Introduction

In the recent decision of In re: 305 East 61st Street Group LLC, Debtor., Little Hearts Marks Family II L.P. v. Jason D. Carter, 61 Prime LLC by the United States Court of Appeals for the Second Circuit (2025), the court addressed the distinction between direct and derivative claims in the context of bankruptcy proceedings. The case involves Little Hearts Marks Family II L.P. (“Little Hearts”), a minority member of a limited liability company formed for purchasing, converting, and managing a condominium building at 305 East 61st Street in Manhattan, and the majority member/manager 61 Prime LLC (“Prime”) along with Jason D. Carter.

At stake were several claims, including breach of fiduciary duty, breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment. The dispute arose after the company filed for bankruptcy and a subsequent sale of the building that allegedly disadvantaged Little Hearts’ contractual rights under the Operating Agreement. This judgment creates new parameters regarding which claims may be directly pursued by an individual creditor versus those that “belong” to the bankruptcy estate and must be asserted by the creditor trustee.

Summary of the Judgment

The Court of Appeals affirmed the lower courts’ dismissal of the breach of fiduciary duty and aiding and abetting fiduciary duty claims, ruling that these injuries were derivative—injuries to the debtor company that properly belong to the creditor trustee. However, the decision vacated the district and bankruptcy court dismissals of the breach of contract and breach of the implied covenant of good faith and fair dealing claims, determining these were direct claims that Little Hearts was entitled to pursue based on its individual contractual rights under the Operating Agreement. The unjust enrichment claim was dismissed as duplicative of the contract claims.

Additionally, the opinion remanded the case for further proceedings with instructions for the bankruptcy court to evaluate its jurisdiction over the direct state law claims under Section 1334(b) and the potential need for abstention under Section 1334(c)(2). In essence, the court delineated the lines between derivative and direct claims, thereby clarifying the appropriate locus for claims that arise out of contractual rights distinct from the corporate injury.

Analysis

Precedents Cited

The court relied on a variety of precedents to analyze the distinction between direct and derivative claims. Central to the analysis was the application of the Tooley framework from Tooley v. Donaldson, Lufkin & Jenrette, Inc. This framework was developed to differentiate stockholders' claims that arise directly from their individual rights versus those that are merely reflective of injuries to the corporation and hence must be asserted derivative by a trustee or the corporate entity itself.

Other cases, such as St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., NAF Holdings, LLC v. Li & Fung (Trading) Ltd., and Brightstar Asia, were also invoked. These decisions underscore that while the fiduciary duty claims traditionally are derivative—requiring a demonstration of injury to the corporation—the breach of contract and implied covenant claims can be “direct” when they protect an individual’s specific contractual rights.

Legal Reasoning

The court’s legal reasoning began with the analysis of whether the claims alleged by Little Hearts were derivative—injuries to the company—or direct injuries to the individual party under its specific contractual rights. Applying the Tooley test, the court highlighted that:

The court found that the breach of fiduciary duty claims, anchored in managerial missteps and a failure to properly protect the company’s assets, were inherently derivative. Conversely, the breach of contract and implied covenant claims concerned rights granted directly to Little Hearts—such as the exclusive rights over designated Marks Units—which did not simply mirror its percentage interest but were advanced contractual entitlements. Because these rights were individually vested, the claims did not fall under limitations imposed by the Tooley test.

An additional component of the reasoning dealt with the issue of jurisdiction. The bankruptcy plan had initially conferred authority to a creditor trust for pursuing claims tied to the debtor’s estate. However, since Little Hearts’ direct claims were based on contractual rights independent of the bankruptcy estate, the court vacated the dismissal of those claims and directed a remand to the bankruptcy court for a determination regarding the proper forum and the application of Section 1334 of the Bankruptcy Code.

Impact

This decision establishes an important precedent on two fronts:

Moreover, the remand for further proceedings on jurisdictional grounds underscores the complex interplay between bankruptcy proceedings and state law claims, potentially influencing how future non-core but related proceedings are handled.

Complex Concepts Simplified

Several legal concepts in the opinion are of particular complexity:

By breaking down these terms, the opinion clarifies that while many claims in corporate litigation may seem intertwined with corporate injuries, contractual rights that are individually conferred can and should be adjudicated on their own merits.

Conclusion

The Second Circuit’s decision in this case is a significant development in distinguishing between derivative and direct claims within the bankruptcy context. It reaffirms that fiduciary duty claims—when tied to corporate mismanagement—are appropriately designated as derivative and must be pursued by the designated trustee. At the same time, it ensures that contractual claims founded on unique, individually vested rights, such as those concerning the use and development of specific property units, are treated as direct claims available for individual enforcement.

This nuanced delineation safeguards individual parties from being forced to assert claims solely as part of the bankruptcy estate, thereby preserving their direct remedies under the contract. As such, this judgment not only clarifies the application of the Tooley framework in a bankruptcy setting but also sets an important precedent in enforcing distinct contractual rights. Legal practitioners and future litigants alike must now navigate these distinctions with greater precision when addressing claims that may lie partly outside the typical purview of the bankruptcy estate.