New York Supreme Court, Appellate Division Addresses Standing to Bring Derivative Suit on Behalf of Cancelled Delaware LLC

This case summary was prepared by Hannah Stephens.

In Favourite Limited v. Cico,[1] the New York Supreme Court, Appellate Division addressed the issue of standing concerning the ability to bring a derivative action on behalf of a Delaware Limited Liability Company (“Company”) after the cancellation of the Company’s certificate of formation under § 18-104(d) of the Delaware Limited Liability due to its failure to designate a new registered agent within thirty days.  The Court found that the Plaintiff, a member of the Company, lacked the authority to act on behalf of the Company when it obtained a certificate of revival because of the language in the Company’s Operating Agreement. 
The dispute involved alleged mismanagement of the Company and misfeasance in connection with the sale of the Company’s building.  The Plaintiffs’ claims predicated on what was done with the sale proceeds, and they sought recovery from the manager Defendants, the Cicos, for their alleged breaches of the Company’s Operating Agreement and their breaches of fiduciary duty. 
The Plaintiffs were given leave to file the second amended complaint by October 30, 2018.  On November 6, 2018, the Defendants moved to dismiss the complaint on the basis that dismissal was mandated because the Company’s claims were being prosecuted without actual authority as the Company is acting at the direction of its members instead of its managers, the claims are time-barred, and the complaint failed to sufficiently plead a claim for breach of fiduciary duty. The Defendant’s motion to dismiss the second amended complaint was denied in part, which they appealed to the Supreme Court of New York County. 
Generally, a suit may not be brought by an LLC after a certificate of cancellation is filed.[2]  In this context, a Company may not sue as a direct plaintiff, and the members may not bring derivative claims on its behalf.[3] 
The Court found that the action should be dismissed on the ground that the Company lacks capacity and standing to sue because the Plaintiff, Sirio SRL, lacked authority to obtain a certificate of revival.  The Court considered the language in the Operating Agreement, which stated, “No Member shall have the right to bind the Company in dealings with third parties. No member is an agent of the Company solely by being a member, and no Member has the authority to act for the Company solely.” [4] Therefore, while the Company could have been revived under § 18-1109(a), the Court found that the Plaintiff lacked the authority to act on behalf of the Company. 
The Court also addressed whether the outcome would be different if the Company had become a member-managed LLC.  The Plaintiffs relied on the vote to authorize the prosecution of the instant action taken between May 31 and June 30, 2018.  However, the record contained no decision by more than 50% of the members to revive the Company before its certification of formation was canceled on April 19, 2018.  
Because the Plaintiffs lack standing or capacity to bring a derivative claim on behalf of the Company, the Court found the action should be dismissed.


[1] 120 N.Y.S.3d 309 (1st Dept. 2020). 
[2] Matthew v. Laudamiel, C.A. No. 5975-VCN, 2012 WL 605589 at *21 (Del. Ch. Feb. 21, 2012).  
[3] Otto v. Otto, 974 N.Y.S.2d 54, 55 (1st Dept. 2013). 
[4] Favourite Limited v. Cico, 120 N.Y.S.3d 309, 311 (1st Dept. 2020).