AMF Trust Ventures LLC, et al. v. 180 Group LLC, et al.
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Attorneys and Parties
Brief Summary
Private investment fund and Delaware limited liability company (LLC) governance, specifically whether former LLC members may pursue derivative claims after being withdrawn from the entities.
The Supreme Court, New York County granted plaintiffs leave to file a second amended complaint asserting, among other things, derivative claims.
The Appellate Division reversed the order granting leave to amend and denied the motion to file the second amended complaint.
The proposed amendment was palpably insufficient because plaintiffs lacked standing under Delaware law to bring derivative claims on behalf of the management entities. Under 6 Del. C. § 18-1002 [in a derivative action brought on behalf of a limited liability company, the plaintiff must be a member at the time of suit and at the time of the challenged transaction], plaintiffs were no longer members when they sued, and neither the reorganization exception nor the narrow fraud exception applied.
Background
Between 2017 and 2020, plaintiffs bought Class B interests in defendants i80 Group LLC and i80 Group Lending Opportunities GP LLC, now known as i80 Group Specialty Finance GP LLC, which the court referred to collectively as the Management Entities. The LLC agreements were governed by Delaware law and addressed how management fees and incentive revenue from the fund would be distributed to Class B members. Defendant Marc Helwani, the Manager of the Management Entities, later accepted a $450 million investment from nonparty Iconiq Capital and placed it into a new fund with a new manager and general partner. Helwani offered plaintiffs the chance to roll over their investment into the new structure, but at a reduced share of revenues. Plaintiffs objected, and Helwani then exercised contractual discretion to require their complete withdrawal from the Management Entities. Plaintiffs, along with another Class B member in a separate suit, then asserted direct and derivative claims.
Lower Court Decision
The Supreme Court, New York County permitted plaintiffs to file a second amended complaint. In doing so, it allowed plaintiffs to attempt to pursue derivative claims despite defendants' contention that plaintiffs no longer had standing once they ceased to be members of the Delaware LLCs.
Appellate Division Reversal
The Appellate Division unanimously reversed on the law, with costs, and denied leave to amend. It held that standing to sue derivatively is governed by the law of the state of organization, here Delaware. Because it was undisputed that plaintiffs were no longer members of the Management Entities when they filed suit, they failed Delaware's continuous ownership requirement. The court rejected plaintiffs' reliance on the fraud exception because they did not plead facts showing the transaction was consummated solely to strip them of derivative standing. It also rejected any proposed third exception based on an allegedly ultra vires expulsion, reasoning that standing is a threshold issue and cannot depend on a later merits determination about whether the expulsion was proper.
Legal Significance
The decision reinforces that New York courts will strictly apply Delaware derivative-standing rules to Delaware LLCs. It underscores the continuous ownership requirement as a threshold standing doctrine, confirms that the fraud exception is narrow and cautiously applied, and declines to recognize an additional exception based on allegations that the plaintiff's removal from the entity was unauthorized.
Former members of a Delaware LLC generally cannot maintain derivative claims after losing their membership status, and they cannot avoid that rule merely by alleging their expulsion was wrongful unless they fit within Delaware's recognized, narrow exceptions.