New York Supreme Court Adjudicates Succession Dispute in Delaware LLC

This case summary was prepared by Jonathan Naji.

Harris v. Harris,[1] a case filed in New York, involved a declaratory judgement action determining the ownership of a 19.35% share of a New York Limited Liability Company (“Company”), following the death of one of its owners, Steven Harris (“Steven”). Plaintiffs (Steven’s wife and one of his daughters), moved for summary judgement arguing that the Company’s operating agreement transferred Steven’s 19.35% ownership interest to her. Defendants (other members of Steven’s family) opposed the motion and cross-moved for summary judgement, arguing that Steven’s will and assignment transferred Steven’s 19.35% share to them.  Additionally, Defendants cross-moved to dismiss the complaint, and for sanctions.
Finding several questions of fact concerning the assignment of Steven’s 19.35% interest, the Supreme Court denied both Plaintiff’s and Defendant’s motions and cross-motions for summary judgement. However, the Court granted in part Defendant’s cross-motion to dismiss Plaintiff’s second through fifth causes of action, and denied Defendant’s cross-motion for sanctions.       
In 1994, Steven and business partner Andrew Lichtenstein (“Lichtenstein”) formed the Company in Manhattan, New York. During this time, Steven’s ownership interests were 50%. At the time of his death on April 28, 2017, however, Steven’s ownership in the Company was 19.35%. 
Following Steven’s death, Defendants brought a related action seeking to enjoin the further distribution of any of the Company’s assets, which they claimed were being dispersed in order to dilute their purported ownership interests.  They based this claim on Steven’s will and assignment, wherein he allegedly transferred 19.35% of his ownership interests in the Company to Defendant for the remainder of her life. Plaintiffs argue that the will and assignment are void and dispute its validity.
Plaintiffs base their argument on the Company’s operating agreement entered into by Steven and Lichtenstein on December 19, 1994. The agreement sets forth the order of succession for each Company members ownership interests, and states that upon his death, Plaintiffs would receive Steven’s ownership interest.  Nonetheless, the agreement also contains many handwritten segments, some of which are illegible. Most significant, however, is where the agreement explicitly states that the text and substance of the agreement will be rewritten and finalized into a formal agreement at a later date.
Following Defendants’ related action seeking to enjoin the Company’s assets, Plaintiffs brought this action to uphold the terms of the operating agreement wherein Steven’s interests would transfer to Plaintiff despite any contrary transfer provisions contained in the will and assignment. In opposition, Defendants claim Steven had free reign to revoke his transfer to Plaintiff, and transfer his ownership interests by will or assignment.
In denying Plaintiff’s motion for summary judgement, the Court found the two affidavits submitted by the Plaintiffs in support of their motion, which each contained copies of the operating agreement, insufficient to establish entitlement to judgement as a matter of law.[2] Specifically, one operating agreement had handwritten sections and added notes, raising a question of fact as to whether more than one copy of the operating agreement exists.[3] Similarly, both copies contained one section wherein the signatory parties privy to the agreement explicitly state the agreement will be redrafted and finalized into an official agreement at a later time.[4] The Court found this to likewise raise a question of fact as to whether a formal agreement between the parties exists, as well as if the operating agreement, as it stands, was enforceable.[5]
Moreover, even acknowledging one of the submitted operating agreements as the formal agreement, the Court reasoned that a triable issue of fact would remain as to whether the transferability of Steven’s interests declared in his will and assignment would be void such that his interests would conclusively transfer to Plaintiff.[6] The Court noted that Plaintiffs “[failed] to point to any language where Steven clearly and unambiguously renounces his future power of testamentary disposition such that summary judgement would be proper.”[7]
Finding several issues of triable fact regarding the operating agreement and transferability of Steven’s interests, the Court also denied the Defendant’s cross-motion seeking to have Steven’s ownership interest transferred to them.[8] In denying their motion, the Court noted that the will and assignment, on which Defendants heavily relied in support of their argument for acquiring Steven’s ownership interests, are being disputed by Plaintiffs in a related action before the Bronx Surrogate Court, and therefore, a question of fact may arise as to will and assignments validity.[9]            
The Court granted Defendant’s cross-motion to dismiss for Plaintiff’s second through fifth causes of action, holding that said causes of action all seek judgement in favor of Plaintiff both individually and derivatively, “demonstrating an impermissible mixing of individual and derivative claims.” [10] Regarding Defendant’s cross-motion for sanctions, the Court briefly concluded “that the conduct of plaintiffs does not merit the imposition of sanctions,” and denied the motion.[11]

[1] (Harris v. Harris, 2020 NY Slip Op 31570[U] [N.Y. Supr. 2020])  
[2] (Harris, 2020 NY Slip Op 31570[U], *3)   
[3] Id.  
[4] Id. 
[5] Id; see also Joseph Martin, Jr. Delicatessen, Inc. v. Schumacher, 52 NY2d 105 (1981) (“Mere agreement to agree, in which material term is left for future negotiations is unenforceable”). 
[6] (Harris, 2020 NY Slip Op 31570[U], *4)    
[7] Id.  
[8] Id.
[9] Id.  
[10] Id. at *6; see also Abrams v. Donati, 66 NY2d 951 (1985); Glenn Hoteltron Sys. Inc., 74 NY2d 386 (1989).  
[11] (Harris, 2020 NY Slip Op 31570[U], *6)