Complaint Dismissed Because Notice Given to Oust General Partner Pursuant to Partnership Agreement Was Not Sent Derivatively

• Posted on: Feb 24 2025

By: Jeffrey M. Haber

It is well-settled that a plaintiff asserting a derivative claim seeks to recover for injury to the business entity, regardless of whether the entity is a corporation, limited liability company, or partnership. A plaintiff asserting a direct claim seeks redress for injury to himself/herself individually. “The distinction between derivative and direct claims is grounded upon the principle that [an entity owner] does not have an individual cause of action that derives from harm done to the [business entity] but may bring a direct claim when the wrongdoer has breached a duty owed directly to the [entity owner] which is independent of any duty owing to the [business entity].”[1] Sometimes, the distinction between the two types of actions is not readily apparent.[2]

Direct vs. Derivative Examined

As noted, where the wrong complained of is directed against a business entity, the claim belongs to the entity. The entity owner does not have an individual claim, even if the entity owner loses the value of his/her shares/units/interests or incurs personal liability in an attempt to keep the entity solvent.[3]

In determining whether a claim is direct or derivative, “a court must look to the nature or the wrong and to whom the relief should go.”[4] Specifically, the 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).”[5]

“The pertinent inquiry is whether the thrust of the plaintiff’s action is to vindicate his [or her] personal rights as an individual and not as [an entity owner] on behalf of the [business entity].”[6] The plaintiff must show that the duty allegedly breached was owed to the entity owner, and that he/she can prevail without showing an injury to the business entity.[7] If the individual claim of harm is “confused with or embedded” within the harm to the business entity, then it must be dismissed.[8]

[Ed. Note: This Blog has previously written about the difficulties plaintiffs often have distinguishing between direct and derivative claims. (E.g., here, here, here, and here.)[9]]

In today’s article, this Blog looks at Molberg v. Phoenix Cayman Ltd., 2025 N.Y. Slip Op. 01048 (1st Dept. Feb. 20, 2025) (here). In Molberg, the Appellate Division, First Department, unanimously reversed the motion court’s denial of defendants’ motion to dismiss because plaintiff failed to comply with the partnership agreement, which required any effort for the relief sought by the action to be brought on behalf of the partnership.

Molberg v. Phoenix Cayman Ltd.

Molberg arose from an attempt to remove defendant Phoenix Cayman Ltd. from its position as the General Partner of nominal plaintiff Phoenix Holdco Ltd. (the “Partnership”).

In March 2011, fifteen people (i.e., limited partners) agreed to invest in the Partnership and entered into a Limited Partnership Agreement with the General Partner (the “LP Agreement”). Pursuant to Section 6.1(d)(i)(B) of the LP Agreement, the General Partner could be “removed with Cause upon the affirmative act of the Supermajority in Interest.” “Cause” was defined to include when the General Partner “has committed a knowing, willful and material breach of th[e] Agreement that is not cured within 30 days after the General Partner’s receipt of a notice from the Partnership with respect to such breach.”

On January 23, 2023, a limited partner emailed one of the directors of the Partnership inquiring as to when the audited financials for 2020 and 2021 would be completed and made available. The director responded that the request should be directed through their attorneys, as the limited partner was involved in a separate litigation with the Partnership. This lawsuit had been brought by four of the limited partners based on their dissatisfaction with the Partnership’s management (see Black v. Phoenix Cayman Ltd., _A.D.3d_, 2025 N.Y. Slip Op. 00147 (1st Dept. 2025) (the “Black Action”)). Shortly thereafter, another nonparty limited partner followed up on the request and received a similar response.

On February 16, 2023, plaintiff, as executor of the estate of her father, a limited partner in the Partnership, circulated the 2020 year-end financials, which had been produced in the Black Action, to the other limited partners and the director. Her communication also stated that “the failure to circulate these financials to the LPs is a breach of the LPA and another dereliction of [Phoenix Cayman’s] duty as GP.”

On April 28, 2023, Phoenix Cayman received a letter, signed by plaintiff individually in her capacity as executor of her father’s estate. The “Re” line read: “Phoenix Holdco LP — Demand for Audited Financials from Phoenix Cayman Ltd.” The letter stated that she was writing “regarding the books, records, financial statements and other reports of Phoenix Holdco LP.” It also detailed the January 2023 requests for the 2020 and 2021 financials, which were “denied,” and concluded with a “demand” for additional financials for 2022 and the first quarter of 2023.

A supermajority of the limited partners voted in favor of removing Phoenix Cayman as General Partner and replacing it with plaintiff Blue Bear Ltd. on June 5, 2023. The General Partner took the position that the resolution was null and void. Later that month, the General Partner provided bank statements and balance sheets for the Partnership for 2021, 2022, and the first quarter of 2023.

Thereafter, plaintiffs commenced the action, alleging that the April 28, 2023 letter provided notice of a breach sufficient to trigger the 30-day contractual cure period set forth in the LP Agreement. Defendants moved to dismiss the complaint, arguing that the letter was not sufficient to provide such notice; therefore, there was no basis to remove the General Partner for “Cause.”

The motion court denied the motion, holding that “[t]he documentary evidence [did] not irrefutably preclude plaintiff’s claim” because of “the attendant circumstances,” including “the multiple correspondences from limited partners requesting the financials at issue, the ongoing [Black Action] based on the same set of facts, and the fact that the April 28, 2023 letter was imperative in its demand for the documents and the cited basis for those documents.” The motion court added that the April 28, 2023 letter “also sufficiently identified the existence of a breach of the [LP Agreement].”

On Appeal, the First Department reversed.

The Court held that “[d]ismissal of th[e] action [was] warranted because the April 28, 2023 letter did not trigger the 30-day cure period under the subject LP Agreement.”[10] The Court observed that “[a]lthough a limited partner could theoretically send notice on the Partnership’s behalf, that [was] not what happened” in the case.[11] “Rather,” said the Court, “the letter was signed by a single limited partner who did not purport to be acting in anything other than her individual capacity.”[12] The Court explained that “[t]he letter was written in the first-person singular, no other limited partners were copied or referenced, and there was no language in the letter suggesting that it was being sent ‘derivatively,’ ‘on behalf of,’ or even ‘for the benefit of’ the Partnership.”[13] Since “the letter was not ‘from the Partnership,’ as required by the LP Agreement,” concluded the Court, “there was no basis to remove the General Partner for ‘Cause’ thereunder.”[14]

In addition, the Court held that the April 28, 2023 letter “did not provide notice of any breach — of § 8.2 or any other provision of the LP Agreement.”[15] The Court explained that the letter “did not use the words ‘notice,’ ‘breach,’ or ‘cure’ and did not reference the contractual removal provision or definition of ‘Cause.’”[16] The Court concluded that “[a]lthough the letter cited the General Partner’s obligation to provide financial information under § 8.2 and referenced the January 2023 email correspondence, it [was] best read as a prospective demand for audited financials, and it did not put defendants on a notice that a ‘knowing, willful and material breach’ of the LP Agreement had already occurred and the 30-day cure period was triggered.”[17]

Takeaway

In one of our prior articles (here), we wrote the following about the difficulties distinguishing between a direct and derivative claim:

The difference between a direct and derivative claim is not always easy to discern. For many practitioners, even those who devote most of their practice litigating derivative claims, the distinction between the two types of claims can be elusive. Nuance and subtlety often rule the day, leading to confusion and uncertainty. The consequences of such confusion can (and often will) result in dismissal of one’s claims.

As shown in Molberg, the language of the LP Agreement was not nuanced or subtle. It was clear and unambiguous. Notice of a breach was to be sent by the Partnership, not by a limited partner in his/her individual capacity. As such, plaintiffs’ complaint was dismissed for failing to comply with the LP Agreement.

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Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

[1] Accredited Aides Plus, Inc. v. Program Risk Mgmt., Inc., 147 A.D.3d 122, 132 (3d Dept. (2017) (citation and internal quotation marks omitted).

[2] Yudell v. Gilbert, 99 A.D.3d 108, 113 (1st Dept. 2012).

[3] Abrams v. Donati, 66 N.Y.2d 951, 953 (1985); Serino v.  Lipper, 123 A.D.3d 34, 40 (1st Dept. 2014).

[4] Tooley v. Donaldson Lufkin & Jenrette, Inc., 845 A.D.2d 1031, 1038 (Del. 2004).

[5] Yudell, 99 A.D.3d at 114 (internal quotation marks and citations omitted); Maldonado v. DiBre, 140 A.D.3d 1501, 1503-1504 (3d Dept. 2016).

[6] Maldonado, 140 A.D.3d at 1504 (internal quotation marks and citation omitted).

[7] Yudell, 99 A.D.3d at 114.

[8] Serino, 123 A.D.3d at 40; Patterson v. Calogero, 150 A.D.3d 1131, 1133 (2d Dept. 2017) (even where individual harm is claimed, if it is confused with or embedded in the harm to the corporation, it cannot stand separately).

[9] To find articles related to the difference between direct and derivative claims, visit the “Blog” tile on our website and enter “direct claim”, “derivative” claim, or any other related search term in the “search” box.

[10] Slip Op. at *2.

[11] Id.

[12] Id.

[13] Id.

[14] Id. (citing Filmtrucks, Inc. v. Express Indus. & Term. Corp., 127 A.D.2d 509, 510 (1st Dept. 1987)).

[15] Id.

[16] Id.

[17] Id.