Statutory Bases under New York Law
As discussed in our last Blog post, the right to an accounting exists under common law and, in some instances, according to statute.
The accounting remedy is codified in New York Partnership Law § 44 and New York Business Corporation Law § 720. Section 44 of the Partnership Law provides that:
Any partner shall have the right to a formal account as to partnership affairs:
1. If he is wrongfully excluded from the partnership business or possession of its property by his copartners,
2. If the right exists under the terms of any agreement,
3. As provided by section forty-three[1],
4. Whenever other circumstances render it just and reasonable.
Accountings are particularly important for partnerships because of “the well-established rule that an action at law may not be maintained by one partner against another for any claim arising out of the partnership until there has been a full accounting, except where the alleged wrong concerns a partnership transaction which may be determined without an examination of partnership accounts.” 1056 Sherman Ave. Associates v. Guyco Const. Corp., 261 A.D.2d 519, 520 (2d Dep’t 1999). The rule is applicable to limited partnerships as well. See, e.g., Goodwin v. MAC Resources Inc., 149 A.D.2d 666, 667 (“It is well settled that as a general rule, partners cannot sue each other at law for acts relating to the partnership unless there is an accounting, prior settlement, or adjustment of the partnership affairs.”)
Section 720(a)(1) of the Business Corporation Law provides that:
(a) An action may be brought against one or more directors or officers of a corporation to procure a judgment for the following relief:
(1) Subject to any provision of the certificate of incorporation authorized pursuant to paragraph (b) of section 402, to compel the defendant to account for his official conduct in the following cases:
(A) The neglect of, or failure to perform, or other violation of his duties in the management and disposition of corporate assets committed to his charge.
(B) The acquisition by himself, transfer to others, loss or waste of corporate assets due to any neglect of, or failure to perform, or other violation of his duties.
(C) In the case of directors or officers of a benefit corporation organized under article seventeen of this chapter: (i) the failure to pursue the general public benefit purpose of a benefit corporation or any specific public benefit set forth in its certificate of incorporation; (ii) the failure by a benefit corporation to deliver or post an annual report as required by section seventeen hundred eight of article seventeen of this chapter; or (iii) the neglect of, or failure to perform, or other violation of his or her duties or standard of conduct under article seventeen of this chapter.
Of note, an action under § 720 must be derivative, on behalf of the corporation. The Southern District of New York Bankruptcy Court has opined that, “section 720 is to be broadly construed and is to cover every form of waste of assets and violation of corporate duty.” In re Princeton Industries, Inc., 39 B.R. 140, 142 (S.D.N.Y. Bankr. 1984). The In re Princeton Court added that, “section 720 of the BCL not only provides for an accounting by the fiduciaries of the corporation, but also provides for the recovery of any money misappropriated by the officers of the corporation.” Id.
Unlike partnerships and corporations, limited liability companies do not have a statutory accounting remedy. Until recently, it was not clear whether members of a limited liability company could bring an action seeking a common law accounting. However, in Gottlieb v. Northriver Trading Co., LLC, 58 A.D.3d 550 (1st Dep’t 2009), the First Department stated that, “members of a limited liability company may seek an equitable accounting under common law.”
[1] Section 43 provides, “Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property.”