MEMORANDUM OPINION & ORDER Appellant Little Hearts Marks Family II, LLP (“Little Hearts”) — an equity member of 305 East 61st Street Group LLC (“Debtor”), which is currently engaged in Chapter 11 bankruptcy proceedings — filed this appeal challenging the Bankruptcy Court’s dismissal of a Complaint filed in New York state court (and subsequently removed to the Bankruptcy Court) stating causes of action against Appellees Jason D. Carter and 61 Prime LLC.1 Specifically, the Bankruptcy Court dismissed the Complaint after finding that Appellant lacked standing to bring the causes of action. See In re: 305 East 61st Street Group LLC, 644 B.R. 75 (Bankr. S.D.N.Y. 2022). For the reasons set forth below, because the Bankruptcy Court correctly found that the causes of action pleaded in the Complaint were derivative claims — that is, claims which seek “to recover for injury to the business entity” generally, rather than for “redress for injury to [Appellant] individually,” Yudell v. Gilbert, 99 A.D.3d 108, 113 (N.Y. App. Div. 2012) — Appellant lacks standing to pursue them given the Debtor’s ongoing bankruptcy. The order of the Bankruptcy Court dismissing the Complaint is therefore affirmed. BACKGROUND The Debtor in the underlying bankruptcy proceedings, 305 East 61st Street Group LLC, owned a ten-story former warehouse building in Manhattan which was acquired for conversion into a condominium.2 The Debtor, in turn, was owned by four members: (1) 61 Prime LLC (“Prime”); (2) Little Hearts; (3) Thaddeus Pollock; and (4) Onestone 305 LLC (“Onestone”). Prime, whose sole member and manager is Jason Carter, held a 50% ownership interest in the Debtor. Little Hearts, whose principal is Mitchell Marks, held a 30% ownership interest in the Debtor and also served as its manager. Pollock and Onestone each held a 10% ownership interest. The members executed an Operating Agreement which assigned to each member specific floors of the building, and required each member to assume responsibility for payment of a portion of the mortgage on the building as part of their capital contributions to the conversion project. Compl. 22. Under those terms, Prime was required to pay 5/8ths of the mortgage, and each of Little Hearts, Pollack, and Onestone were required to pay 1/8th of the mortgage. Id. 23. The Operating Agreement also assigned a percentage of membership in the Debtor to each member in exchange for their investment, and provided that each member would have the right to acquire and retain, use, occupy, and develop one or more floors of the building, roughly equal to one floor for each ten percent of equity. Id. 28. Prime therefore acquired exclusive rights to the 4th, 5th, 6th, 7th, and 9th floors, id. 30; Little Hearts acquired exclusive rights to the “basement/cellar” and 1st floor, 2nd floor, 10th floor, and roof, id. 29; Pollock acquired exclusive rights to the 3rd floor, id. 31; and Onestone acquired exclusive rights to the 8th floor, id. 32. The Operating Agreement further set forth a priority for the distribution of proceeds in the event that a unit in the building was sold. See Operating Agreement §21.2. Under those terms, any profits that the members recognized from the sale of a unit would go first to the Debtor generally, and — only after a member’s obligations to the Debtor were fully paid — then to a member on an individual basis. The members have a particularly litigious history. See, e.g., In re 305 East 61st St. Grp. LLC, 644 B.R. 75, 78-80 (Bankr. S.D.N.Y. 2022) (detailing the years-long legal battle between the equity members for control of the Debtor). To briefly summarize: first, while under the management of Little Hearts, the Debtor brought an action against Prime in New York State court in spring 2018, alleging that Prime had refused to pay $62,500 of its original subscription to the Debtor. Compl. 39 (citing 305 East 61st Street Group LLC v. 61 Prime LLC, Index No. 652934/2018). In July 2018, Prime and its principal, Carter, brought a separate action in New York State court (hereafter, the “Prime Action”) against Little Hearts and its principal, Marks, alleging that they had violated the Operating Agreement by, among other things, misappropriating a portion of construction loan proceeds and misappropriating the unexcavated land below Debtor’s building. Id.
41-42 (citing 61 Prime LLC, et al. v. Little Hearts Marks Family II, LP, et al., Index No. 653281/2018). The court in the Prime Action issued a temporary restraining order removing Little Hearts as manager of the Debtor and substituting Prime in its place. Id. 44. Little Hearts and Marks thereafter brought an action in August 2018 in New York State court (the “Little Hearts Action”) alleging that Prime and Carter had improperly removed it as manager, and that Prime and Carter had mismanaged the property, purportedly causing violations to be issued by the Department of Buildings of the City of New York. See Little Hearts Marks Family II, LP v. 61 Prime LLC, et al., Index No. 654198/2018; see also Compl. 64. In June 2019, the fraught history of the Debtor reached a breaking point, and it filed a petition for relief under Chapter 11 of the Bankruptcy Code. Bankr. Dkt. 1. Upon the filing of the petition, both the Prime Action and the Little Hearts Action were automatically stayed, as required by 11 U.S.C. §362. In view of the equity members’ litigious history and rivaling interests regarding the Debtor’s remaining assets, the Bankruptcy Court eventually appointed Kenneth P. Silverman as the Chapter 11 Trustee to administer the Debtor’s bankruptcy estate. See Bankr. Dkt. 79 at 3 (Memorandum Decision recounting that appointment of a neutral third party as trustee was necessary because “the equity members could not agree on a path forward for the Debtor”). The Chapter 11 Trustee later filed a plan of liquidation (the “Plan”), which was confirmed by an order of the Bankruptcy Court, and which established a trust (the “Creditor Trust”) into which all of the Debtor’s remaining assets — including causes of action held by the Debtor — were transferred. Silverman, already the Chapter 11 Trustee, also assumed the role of Creditor Trustee. Following the automatic stay of the Little Hearts Action against Prime and Carter, Little Hearts then brought an adversary proceeding in the Bankruptcy Court against the Debtor seeking a declaratory judgment and injunctive relief, as well as claims asserting breach of contract and breach of implied covenant of good faith and fair dealing. In August 2019, Little Hearts also filed a proof of claim against the Debtor in its Chapter 11 proceedings in the amount of $12 million. The proof of claim included language directly tying Little Hearts’ claims against the Debtor to its existing claims against Prime and Carter: [I]f it is determined that Prime and Mr. Carter are not individually liable to Claimant for their actions or inactions, the Claimant asserts claims against the Debtor for monetary damages arising from the Debtor’s breaches of the Operating Agreement by, inter alia, failing to timely complete the Project (defined below), pay off its mortgages, and secure approval of a condominium offering plan, as expressly contemplated by the Operating Agreement; causing or permitting damage to Claimant’s condominium units and other portions of the Building (defined below); and other losses suffered by the Claimant. Bankr. Rec. 245-56, Proof of Claim at 4. In October 2019, Little Hearts then moved for the stay in the Little Hearts Action to be lifted. See Bankr. Dkt. 66. Notably, in that motion, Little Hearts acknowledged that its claims against Prime and Carter were effectively the same claims that it had also asserted against the Debtor’s estate: [Little Hearts] intends to assert claims…against Prime and Mr. Carter arising from their actions in failing to complete the Project, failing to obtain approval of the condominium offering, and permitting the Mortgage to mature without being timely refinanced or paid off. If the State Court rules in the Marks Parties’ favor on the claims or counterclaims, then Prime and Carter (and not the Debtor) will be liable for Marks LP’s damages. If, on the other hand, the State Court determines that Prime and Mr. Carter acted properly, then Marks LP’s claims against the Debtor…would continue to exist. Bankr. Dkt. 66, Mot. to Lift Stay at
