It’s difficult to assess the potency of section 417(a) of New York’s LLC law. The provision starts off with a seemingly broad rule: “The operating agreement may set forth a provision eliminating or limiting the personal liability of managers to the limited liability company or its members for damages for any breach of duty in such capacity. . . ”
The “in such capacity,” qualifier is a bit of a mystery; it suggests that members acting in some other capacity might not be able to limit their fiduciary duties.
More importantly, an almost equally broad exception follows that rule: “provided that no such provision shall eliminate or limit: the liability of any manager if a judgment or other final adjudication adverse to him or her establishes that his or her acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law or that he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled.”
In plain English: the operating agreement can limit the liability of members for breaches of fiduciary duty “in such capacity,” but not for acts of bad faith or self-dealing.
And since most of the breach of fiduciary duty cases we come across involve claims of bad faith or self-dealing (usually pled that way to avoid application of the business judgment rule), the exception in LLCL 417(a)(1) often swallows the rule (read Peter Mahler’s recent take on LLCL 417 here).
But not always, as In re Transfix Prods. LLC, No. 24-04040 (Bankr. S.D.N.Y. 2025) demonstrates. Coming from the courtroom of Hon. James L. Garrity Jr., United States Bankruptcy Judge for the Southern District of New York, In re Transfix shows how the seemingly tepid LLCL 417 can still be a benefit for LLC members, and sheds some light on the cryptic “in such capacity” phrasing.
The Company and the Operating Agreement.
In 2021, Michael Blatter and others formed Transfix Productions LLC as an arts and entertainment company. The Company planned to lease large-scale artwork and display it at exhibitions it organized and produced.
The Company’s members executed an Amended and Restated Operating Agreement that made Blatter the managing member and contained relatively standard provisions concerning the Company’s operations and the relationship between the members.
Relevant here, Section 4.7 of the Operating Agreement contained a broad fiduciary waiver clause:
To the maximum extent permitted by the NY LLC Law and applicable law, no Person, in such Person’s capacity as a Member, shall have any duties or liabilities, including fiduciary duties, to the Company, any Member or any other Persons bound by this Agreement, and all such duties or liabilities are hereby irrevocably disclaimed and eliminated. The provisions of this Agreement, to the extent they restrict or otherwise modify or eliminate . . . fiduciary duties . . . replace any such other duties or liabilities of the Member.”
Likewise, Section 5.11 provided that “no Member shall have any personal liability whatsoever in such Member’s capacity as a member.”
Bankruptcy.
Almost from its inception, the Company failed spectacularly. The first of the Company’s exhibitions was in Las Vegas. And while scheduled to run from April 2023 to October 2023, the exhibition closed after only six weeks of low attendance and mounting debts. In August of 2023, Blatter caused the Company to file for bankruptcy.
The Company’s bankruptcy filing led to the appointment of a bankruptcy trustee charged with marshalling and liquidating the Company’s assets. In that role, the Trustee sued Blatter on behalf of the Company, seeking at least $8.1 million for breach of fiduciary duty.
The Trustee’s Claims Against Blatter.
The Trustee’s complaint alleged that Blatter breached his fiduciary duties to the Company by:
- Failing to adhere to any budgetary controls, causing the Company to suffer from a “woeful lack of sufficient working capital;”
- Irresponsibly and recklessly spending the Company’s funds, including with more than 100 employees per night; and
- Grossly overestimating attendance, predicting that the exhibition would sell 3,000 tickets per night when it sold as few as 200 on some nights.
Attempts to Avoid the Fiduciary Duty Waiver in the Operating Agreement.
Blatter moved to dismiss the Trustee’s action, arguing that the Operating Agreement eliminated his fiduciary duties to the Company.
The Trustee opposed on three grounds.
- First, the Trustee argued that LLCL 417(a) only allows the Operating Agreement to eliminate members’ liability for breaches of fiduciary duty “in such capacity”—i.e., members’ fiduciary duties can be eliminated only when they are acting as members. Likewise, the Operating Agreement’s language by its terms only applied to acts committed “in such Person’s capacity as a Member.” And the Trustee argued that her claims did not arise from misconduct that Blatter committed as a member, but instead arose from Blatter’s misconduct as an officer. Blatter appointed himself the CEO of the Company, executed agreements (including with artists and employees) as the CEO of the Company, and made public appearances as the CEO, not as a member, insisted the Trustee.
- Second, the Trustee argued that once the Company became insolvent, Blatter had a fiduciary duty to the Company’s creditors, regardless of the terms of the Operating Agreement.
- Third, the Trustee argued that under LLCL 417(a) the fiduciary duty waiver in the Operating Agreement could not waive claims based on Blatter’s “bad faith or involv[ing] intentional misconduct.” And, the Trustee asserted, the complaint sufficiently alleged that Blatter committed actions and omissions in bad faith and or engaged in intentional misconduct that, if proven, would result in a final adjudication falling under that exception.
The Exculpation Clause Defeats the Trustee’s Claims.
By Decision and Order Dated June 13, 2025, Judge Garrity granted Blatter’s motion to dismiss. The Court’s well-researched opinion dismantled each of the Trustee’s attempts to plead around the fiduciary duty waiver in the Operating Agreement.
First the Court addressed the Trustee’s contention that her claims sought damages for Blatter’s breaches of fiduciary duty as CEO. The Court held that even if the first sentence of the fiduciary waiver arguably only applied to actions taken “in such Person’s capacity as a Member,” the second sentence was not so limited: it waived all fiduciary duties of the members.
Relying on several cases where the courts declined to impose officer-level fiduciary duties on members (Allianz, Farsura, and Trahan) the Court found that the Trustee cannot circumvent the Operating Agreement merely by alleging that Blatter acted in an officer capacity.
The Court was equally untroubled by the “in such capacity” qualifier in LLCL 417(a), noting that “the Trustee has cited no authority permitting a debtor LLC, through its bankruptcy trustee, to pursue fiduciary duty claims against a member based on conduct in an officer capacity where the operating agreement eliminates member duties. The Court is unaware of any such precedent.”
Next addressing the Trustee’s argument that Blatter had fiduciary duties to creditors once the Company was insolvent, the Court held that even so, the Trustee did not have standing to assert the potential claims of creditors.
The Court lastly rejected the Trustee’s attempt to invoke the statutory carve-out in section 417(a)(1) for acts committed in “bad faith” or involving “intentional misconduct.” While the Trustee repeatedly labeled Blatter’s management as “intentional,” “reckless,” and “grossly negligent,” the Court found that despite those terms, the Complaint targeted Blatter’s (perhaps woefully imprudent) business decisions, not acts of bad faith or self-dealing that would trigger 417(a)(1)’s exception.
In considering the sufficiency of the allegations, the Court gave a helpful survey of the limited caselaw on the scope of an exculpation provision under LLCL 417:
- Agarwal v Jain: allegations that member conspired with the company’s competitors sufficiently alleged bad faith or intentional misconduct to overcome exculpatory provision.
- TIC Holdings LLC v HR Software: allegations that the defendant intentionally interfered with the company’s ability to obtain financing were sufficient to overcome exculpatory provision.
- Kagan v HMC-New York Inc.: under Delaware law, allegations that defendant failed to properly calculate and distribute monies could not survive the exculpatory provision in the operating agreement which limited liability to “intentional misconduct, a knowing violation of law . . . and self-dealing.”
Finding the Trustee’s allegations to be more like the plaintiffs’ in Kagan, and lacking the critical allegation present in both Agarwal and TIC that the defendant stood on both-sides-of-the-deal, the Court dismissed the Trustee’s claims.
Don’t Count Out LLC Law 417(a), Especially for Dual-Role Member/Officers.
While it’s easy to assume that the bad faith, self-dealing, and intentional misconduct exceptions in LLCL 417(a)(1) will render any fiduciary duty waiver in a New York LLC effectively toothless, Transfix exposes the (perhaps minimal) territory where the 417(a)(1) exception doesn’t entirely vitiate the waiver.
More importantly, Transfix shows that 417(a) waivers can be especially valuable to LLC members who also serve in officer capacities. Under Transfix, the fiduciary-duty waiver in the operating agreement can extend to acts taken as an officer, despite the “in such capacity” qualifier in LLCL 417(a). Members who wear multiple hats take note.
[View source.]
