Little Hearts Marks Family II L.P. v. Carter et al

UNITED STATES BANKRUPTCY COURT 	FOR PUBLICATION
SOUTHERN DISTRICT OF NEW YORK
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In re: 	Chapter 11
305 EAST 61ST STREET GROUP LLC, 	Case No. 19-11911 (SHL)
Debtor.
---------------------------------------------------------------x
LITTLE HEARTS MARKS FAMILY II L.P.,
Plaintiff,
vs.
Adv. Pro. No. 21-01137 (SHL)
JASON D. CARTER and 61 PRIME LLC,
Defendants.
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MEMORANDUM OF DECISION
A P P E A R A N C E S:
GOLDENBERG LAW, P.C.
Counsel for Little Hearts Marks Family II L.P.
By: 	Andrew R. Goldenberg, Esq.
345 Seventh Avenue, 3 rd Floor
New York, New York 10001
STAMELL & SCHAGER, LLP
Counsel for Little Hearts Marks Family II L.P.
By: 	Jared B. Stamell, Esq.
260 Madison Avenue, 16th Floor
New York, New York 10016
ALSTON & BIRD LLP
Counsel for Jason D. Carter and 61 Prime LLC
By: 	Gerard S. Catalanello, Esq.
James J. Vincequerra, Esq.
Kimberly J. Kodis, Esq.
Geoffrey C. Williams, Esq.
90 Park Avenue
New York, New York 10016-1387
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SEAN H. LANE
UNITED STATES BANKRUPTCY JUDGE
Before the Court are two motions filed in the above-captioned adversary proceeding (the
“Adversary Proceeding”). First, the Defendants Jason Carter (“Carter”) and 61 Prime LLC
(“Prime”) have filed a motion to dismiss the Adversary Proceeding. See Mem. of Law in Supp.
Of Mot. of Def.s’ Jason D. Carter and 61 Prime LLC to Dismiss the Compl. Filed by Plaintiff
Little Hearts Marks Family II L.P. Pursuant to Rules 9(b); 12(b)(1) and 12(b)(6) of the Fed. R.
of Civ. Pro. [ECF No. 5] (the “Motion to Dismiss”).1 The Defendants argue that the Plaintiff,
Little Hearts Marks Family II L.P. (“Little Hearts”), lacks standing to pursue the allegations in
the Complaint [ECF No. 10-7],2 which was originally filed in New York State Supreme Court
(the “State Court”) during the pendency of these bankruptcy proceedings and removed by the
Defendants to this Court. See Little Hearts Marks Family II L.P. v. Jason D. Carter and 61
Prime LLC, Index No. 652410/2021. The Defendants believe that the claims asserted in the
Complaint belong to the debtor, 305 East 61 st Street Group LLC. They argue that the creditor
trustee appointed under the Debtor’s plan of liquidation has the exclusive right to pursue those
claims.
Second, the Plaintiff has filed a motion for this Court to abstain from hearing the
Adversary Proceeding or to remand the Adversary Proceeding back to the State Court due to a
lack of subject matter jurisdiction. See Mem. of Law in Supp. of Pl.’s Mot to Remand to State
Court Based on Lack of Subject Matter Jurisdiction or, in the Alternative, Principles of
1 	Unless otherwise noted, all Case Management/Electronic Case Filing (“ECF”) references are to Adv.
Proceeding No. 21-01137.
2 	The Complaint is attached as Exhibit G to the Decl. of Andrew R. Goldenberg in Supp. of Pl.’s Mot. to
Remand, Opp. to Def.s’ Mot to Dismiss and Opp. to Creditor Trustee’s Mot. for Contempt, dated July 20, 2021 (the
“Goldenberg Declaration”) [ECF No. 10].
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Abstention [ECF No. 9] (the “Remand Motion”). The Plaintiff argues that the claims asserted in
the Complaint relate to injuries that it suffered directly and that none of the claims seek recovery
for an injury to the Debtor or involve estate assets. For the reasons set forth below, the
Defendants’ motion to dismiss is granted based on a lack of standing. Given the dismissal, the
Plaintiffs’ motion to abstain or remand is denied as moot.
BACKGROUND
A. The Company
Prior to its bankruptcy filing, the Debtor operated as a New York limited liability
company (the “Company”) that consisted of four members: Prime, Little Hearts, Thaddeus
Pollack, and Onestone 305 LLC (collectively, the “Members”). Compl. ¶ 16. Prime held a 50%
ownership interest in the Company; Mr. Carter is the sole member and manager of Prime.
Compl. ¶¶ 11, 16. Little Hearts held a 30% ownership interest in the Company; the principal of
Little Hearts is Mitchell Marks (“Marks”). Compl. ¶¶ 13, 16. Onestone and Thaddeus Pollock
each held a 10% ownership interest in the Company. Compl. ¶ 16.3
The Company owned a ten-story building located at 305-307 East 61st Street in
Manhattan (the “Building”). Compl. ¶¶ 1, 14, 18. The Company’s only activity was conversion
of the Building into a condominium (the “Project”). Id. Little Hearts served as the manager of
the Company and, in that capacity, was responsible for the Project from its inception in 2016
until July 2018. Compl. ¶ 38.
The Company acquired the Building in August 2016 for $40,000,000. Compl. ¶ 18. The
purchase of the Building was financed by a $20,000,000 acquisition loan from Banco Popular
3 	Prime and Little Hearts held their interest in Class B and Onestone and Thaddeus Pollock in Class A.
Compl. ¶ 16.
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North America (“Banco Popular”), with another $21,328,000 in capital contributions by the
Members. Compl. ¶¶ 18, 20. Construction of the Project was funded through a $5,186,000
construction loan from Banco Popular and an additional $4,924,000 in capital contributions by
the Members, along with other amounts the Members contributed for renovations. Compl. ¶ 19.
The loans were secured by a mortgage held by Banco Popular (the “Mortgage”) and were
subsequently assigned to 305 East 61 st Street Lender LLC (the “Lender”). Compl. ¶ 20. The
Mortgage was guaranteed by Little Hearts and Prime and a personal guarantee was provided by
Mr. Carter and Mr. Marks. Compl. ¶ 21.
Each Member of the Company signed a Subscription Agreement and an Operating
Agreement. Compl. ¶ 22. These agreements assigned each Member a specific floor or floors in
the Building and required each Member to assume responsibility for payment of a portion of the
Mortgage as part of their capital contributions. Id.
The Operating Agreement governed management of the Company. Compl. ¶ 26. It
provided that each Member acquired exclusive use of one or more floors of the Building with the
right to “retain, use, occupy, [and] develop” those floors. Compl. ¶ 28 (citing Operating
Agreement at ¶¶ 4(F)(i)-(ii), 9(F), 9(H)).4 Little Hearts acquired exclusive rights to the
basement/cellar and the 1st floor (the “Ground Floor Unit”), the 2nd floor and the 10th floor and
roof of the Building (collectively, the “Marks Units”).5 Compl. ¶ 29. The Operating Agreement
also granted Little Hearts the right to make alterations to and/or sell, lease, sublease, assign, and
use each of their assigned floors or a portion thereof, without the Debtor’s consent and without
payment of any fees or expenses to the Debtor. Comp. ¶ 33 (citing Operating Agreement ¶
4 	The Operating Agreement is attached as Exhibit A to the Goldenberg Declaration.
5 	Prime acquired exclusive rights to the 4 th
, 5 th
, 6 th
, 7 th and 9 th floors; Mr. Pollock acquired exclusive use of
the 3 rd floor; and Onestone acquired exclusive use of the 8 th floor. Compl. ¶¶ 30-32.
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9(F)). Little Hearts asserts that it spent millions renovating the Marks Units for the purpose of
their use, lease, or sale. Compl. ¶ 34.
The Operating Agreement provides Members with a certain percentage interest in the
Company, “together with the right to retain, use, occupy, develop and acquire the condominium
units” on the floors designated to each. Operating Agreement ¶ 4(F)(i)-(ii); see also Operating
Agreement ¶¶ 9(F), 9(H). The Operating Agreement also sets out a priority for the distribution
of proceeds when a unit in the Building was sold once the condominium plan was approved. It
provides that:
All net sales proceeds realized from the sale of any Condominium Unit comprised
of any part of the Designated Portions shall be applied and paid as follows, and in
the following priority: first to the amount of the Loan allocated to such floor . . .
next to the payment of all closing expenses for the sale of such individual
condominium unit . . . next to the payment of all sums due hereunder; and the
balance, if any, to such Member. In no event shall any Condominium Unit be
conveyed unless all costs set forth above are paid.
Operating Agreement ¶ 21.2.
The Operating Agreement further granted the right to a proposed twenty-five year lease
for the Ground Floor Unit from the Company as landlord to Little Hearts as tenant. Compl. ¶ 35
(citing Operating Agreement ¶ 9(G)). This lease was entered into by the Company and Little
Hearts in August 2016 (the “Lease”); Little Hearts subsequently subleased the ground floor unit
to non-party Acqua Ancien Bath New York, Inc. (the “Spa”) for a term of 15 years (the
“Sublease”). Compl. ¶¶ 36-37. The Company consented to the sublease. Compl. ¶ 37.
B. Prepetition Litigation
In Spring 2018, the Company—under the management of Little Hearts—filed a lawsuit
against Prime in the State Court (the “Little Hearts Action”). Compl. ¶ 39 (citing 305 East 61 st
Street Group LLC v. 61 Prime LLC, Index No. 652934/2018). The Little Hearts Action asserted
that Prime had refused to pay $62,500 of its original subscription to the Company. Compl. ¶ 39.
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Then in May 2018, the Company and Defendants Carter and Prime filed an action in the
State Court against Little Hearts and Mitchell Marks (the “Prime Action”). Compl. ¶ 41 (citing
61 Prime LLC, et al. v. Little Hearts Marks Family II, LP, et al., Index No. 653281/2018). The
Prime Action asserted, among other things, that Little Hearts and Marks committed wrongful
acts and omissions of duties in violation of the Operating Agreement and sought to remove Little
Hearts as the Company’s manager. Compl. ¶ 42. In July 2018, Prime and Carter moved for a
temporary restraining order in the Prime Action on an ex parte basis. Compl. ¶ 43. The State
Court granted the request and issued a temporary restraining order that effectively removed Little
Hearts as manager of the Company and substituted Prime in its place. Compl. ¶ 44. A hearing
on a preliminary injunction was conducted by the State Court in February 2019, but the Debtor
filed for bankruptcy before the State Court issued its decision, thereby staying the Prime Action.
Compl. ¶¶ 51-54.
In August 2018, Little Hearts filed its own lawsuit against the Company and Defendants
Carter and Prime in the State Court, asserting causes of action due to alleged improper removal
of Little Hearts as manager of the Company and alleging mismanagement of the Property by the
Defendants, including actions that interfered with the Spa. See Little Heart Marks Family II,
L.P. v. 61 Prime LLC, Jason Carter and 305 East 61st Street Group LLC, Index No.
654198/2018 (the “Marks Action”), attached as Exhibit B to the Declaration of Gerard S.
Catalanello in Support of Defendants’ Motion to Dismiss Complaint (the “Catalanello
Declaration”) [ECF No. 6-2]. The Marks Action was also stayed by the Debtor’s subsequent
bankruptcy filing.
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C. Bankruptcy Filing
In June 2019, the Company filed for protection under Chapter 11 of the Bankruptcy
Code. Compl. ¶ 54. On the same day that the bankruptcy was filed, Carter incorporated a
company named Lazarus 5 LLC (“Lazarus”). Compl. ¶¶ 55, 78.
Later that month, Little Hearts commenced an adversary proceeding in this Court against
the Debtor that sought a declaratory judgment and injunctive relief as well as claims asserting
breach of contract and breach of implied covenant of good faith and fair dealings to Plaintiff with
respect to Little Hearts leasehold interest in the Building and the sublease with the Spa. See
Little Heart Marks Family II, L.P. v. 305 East 61 st Street Group LLC Adversary Proceeding
Complaint [Adv. Pro. No. 19-01297, ECF No. 1]. 6 The Debtor filed an answer that included
counterclaims. See First Amended Answer and Counterclaims [Adv. Pro. No. 19-01297, ECF
No. 10].
Little Heart also filed a proof of claim against the Debtor in the amount of $12,000,000
based on breach of contract and contractual indemnification under the Operating Agreement
arising from what Little Heart referred to as baseless claims made against it by the Plaintiffs in
the Prime Action. See Proof of Claim ¶ 4, attached as Exhibit D to the Catalanello Decl. [ECF
No. 6-4] (the “Proof of Claim”). 	Then in October 2019, Little Hearts filed a motion to lift the
automatic stay to proceed with the Prime Action and the Marks Action against the Defendants
individually. See Motion of Little Hearts Marks Family II, L.P. Pursuant to 11 U.S.C. § 362(d)
6 	The Court is permitted to take judicial notice of public filings on its own docket in a bankruptcy
case. See Fed. R. Evid. 201; Teamsters Nat'l Freight Indus. Negotiating Comm. et al. v. Howard's Express, Inc. (In
re Howard's Express, Inc.), 151 F. Appx. 46, 48 (2d Cir. 2005) (stating that courts are empowered to take judicial
notice of public filings, including a court's docket); American Tissue, Inc. v. Donaldson, Lufkin & Jenrette Securities
Corp., 351 F. Supp. 2d 79, 95 n. 17 (S.D.N.Y. 2004) ("The Court can take judicial notice of matters of public record
. . . including filings in related lawsuits. . . .") (citing Rothman v. Gregor, 220 F.3d 81, 92 (2d Cir.
2000)); Katzenstein v. VII SV5556 Lender, LLC (In re St. Vincent's Catholic Medical Centers of New York), 440
B.R. 587, 599 (Bankr. S.D.N.Y. 2010).
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for Relief from the Automatic Stay to (A) Proceed with Existing State Court Litigation Against
Non-Debtors and (B) Commence Any New Litigation Against Non-Debtors [Case No. 19-11911,
ECF No. 66] (the “Lift Stay Motion”).
Given the continued warring among the various equity holders—even after the
appointment of a new manager—the Court entered an order approving the appointment of a
Chapter 11 trustee to administer the Debtor’s bankruptcy estate pursuant to Section 1104(a)(2) of
the Bankruptcy Code (the “Chapter 11 Trustee”). See Order Appointing a Chapter 11 Trustee
Pursuant to 11 U.S.C. Sections 104(a)(1) and (a)(2); and (ii) Granting Related Relief [Case No.
19-11911, ECF No. 72]. 7 Following the appointment of the Chapter 11 Trustee, the Little
Hearts’ Lift Stay Motion was adjourned from time to time, during which period the Chapter 11
Trustee attempted to reach a resolution with the Plaintiff and the Defendants regarding
ownership of the claims addressed in the lift stay motion.8 See Motion to Dismiss ¶ 15 [ECF No.
5].
The Chapter 11 Trustee ultimately sought to sell the Building under Section 363 of the
Bankruptcy Code. See Trustee’s Motion for Entry of Order Approving (I) Purchase and Sale
Agreement Between Trustee and 305 E. 61st Street Lender LLC, (II) Break-up Fee to Be Paid to
Stalking Horse Bidder; (III) Bidding Procedures, and (IV) the Time, Date, Place and Form of
Notice for Auction and Sale Hearing [Case No. 19-11911, ECF No. 117]; Trustee’s Motion in
Further Support of the Court’s Previously Entered Bidding Procedures Order Authorizing and
Approving Sale of Property Free and Clear of Liens, Claims, Interests and Encumbrances
7 	Kenneth P. Silverman, Esq. was subsequently appointed as the Chapter 11 Trustee. See Order Approving
the Appointment of Chapter 11 Trustee [Case No. 19-11911, ECF No. 79].
8 	The Lift Stay Motion was never heard by the Court, nor has it been withdrawn by Little Hearts, despite the
eventual sale of the Building and confirmation of a plan of liquidation (as discussed below).
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Pursuant to 11 U.S.C. §§ 105(a) and 363(f) [Case No. 19-11911, ECF No. 170]. The Court
authorized the Chapter 11 Trustee to enter into an agreement for the sale of the Building to a
stalking horse bidder, subject to higher and better offers. Compl. ¶ 79; Order Approving (I)
Purchase and Sale Agreement Between Trustee and 305 E. 61st Street Lender LLC, (II) Break-up
Fee to Be Paid to the Initial Bidder; (III) Bidding Procedures, and (IV) the Time, Date, Place
and Form of Notice for Auction [Case No. 19-11911, ECF No. 148]; Order Granting Trustee’s
Motion in Further Support of the Court’s Previously Entered Bidding Procedures Order
Authorizing and Approving Sale of Property Free and Clear of Liens, Claims, Interests and
Encumbrances Pursuant to 11 U.S.C. §§ 105(a) and 363(f) [Case No. 19-11911, ECF No. 202].
An auction was conducted in August 2020, at which Lazarus was the only bidder. Compl. ¶ 70;
Notice of Results of Auction of Debtor’s Real Property [Case No. 19-11911, ECF No. 215].
Lazarus ultimately purchased the Building during the pendency of the Debtor’s bankruptcy
proceeding for approximately $50,000,000. Compl. ¶ 81; Order: (i) Approving Trustee’s Sale of
Real Property Located at 305-307 East 61st Street, New York, New York, Free and Clear of All
Liens, Claims, Encumbrances, and other Interests; and (ii) Granting Related Relief [Case No.
19-11911, ECF No. 218].
In May 2020, the Trustee filed the Chapter 11 Trustee’s Plan of Liquidation under
Chapter 11 of the Bankruptcy Code [Case No. 19-11911, ECF No. 171] (the “Plan”), which was
confirmed by the Court in August 2020. See Order Confirming Chapter 11 Trustee’s Plan of
Liquidation Under Chapter 11 of the Bankruptcy Code [Case No. 19-11911, ECF No. 219]. The
Plan created a Creditor Trust, into which the Debtor’s remaining assets were transferred,
including all causes of action held by the Debtor. See Plan at Art. V, § B(6). Specifically, the
Plan provides, in relevant part:
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On the Effective Date, the Debtor shall transfer to the Creditor Trust all of its
rights, titles, and interests in and to the Creditor Trust Assets, including, without
limitation, all Avoidance Actions and Causes of Action. For avoidance of doubt,
the Causes of Action shall be deemed to have been automatically assigned and
transferred to the Creditor Trust on the Effective Date without the need for further
conveyance or assignment document. Upon the Effective Date, the Creditor Trust
shall be deemed to be substituted for, without further order of any court, the
plaintiff in all Causes of Action. Any recoveries on account of the Causes of
Action transferred to the Creditor Trust shall be distributed in accordance
with the Plan.
See id.
Kenneth P. Silverman was appointed as a trustee of the Creditor Trust (the “Creditor
Trustee”). See Plan at Art. V, § B(6); Creditor Trust Agreement § 2.2(j) [Case No. 19-11911,
ECF No. 207, Ex. A] (the “Creditor Trust Agreement”). The Creditor Trustee was vested with
power over the assets in the Creditor Trust and was tasked with pursuing any causes of action.
See id. The Creditor Trust Agreement between the Debtor and the Trustee provides that upon
confirmation of the Plan, the Creditor Trustee is empowered:
[T]o act on behalf of the Creditor Trust in all adversary proceedings and contested
matters (including, without limitation, any Avoidance Actions and Causes of
Action) assigned to the Creditor Trust, then pending or that can be commenced in
the Bankruptcy Court and in all actions and proceedings pending or commenced
elsewhere, and to settle, retain, enforce, or dispute any adversary proceedings or
contested matters (including, without limitation, any Causes of Action) and
otherwise pursue actions involving Creditor Trust Assets that could arise or be
asserted at any time under the Bankruptcy Code or otherwise, unless otherwise
specifically waived or relinquished in the Plan. The Creditor Trust shall be
authorized to enter into settlements of Causes of Action without a hearing or
Court approval[.]
Creditor Trust Agreement § 2.2(j).
The Plan stated that all actions by creditors and interest holders involving property of the
Debtor’s estate, including claims and causes of action of the Creditor Trustee, were permanently
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enjoined.9 A section of the Plan provides for the Bankruptcy Court to retain jurisdiction over all
matters relating to the Plan and litigation involving the Debtor:
Notwithstanding the entry of the Confirmation Order and the occurrence of the
Effective Date, to the extent legally permissible, the Bankruptcy Court shall, after
the Effective Date, retain such jurisdiction over the Chapter 11 Case and all
Persons and Entities with respect to all matters related to the Chapter 11 Case, the
Debtor, the Trustee, the Creditor Trust and the Plan, including jurisdiction to . . .
[d]ecide or resolve any motions, adversary proceedings, contested or litigated
matters and any other Causes of Action that are pending as of the Effective Date
or that may be commenced in the future, and grant or deny any application
involving the Debtor that may be pending on the Effective Date or instituted by
the Creditor Trust after the Effective Date; provided that the Creditor Trust shall
reserve the right to commence actions in all appropriate forums and
jurisdictions[.]
Plan at Art. XI, § 7 (emphasis added).
In an effort to resolve the ongoing litigation and competing claims to ownership over
various causes of action, mediation was agreed to by Little Hearts, Carter and the Creditor
Trustee. But soon after that agreement to pursue mediation, Little Hearts filed this action in the
9 	With regard to the preservation of rights, including all causes of action not expressly sold, settled, or
released, the Plan states that:
EXCEPT AS OTHERWISE PROVIDED IN THE PLAN, ALL ENTITIES WHO HAVE HELD,
HOLD OR MAY HOLD CLAIMS, INTERESTS, CAUSES OF ACTION, OR LIABILITIES
AGAINST THE DEBTOR’S ESTATE, THE TRUSTEE, THE CREDITOR TRUST, AND THE
CREDITOR TRUSTEE SOLELY IN SUCH CAPACITY, INCLUDING BUT NOT LIMITED
TO ANY AND ALL PROPERTY OF THE DEBTOR AND THE CREDITOR TRUST ASSETS,
ARE PERMANENTLY ENJOINED AND PRECLUDED, FROM AND AFTER THE
EFFECTIVE DATE, FROM: (A) COMMENCING OR CONTINUING IN ANY MANNER ANY
ACTION OR OTHER PROCEEDING OF ANY KIND AGAINST ANY ENTITY ENTITLED
TO EXCULPATION UNDER THIS PLAN, ON ACCOUNT OF OR IN CONNECTION WITH
OR WITH RESPECT TO ANY CLAIMS, INTERESTS, CAUSES OF ACTION OR
LIABILITIES OF THE DEBTOR; (B) ENFORCING, ATTACHING, COLLECTING OR
RECOVERING BY ANY MANNER OR MEANS ANY JUDGMENT, AWARD, DECREE OR
ORDER AGAINST ANY ENTITY ENTITLED TO EXCULPATION ON ACCOUNT OF OR IN
CONNECTION WITH OR WITH RESPECT TO ANY CLAIMS, INTERESTS, CAUSES OF
ACTION OR LIABILITIES OF THE DEBTOR; (C) CREATING, PERFECTING OR
ENFORCING ANY LIEN, CLAIM OR ENCUMBRANCE OF ANY KIND AGAINST ANY
ENTITY ENTITLED TO EXCULPATION ON ACCOUNT OF OR IN CONNECTION WITH
OR WITH RESPECT TO ANY SUCH CLAIMS, INTERESTS, CAUSES OF ACTION OR
LIABILITIES OF THE DEBTOR. . .
Plan at Art. X, § E.
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State Court, which was then removed by the Defendants to this Court on May 14, 2021, pursuant
to Bankruptcy Rule 9027(a)(3). See Notice of Removal [ECF No. 1].
DISCUSSION
A. Legal Standard
“[S]tanding is the threshold question in every federal case, determining the power of the
court to entertain the suit.” In re Gucci, 126 F.3d 380, 387-88 (2d Cir. 1997); see also Breeden
v. Kirkpatrick & Lockhart, LLC, 268 B.R. 704, 708 (S.D.N.Y. 2001) (“Standing . . . is a
threshold issue in all cases since putative plaintiffs lacking standing are not entitled to have their
claims litigated in federal court.”). When a plaintiff lacks standing to bring a suit, the court does
not have subject matter jurisdiction to hear their claim, and this is grounds for dismissal of a
case. See Cent. States Southeast & Southwest Areas Health & Welfare Fund v. Merck-Medco
Managed Care, L.L.C., 433 F.3d 181, 198 (2d Cir. 2005) (internal citations and quotations
omitted); see also Fed. R. Civ. Pro. 12(b)(1). A court must therefore determine a plaintiff’s
standing to bring its claims prior to reaching the merits of a case. See Steel Co. v. Citizens for a
Better Env’t, 523 U.S. 83, 110 (1998).
Property of the bankruptcy estate includes “all legal or equitable interests of the debtor in
property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). A representative of the
bankruptcy estate, including a bankruptcy trustee, stands in the shoes of the debtor and therefore
has exclusive standing to assert causes of action belonging to the estate. See BRS Assocs., L.P. v.
Dansker, 246 B.R. 755, 771-72 (S.D.N.Y. 2000); see also Goldin v. Primavera Familienstiftung
Tag Assocs. (In re Granite Partners, L.P.), 194 B.R. 318, 325 (Bankr. S.D.N.Y 1996) (“Where
the trustee has standing to sue, the automatic stay prevents creditors or shareholders from
asserting the claim notwithstanding that outside of bankruptcy, they have the right to do so.”).
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But if a cause of action belongs solely to individual shareholders or creditors, the trustee lacks
standing to assert the claim. See id.; see also In re Granite Partners, 194 B.R. at 324 (the trustee
is unable to “assert the personal, direct claims of creditors for the benefit of the estate or for a
particular class of creditors.”).
A bankruptcy court turns to state law to determine which claims belong to the bankruptcy
estate. See St. Paul Fire & Marine Ins. Co. v. Pepsico, Inc., 884 F.2d 688, 700 (2d Cir. 1989).
New York law distinguishes between direct and derivative claims. “A plaintiff asserting a
derivative claim seeks to recover for injury to the business entity [while] [a] plaintiff asserting a
direct claim seeks redress for injury to him or herself individually.” Yudell v. Gilbert, 949
N.Y.S.2d 380, 383 (App. Div. 1st Dep’t 2012). Typically, a shareholder has no individual cause
of action for an alleged wrong against a business entity, even if he or she suffers injury because
of that wrong and would share in the recovery. Serino v. Lipper, 994 N.Y.S.2d 64, 68-69 (App.
Div. 1st Dep’t 2014). Since only the trustee is permitted to assert claims the debtor could have
brought before bankruptcy, the court must dismiss derivative claims that properly belong to the
bankruptcy estate. See St. Paul Fire & Marine Ins. Co., 884 F.2d at 697 (“If, under state law, a
cause of action belongs to the debtor or if rights of action exist against officers, directors and
shareholders of a corporation for breaches of fiduciary duties, which can be enforced by either
the corporation directly or the shareholders derivatively before bankruptcy, those actions are
properly asserted by the bankruptcy trustee.”) (internal citations and quotations omitted).
Some New York cases look to the test formulated by the Delaware Supreme Court in
Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), as a “clear and simple
framework to determine whether a claim is direct or derivative.” Yudell, 949 N.Y.S.2d at 381;
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see also Serino, 994 N.Y.S.2d at 66. Under this test, when determining whether a claim is direct
or derivative, a court should consider:
(1) who suffered the alleged harm (the corporation or the suing stockholders,
individually); and (2) who would receive the benefit of any recovery or other
remedy (the corporation or the stockholders, individually).
Yudell, 949 N.Y.S.2d at 384 (quoting Tooley, 845 A.2d at 1033).
The first part of the test asks whether the individual or the business entity suffered the
alleged harm. See Yudell, 949 N.Y.S.2d at 384 (citing Tooley, 845 A.2d at 1035). To maintain a
direct action, the plaintiff must allege an injury to itself independent of any injury to the business
entity. Beatrice Invs., LLC v. 940 Realty LLC, 2018 N.Y. Misc. LEXIS 2008, *25 (Sup. Ct. N.Y.
Cty. 2018); Abrams v. Donati, 66 N.Y.2d 951, 953 (1985) (“For a wrong against a corporation a
shareholder has no individual cause of action . . . . Exceptions to that rule have been recognized
when the wrongdoer has breached a duty owed to the shareholder independent of any duty owing
to the corporation wronged.”); see also Serino, 994 N.Y.S.2d at 69 (characterizing this exception
as “narrow”). The Court should “look to the nature of the wrongs alleged in the complaint
without regard to the [p]laintiffs’ designation . . . .” BRS Assocs., L.P. v. Dansker, 246 B.R. 755,
772 (S.D.N.Y. 2000). “The fact that an individual closely affiliated with a corporation is
incidentally injured by an injury to the corporation does not confer on the injured individual
standing to sue on the basis of either that indirect injury or the direct injury to the corporation.”
Patterson v. Calogero, 56 N.Y.S.3d 324, 327 (App. Div. 2d Dep’t 2017). Rather, the plaintiff
“must demonstrate that the duty breached was owed to the [plaintiff] and that he or she can
prevail without showing an injury to the” business entity. 1993 Trust of Joan Cohen v. Baum,
2017 N.Y. Misc. LEXIS 1667, at *6 (Sup. Ct. N.Y. Cty. May 2, 2017); see also Yudell, 949
N.Y.S.2d at 384 (noting that “plaintiffs’ claim for breach of fiduciary duty is derivative, because
any pecuniary loss plaintiffs suffered derives from a breach of duty and harm to the business
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entity . . . ”); Serino, 994 N.Y.S.2d at 70 (in holding claims were derivative, court noted that
plaintiff’s damages are no different from losses suffered by any other investor and claims are
supported by the same proof).10
But even where the plaintiff alleges such a breach or injury, if that claim is “confused
with or embedded in” a harm to the business entity, it cannot be maintained as a direct claim.
Serino, 994 N.Y.S.2d at 69 (noting that “claim must be factually supportable by more than
complaints that conflate [claimant’s] derivative and individual rights”); see also Abrams v.
Donati, 66 N.Y.2d at 953 (“A complaint the allegations of which confuse a shareholder's
derivative and individual rights will . . . be dismissed.”).11
The second part of the test examines whether the individual or the business entity would
receive the benefits of recovery for the alleged harm. See Yudell, 949 N.Y.S.2d at 384 (citing
Tooley, 845 A.2d at 1035). A claimant “may not obtain a recovery that otherwise duplicates or
belongs to the corporation.” Serino, 994 N.Y.S.2d at 69. In the bankruptcy context, this
consideration is especially important: When a plaintiff’s allegations would benefit all creditors,
but a plaintiff is proceeding alone, “to allow the plaintiff's actions to proceed would undercut the
general bankruptcy policy of ensuring that all similarly-situated creditors are treated fairly.” St.
10 	See also MatlinPatterson ATA Holdings LLC v Federal Express Corp., 929 N.Y.S.2d 571, 575 (App. Div.
1st Dep’t 2011) (“[C]orporations . . . exist independently from that of their shareholders, and in many cases, an
individual shareholder cannot secure a personal recovery for an alleged wrong done to a corporation. . . . The fact
that an individual closely affiliated with a corporation (for example a principal shareholder, or even a sole
shareholder), is incidentally injured by an injury to the corporation does not confer on the injured individual
standing to sue on the basis of either that indirect injury or the direct injury to the corporation. . . . However, a
shareholder can pursue a direct claim against a third party where it appears that the injury to the shareholder resulted
from the violation of a duty owing to the shareholder from the wrongdoer, having its origin in circumstances
independent of and extrinsic to the corporate entity.”) (internal citations and quotations omitted).
11 	Courts have also held that where a party’s wrong inflicts an injury to the rights of a stockholder rather than
a corporation, the stockholder may seek direct relief against that third party. See In re Granite Partners, 194 B.R. at
325. This can occur “where the allegedly wrongful conduct violates a separate duty to the complaining shareholder
independent of the fiduciary duties that the wrongdoer owes to all of the shareholders, or where the conduct causes
an injury to the plaintiff distinct from any injury to the corporation.” Id.
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Paul Fire & Marine Ins. Co., 884 F.2d at 697 (citing In re S.I. Acquisition, Inc., 817 F.2d 1142,
1153 (5th Cir. 1987)); see also Cohain v. Klimley, 2010 U.S. Dist. LEXIS 98870, at *33-34
(S.D.N.Y. Sept. 20, 2010) (“Making the pursuit of certain causes of action the sole responsibility
of the trustee in bankruptcy furthers the fundamental bankruptcy policy of equitable distribution
amount creditors.”) (citing Cumberland Oil Corp. v. Thropp, 791 F.2d 1037, 1041 (2d Cir.
1986)); Glenn v. Hoteltron Systems, Inc., 74 N.Y.2d 386, 393 (1989) (awarding damages
“directly to a shareholder could impair the rights of creditors whose claims may be superior to
that of the innocent shareholder.”).
Recovery by the business entity in these circumstances also avoids imposing the burden
of defending a multiplicity of lawsuits by every injured shareholder on the alleged wrongdoer.
See St. Paul Fire & Marine Ins., 884 F.2d at 697 (noting that “if one creditor could bring an alter
ego action outside of the bankruptcy court, all creditors could” and that staying an alter ego
action against a bankrupt corporation’s parent upon the filing of bankruptcy would “prevent a
‘multi- jurisdictional rush to judgment [and] . . . . a potential conflict in judgments’ . . .
potentially resulting in collateral estoppel problems.”) (quoting In re S.I. Acquisition, Inc., 817
F.2d at 1154). Thus, “[w]here all of a corporation's stockholders are harmed and would recover
pro rata in proportion with their ownership of the corporation's stock solely because they are
stockholders, then the claim is derivative in nature.” Otoka Energy, LLC v. State Street Bank &
Trust Co., 2019 N.Y. Misc. LEXIS 3885, at *6 (Sup. Ct. N.Y. Cty. July 10, 2019) (quoting
Feldman v. Cutaia, 951 A.2d 727, 733 (Del. 2008)); see also Yudell, 949 N.Y.S.2d at 384
(holding that plaintiffs’ claims were derivative where joint venture first receives compensation
and then plaintiffs would be entitled to receive their proportionate share). On the other hand, it
would be counterproductive to allow a trustee to control the litigation where the estate’s
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“concerns are only tangential and the estate would not share any eventual recovery.” Agostino v.
Hicks, 845 A.2d 1110, 1117 (Del. 2004).
B. Plaintiff Lacks Standing Over the Claims
As standing is a threshold issue, the Court will first address the Defendants’ Motion to
Dismiss. The Complaint asserts six causes of action against the Defendants (each a “Cause of
Action” and collectively, the “Causes of Action”): (i) Count 1 asserts a Cause of Action for
breach of fiduciary duty against all Defendants; (ii) Count 2 asserts a Cause of Action for aiding
and abetting breach of fiduciary duty against Defendant Carter; (iii) Count 3 asserts a Cause of
Action for breach of contract against all Defendants; (iv) Count 4 asserts a Cause of Action for
violation of the covenant of good faith and fair dealing against all Defendants; (v) Count 5
asserts a Cause of Action for liability as alter ego of Prime and Lazarus against Defendant
Carter; and (vi) Count 6 asserts a Cause of Action for unjust enrichment against all Defendants.
An examination of the language of the Complaint and the nature of the alleged injuries
demonstrates that the harms impacted the Debtor and/or all Members, not just Little Hearts
individually. The fundamental allegation by the Plaintiff is that the Defendants took control of
the Company, mismanaged the Company to drive it into bankruptcy, and forced a sale of the
Building to Lazarus 5. See, e.g., Compl. ¶¶ 88, 97, 106, 122. The other allegations hang on this
central narrative. For example, the alleged breaches of fiduciary duty in Count 1 include:
 	“Improperly removing Little Hearts as Manager through false representations to
the Court ex parte to obtain a TRO appointing Carter and Prime as Managers
without notice or a hearing to Little Hearts or any other Member.”
 	“Placing the Company into a Bankruptcy Proceeding and thereby staying the
TRO after learning that the state court judge was about to issue an adverse ruling
vacating the TRO.”
 	“Stopping construction at the Building, failing to renew permits, not advancing
construction during the time Defendants served as Managers, and allowing the
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condominium offering plan expire so that the other Members, including Little
Hearts, could not proceed with construction of their units.”
 	“Doing unpermitted work and dangerous work against the advice of the
construction manager and engineer that caused the New York City Department of
Buildings to issue a stop work order and halt all work including work done by the
Spa.”
 	“Allowing the Mortgage to mature so that Members would be responsible for
paying interest at the 24% default rate without calling on the Members to pay the
debt and refusing to . . . consider . . . commercially reasonable refinancing
proposals presented by Marks.”
 	“After the Mortgage matured, Carter and Prime refused to accept the funds
Members were required to pay the Mortgage pursuant to their Subscription
Agreements with the Company . . . and the Notes. . . .”
 	“On the day that Carter and Prime placed the Company into the Bankruptcy
Proceeding, forming Lazarus 5 which purchased the Mortgage from the Lender
and then forced the sale of the Building to Lazarus 5. . . . .”
Compl. ¶ 88; see also Compl. ¶¶ 97, 106, 115, 122 (placing the Company into bankruptcy,
forming Lazarus 5 and forcing the sale of the Building to Lazarus 5). But it is well established
that “[a] claim for deficient management or administration of a [company] is a paradigmatic
derivative claim.” Saltz v. First Frontier, LP, 782 F. Supp. 2d 61, 79 (S.D.N.Y. 2010) (internal
citations and quotations omitted); see also Cohain, 2010 U.S. Dist. LEXIS 98870, at *34 (noting
that claims for fraudulent conveyance, waste of corporate assets, self dealing, deepening
insolvency and breach of fiduciary duty assert rights belonging to the debtor “and could be
brought by any creditor of the Company; as such, they are the property of the debtor’s estate in
bankruptcy”) (citing cases). The Plaintiff argues that the Defendants’ reliance on the Saltz case
is misplaced because it utilizes the Tooley test for derivative standing under Delaware law. But
the Court disagrees given that New York state cases have clearly relied on the Tooley test when
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determining a direct versus derivative claim. See Yudell, 949 N.Y.S.2d at 381; Serino, 994
N.Y.S.2d at 66.12
Similarly, the other counts of the Complaint are anchored in the Defendants alleged
wrongful conduct as to the Company, with effects that impacted all Members’ rights. These
12 	Count 2 of the Complaint asserts a claim against Mr. Carter alone for aiding and abetting a breach of
fiduciary duty. The allegations against Mr. Carter in Count 2 are substantially identical to those in Count 1. See
Compl. ¶ 97. The claim of aiding and abetting cannot stand independent of the claim for breach of fiduciary duty.
See Kirschner v. Bennett, 648 F. Supp. 2d 525, 533 (S.D.N.Y. 2009) (elements of aiding and abetting a breach of
fiduciary duty include “existence of a primary violation, actual knowledge of the violation on the part of the aider
and abettor, and substantial assistance”); Marino v. Grupo Mundial Tenedora, S.A., 810 F. Supp. 2d 601, 613
(S.D.N.Y. 2011) (“Under either New York of Delaware law, a claim for aiding and abetting breach of fiduciary duty
is dependent upon the underlying breach of fiduciary duty.”); see, e.g., Horan v. Vieira, 2021 U.S. Dist. LEXIS
48421, at *23 (E.D.N.Y. Mar. 12, 2021) (“This Court has already recommended denying summary judgment on
Plaintiffs’ primary breach of fiduciary duty claim . . . . Accordingly, in the absence of a primary breach, Plaintiffs
cannot establish that there is no dispute of material fact as to the first element of their aiding and abetting claim.”).
Thus, to the extent the claims in Court 1 have been dismissed, so must the claims asserted in Count 2.
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other counts mirror Count 1, regardless of whether they sound in contract,13 alter ego,14 the
covenant of good faith and fair dealings,15 or unjust enrichment.16
13 	For example, Count 3 of the Complaint asserts a claim against the Defendants for breach of contract,
alleging that Carter, through ownership, domination and control, caused Prime to breach the Operating Agreement.
See Compl. ¶ 105. The Complaint asserts that the Defendants breached two separate sections of the Operating
Agreement, both of which relate to the Manager’s duties to the Company and/or all Members generally:
 	Paragraph 9(I), which requires the Manager, to “discharge the Manager’s duties to the Company and to the
other Members in good faith and with the degree of care that an ordinarily prudent person and an
experienced real estate developer in a similar position would use under similar circumstances.” Operating
Agreement, ¶ 9(I) (emphasis added).
 	Paragraph 9(F), which states that the Manager was “required to devote as much time as is reasonably
necessary to the management of the Company’s business to the extent of obtaining detailed proposals and
bids from subcontractor and professionals which may be necessary to perform all work required to expedite
the filing of alteration plans, obtaining municipal and utilities approvals and executing the alteration work
in order to obtain a new certificate of occupancy for a mixed use residential/commercial, as herein
contemplated and provided.” Operating Agreement, ¶ 9(F) (emphasis added).
The alleged violations in Count 3 mirror Count 1 and include:
 	“Removing Little Hearts as Manager by making false representations to the [State Court] in order to obtain
the TRO, without notice or a hearing.”
 	“Placing the Company into the Bankruptcy Proceeding, thereby staying the TRO from being vacated before
[the State Court judge] issued an order vacating the TRO.”
 	“Stopping construction of the Building, failing to renew the permits, not advancing construction at all
during the entire time Defendants served as Managers, and allowing the condominium offering plan to
expire so that the other Members could not proceed with construction of their units.”
 	“Allowing the Mortgage to mature so that Members would be liable to pay interest at the 24% default rate
and refusing to consider the commercially reasonable refinancing proposals presented by Marks.”
 	“After the Mortgage matured, refusing to enforce the Company’s rights to require Members to pay off the
Mortgage pursuant to their Subscription Agreements with the Company . . . and the Notes, which were due
and payable on the same day the Mortgage matured. . . .”
 	“After the Mortgage went into default . . . adding $23,000,000 in additional debt by accruing interest at the
24% per annum default rate and artificially causing a foreclosure proceeding which could have been
avoided.”
 	“On the day that Carter caused the Company to commence the Bankruptcy Proceeding, forming Lazarus 5,
which was created solely for the purpose of purchasing the Mortgage from the Lender and then forcing a
sale of the Building to Carter for his own personal gain . . .”
 	“Self-dealing in using Lazarus 5 to purchase the Building at the Bankruptcy sale, thereby completing
Carter’s strategy, relying on his vast wealth, through his domination and control of Prime to suffocate Little
Hearts and wipe out its equity in order to force a sale of the Building to Carter for his own personal gain.”
Compl. ¶ 106
14 	Count 5 of the Complaint states a claim against Mr. Carter alone for liability as the alter ego of Prime and
Lazarus 5. Compl. ¶ 119. The Complaint alleges that at the direction and under the control of Carter, Prime
committed several wrongs; these wrongs once again echo those set forth in Count 1 and include:
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Not surprisingly then, the damages asserted in the Complaint flow directly from the
impact of the Defendants’ actions upon the Company’s operations and are experienced by all
Members with respect to their own designated units. See, e.g., Compl. ¶¶ 92, 99 (lost
investment of capital and other costs and expenses into the Company and the rights Little Hearts
was granted in the Operating Agreement to “retain, use, occupy [and] develop” the Marks Units
and the loss of the total offering value of the Marks Units in the Building’s condominium
offering plan at the time the Building was to be completed in 2018). Said another way, the
Defendants’ alleged mismanagement of the Company—culminating in the sale of the Building to
 	Removing Little Hearts as Manager by making false representations to the State Court in order to obtain the
TRO, without notice or a hearing.
 	Placing the Company into bankruptcy, thereby staying the TRO from being vacated and avoiding an
adverse ruling from the State Court judge which prevented Little Hearts from the Company’s management,
and selling the Building so that Carter could acquire it for his own personal gain.
 	Stopping construction at the Building, failing to renew building permits, not advancing construction during
the time Carter served as Manager, and allowing the condominium offering plan to expire so that the other
Members, including Little Hearts, could not proceed with the completion of construction of their units.
 	Allowing the Mortgage to mature so that Members would be responsible for paying interest at the 24%
default rate, rejecting commercially reasonable refinancing options.
 	After the Mortgage matured, refusing to enforce the Company’s rights to require the Members to pay off
the Mortgage pursuant to their Subscription Agreements with the Company . . . and the Notes, which were
due and payable on the same day the Mortgage matured . . . .
 	On the very same day that the Company commenced the Bankruptcy Proceeding, forming Lazarus 5, for
the purpose of purchasing the Mortgage from the Lender and then forcing a sale of the Building to Lazarus
5 for Carter’s own personal gain.
Compl. ¶ 122.
15 	Count 4 asserts a claim for violation of the covenant of good faith and fair dealing against each of the
Defendants. The Complaint states that the “Defendants violated their obligations to act in good faith and fair
dealing required as Managers by acting in their personal interests, self-dealing and acting against the Company and
other Members.” Compl. ¶ 113 (emphasis added). Little Heart argues that the Defendants deprived them of the
benefits of the Operating Agreement and that the Defendants acted in bad faith and with corrupt dealing so that Mr.
Carter could purchase the Mortgage and force a sale of the Building to Lazarus 5, instead of paying the Mortgage off
as required in the Operating Agreement. Compl. ¶¶ 114-115.
16 	Count 6 of the Complaint asserts a claim against both of the Defendants for unjust enrichment. The
Complaint alleges that the Defendants engaged in wrongful and inequitable conduct that caused injury to the
Plaintiff and that, as a result, the Defendants have been unjustly enriched. Compl. ¶¶ 130-31. Echoing the other
counts of the Complaint, the Plaintiff’s unjust enrichment claim arises from the same allegations previously asserted
in the Complaint. Compl. ¶ 128. The Complaint states that it would be inequitable and unjust to allow the
Defendants to retain the Marks Units and profit from their wrongful conduct. Compl. ¶ 131.
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Lazarus 5—resulted in harm to all equity holders, including not only the Plaintiff Little Hearts,
but also Onestone and Thaddeus Pollack.17 Were each equity holder permitted to pursue their
own causes of action, it would lead to a multiplicity of suits, resulting in a race to the courthouse
and also possible issues with conflicting rulings in each suit relating to the same causes of action.
See St. Paul Fire & Marine Ins., 884 F.2d at 697 (noting that “if one creditor could bring an alter
ego action outside of the bankruptcy court, all creditors could” and that staying an alter ego
action against a bankrupt corporation’s parent upon the filing of bankruptcy would “prevent a
‘multi- jurisdictional rush to judgment [and] . . . . a potential conflict in judgments’ . . .
potentially resulting in collateral estoppel problems.”) (quoting In re S.I. Acquisition, Inc., 817
F.2d at 1154).
The language of the proof of claim filed by Little Hearts in the Debtor’s bankruptcy case
demonstrates how inextricably interwoven the causes of action in the Complaint are with the
Debtor. The proof of claim clearly echoes the allegations of corporate mismanagement in this
Adversary Proceeding:
[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 . . . and other losses suffered by the
Claimant.
17 	The same is presumably true for equity holder Prime. The Complaint’s theory is that the equity holder of
Prime—Jason Carter—set up a separate company of Lazarus 5 to reap the benefit of the Defendants’ actions by
purchasing the Building. As a technical matter, however, Prime is a separate corporate entity from Lazarus 5, with
its own creditors in any bankruptcy proceeding. Like all other equity holders, Prime lost its investment in the
Company. While Lazarus 5 ultimately purchased the Building in this bankruptcy proceeding, the sale was run by
the Chapter 11 Trustee—an independent third-party with its own fiduciary duties to the Debtor’s estate—and the
sale was open to all bidders.
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Proof of Claim ¶ 5, attached as Exhibit D to the Catalanello Decl. The overlap is further
demonstrated by Little Hearts’ motion to lift the automatic stay as to the Defendants, which
stated that:
[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.
Lift Stay Motion ¶¶ 27-28 (emphasis added).
For all these reasons, the Court finds that the vast majority of the claims asserted in the
Complaint are derivative and Little Hearts lacks standing to pursue them. As derivative claims,
the causes of action belonged to the Debtor and pursuant to the terms of the Debtor’s plan and
the Creditor Trust Agreement, are now vested with the Creditor Trust. Standing lies with the
Creditor Trustee to pursue these claims on behalf of all creditors of the Debtor’s estate. The
terms of the Debtor’s confirmed plan explicitly enjoin Little Hearts from pursuing any claims
that belong to the Creditor Trust. See Plan at Articles V and X and Section 2 of the Creditor
Trust Agreement.
A few of the Plaintiff’s arguments are worthy of comment. The Plaintiff argues that the
injuries they assert flow from their specific rights in the Marks Units, citing to the provisions in
the Operating Agreement granting Little Hearts the right to “retain, use, occupy [and] develop”
its designated floors. See Memo. of Law in Opp. to Def.s’ Mot. to Dismiss at ¶ 15 [ECF No.11].
The Plaintiff argues that the Creditor Trustee does not have standing to assert the claims in
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question because he does not have a right to the Marks Units. See id. at 2 and ¶¶ 7, 9. 18 But the
Court disagrees. The Marks Units were not distinct property rights or interests separate from the
Plaintiff’s investment in the Debtor.
Rather, the Marks Units (and each other Members’ designated units) represented an
agreement amongst the Members to reflect their membership interests in the Debtor. See
Operating Agreement § 5 (“The respective percentage interest of the Members (the ‘Percentage
Interests”) of the Company shall be as set forth in Exhibit ‘A’. Each Member’s Initial Capital
Contribution consists of the amount described on Exhibit ‘A’ as ‘Initial Contribution , and as to
the Others [sic] Members, the payment of such Initial Contribution shall be made simultaneously
with the execution hereof.”). The Operating Agreement provided that Little Hearts
shall and is hereby granted a 20% Percentage Interest in the Company, together
with the right to retain, use, occupy, develop and acquire the condominium units
consisting of the (i) basement/cellar and first floor, and (ii) 10th floor and roof, of
the Building, which Percentage Interests, shall be set forth on Exhibit “A”
annexed hereto.
Operating Agreement § 4(f)(i); see also Operating Agreement § 4(f)(ii) (granting Prime a 50%
Percentage Interest and the same rights with respect to the fourth, fifth, sixth, seventh and ninth
floors of the Building). The other Members held similar rights as shareholders to their own
designated units in the Building and all experienced the same injuries with respect to the alleged
mismanagement of the Company and the loss of their interests in the Debtor. Indeed, the
Complaint notes that the rights relied upon by the Plaintiff were essentially same for all
Members.19 See Compl. ¶ 28 (citing Operating Agreement at ¶¶ 4(F)(i)-(ii), 9(F), 9(H)). See,
18 	The Plaintiff also maintains that, to the extent the allegations of the Complaint also relate to harm to the
Debtor, Little Hearts does not allege or seek recovery based on such allegations. See Memo. of Law in Opp. to
Def.s’ Mot. to Dismiss at ¶ 16.
19 	The Court notes that several of the cases relied on by Little Hearts in support of its argument for standing
involve cases in which a shareholder was somehow treated in a different manner from other shareholders, resulting
in direct injury to that shareholder that is distinct from other shareholders. See, e.g., In re Harbinger Cap. Partners
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e.g., Vaughan v. Standard Gen. L.P., 63 N.Y.S.3d 44, 45-6 (App. Div. 1st Dep’t. 2017)
(“Because the alleged injury—a lost opportunity to realize a premium on the share price—affects
all shareholders, not only plaintiff and the putative class, these claims are derivative, rather than
direct.”); Otoka Energy, LLC v. State Street Bank & Trust Co., 2019 N.Y. Misc. LEXIS 3885, at
*6 (Sup. Ct. N.Y. Cty. July 10, 2019) (“Where all of a corporation's stockholders are harmed and
would recover pro rata in proportion with their ownership of the corporation's stock solely
because they are stockholders, then the claim is derivative in nature.”) (quoting Feldman v.
Cutaia, 951 A.2d 727, 733 (Del. 2008)); see also Yudell, 949 N.Y.S.2d at 384 (holding that
plaintiffs’ claims were derivative where joint venture first receives compensation and then
plaintiffs would be entitled to receive their proportionate share).20
The Plaintiff also states that any rental or sales proceeds from the Marks Units would
have been received only by Little Hearts. See Mem. of Law in Opp. to Def.s’ Mot. to Dismiss ¶ 8
[ECF No. 11]. But that is not accurate. In fact, the Operating Agreement sets out a priority for
the distribution of proceeds in the event that a condominium unit in the Building were to be sold.
It is specifically structured so that all profits that the Members recognize from the sale of their
units go first to the Company and then only when a Member’s obligations to the company are
fully repaid, can the Member recover on an individual basis:
Funds Inv. Litig., 2013 U.S. Dist. LEXIS 142268, at *35 (S.D.N.Y. Sept. 30, 2013) (noting that case involved
defendants “allegedly conferring an ‘exclusive benefit’ . . . on a subset of investors in exchange for votes intended to
injure other investors” and that “allegations involving the enrichment of majority investors at the expense of the
minority have been held to state direct claims.”); Gjuraj v. Uplift El. Corp., 973 N.Y.S.2d 172, 173-74 (App. Div.,
1st Dep’t 2013) (noting that plaintiff—a 15% minority shareholder—was prevented by majority shareholder from
receiving profit distribution, was not informed of relocation of corporate office and was not provided with access,
and was removed as a signatory on the corporate account); Scott v. Pro Mgmt. Servs. Grp., LLC, 2 N.Y.S.3d 90,
(App. Div., 1 st Dep’t 2015) (stating that claim was direct because plaintiff suffered the harm individually and noting
that all other owners of the company received revenues, licensing fees and royalties except for the plaintiff).
20 	To the extent that Little Hearts relies upon the fact that ownership rights of specific condominium units
would have passed to the Members upon approval of the condominium plan, the argument fails because the
condominium plan was never approved. See Compl. ¶ 88 (alleging that the Defendants allowed the condominium
plan to expire).
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All net sales proceeds realized from the sale of any Condominium Unit comprised of any
part of the Designated Portions shall be applied and paid as follows, and in the following
priority: first to the amount of the Loan allocated to such floor . . . next to the payment of
all closing expenses for the sale of such individual condominium unit . . . next to the
payment of all sums due hereunder; and the balance, if any, to such Member. In no event
shall any Condominium Unit be conveyed unless all costs set forth above are paid.
Operating Agreement ¶ 21.2. The sale proceeds are required to flow through the Debtor in
satisfaction of its debt obligations and any recovery by Little Hearts is entirely dependent on
such satisfaction, indicating that the Members interests int the Debtor represent a pure equity
ownership.
In sum, therefore, the claims asserted in the Complaint are all grounded in allegations of
the Defendants mismanaging the Company and the loss of the Debtor’s sole asset, the Building.
Clearly these injuries all flowed directly from the alleged injuries caused to the Company. Little
Hearts would be unable to show that these injuries arose independent of the injuries sustained by
the Company. See Beatrice Invs., LLC, 2018 N.Y. Misc. LEXIS 2008, at *25; Abrams, 66
N.Y.2d at 953; 1993 Trust of Joan Cohen, 2017 N.Y. Misc. LEXIS 1667, at *6; Yudell, 949
N.Y.S.2d at 384.
Even if the Plaintiff might establish independent injury by virtue of the Marks Units, such
claims would be so “confused with or embedded in” a harm to the Company, it cannot be
maintained as a direct claim. Serino, 994 N.Y.S.2d at 69 (noting that “claim must be factually
supportable by more than complaints that conflate [claimant’s] derivative and individual rights”);
see also Abrams, 66 N.Y.2d at 953. That is because any such injuries are all based on the same
alleged mismanagement of the Company and the resulting sale of the Building to Lazarus 5.
Said another way, the alleged wrongful conduct that injured the Marks Units is the same conduct
that would have caused injury to the units of Onestone or Thaddeus Pollack.
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There are only two instances where the injury and damages are arguably personal to
Little Hearts and distinct from its rights as a Member under the Operating Agreement. The first
of these is the loss of the Lease and the Sublease with the Spa, a business arrangement that
appears to have been unique to Little Hearts. Under the Lease and Sublease, Little Hearts
appears to have been the only Member with a tenant in its designated space. But once again, any
determination of claims relating to the Lease and Sublease are “confused with or embedded in”
the alleged harm caused by the Defendants mismanagement of the Company and Building.
Serino, 994 N.Y.S.2d at 69. Accordingly, such a claim cannot be maintained as a direct claim.
See id. (noting that “claim must be factually supportable by more than complaints that conflate
[claimant’s] derivative and individual rights”); see also Yudell, 949 N.Y.S.2d at 384 (“To the
extent, if any, that plaintiffs have asserted direct claims, they are embedded in an otherwise
derivative claim for partnership waste and mismanagement.”); Abrams, 66 N.Y.2d at 953 (“A
complaint the allegations of which confuse a shareholder's derivative and individual rights will . .
. be dismissed.”); Nisselson v. Marjerry Realty Corp. (In re Port Morris Tile & Marble LP),
Memorandum Opinion and Order Denying Pl.’s Mot. for Prelim. Injunction [Adv. Pro. No. 22-
01137, ECF No. 14] (Bankr. S.D.N.Y. Oct. 6, 2022) (“[E]ven if the trustee cannot bring the
exact claim as a creditor, the creditor’s claim may still be general where the trustee is
empowered to bring actions based on the same factual harm alleged by the creditor.”) (citing In
re Madoff, 818 F. App’x 48 (2d Cir. 2020) (finding plaintiffs’ claims for control person liability
under federal securities law to be “duplicative or derivative of the claims brought by the Trustee,
or which could have been brought by the Trustee.”). The other injury that appears to be personal
to Little Hearts relates to its alleged wrongful removal as Manager of the Building. See, e.g.,
Compl. ¶ 88 (“Improperly removing Little Hearts as Manager through false representations to the
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Court ex parte to obtain a TRO appointing Carter and Prime as Managers without notice or a
hearing to Little Hearts or any other Member.”); see also id. ¶¶ 97, 106, 122. To the extent that
the injuries alleged by Little Hearts relate only to its removal as Manager—as opposed to alleged
harm as a Member—then these claims are individual and may proceed if properly plead as
distinct. But to the extent that such an alleged wrong seeks damages to the value of Little
Hearts’ interest as a Member—as the Complaint does now—the Court finds those claims to be
derivative for the reasons discussed above.21
CONCLUSION
For the reasons stated above, the Defendants’ Motion to Dismiss is granted. Given the
dismissal of the Adversary Proceeding, the Court denies the Plaintiff’s Remand Motion as moot.
The Defendants should settle an order on five days’ notice. The proposed order must be
submitted by filing a notice of the proposed order on the Case Management/Electronic Case
21 	In reaching its decision, the Court rejects the argument of the Defendants that Little Hearts “lost” its right
to retain, use, occupy and develop the Marks Units due to a stipulation entered between Little Hearts and the
Creditor Trustee, which provides that:
Delivery of Possession/Access/Removal of Property. (a) [Little Hearts] will be deemed to have
surrendered possession of any premises subject to the Leases including but not limited to the
cellar, basement, first floor, and tenth floor units upon the Effective Date, except as provided in
the next sentence; (b) LHMF shall be deemed to have surrendered possession of the second floor
unit effective as of the 30 th day after the date the State of New York’s COVID-19 ‘stay at home’
restrictions (under Governor Cuomo’s executive orders) have been lifted; (c) LHMDF shall be
permitted access to the second and tenth floor units up until 30 days after the date the State of New
York’s COVID-19 ‘stay at home’ restrictions (under Governor Cuomo’s executive orders) have
been lifted to remove its property, furniture, tools and other items which were properly
documented to the Tree’s satisfaction to have been purchased by LHMF, its non-debtor affiliates
and/or principals located in such units.
Stip. By and Between Kenneth P. Silverman, Operating Chapter 11 Trustee for the Debtor and Little Hearts Marks
Family II L.P. ¶ 6 [Case No. 19-11911, ECF No. 183]; see also Order Approving Stip. By and Between Kenneth P.
Silverman, Operating Chapter 11 Trustee for the Debtor and Little Hearts Marks Family II L.P. at [Case No. 19-
11911, ECF No. 209]. While this language provides for the surrender of Little Hearts’ possessory interest, the
Defendants have not pointed to language that deprives Little Hearts of any claims that it may have as a result of the
parties’ prior conduct.
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Filing docket, with a copy of the proposed order attached as an exhibit to the notice. A copy of
the notice and proposed order shall also be served upon opposing counsel.
Dated: White Plains, New York
October 11, 2022
/s/ Sean H. Lane
UNITED STATES BANKRUPTCY JUDGE
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