At New York Business Divorce, schadenfreude is our stock-in-trade.

Legal missteps, misconceived strategies, and big losses provide the inspiration we need to keep informing and entertaining ourselves and our audience with posts each and every Monday.

A constant source of misery for litigants and lessons for us are attempted assignments of ownership interests and the chaos that ensues when the assignment is not fully consummated.

For LLCs, the concept is straightforward in principle, but frequently violated in practice, distilled to a couple of sentences:

If you hope to become a full-blown LLC member through assignment of a membership interest, you must secure the consent of all members and comply with any other terms of the operating agreement, if there is one.

Failure to do so will make you no more than a mere assignee of the former member’s economic interest in the LLC, not a true member, lacking the right to vote or participate in the management of the LLC, lacking standing to sue derivatively on behalf of the LLC, and lacking standing to sue to dissolve the LLC.

New York jurisprudence is riddled with the corpses of lawsuits that perished because of the simple yet deadly rule that mere assignees lack full equity ownership rights:

We now add to that inauspicious list another recent decision, Kober v Nestampower (___AD3d ___, 2025 NY Slip Op 06609 [2d Dept Nov. 26, 2025]).

In 2018, the year the Dow Jones Industrial Average closed for the first time above 25,000, the year #MeToo became a cultural phenomenon, and the year the Senate confirmed Brett Cavanaugh as Associate Justice of the United States Supreme Court, Linda Kober (“Linda”) and Bettina Rabinowitz (“Bettina”) filed a lawsuit in the Nassau County Commercial Division derivatively on behalf of KGN Associates, LLC (“KGN”).

KGN’s three founding members were Bernice Klein (“Bernice”), Martha Gendel, and Rita Nestampower. Linda and Bettina traced their interests in KGN, and their alleged standing to sue derivatively, back to Bernice, who, in 2004, allegedly transferred her 1/3 membership interest to a revocable living trust, which, in 2011, transferred via a written assignment Bernice’s former 1/3 membership interest in KGN in three equal parts to Linda, Bettina, and Jules Klein (“Jules”). The assignment purported to bestow upon each assignee the status of “substitute member in the company to the extent of the assignment.”

In their complaint, Linda and Bettina pled that Section 11 of KGN’s operating agreement, a simple, off-the-rack form, permitted assignment of membership interests with the following language: “The Members may assign or transfer in whole or in part their interest in the Company.” Linda and Bettina omitted to mention another provision of the operating agreement, Section 13, providing: “The Members may cause the Company to admit one or more additional Members of the Company.” The operating agreement was silent about the procedure or voting thresholds required for admission of new members.

Derivative litigation ensued over the next seven years, resulting in the Appellate Division’s decision last month affirming a Decision and Order by Nassau County Commercial Division Justice Jerome C. Murphy dismissing the complaint for lack of standing.

Kober is a lovely, concise packet of rules of law:

  • Rule 1: Only members of an LLC may bring derivative suits on the LLC’s behalf.
  • Rule 2: A membership interest in an LLC is assignable, in whole or in part.
  • Rule 3: The assignment of a membership interest does not entitle the assignee to participate in the management and affairs of the LLC or to become or to exercise any rights or powers of a member.
  • Rule 4: 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 – in other words, the assignment transfers the assignor’s economic rights in the LLC, but not the assignor’s voting or management rights.
  • Rule 5: A person can become a member of an LLC by assignment, but only where the operating agreement grants the assignor such power, and, then, only where the conditions of such authority have been complied with.

Applying these hard-and-fast rules of law, the Appellate Division concluded:

Here, the LLC’s operating agreement allows for the transfer of a membership interest, but provides that new members may only be admitted with the consent of the LLC’s other members. . . . [T]he defendants established . . . that there had not been any prior consent allowing for the transfer of any membership interest to the plaintiffs. In opposition, the plaintiffs . . . do 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. Therefore, the 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.

(citations omitted).

Like many other cases featured here over the years, Kober is a warning to litigation counsel and closely-held business owners to assiduously verify the provenance of an assigned equity interest for compliance with all of the contractual and statutory conditions to full ownership status before launching a costly lawsuit for which full ownership status is outcome determinative of standing to sue.

As in Kober, faulty reliance upon a dubious equity interest assignment to confer standing to sue on behalf of a business entity can lead to many years of litigation with little or nothing to show for it.