Assignment of Membership Interests . . . Always Check the Operating Agreement and The LLC Law

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Posted on: Dec 1 2025

In Kober v. Nestampower, 2025 N.Y. Slip Op. 06609 (2d Dept. Nov. 26, 2025), the Appellate Division, Second Department, decided an appeal involving disputes over membership interests in a limited liability company. After a member’s death, her daughter attempted to assign the trust’s LLC interest to herself and siblings without obtaining consent from other members. Plaintiffs sued for declaratory relief and damages. The Court held that under New York’s Limited Liability Company Law and the LLC’s operating agreement, an assignment of interest does not confer management rights or membership unless expressly permitted and consented to by existing members. Since plaintiffs lacked such consent, they were not members of the LLC and had no standing to assert the derivative claims alleged in the complaint.

Defendants Rita Nestampower and Martha Gendel and their sister Bernice Klein (the “decedent”) were members of KGN Associates, LLC (hereinafter, “KGN” or the “LLC”). The sisters formed KGN on February 26, 2003, for the purpose of owning and managing commercial property in Farmingdale, New York. KGN also owned two parcels of vacant land in Yaphank, New York. All properties were inherited from the sisters’ father.

In October 2004, the decedent assigned her interest in the LLC “to the extent of thirty three and one third Percent (33 1/3%) of the Net Profits in the [LLC] as defined by the [LLC]” to a living trust in her name (hereinafter, the “trust”), of which she was the trustee. In June 2010, the decedent died, and plaintiff, Linda Robin Kober (“Kober”), the decedent’s daughter, became the trustee of the trust.

In February 2011, Kober executed an assignment on behalf of the trust (the “assignment”), intending to assign the trust’s interest in the LLC to herself and the decedent’s other children, plaintiff Bettina Iris Rabinowitz (“Rabinowitz”) and defendant Jules Mark Klein (“Klein”), each as an 11.11% member.

In February 2018, Kober and Rabinowitz (collectively, the “plaintiffs”), individually and derivatively on behalf of the LLC, commenced the action against, among others, defendants, inter alia, to recover damages for breach of fiduciary duty and for declaratory relief. In particular, plaintiffs asserted the following four causes of action: First – declaratory judgment that plaintiffs and Klein were members of the LLC, each owning an 11.11% interest, and permanently enjoining defendants from excluding them from the management of the LLC; Second – on behalf of the LLC and against defendants in an amount equal to the difference between the fair market value and the sales price of the Yaphank property, with interest from the date of sale, and reasonable attorney’s fees for the prosecution of the claim; Third – on behalf of the LLC against the attorney and his law firm for the LLC in connection with the sale of the Yaphank property, in an amount equal to the difference between the fair market value and the sales price of the Yaphank property, with interest from the date of sale; and Fourth – on behalf of the LLC against defendants, permanently enjoining them from selling the Farmingdale property without notice to plaintiffs and Klein, and without permitting them to participate equally in the management of the LLC, together with reasonable attorney’s fees in prosecuting the claim.

Thereafter, plaintiffs moved for summary judgment on the complaint. Defendants cross-moved for summary judgment dismissing the first, second, and fourth causes of action on the ground, among others, that plaintiffs lacked standing to assert derivative causes of action on behalf of the LLC. In an amended order dated April 30, 2021, the Supreme Court denied plaintiffs’ motion and granted defendants’ cross-motion. Plaintiffs appealed. The Second Department affirmed.

“A membership interest in a limited liability company is assignable in whole or in part.”[1] However, the assignment of a membership interest “does not . . . entitle the assignee to participate in the management and affairs of the limited liability company or to become or to exercise any rights or powers of a member.”[2] Rather, “the only effect of an assignment of a membership interest is to entitle the assignee to receive, to the extent assigned, the distributions and allocations of profits and losses to which the assignor would be entitled.”[3] “A person can become a member of a limited liability company by assignment, but only where the operating agreement grants the assignor such power, and, then, where the conditions of such authority have been complied with.”[4]

Looking at the LLC’s operating agreement, the Court noted that the agreement “allow[ed] for the transfer of a membership interest, but provide[d] that new members [could] only be admitted with the consent of the LLC’s other members”.[5] The assignment at issue provided that the transfer of the membership interest was “[s]ubject to the acceptance of [the] assignment and assumption by the LLC.”[6] The Court found that, as demonstrated by defendants in their cross-motion, “there had not been any prior consent allowing for the transfer of any membership interest to the plaintiffs”.[7] As a result, the Court held that “defendants established their prima facie entitlement to judgment as a matter of law dismissing the first, second, and fourth causes of action”.[8] “In opposition,” said the Court, “plaintiffs failed to raise a triable issue of fact, as they [did] not dispute that they failed to obtain the consent of the LLC’s other members to be admitted as members of the LLC when they acquired their membership interest.”[9] “Therefore,” concluded the Court, “plaintiffs, as nonmembers who had not been admitted as members of the LLC, lacked standing to pursue derivative causes of action on behalf of the LLC.”[10]

For the reasons stated with respect to defendants’ cross-motion, the Court held that “plaintiffs failed to demonstrate their prima facie entitlement to judgment as a matter of law on the complaint.”[11]

Takeaway

Under the LLC Law, assigning a membership interest only transfers economic rights (profits and losses), not management rights or membership status. As explained in Kober, becoming a member requires compliance with the operating agreement and consent from existing members.

Kober also underscores the importance of an operating agreement. An operating agreement typically includes a number of provisions that give clarity to the conduct of the LLC and its members. For example, an operating agreement specifies: (a) each member’s ownership percentage, voting rights, and responsibilities; (b) whether the LLC is member-managed or manager-managed, detailing decision-making authority and operational procedures, provisions that are important in determining the fiduciary duties each member has, or may have, vis-à-vis the other and/or the LLC; and (c) the rules for admitting new members and transferring interests, ensuring that ownership changes occur only with proper consent—avoiding issues like those in Kober. Moreover, an operating agreement typically addresses profit distribution, dispute resolution, and dissolution procedures, thereby reducing risk and uncertainty.

Without an operating agreement, the LLC Law applies by default, which may not align with members’ intentions. A tailored agreement, therefore, gives members flexibility and control.

In Kober, the LLC had an operating agreement that governed the admission of new members. Under that agreement, even if an assignment occurs, without explicit consent from other members, the assignee cannot participate in management or assert member rights. The failure to obtain the consent of the other members was the death knell of plaintiff’s derivative claims. Only members of an LLC have standing to bring derivative actions on behalf of an LLC. As made clear in Kober, nonmembers, even with assigned economic interests, cannot pursue such claims.

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Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

[1] Behrend v. New Windsor Group, LLC, 180 A.D.3d 636, 639 (2d Dept. 2020); see Limited Liability Company Law (“LLC Law”) § 603(a)(1).

[2] LLC Law § 603(a)(2); see Behrend, 180 A.D.3d at 639. It is important to note that Section 603(a) of the LLC Law makes clear that an assignment of a membership interest is governed by the statute, “[e]xcept as provided in the operating agreement.”

[3] LLC Law § 603(a)(3); see Behrend, 180 A.D.3d at 639.

[4] Behrend, 180 A.D.3d at 639; see LLC Law § 602(b)(2).

[5] Addressing the terms of the operating agreement, the Supreme Court found that there was “no provision in the Operating Agreement which contradicts the language of [LLCL] § 603(a)(3).”

[6] Slip Op. at *2.

[7] Id. (citing Behrend, 180 A.D.3d at 640; Kaminski, 169 A.D.3d at 786). The Supreme Court found “[t]here is no provision in the Operating Agreement that a member’s interest may be evidenced by a certificate issued by the company, and plaintiffs do not claim that such a certificate reflecting transfer of membership was ever issued. The Operating Agreement at ¶ 13 sets forth the process whereby members may admit new members. Plaintiffs do not allege that the defendant members ever caused the Company to admit plaintiffs as members.”

[8] Id.

[9] Id. (citing Kaminski v. Sirera, 169 A.D.3d 785, 786 (2d Dept. 2019)).

[10] Id. (citing Tzolis v. Wolff, 10 N.Y.3d 100, 102 (2008); Harounian v. Harounian, 198 A.D.3d 734, 736 (2d Dept. 2021); Kaminski, 169 A.D.3d at 786).

[11] Id. (citing Behrend, 180 A.D.3d at 640).

Tagged with: Assignment, Commercial Litigation, LLC, LLC Law, Operating Agreement