In Behrend v. New Windsor Group, LLC, the Second Department affirmed the denial of Plaintiff Julius Behrend’s (“Behrend”) motion for summary judgment in his action seeking a declaratory judgment that he held a membership interest in defendant New Windsor Group, LLC (“New Windsor”) or an interest in New Windsor’s assets.[1]  The Court’s decision affirmed a ruling by former Queens County Commercial Division Justice Martin E. Ritholtz. The opinion addressed the effect of a putative assignment of interest in New Windsor from Joseph Klein (“Klein”) to Behrend pursuant to a memorandum of understanding between them.  Behrend failed to seek consent to the assignment from New Windsor’s managing member, Andrew Perkal (“Perkal”), as was required by New Windsor’s operating agreement.

Factual Background

New Windsor is an LLC whose principal asset is a shopping center.[2]  In April 2012, Behrend filed a complaint against New Windsor, Perkal, and Klein (collectively, “Defendants”) in the Commercial Division seeking a declaratory judgment that he held a 50% membership interest in New Windsor, and a 50% interest in certain of its assets.[3]  Behrend alleged that he loaned more than $2.5 million to Klein, and that in December 2007, Behrend and Klein entered into a memorandum of understanding in which Klein agreed to assign his interest in New Windsor to Behrend.[4]  In his complaint, Behrend alleged that Defendants had refused to honor his membership interest in New Windsor or his interest in New Windsor’s assets.[5]  Klein did not appear in the case, but New Windsor and Perkal denied Behrend’s allegations and contended that any interest that Klein had in New Windsor had been transferred and extinguished prior to the filing of the complaint.[6]

In the Supreme Court, Behrend moved for summary judgment based on the memorandum of understanding which demonstrated that Klein owed Behrend for the money that Behrend loaned him and that Klein agreed to transfer his membership interest in New Windsor to Behrend.[7]  New Windsor and Perkal cross-moved for summary judgment.  They explained that Klein never actually became a member of New Windsor because he had defaulted on his obligations, resulting in an arbitration award against Klein which required Klein to transfer his interest in New Windsor to Perkal.[8]  In 2010, the Supreme Court, Queens County confirmed that arbitration award and ordered Klein to transfer any interest that he held in New Windsor to Perkal.  On April 26, 2012, Klein transferred his LLC interest and resigned as a member of New Windsor.[9]

Moreover, under New Windsor’s operating agreement, Klein could only transfer his interest in the LLC with the prior consent of Perkal and his wife.[10]  Perkal affirmed that he did not provide Behrend with his consent prior to the putative transfer of Klein’s interest in New Windsor to Behrend.[11]

Procedural History

The Commercial Division denied Behrend’s motion for summary judgment against New Windsor and Perkal, granted their cross-motion for summary judgment, declared that Behrend does not have a 50% membership interest in New Windsor or a 50% interest in any of its assets, and dismissed the claims in the complaint against Klein as abandoned.[12]  Judge Ritholtz ruled that Behrend failed to establish that Klein had transferred his interest in New Windsor to Behrend, and at most, Klein had transferred only a security interest that was never perfected.[13]  The court also determined that Behrend had no interest in New Windsor’s property because a member of an LLC has no interest in specific property of the LLC.[14]  In addition, because the evidence demonstrated that the assignment failed to satisfy the consent requirement in New Windsor’s operating agreement, the Commercial Division held that the assignment from Klein to Behrend was invalid.[15] 

Behrend appealed that decision to the Appellate Division, Second Department.

The Second Department’s Opinion

The Appellate Division began its analysis with a discussion of the relevant principles of law governing limited liability companies.  The Court explained that “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.”[16]  Moreover, a person may only become a member of an LLC by assignment when permitted by the LLC’s operating agreement and when the conditions of a valid transfer are satisfied.[17]

Applying these governing principles, the Second Department affirmed the decision of the Commercial Division. The Court held that, notwithstanding any questions of fact concerning whether Klein had a membership interest in New Windsor, New Windsor’s operating agreement only permitted a transfer of a membership interest with the prior unanimous consent of New Windsor’s members.  Behrend, however, never obtained that requisite consent.[18] Moreover, the Second Department agreed that any interest Klein may have held in New Windsor was extinguished as of April 26, 2012 when he transferred that interest to Perkal and resigned as a member.[19] Consequently, “to the extent that Klein purportedly assigned his membership interest to the plaintiff, the only effect of such an assignment would be that the plaintiff was entitled to receive the distributions and allocations of profits and losses to which Klein would have been entitled” from the date of the memorandum of understanding to April 26, 2012.[20]

Conclusion

In sum, the Second Department held that the putative assignee of an LLC interest was not entitled to a declaratory judgment that he had a membership interest in the LLC or an interest in the LLC’s assets when the assignment failed to comply with the terms of the LLC’s operating agreement.  The decision underscores the importance of evaluating an LLC’s operating agreement for any contractual restrictions prior to negotiating an assignment of any interests in the LLC.