Is Your LLC Manager Acting in Bad Faith? New York Fiduciary Duty Claims Explained

You own 35% of a Long Island City warehousing LLC. Your managing member handles operations, signs the checks, and controls the books. Over the past year you've noticed three things: a new "consulting" entity owned by his brother is suddenly invoicing the company, his salary jumped 40% without a vote, and the most profitable client you brought in is now being serviced by a side company he formed in Delaware. When you ask questions, you get silence. This is what a managing member breach of fiduciary duty in New York looks like, and it's one of the most common business disputes we see in the five boroughs and on Long Island.

The good news is that New York law gives non-managing members real leverage. The bad news is that the strongest claims get lost when members wait too long, frame the case wrong, or trust their gut instead of building a paper record. This guide walks you through what duties your manager owes you, how courts evaluate self-dealing, what you can recover, and the procedural traps that quietly kill otherwise strong cases.

What fiduciary duties does a managing member owe in a New York LLC?

A managing member of a New York LLC owes the company and its members fiduciary duties of loyalty, care, and good faith — the same kind of duties a trustee owes a beneficiary. New York courts treat managing members like corporate directors when it comes to self-dealing, usurping company opportunities, or putting personal gain ahead of the entity. That fiduciary status is the foundation of every claim discussed below.

The statutory baseline appears in LLCL § 409, which requires managers to perform their duties in good faith and with the degree of care that an ordinarily prudent person in a like position would use under similar circumstances. New York courts have repeatedly held that, separate from any statute, managing members owe traditional common-law fiduciary duties to the LLC and its members. It is well established that a fiduciary must act with "undivided and undiluted loyalty." The Second Department applied that rule to LLC managing members in Salm v. Feldstein, 20 A.D.3d 469 (2d Dep't 2005), and the First Department reinforced it in Pokoik v. Pokoik, 115 A.D.3d 428 (1st Dep't 2014), where the court refused to let an operating agreement quietly eliminate the duty of loyalty.

Here's what most non-lawyer LLC members don't realize: New York has a substantial number of active business entities on file with the New York Department of State Division of Corporations, and the vast majority of LLCs are governed by short, generic operating agreements that don't customize fiduciary duties at all. That means the default common-law rules govern your relationship — and those rules are far more protective than members realize until a dispute starts.

Can the operating agreement reduce or eliminate these duties?

Sometimes, but not entirely. LLCL § 417 lets members structure many aspects of their relationship by agreement, and well-drafted operating agreements can narrow the scope of duties or pre-approve certain related-party transactions. But New York courts will not enforce a clause that effectively eliminates the duty of loyalty or insulates a manager from his own bad faith. We covered this in detail in our post on three operating agreement traps that can cost New York business owners millions, and it's worth reading before you assume your agreement waives anything important.

What are the most common managing member self-dealing patterns in NYC LLCs?

The most common patterns we see across Manhattan, Brooklyn, Queens, and Nassau County fall into four recurring buckets: related-party contracts, diverted business opportunities, undisclosed compensation increases, and asset stripping before a sale or dissolution. Each one is a textbook fiduciary breach when done without proper disclosure or member approval.

Related-party contracts are the most frequent. A managing member quietly hires his spouse, brother, or wholly-owned LLC to provide "consulting," "management," or "marketing" services to the company. The fees are above market and the deliverables are vague. In a Bronx contracting LLC we recently saw, a managing member was paying his cousin's "equipment rental company" $18,000 a month for trucks the company already owned outright.

Diverted opportunities are the second pattern. A managing member learns of a profitable contract through the company — a developer client, a wholesale customer, a real estate deal — and routes it instead through a side entity he owns. This is a classic breach. It doesn't matter that the side entity is technically a different company; what matters is that the opportunity belonged to the LLC and the manager appropriated it for himself.

The third pattern is undisclosed compensation. The manager raises his own salary, gives himself bonuses, or starts billing the company for personal expenses without telling other members. The fourth is asset stripping in anticipation of a buyout or dissolution — moving valuable contracts, employees, or intellectual property to a new entity so the LLC's value collapses right before a valuation is done. We discuss the valuation consequences of this tactic in our piece on LLC buyout valuation in New York, and it's a tactic courts have grown sophisticated about catching.

How do you prove a breach of fiduciary duty claim in New York?

To prove a breach of fiduciary duty claim in New York, you need to show three elements: a fiduciary relationship existed, the manager breached his duty, and the breach caused damages or unjust enrichment. The first element is usually easy because managing members are fiduciaries as a matter of law. The second and third elements are where cases are won or lost — and they're won with documents, not with feelings.

The first practical step is getting the records. New York gives non-managing members a statutory inspection right under LLCL § 1102, which entitles you to tax returns, financial statements, member lists, and copies of the operating agreement. If your managing member refuses, you can file a special proceeding to compel production. Our deep dive on forcing disclosure under LLCL § 1102 walks through exactly how that process works, and it's usually the first move in any serious fiduciary case.

Once you have records, the evidence builds itself. General ledgers show related-party payments. Bank statements show personal expenses. Email and text production through discovery shows the opportunities that were quietly redirected. In one Queens dispute we handled, three years of QuickBooks history revealed $640,000 in payments to a vendor that didn't exist outside the manager's personal LinkedIn.

If the harm was to the company rather than to you individually, the claim usually has to be brought derivatively — meaning you sue on behalf of the LLC rather than for yourself. LLC members have standing to bring derivative actions even though the LLC statute doesn't expressly authorize them. We unpack the strategic difference between direct and derivative claims in our post on LLC derivative actions in New York, and getting that distinction right at the pleading stage matters enormously — courts dismiss claims weekly for being filed in the wrong posture.

What remedies can you recover from a breaching managing member?

You can recover money damages, disgorgement of the manager's ill-gotten gains, a constructive trust over diverted assets, an accounting, removal of the manager, and in serious cases judicial dissolution of the LLC. New York courts treat fiduciary breach cases as equitable in nature, which means judges have broad discretion to craft remedies that fit the misconduct.

Money damages compensate the LLC for what it lost. If the manager diverted a $400,000 contract, the company is entitled to the lost profits on that contract. New York requires lost profits to be proven with reasonable certainty rather than speculation, a principle we cover in detail in our post on lost profits damages in New York breach of contract cases.

Disgorgement is sometimes more valuable than damages. Under longstanding New York law, a faithless fiduciary forfeits any compensation he earned during the period of disloyalty — even compensation for legitimate work. This "faithless servant" doctrine can let you claw back salary, bonuses, and distributions the manager received while he was breaching. In high-comp cases that figure can dwarf the actual measurable damage to the business.

A constructive trust is the right remedy when the manager used company assets or opportunities to acquire something specific — a piece of real estate, a contract, an interest in a side entity. The court declares that the manager holds the asset in trust for the LLC and orders him to transfer it. An accounting forces the manager to formally lay out every dollar that came in and went out during a defined period, which often surfaces additional wrongdoing.

Removal and dissolution are nuclear options. A court can remove a managing member for cause, and in severe cases dissolve the LLC under LLCL § 702 when continued operation is "not reasonably practicable." The leading case is Matter of 1545 Ocean Avenue, LLC, 72 A.D.3d 121 (2d Dep't 2010), which established the modern framework for evaluating dissolution petitions. We walk through that standard at length in our piece on the "not reasonably practicable" standard for LLC dissolution. In practice, the threat of dissolution often produces a negotiated buyout, which is usually a better outcome than years of litigation. If you're being squeezed out of management and distributions, our companion guide on minority LLC member freeze-outs covers the tactical sequence for getting back in the room or getting cashed out.

How long do you have to sue, and what procedural mistakes kill these cases?

You generally have three years to sue a managing member for money damages and six years to sue for equitable relief, but the actual deadline depends on what you're asking the court to do. CPLR § 214 sets a three-year limit for actions seeking purely monetary recovery, while CPLR § 213(1) provides a six-year residual period that New York courts apply to fiduciary claims seeking an accounting, constructive trust, or other equitable remedy. The discovery rule can extend deadlines for fraud-based claims, but it's not a savior — courts apply it narrowly.

Three other procedural mistakes kill otherwise strong cases. First, members file individually when they should file derivatively, or vice versa. Second, they fail to plead fraud-based theories with the particularity required by CPLR § 3016(b), which requires that the circumstances of fraud be stated in detail. We explain the particularity standard in our guide on how to plead fraud in New York business disputes. Third, they sit on their rights — continuing to accept distributions, signing tax returns, or attending meetings without objection. Courts will treat that pattern as ratification and dismiss the claim.

One last strategic point. Cases above the Commercial Division's monetary threshold get assigned to specialized judges who handle business disputes daily. Those judges move fiduciary cases faster, grant preliminary injunctions more readily, and write opinions that hold up on appeal. If the dollars justify it, you want to be there, not in a general IAS part. Our piece on preliminary injunctions and TROs walks through how to use the Commercial Division to stop ongoing self-dealing before trial.

Frequently Asked Questions

Can I sue a managing member personally, or do I have to sue the LLC?

You sue the managing member personally for fiduciary breach because the duty runs from him to you and to the company. The LLC is typically named as a nominal defendant in a derivative action so the court has jurisdiction to award recovery back to the company. The judgment is enforceable against the manager's personal assets, which is critical when the LLC itself has been drained.

What if my operating agreement has a clause waiving fiduciary duties?

Most general waivers fail under New York law. Courts will enforce specific, narrowly tailored modifications — for example, a clause that pre-approves a defined related-party contract on disclosed terms — but they won't enforce blanket language that effectively eliminates the duty of loyalty or insulates a manager from bad faith. If your agreement contains aggressive waiver language, have it reviewed before you assume it bars your claim.

Can I get the managing member removed without dissolving the company?

Yes. New York courts can order removal of a managing member for cause as a standalone equitable remedy, and many operating agreements include their own removal procedures triggered by misconduct. Removal preserves the business as a going concern while ending the manager's control, which is often the outcome non-managing members actually want — they want the company to keep running, just without the bad actor at the wheel.

How much does it cost to bring a fiduciary breach case in New York?

Costs vary widely, but a fiduciary case involving meaningful self-dealing typically runs into substantial six-figure territory through trial because of the forensic accounting, document discovery, and depositions involved. Many of these cases settle once the documents come out, which dramatically reduces total spend. At Yassi Law, we discuss fee structures and likely budgets at the consultation stage so you can make an informed decision before committing.

The bottom line

A managing member breach of fiduciary duty in New York is one of the most powerful claims a non-managing LLC member has — but it's also one of the most procedurally complex, and the wrong framing or a missed deadline can sink an otherwise winnable case. Build the paper record early, get the books under LLCL § 1102, pick the right posture between direct and derivative, and pay close attention to the statute of limitations that applies to the remedy you actually want.

If you or your business is dealing with a managing member who's self-dealing, freezing you out, or refusing to share the books, the team at Yassi Law PC is ready to help. Call us today at 646-992-2138 for a consultation.

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