In Little Hearts Marks Fam. II L.P. v. Carter (In re 305 E. 61st St. Grp. LLC), 130 F.4th 272 (2d Cir. 2025), the U.S. Court of Appeals for the Second Circuit adopted the test announced by the Supreme Court of Delaware in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1039 (Del. 2004) for determining whether a claim is derivative or direct in nature. 

Under Tooley, for a claim to be direct, the injury asserted “must be independent of any alleged injury to the corporation” and the injured party “must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation.”

Little Hearts provides important guidance for determining whether a creditor is asserting a claim that is derivative in nature that belongs to the bankruptcy estate—or one that is direct that may be brought by the creditor individually. 

Background

The debtor was a limited liability company that was formed primarily to hold and develop a property in Manhattan. The debtor sued Prime, its majority member, after Prime refused to pay a portion of its “original subscription” to the debtor. 

In response to the debtor’s lawsuit, Prime (and its principal) brought a separate lawsuit to remove the debtor’s manager. In that lawsuit, Prime sought and obtained a temporary restraining order, which resulted in Prime being “installed” as manager of the debtor. Thereafter, Prime proceeded to mismanage the debtor’s operations, including by not allowing any construction work on the property, failing to renew building permits, or correcting stop work orders, among other things. 

When Prime sought a preliminary injunction to maintain the removal of the former manager, the state court indicated that not only was Prime not entitled to a preliminary injunction, but that the former manager was entitled to have a receiver appointed over the debtor. 

Before the state court could resolve the matter, Prime caused the debtor to file a Chapter 11 bankruptcy proceeding. Subsequently, a Chapter 11 trustee was appointed. The trustee submitted a plan of liquidation that called for a sale of the property and the establishment of a trust to liquidate the remaining assets of the estate—including legal claims. A newly formed affiliate of Prime purchased the building for $50 million. 

The former manager commenced an adversary proceeding against Prime and its principal, asserting claims for:

1. Breach of fiduciary duty;
2. Aiding and abetting breach of fiduciary duty;
3. Breach of contract;
4. Breach of the implied covenant of good faith and fair dealing;
5. Alter ego liability against the principal; and 
6. Unjust enrichment. 

The bankruptcy court dismissed the complaint in its entirety, holding that the claims asserted in the complaint were derivative of injuries to the debtor. And because the claims belonged to the debtor, they became vested in the trust pursuant to the plan and could only be asserted by the trustee of the trust—not the former manager.

The district court affirmed the judgment of the bankruptcy court.

Second Circuit Applies Delaware’s Tooley Test

The Second Circuit began its analysis by observing that the former manager could not maintain its claims if they were derivative in nature—and part of the bankruptcy estate—because the plan prohibited anyone other than the trustee of the trust from pursuing legal claims belonging to the debtor's estate. 

The court observed that state law governs whether a claim is derivative in nature and that New York’s intermediate appellate courts have largely adopted the test announced by the Delaware Supreme Court in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1039 (Del. 2004). New York’s highest court has not directly spoken to the test to apply for determining whether a claim is derivative. However, the Second Circuit observed that “[w]e are not convinced that the New York Court of Appeals would decide otherwise, so we apply the Tooley framework here.”

Under the Tooley test, for a claim to be direct, (1) the stockholder’s alleged injury must be independent of any alleged injury to the corporation, (2) the stockholder must demonstrate that the duty breached was owed to the stockholder, and (3) the stockholder must show that he or she can prevail without showing an injury to the corporation. 

The court found that Tooley does not apply if “the plaintiff seek[s] to bring a claim belonging to her personally” as opposed to “one belonging to the corporation itself.” The Second Circuit proceeded to apply the Tooley test as to each claim outlined below.

The Claims for Breach of Fiduciary Duty Claim and Aiding Abetting 

The court found that under Tooley, the fiduciary duty claim was derivative because all the injuries alleged—the alleged mismanagement, bad-faith bankruptcy filing and loss of ownership of the building—were injuries to the company that, in turn, caused the injury to the former manager. The former manager could not prevail on the claim without showing an injury to the company, so the claim was derivative under Tooley and the plan barred the former manager from asserting it.

Likewise the aiding and abetting claim failed because it “cannot stand independent of the claim for breach of fiduciary duty.”

The Claims for Breach of Contract and Breach of the Implied Covenant 

The court first held that Tooley did not apply to the claims for breach of contract and breach of the implied covenant because the former manager was attempting to vindicate a personal right. Specifically, the contract claim injuries to the former manager (i.e., to retain, use, occupy, develop specific units within the building) did not “follow automatically from ownership of a percentage of the equity in the company that owns the building.” 

Indeed, the former manager’s rights flowed from a contract that was independent of its equity interest in the debtor. Therefore, it was vindicating a direct interest and not one that was derivative in nature. 

Unjust Enrichment Claim.

The court found that this “claim [was] duplicative of the contract claims . . . and must be dismissed regardless of whether it [was] direct or derivative.”

Conclusion

Little Hearts provides important guidance for determining whether a claim is derivative or direct in nature. The decision provides particularly important guidance to bankruptcy practitioners who often must navigate the waters between direct claims (that belong to individual creditors) and those that are derivative (that belong to a debtor).