If you Google the names Edward Kalikow and Eugene Shalik, you’ll notice a distinct pattern in the search results dating before and after 2006. Before that date, you’ll come across numerous trade publications trumpeting significant real estate development projects across the country involving Messrs. Kalikow and Shalik as longtime, successful, Long Island-based business partners. But after 2006, pretty much all you’ll find are numerous court decisions in multiple, nasty lawsuits between the two gentlemen and their affiliated entities fighting over all sorts of matters big and small. So what happened in 2006?
As best as I can glean from the public record, that’s the year Kalikow’s mother died, leaving behind a will naming Shalik as executor and apparently giving a good portion if not the bulk of her estate, including valuable real estate partnership interests left to her by her late husband, to a charitable foundation of which Shalik is trustee. Kalikow’s subsequent challenge to the will’s disposition of the partnership interests, alongside a host of other business disputes precipitated by the poisonous atmosphere, evolved into a litigation juggernaut still going strong after eight years of zigzagging through surrogate’s court, civil court, tax court, arbitration and appellate tribunals.
One of the more recent legal spats, involving a single-asset realty company owned by the two of them 50/50, led to an interesting decision earlier this year by Nassau County Commercial Division Justice Vito M. DeStefano in which the court addressed the question whether the non-managing member of a New York limited liability company owes any fiduciary duty to the LLC or its other members. The court’s decision in Kalikow v. Shalik, 2014 NY Slip Op 24099 [Sup Ct, Nassau County Feb. 26, 2014], also considered whether a common-law claim for contribution exists when one of two LLC members, both of whom personally guaranteed the LLC’s mortgage debt, voluntarily pays down a portion of the debt to avoid a default.
Background
In 1997, using funds loaned by Kalikow’s mother, Kalikow and Shalik formed 7001 Brush Hollow Road LLC as co-equal members to purchase and own a two-story office building and long term ground lease in Westbury, New York. Shalik’s accounting firm occupied offices on one floor and a separate business owned by Kalikow occupied the other floor.
In 1998, the LLC refinanced the property with a $1.3 million bank loan personally guaranteed by Kalikow and Shalik. The LLC failed to pay the $950,000 balance when the loan matured in January 2013. The following month the bank wrote to Kalikow and Shalik indicating its willingness to extend the loan on condition the bank receive a principal pay-down of approximately $234,000 and stating that the bank had not yet declared an event of default but reserved the right to do so “at any time in the future.” The LLC did not have sufficient funds for the pay-down.
Kalikow requested a 5-year loan extension which the bank turned down allegedly after Shalik disclosed that his accounting firm was not renewing its lease that expired around April 2013. Kalikow also demanded that Shalik put up half the $234,000 pay-down, which Shalik refused to do. Instead, Kalikow paid the entire $234,000 himself and secured a 9-month extension.
In August 2013, after Shalik’s accounting firm left the building, Kalikow brought suit in his own and the LLC’s name against Shalik. The complaint (read here) asserts two claims, the first for contribution for half the $234,000 paid to the bank by Kalikow, and the second seeking unspecified damages for breach of fiduciary duty for failing to timely advise, and instead to affirmatively mislead, Kalikow of Shalik’s intention not to renew his accounting firm’s lease, and impeding the re-letting of the space.
In October 2013, Shalik filed a pre-answer motion to dismiss the complaint for failure to state a claim and based on the terms of the bank loan documents. Kalikow opposed and cross moved to convert the motion to one for summary judgment and entering judgment in Kalikow’s and the LLC’s favor on both claims. (Read here and here Shalik’s and Kalikow’s respective memoranda of law.)
The Court’s Dismissal of the Fiduciary Breach Claim
Justice DeStefano begins his analysis by noting that the LLC’s barely legible operating agreement (good luck reading here) designates Kalikow as managing member with “sole discretion” to manage the LLC’s affairs, which, parenthetically, explains why Kalikow as 50% member unilaterally was able to bring suit in the LLC’s name. Thus Shalik, the court further notes, “is a non-managing member of the LLC.”
While “New York caselaw is replete with cases demonstrating that a managing member of an LLC has a fiduciary duty to other members of the LLC,” Justice DeStefano continues, the same is not true for non-managing members. “Noticeably absent from the Limited Liability Company Law,” including § 409 which defines the duties of an LLC manager, “is any concomitant duty on a non-managing member.” Emphasizing rules of statutory construction, he concludes that Kalikow’s claim for fiduciary breach against a non-managing member must be dismissed, writing as follows:
Given the Legislature’s intent to specifically omit any duty of good faith or loyalty on behalf of a non-managing member of an LLC, coupled with the fact that the operating agreement gives Kalikow the sole discretion to manage the business and affairs of the LLC, the court concludes that the second cause of action asserting that Shalik, as a non-managing member, breached his fiduciary duty to the LLC and to Kalikow fails to state a cause of action and, therefore, must be dismissed.
The Court’s Dismissal of the Contribution Claim
Kalikow’s contribution claim, predicated on Shalik’s joint and several liability under their personal guaranty of the bank loan to the LLC, fares no better. “To sustain a claim for contribution,” Justice DeStefano observes, “a guarantor must establish the existence of a shared obligation to pay (common liability) and payment of more than his or her proportionate share.”
In this case, Kalikow had no obligation to pay the $234,000 to the bank because the bank never declared a loan default and never made demand upon the guarantors to perform the LLC’s repayment obligation, as required by the express terms of the loan guaranty. Because Kalikow had no obligation to pay, Justice DeStefano finds, “Shalik cannot be obligated to contribute any amount toward the payment made by Kalikow” and, accordingly, the “cause of action for contribution must be dismissed.”
Takeaways:
- The court’s refusal to acknowledge a fiduciary duty of a non-managing LLC member is no surprise, and is consistent with case law from other jurisdictions and with New York precedent to similar effect in cases involving passive minority shareholders of closely held corporations.
- The Kalikow case, as have other cases previously highlighted on this blog, underscores the tension between the separate sets of rights and obligations that exist as between, on the one hand, the co-owners of the realty entity and, on the other hand, as between the realty entity and a tenant entity with overlapping but non-identical ownership. Best practice is to avoid the temptation of an undocumented or “friendly” landlord-tenant relationship by entering into a standard, formal lease on terms negotiated at arm’s length.
- The bare-bones operating agreement in this case has no provision authorizing a capital call, much less setting forth consequences for failing to make a required capital contribution. Had such provisions been included, Mr. Kalikow would have been in a much stronger position to induce Mr. Shalik to put up his half of the bank loan pay-down.