In other words, even where another member of a limited liability company owes the plaintiff a fiduciary duty, that plaintiff cannot successfully assert a breach of fiduciary duty cause of action if the only harm it sustained as a result of the defendant’s conduct was the reduction in value of the plaintiff’s investment in the company.

This case is a helpful reminder that members of limited liability companies, like shareholders in corporations, will face dismissal of their breach of fiduciary duty claims where they only suffer a loss in value of their investments.  These claims belong to the company or the corporation, respectively, not to the individual account holder or shareholder.