bk IN RE : 305 EAST 61 ST STREET GROUP LLC v. Jason D. Carter , 61 Prime LLC

23-1202-bk
In re: 305 East 61st St. Grp. LLC
In the
United States Court of Appeals
FOR THE SECOND CIRCUIT
A UGUST TERM 2023
No. 23-1202-bk
IN RE :
305 E AST 61 ST S TREET G ROUP LLC,
Debtor.
_______________
L ITTLE H EARTS M ARKS FAMILY II L.P.,
Appellant,
v.
JASON D. C ARTER , 61 PRIME LLC,
Appellees.
On Appeal from the U.S. District Court
for the Southern District of New York
A RGUED: JUNE 17, 2024
DECIDED: MARCH 4, 2025
Before: L YNCH , CARNEY , and MENASHI, Circuit Judges.

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2
Plaintiff-Appellant Little Hearts Marks Family II L.P. was a
member of 305 East 61st Street Group LLC, a company organized to
purchase a building and convert it into a condominium. Defendant-
Appellee 61 Prime LLC was the majority member and manager of the
company, and Defendant-Appellee Jason D. Carter was the manager
and sole member of Prime. In 2021, the company filed for bankruptcy
and eventually sold the building to a different company that Carter
had created. The plan of liquidation established a creditor trust with
the exclusive right to pursue causes of action that belong to the
debtor’s estate. After the sale of the building, Little Hearts sued Prime
and Carter for breach of fiduciary duty, aiding and abetting breach of
fiduciary duty, breach of contract, breach of the implied covenant of
good faith and fair dealing, and unjust enrichment. Little Hearts
sought damages representing its lost capital investment in the
company and the loss of its rights under the Operating Agreement,
including the right to use and develop designated units in the
building.
We affirm the judgment insofar as the bankruptcy and district
courts dismissed the claims for breach of fiduciary duty and aiding
and abetting breach of fiduciary duty. These claims belonged to the
company and could be asserted only by the creditor trustee. We
vacate the judgment insofar as the bankruptcy and district courts
dismissed the claims for breach of contract and breach of the implied
covenant of good faith and fair dealing. These claims seek to vindicate
rights belonging directly to Little Hearts under the Operating
Agreement and may proceed. The unjust enrichment claim,
meanwhile, must be dismissed as duplicative of the contract claims.
We remand for further proceedings consistent with this opinion.

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A NDREW R. G OLDENBERG , Levy Goldenberg LLP, New
York, New York, for Plaintiff-Appellant.
G ERARD S. C ATALANELLO (James J. Vincequerra,
Kimberly J. Schiffman, Christopher J. Borchert, on the
brief), Alston & Bird LLP, New York, New York, for
Defendants-Appellees.
MENASHI, Circuit Judge:
Plaintiff-Appellant Little Hearts Marks Family II L.P. (“Little
Hearts”) was a member of 305 East 61st Street Group LLC, a company
organized to purchase a building at 305 East 61st Street in Manhattan
and convert it into a condominium. Defendant-Appellee 61 Prime
LLC (“Prime”) was the majority member and manager of the
company, and Defendant-Appellee Jason D. Carter was the manager
and sole member of Prime. In 2021, 305 East 61st Street Group filed
for bankruptcy and eventually sold the building to another company
that Carter had created.
The plan of liquidation established a creditor trust with the
exclusive right to pursue legal claims that belonged to the estate of
305 East 61st Street Group. After the sale of the building, Little Hearts
filed its own lawsuit against Prime and Carter in state court, asserting
claims for breach of fiduciary duty, aiding and abetting breach of
fiduciary duty, breach of contract, breach of the implied covenant of
good faith and fair dealing, and unjust enrichment. Little Hearts
sought damages for its lost capital investment in the company and the
loss of its rights under the Operating Agreement, which had granted
Little Hearts the right to use and develop designated units in the

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building. Carter and Prime removed the action to the bankruptcy
court.
We affirm the judgment insofar as the bankruptcy and district
courts dismissed the claims for breach of fiduciary duty and for
aiding and abetting breach of fiduciary duty. These claims were
derivative of claims that belonged to the debtor company and
therefore could be asserted only by the creditor trustee. We vacate the
judgment insofar as the bankruptcy and district courts dismissed the
claims for breach of contract and for breach of the implied covenant
of good faith and fair dealing. These were direct claims that sought to
vindicate contractual rights that belonged to Little Hearts. The unjust
enrichment claim, meanwhile, must be dismissed as duplicative of the
contract claims. We remand for further proceedings consistent with
this opinion.
BACKGROUND
I
On August 15, 2016, Mitchell Marks—the principal of Little
Hearts—signed a contract to purchase “a 65,000 square foot
warehouse at 305 East 61st Street, between Second Avenue and a
ramp off the 59th Street bridge,” for $40,000,000. App’x 27. Marks then
organized a group of real estate investors to finance the purchase and
to convert the building into a condominium. The vehicle for doing so
was 305 East 61st Street Group, a limited liability company with four
members: (1) Prime, which owned a 50 percent interest; (2) Little
Hearts, which owned 30 percent; (3) Onestone 305, LLC
(“Onestone”), which owned 10 percent; and (4) an individual investor
named Thaddeus Pollock with a 10 percent ownership interest.
The purchase was financed by a $20,000,000 acquisition loan
from Banco Popular North America and a capital investment of

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$21,328,000 from the members. Construction work on the building
was to be financed with an additional loan of $10,000,000 from Banco
Popular.1 The acquisition and construction loans were secured by a
single mortgage on the building in favor of Banco Popular, which was
guaranteed by Little Hearts, Prime, Marks, and Carter. Little Hearts,
Onestone, and Pollock each assumed responsibility for $3,750,000—
or one-eighth of the $30,000,000 in total indebtedness to Banco
Popular—with Prime assuming responsibility for the remaining
$18,750,000 or five-eighths.
The members executed an Operating Agreement to govern the
affairs of the company. Little Hearts was designated the manager of
the company and, in the event that Little Hearts resigned or was
removed as manager, Prime held “the right to assume the duties of
[Little Hearts] as [m]anager … or to designate a [m]anager in the place
and stead of [Little Hearts].” App’x 75. The Operating Agreement
assigned each member certain floors of the building on which it was
authorized to perform interior work. Little Hearts received “the right
to retain, use, occupy, develop and acquire the condominium units
consisting of the (i) basement/cellar and first floor, and (ii) 10 th floor
and roof, of the [b]uilding.” Id. at 64. A similar provision assigned
Prime the fourth through seventh floors and the ninth floor of the
1 The complaint states at one point that the $10,000,000 investment in
construction was funded with a loan from Banco Popular of $5,186,000 and
an investment from the members of $4,924,000. See App’x 28. But it then
states that the members “signed promissory notes for the Construction
Loan totaling $10,000,000.” Id. at 29. The percentages of the mortgage
assigned to each member indicate that the total mortgage was $30,000,000—
$20,000,000 for the acquisition loan and $10,000,000 for the construction
loan.

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building. The Operating Agreement was subsequently amended to
give Little Hearts the right to the second floor as well.
With respect to the units on their assigned floors, Little Hearts
and Prime also had the right to “perform any alterations,” to “sell all
or any part,” and to “lease, sublease, assign, and use, without consent
and without the payment of any fees or expenses to the [c]ompany or
when in Condominium Ownership, to the Board of Managers.” Id. at
70. Once the condominium plan was approved, Little Hearts and
Prime would have the option either to acquire the units on their
designated floors or to market those units and share in the proceeds.
The proceeds from any sale of condominium units by Little Hearts or
Prime would first be applied to pay off the Banco Popular loans, then
be directed to settle closing expenses in connection with the sale, next
be put toward “the payment of all sums due hereunder,” and finally
be remitted to the member who sold the unit. Id. at 86. Onestone and
Pollock received the option to acquire the units on their designated
floors but not the right to share in the proceeds of any sale or lease of
the units.
Little Hearts received additional rights with respect to its units
in the cellar and on the first floor—part of the so-called “Marks
Units”—that the other members did not receive. At the closing of the
acquisition of the building, the company as landlord entered into a
lease with Little Hearts as tenant for the cellar and the first floor. A
rider to the lease gave Little Hearts the right to sublease these floors
without the consent of the company and to install “signs, lights,
advertisements or notices on the exterior of the building.” Id. at 462.
Little Hearts also had the right, with Prime’s consent, to make
alterations to the roof “financed by the capital of the [c]ompany.” Id.
at 72. Additionally, Little Hearts had the right to subdivide the tenth
floor into two separate units without the consent of the company.

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Little Hearts alleges that “[i]n reliance on the rights granted to [it]
under the Operating Agreement, [it] spent millions of dollars
renovating each of the Marks Units to use, lease, or sell.” Id. at 30.
Little Hearts also “entered into a valuable sublease, as sub-landlord,
with non-party Acqua Ancien Bath New York, Inc. (“Spa”), as sub-
tenant, for the Ground Floor Unit for a term of 15 years.” Id.
In the spring of 2018, “Prime refused to pay $62,500 of its
original subscription to the [c]ompany,” and the company sued Prime
in New York state court. Id. at 31. In response, Prime and Carter
brought a separate action to remove Little Hearts as manager and
moved ex parte for a temporary restraining order based on allegations
that Little Hearts describes as “grossly false.” Id. The state court
granted the TRO and installed Prime as manager of the company.
According to the allegations of the complaint, Prime mismanaged the
company. “[I]n the two years that followed the TRO, Carter and
Prime did not advance any construction work, renew building
permits, advance the condominium offering plan, or correct the stop
work order issued by the City of New York for the illegal work
commenced by Defendants.” Id. at 34-35. Little Hearts further alleges
that Prime and Carter interfered with its sublease to the Spa. Prime
and Carter allegedly “[c]ut the power and water to the Ground Floor
Unit,” “locked the Spa out of the Ground Floor Unit” in violation of a
court order, “[v]iolated a temporary restraining order and court order
dated August 23, 2018 directing Defendants to re-install power and
water to the Spa’s ground floor unit,” and “[c]aused the Spa to sue the
[c]ompany for … millions of dollars.” Id. at 35-36.
The Banco Popular loans matured in December 2018, and Prime
“failed to pay [its] 5/8ths portion of the [m]ortgage.” Id. at 36-37.
“Instead, Carter attempted to refinance the [m]ortgage with
commercially unreasonable terms from a personal friend.” Id. at 37.

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“Little Hearts presented multiple refinancing proposals at
commercially reasonable terms, which Carter unreasonably refused
to consider.” Id. According to the complaint, “Carter tried to pressure
Little Hearts to accept his refinancing proposal … and called Marks
telling him ‘there is only going to be one winner here, and it’s not
going to be you—give in while there is something still left in it for
you.’” Id. Little Hearts alleges that “Carter did not want the
[m]ortgage paid so he could purchase the [b]uilding.” Id. at 37-38.
After the company defaulted, the LLC that held the loans began
foreclosure proceedings.
In its state action, Prime sought a preliminary injunction to
maintain the removal of Little Hearts as manager. The state court held
a hearing on the request in February 2019. During a subsequent
session in May 2019, the presiding judge indicated not only that Prime
was not entitled to a preliminary injunction but that Little Hearts was
entitled to have a receiver appointed. On June 10, 2019, before the
state court could resolve the request for the preliminary injunction,
Prime as manager caused the company to file for bankruptcy under
Chapter 11 in the Southern District of New York. According to the
complaint, “[t]he Bankruptcy Proceeding was unnecessary as the
[c]ompany was solvent. The value of the [c]ompany’s [sole] asset, the
[b]uilding, far exceeded the [c]ompany’s liabilities.” Id. at 34.
Little Hearts alleges that Prime initiated the bankruptcy
proceeding solely to forestall an adverse ruling in the state court
litigation. On the same day that the company filed for bankruptcy,
Carter formed a new entity called Lazarus 5, LLC. The complaint
alleges that “Lazarus 5 was [formed] solely for the purpose of
purchasing the [m]ortgage … and then forcing a sale of the [b]uilding
to Lazarus 5.” Id. at 39. A bankruptcy trustee was appointed and
submitted a plan of liquidation in May 2020. The plan provided for

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the sale of the building to Lazarus 5 and established the creditor trust,
the “sole purpose” of which was to liquidate the remaining assets of
the estate—including legal claims—and to distribute the proceeds to
the bankruptcy claimants. Prime App’x 20. The plan permanently
enjoined actions involving property of the estate brought by anyone
other than the creditor trustee. At a bankruptcy sale held on August
12, 2020, Lazarus 5 purchased the mortgage and acquired the building
for approximately $50,000,000.
II
In June 2019, Little Hearts commenced an adversary
proceeding in the bankruptcy court. Little Hearts, Carter, and the
creditor trustee entered into mediation. When the mediation failed,
Little Hearts sued in New York state court. The defendants removed
the action to the bankruptcy court pursuant to Bankruptcy Rule
9027(a)(3).
The complaint asserted six causes of action. Counts I and II
asserted claims for breach of fiduciary duty and for aiding and
abetting breach of fiduciary duty. Counts III and IV asserted claims
for breach of contract and for breach of the implied covenant of good
faith and fair dealing. Count V advanced a theory of alter ego liability
against Carter, which was styled as a separate cause of action, and
Count VI asserted a claim for unjust enrichment. The complaint
alleged that Prime and Carter used their positions as managers “to
squeeze out Little Hearts and transfer the [b]uilding to themselves.”
App’x 25. Little Hearts claimed damages of “at least $48,052,000 in
lost capital and the loss of valuable rights afforded to [Little Hearts]
in the Operating Agreement, including the right to retain, use, occupy
and develop” the Marks Units. Id. at 26 (internal quotation marks and
alterations omitted).

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The bankruptcy court dismissed the complaint in its entirety.
The bankruptcy court held that the claims asserted in the complaint
were derivative of injuries to the debtor. “As derivative claims, the
causes of action belonged to the Debtor and[,] pursuant to the terms
of the Debtor’s plan and the Creditor Trust Agreement, are now
vested with the [c]reditor [t]rust.” In re 305 E. 61st St. Grp. LLC, 644
B.R. 75, 90 (Bankr. S.D.N.Y. 2022). Little Hearts argued that its claims
were based on its own contractual rights with respect to the Marks
Units. The bankruptcy court concluded that “[t]he Marks Units were
not distinct property rights or interests separate from the Plaintiff’s
investment in the Debtor” but rather that the assignment of specific
units to each member “represented an agreement amongst the
[m]embers to reflect their membership interests in the Debtor.” Id. at
91. The district court affirmed the judgment of the bankruptcy court.
See App’x 861-75. This appeal followed.
DISCUSSION
The plan of liquidation prohibits anyone other than the creditor
trustee from pursuing legal claims belonging to the debtor’s estate
under 11 U.S.C. § 541(a)(1). For that reason, Little Hearts may not
maintain its claims if those claims were part of the bankruptcy estate
when the debtor filed for bankruptcy. To resolve that issue, we ask
whether the claims Little Hearts asserts are derivative or direct under
New York law. “[I]f, under state law, a cause of action belongs to the
debtor or if ‘rights of action exist against officers, directors and
shareholders of a corporation for breaches of fiduciary duties, which
can be enforced by either the corporation directly or the shareholders
derivatively before bankruptcy,’ those actions properly are asserted
by the bankruptcy trustee” or by the debtor in possession—and such
claims cannot be maintained by individual creditors. St. Paul Fire &
Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688, 697 (2d Cir. 1989)

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(alteration and citation omitted) (quoting Koch Refining v. Farmers
Union Cent. Exch., Inc., 831 F.2d 1339, 1343 (7th Cir. 1987)).
“We exercise plenary review over a district court’s affirmance
of a bankruptcy court’s decisions.” DuVall v. County of Ontario, 83
F.4th 147, 150 (2d Cir. 2023) (quoting Gasson v. Premier Cap., LLC, 43
F.4th 37, 41 (2d Cir. 2022)). “In other words, we independently review
the bankruptcy court’s decision.” In re DiBattista, 33 F.4th 698, 702 (2d
Cir. 2022). We review de novo the decision to dismiss “causes of action
for failure to state a claim for relief.” In re Bernard L. Madoff Inv. Secs.
LLC, 721 F.3d 54, 63 (2d Cir. 2013). In doing so, we “accept[] all factual
allegations in the complaint as true, and draw[] all reasonable
inferences in the plaintiff’s favor.” City of Pontiac Gen. Emps.’ Ret. Sys.
v. MBIA, Inc., 637 F.3d 169, 173 (2d Cir. 2011) (quoting Shomo v. City of
New York, 579 F.3d 176, 183 (2d Cir. 2009)).2
We conclude that the claims for breach of fiduciary duty and
for aiding and abetting breach of fiduciary duty are derivative and
may be asserted only by the creditor trustee. The claims for breach of
contract and for breach of the implied covenant of good faith and fair
dealing, however, are direct claims that Little Hearts may pursue
against Prime and Carter. The claim for unjust enrichment,
meanwhile, must be dismissed as duplicative of the contract claims.
Accordingly, we affirm in part, vacate in part, and remand for further
proceedings consistent with this opinion.
2 The defendants-appellees argue that Little Hearts lacks “standing” to
bring derivative claims and that subject-matter jurisdiction is therefore
lacking. Appellees’ Br. 23. But “the inquiry into whether a claim is direct,
and a plaintiff therefore has ‘standing’ to bring it, is not an Article III
standing inquiry.” Miller v. Brightstar Asia, Ltd., 43 F.4th 112, 125-26 (2d Cir.
2022).

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I
Whether a cause of action belongs to the bankruptcy debtor—
and therefore forms a part of the bankruptcy estate—or belongs to an
individual creditor “depends on an analysis of state law.” St. Paul, 884
F.2d at 700. The parties do not dispute that the relevant state law in
this case is that of New York. Historically, “New York has lacked a
clear approach for determining” the “difference between direct and
derivative claims.” Yudell v. Gilbert, 949 N.Y.S.2d 380, 381 (1st Dep’t
2012). For that reason, the Appellate Division, First Department, has
“adopt[ed] the test the Supreme Court of Delaware developed in
Tooley v. Donaldson, Lufkin & Jenrette, Inc.” Id. (citing Tooley v.
Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1039 (Del. 2004)). The
Second and Third Departments have followed that precedent. See,
e.g., Accredited Aides Plus, Inc. v. Program Risk Mgmt., Inc., 46 N.Y.S.3d
246, 255 (3d Dep’t 2017) (quoting Yudell, 949 N.Y.S.2d at 384); Mizrahi
v. Cohen, 961 N.Y.S.2d 538, 541 (2d Dep’t 2013) (citing Yudell, 949
N.Y.S.2d at 383-84).
“[T]he decisions of New York State’s Appellate Division are
helpful indicators” of “how the [New York] Court of Appeals would
rule.” Michalski v. Home Depot, Inc., 225 F.3d 113, 116 (2d Cir. 2000).
Those decisions are “not to be disregarded by a federal court unless it
is convinced by other persuasive data that the highest court of the
state would decide otherwise.” Id. (quoting West v. AT&T Co., 311 U.S.
223, 237 (1940)). We are not convinced that the New York Court of
Appeals would decide otherwise, so we apply the Tooley framework
here.
In Tooley, the Delaware Supreme Court explained that a court
must “look to the nature of the wrong and to whom the relief should
go” to determine whether a corporate stockholder’s claim for breach

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of fiduciary duty is derivative or direct. Tooley, 845 A.2d at 1039. For
a claim to be direct, the stockholder’s alleged injury “must be
independent of any alleged injury to the corporation. The stockholder
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.” Id.
“[T]he Delaware Supreme Court has clarified that ‘when a
plaintiff asserts a claim based on the plaintiff’s own right, such as a
claim for breach of a commercial contract, Tooley does not apply.’”
Brightstar Asia, 43 F.4th at 122 (quoting Citigroup Inc. v. AHW Inv.
P’ship, 140 A.3d 1125, 1139-40 (Del. 2016)). The Tooley test helps to
evaluate claims that are “based on the defendants’ alleged violation
of fiduciary duties arising by law from the defendants’ status in the
corporate structure.” NAF Holdings, LLC v. Li & Fung (Trading) Ltd.,
772 F.3d 740, 745 (2d Cir. 2014). Before applying the Tooley test,
therefore, “a more important initial question has to be answered: does
the plaintiff seek to bring a claim belonging to her personally or one
belonging to the corporation itself?” NAF Holdings, LLC v. Li & Fung
(Trading) Ltd., 118 A.3d 175, 180 (Del. 2015). We ask that question with
respect to each claim asserted in the complaint.
A
We begin with Counts I and II, which assert claims for breach
of fiduciary duty and for aiding and abetting breach of fiduciary duty.
The paradigmatic claim to which Tooley applies is a stockholder’s
claim for breach of fiduciary duty. “Tooley and its progeny” were
“intended” specifically to identify “the line between direct actions for
breach of fiduciary duty suits by stockholders,” on the one hand, “and
derivative actions for breach of fiduciary duty suits subject to the
demand excusal rules,” on the other. NAF Holdings, 118 A.3d at 179.

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Under Tooley, Little Hearts may maintain its claims for breach
of fiduciary duty and for aiding and abetting breach of fiduciary duty
only if (1) the claimed injury is “independent of any alleged injury to
the corporation,” (2) “the duty breached was owed to” Little Hearts,
and (3) Little Hearts “can prevail without showing an injury to the
corporation.” Tooley, 845 A.2d at 1039. Counts I and II do not satisfy
these criteria, so Little Hearts cannot maintain those claims directly.
Count I alleges that Prime and Carter breached a fiduciary duty
to Little Hearts by having Little Hearts removed as manager, placing
the company into bankruptcy, failing to advance construction
projects on the building, failing to pay off the mortgage, and
orchestrating the sale of the building to Lazarus 5. The complaint
alleges that these actions violated Paragraphs 9(F) and 9(I) of the
Operating Agreement. Paragraph 9(F) requires the manager to
“devote as much time as is reasonably necessary to the management
of the [c]ompany’s business.” App’x 71. Paragraph 9(I) requires the
manager to “discharge [its] duties to the [c]ompany and to the other
[m]embers in good faith and with that degree of care that an
ordinarily prudent person and an experienced real estate developer
in a similar position would use under similar circumstances.” Id. at
73.
We agree with the bankruptcy court that these claims are
derivative under Tooley. 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 Little Hearts. The
conduct of Prime and Carter that allegedly breached a fiduciary duty
to Little Hearts would also have breached a fiduciary duty to the
company. Because Little Hearts cannot prevail on its claim for breach
of fiduciary duty without showing an injury to the company, the
claim is derivative under Tooley, and the plan bars Little Hearts from

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asserting it. As the bankruptcy court observed, moreover, “[t]he claim
of aiding and abetting cannot stand independent of the claim for
breach of fiduciary duty,” so Count II was properly dismissed along
with Count I. 305 East 61st St., 644 B.R. at 87 n.12.
B
Counts III and IV, which assert claims for breach of contract
and for breach of the implied covenant of good faith and fair dealing,
are different. The bankruptcy court was right that all of the counts
“are anchored in the Defendants[’] alleged wrongful conduct as to the
[c]ompany, with effects that impacted all [m]embers’ rights.” Id. at 87.
But it does not follow from that observation that Tooley bars all the
claims. When the answer to the “important initial question” is that
“the plaintiff seek[s] to bring a claim belonging to her personally”
rather than “belonging to the corporation,” NAF Holdings, 118 A.3d at
180, the Tooley test “does not apply,” Citigroup, 140 A.3d at 1140.
When the Tooley test does not apply, a plaintiff may bring a direct
claim even if it cannot demonstrate its injury without showing an
injury to the corporation. Thus, “a suit by a party to a commercial
contract to enforce its own contractual rights is not a derivative action
under Delaware law, despite the fact that [the party] cannot
demonstrate its injury without showing an injury to the corporation
in which it owns stock.” Brightstar Asia, 43 F.4th at 122 (internal
quotation marks and citation omitted).
We made this clear in Brightstar Asia. The plaintiff in that case
was a stockholder and former officer of a cellular telephone
refurbishment business, Harvestar, that was purchased by Brightstar
Asia. The complaint alleged that Brightstar Asia mismanaged
Harvestar and caused the company to enter into transactions on non-
market terms with its own affiliates. As a result, the plaintiff’s stock

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options under the shareholders agreement were rendered worthless.
See id. at 117-18. Applying Delaware law, we held that the plaintiff
could not bring a direct claim for breach of the conflicted-transactions
provision of the shareholders agreement because that provision
created a duty to the company rather than to the plaintiff
individually. We held, however, that the plaintiff could bring a direct
claim for breach of the implied covenant of good faith and fair dealing
based on the loss of his option rights. See id. at 123-25. Because those
rights were “individual rights” belonging to the plaintiff, the plaintiff
adequately alleged “an implied covenant of good faith and fair
dealing that creates a contractual duty owed to him, not to
Harvestar.” Id. at 124. Even though the plaintiff could not prevail on
the claim without also showing an injury to the company, the claim
was direct because it was based on a right belonging to the plaintiff
personally.
The same conclusion applies in this case. We disagree with the
assertion of the bankruptcy court that the interests of Little Hearts in
the Marks Units “were not distinct property rights or interests
separate from [its] investment in the Debtor.” 305 E. 61st St., 644 B.R.
at 91. The right to “retain, use, occupy, develop, and acquire” specific
units in a building does not follow automatically from ownership of
a percentage of the equity in the company that owns the building. It
would have been possible for an additional investor to contribute and
to become a member of the company without receiving the right to
occupy or to renovate specific units in the building. In fact, Little
Hearts had contractual rights with respect to its designated units that
the other investors lacked. It was contractually entitled to lease the
cellar and first floor units from the company and to sublease those
units to a commercial tenant. Because no other member of the

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company had such contractual rights, the rights did not simply reflect
the percentage interest of Little Hearts in the company.
New York courts applying Tooley have held that even if a claim
is direct, it still must be dismissed “if it is confused with or embedded
in the harm to the corporation.” Serino v. Lipper, 994 N.Y.S.2d 64, 69
(1st Dep’t 2014); Yudell, 949 N.Y.S.2d at 384 (“To the extent, if any, that
plaintiffs have asserted direct claims, they are embedded in an
otherwise derivative claim for partnership waste and
mismanagement.”); see also Abrams v. Donati, 66 N.Y.2d 951, 953 (1985)
(“A complaint the allegations of which confuse a shareholder’s
derivative and individual rights will … be dismissed.”). But this
principle does not apply when, in light of the predicate “important
initial question,” the Tooley test does not apply. NAF Holdings, 118
A.3d at 180. In such a case, the plaintiff may pursue a direct claim
even if he cannot state the claim without showing an injury to the
corporation. See Brightstar Asia, 43 F.4th at 122; NAF Holdings, 772 F.3d
at 744. If the plaintiff may pursue even a claim based on a derivative
harm, he surely may also pursue a claim based on an independent
harm that is “embedded in the harm to the corporation.” Serino, 994
N.Y.S.2d at 69.
The underlying principle the New York courts have identified
is that it is not enough to allege an individual harm. See id. (“[E]ven
where an individual harm is claimed, if it is confused with or
embedded in the harm to the corporation, it cannot separately
stand.”). The plaintiff must also allege that “the wrongdoer has
breached a duty owed directly to the shareholder which is
independent of any duty owing to the corporation.” Id. Accordingly,
New York courts have dismissed claims as “confused with or
embedded in” derivative claims when the plaintiff has failed to allege

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an independent duty owed to himself directly. Id.3 These decisions
aim to preserve the distinction between the rights of the individual
shareholder and the rights of the corporation. See Serino, 994 N.Y.S.2d
at 69 (explaining that a direct claim “must be factually supportable by
more than complaints that conflate [the plaintiff’s] derivative and
individual rights”) (citing Abrams, 66 N.Y.2d at 953-54). Here, Counts
III and IV are not impermissibly confused with or embedded in harm
to the corporation because those claims seek to vindicate independent
contractual obligations owed to Little Hearts individually.
Because Counts III and IV are based on contractual duties—
express or implied—that are owed to Little Hearts individually, the
Tooley test does not apply and Little Hearts may assert those claims
directly. The bankruptcy court therefore erred in dismissing those
claims on the ground that the claims are derivative.
C
Count VI asserts a claim for unjust enrichment. This claim is
duplicative of the contract claims asserted in Counts III and IV and
must be dismissed regardless of whether it is direct or derivative.
Under New York law, “[a]n unjust enrichment claim is not available
3 See Serino, 994 N.Y.S.2d at 70 (dismissing a claim for lost earning capacity
as a result of reputational harm from a corporate scandal); Yudell, 949
N.Y.S.2d at 384 (dismissing claims based on pecuniary loss to joint venture
partners resulting from a manager’s “failure to collect rents and other
obligations owed the joint venture”); Abrams, 66 N.Y.2d at 953-54
(dismissing a complaint alleging a “conspiracy to terminate [the plaintiff’s]
employment as president of [the corporation]” that “mixe[d] those
allegations with charges of diversion of corporate assets … and the
fraudulent reduction of the price of [the corporation’s] products” because
the plaintiff failed to allege “that defendants breached an independent duty
owed [to him]”).

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where it simply duplicates, or replaces, a conventional contract or tort
claim.” Corsello v. Verizon New York, Inc., 18 N.Y.3d 777, 790 (2012).
“Two claims are duplicative of one another if they ‘arise from the
same facts and do not allege distinct damages.’” NetJets Aviation, Inc.
v. LHC Commc’ns, LLC, 537 F.3d 168, 175 (2d Cir. 2008) (alteration
omitted) (quoting Sitar v. Sitar, 854 N.Y.S.2d 536, 538 (2d Dep’t 2008)).
The unjust enrichment claim parallels the contract claims by
resting on allegations that Prime and Carter wrongfully deprived
Little Hearts of its exclusive rights with respect to the Marks Units.
Count VI seeks the same damages as Counts III and IV of not less than
$48,052,000 to compensate Little Hearts for “lost capital and the loss
of valuable rights afforded to [Little Hearts] in the Operating
Agreement, including the right to ‘retain, use, occupy [and] develop’
designated units in the [b]uilding.” App’x 26, 50-51. The unjust
enrichment claim in Count VI therefore must be dismissed as
duplicative.
II
Neither party addresses in its briefing on appeal whether the
case must be remanded to the bankruptcy court or to state court. At
oral argument, counsel for Little Hearts argued that the bankruptcy
court lacks subject-matter jurisdiction over the direct claims and
therefore the case must return to the state court. See Oral Argument
Audio Recording at 45:50. He acknowledged that the bankruptcy
court may exercise jurisdiction over a direct claim that is closely
related to a bankruptcy case, but he suggested that such a close
relationship is missing here. See 28 U.S.C. § 1334(b) (providing that
the district court in which the bankruptcy case is filed “shall have
original but not exclusive jurisdiction of all civil proceedings arising
under title 11, or arising in or related to cases under title 11”).

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The jurisdiction of the bankruptcy court extends to “core
proceedings” that arise under—or in cases under—the Bankruptcy
Code and to non-core proceedings that are “related.” 28 U.S.C. § 157;
see id. § 1334. “Core proceedings” include “matters concerning the
administration of the estate” and “proceedings affecting the
liquidation of the assets of the estate.” Id. § 157(b)(2)(A), (O). Among
the “assets of the estate” that the creditor trust must liquidate
pursuant to the plan is the derivative claim for breach of fiduciary
duty against Prime and Carter. The direct claims that Little Hearts
asserts here may affect the liquidation of that asset because if Little
Hearts prevails, its share of any recovery for the fiduciary-duty claims
will be correspondingly reduced to avoid a double recovery.
Moreover, even if the direct claims are not part of a core proceeding,
the claims may still be “related” to the bankruptcy. 4 “[A] civil
proceeding is related to a bankruptcy case when ‘the outcome of that
proceeding could conceivably have any effect on the estate.’” 1 Collier
on Bankruptcy ¶ 3.01[3][e][ii] (16th ed. 2024) (quoting Pacor, Inc. v.
Higgins, 743 F.2d 984, 994 (3d Cir. 1984)).
If the direct claims are part of a non-core but related proceeding
based on a state law claim or cause of action, the bankruptcy court
will need to decide whether to abstain under § 1334(c)(2). That statute
provides that when a proceeding is “related” to a core proceeding but
4 It is not inconsistent to conclude that a claim arises in or is related to a
bankruptcy proceeding, on the one hand, but is not embedded in or
confused with a claim belonging to the debtor, on the other. The statute
conferring jurisdiction on the bankruptcy court looks to the effect of the
proceeding on the bankruptcy estate. The New York cases applying Tooley,
by contrast, aim at ensuring plaintiffs do not “conflate … derivative and
individual rights.” Serino, 994 N.Y.S.2d at 69. A claim may be based on a
plaintiff’s individual rights—such as a contract right—and nonetheless
have a potential effect on the bankruptcy estate.

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“could not have been commenced in a court of the United States”
absent that relation, the federal courts “shall abstain from hearing
such proceeding if an action is commenced, and can be timely
adjudicated, in a State forum of appropriate jurisdiction.” 28 U.S.C.
§ 1334(c)(2). We have explained that timeliness under § 1334(c)(2)
depends on “a case- and situation-specific inquiry that requires a
comparison of the time in which the respective state and federal
forums can reasonably be expected to adjudicate the matter.” Parmalat
Cap. Fin. Ltd. v. Bank of Am. Corp., 639 F.3d 572, 580 (2d Cir. 2011).
The bankruptcy court should address these questions in the
first instance, with the option of receiving briefing from the parties.
We therefore remand to the district court with instructions to remand
to the bankruptcy court so that the bankruptcy court may
determine—before it proceeds to the merits—whether it may exercise
jurisdiction over the direct claims under 28 U.S.C. § 1334(b) and
whether, if the claims are part of a non-core proceeding, abstention is
warranted under 28 U.S.C. § 1334(c)(2).
CONCLUSION
We have previously explained that “when a plaintiff asserts a
claim based on the plaintiff’s own right, such as a claim for breach of
a commercial contract,” the claim is direct regardless of the Tooley test.
Brightstar Asia, 43 F.4th at 122 (quoting Citigroup, 140 A.3d at 1139-40).
In this case, the claims for breach of contract and for breach of the
implied covenant of good faith and fair dealing belong to Little
Hearts, not to the creditor trust. The fiduciary duty claims are
derivative, however, and may be asserted only by the creditor trustee.
Because the unjust enrichment claim duplicates the contract claims, it
must also be dismissed. We therefore affirm the judgment in part,

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vacate in part, and remand for further proceedings consistent with
this opinion.5
5 We note that Count V asserts an alter ego theory of liability against Carter.
Because alter ego liability “is not itself an independent … cause of action,
but rather is a means of imposing liability on an underlying cause of
action,” Peacock v. Thomas, 516 U.S. 349, 354 (1996) (internal quotation marks
omitted), Little Hearts may pursue the theory on remand for its direct
claims.

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