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Under New York Law, an Accounting Does Not Equal a Books and Records Inspection

A recent case out of the New York Commercial Division demonstrates that the remedy of an accounting can be confused with the right of a shareholder or LLC member to inspect books and records.  In Atlantis Management Group II LLC v. Nabe, Index No. 651598/2017, 2018 BL 366555, at *4–5 (Sup. Ct., N.Y. Cty. Oct. 1, 2018), Justice Saliann Scarpulla granted partial summary judgment on the plaintiff’s claim for an accounting.  Nonetheless, in accordance with the plaintiff’s request for relief, the Court only ordered that the defendants turn over existing books and records.

The Atlantis case involved four LLCs, each of which operated a gas station in New York City.[1]  The plaintiff, an investor in the LLCs, sued the companies and their managing members in the Commercial Division.  The plaintiff alleged that the LLCs’ managing members had failed to properly account for the plaintiff’s share of the LLCs’ profits, and had refused the plaintiff’s demands to inspect the LLCs’ books and records.[2]  The plaintiff’s complaint included a cause of action for an accounting, which alleged that “[a]n accounting is necessary to determine plaintiff’s monetary damages and/or in order to determine the true and full information about the financial affairs of the Defendant LLCs.”[3]

Under New York law, the members of an LLC may seek an equitable accounting.[4]  The right to an equitable accounting “is premised upon the existence of a confidential or fiduciary relationship and a breach of the duty imposed by that relationship respecting property in which the party seeking the accounting has an interest.”[5]  In Atlantis, Justice Scarpulla ruled that the managing members of the four LLCs owed the plaintiff a fiduciary duty, and that plaintiff, as an LLC member, was entitled to an equitable accounting.[6]

But what is an accounting?  The New York Court of Appeals has described this concept as an equitable remedy that is “designed to require a person in possession of financial records to produce them, demonstrate how money was expended and return pilfered funds in his or her possession.”[7]  In other words, an accounting involves more than simply turning over existing books and records.

Significantly, in connection with its motion for partial summary judgment, the plaintiff in Atlantis asserted only that it was entitled to inspect the LLCs’ books and records pursuant to the New York Limited Liability Company Law and the LLCs’ operating agreements, a right that the plaintiff was owed as an LLC member.[8]  Justice Scarpulla agreed with this contention, granted partial summary judgment on the plaintiff’s accounting claim, and ordered the defendants to produce the LLCs’ books and records to the plaintiff.[9]  The plaintiff got what it wanted, but not what it requested in its complaint.  Although it won partial summary judgment sustaining its accounting claim—a remedy that would ordinarily include the production of detailed financial schedules—the plaintiff here merely won the right to review existing company records.

The Atlantis case stands as a reminder that, if a plaintiff only seeks access to existing books and records, there are statutory and, typically, contractual grounds for pursuing that relief which do not require a showing of an entitlement to an accounting.

By Eric B. LaPre and Stephen P. Younger

[1] Atlantis Mgmt. Grp. II, 2018 BL 366555, at *1.

[2] Id. at *1–2.

[3] Complaint ¶ 137, Atlantis Mgmt. Grp. II v. Nabe, Index No. 651598/2017 (Sup. Ct., N.Y. Cty. Mar. 27, 2017).

[4] Atlantis Mgmt. Grp. II, 2018 BL 366555, at *3 (citing Gottlieb v. Northriver Trading Co., 58 A.D.3d 550, 551 (1st Dep’t 2009).

[5] Id. (quoting Ctr. for Rehabilitation & Nursing at Birchwood v. S&L Birchwood, 92 A.D.3d 711, 713 (2d Dep’t 2012).

[6] Id. at *3–4.

[7] Roslyn Union Free Sch. Dist. v. Barkan, 16 N.Y.3d 643, 653 (2011).

[8] See Atlantis Mgmt. Grp. II, 2018 BL 366555, at *2.

[9] Id. at *3–5.