Tuesday, August 16, 2016

New York Court Holds that Assignee of Membership Interests Does Not Have Standing to Bring a Derivative Action

New York Court Holds that Assignee of Membership Interests
Does Not Have Standing to Bring a Derivative Action

      In a recent decision from New York, it was held that a transferee of a membership interest eho  was never admitted as a member did not have standing to bring a derivative action on the LLC’s behalf. MFB Realty LLC v. Eichner, 2016 NY Slip Op 31242(U) (Sup. Ct. New York County, June 24, 2016).
       The allegations in this purportedly derivative action are based upon assertions that certain members used one LLC in order to support another while at the same time depriving the first LLC of various opportunities. Ultimately, the substance of those allegations is irrelevant in that the suit was dismissed for lack of standing.
      Under the subject LLC’s operating agreement, a transfer of the economic rights of membership required the consent of 95% of the members (apparently this 95% threshold was applied on a disinterested basis). Separately, there was a requirement of 95% of the members (again, it appears that this was to be applied on a disinterested basis) in order to effect the admission of a transferee as a member. On the basis that MFB, the purported member bringing the derivative action, was a mere transferee, dismissal was sought.
      As an initial matter, the court reviewed the various allegations and determined them to be derivative (and not direct) in nature. In this case, while the first step, namely consent to the assignment of the economic rights, had been granted, there had been no satisfaction of the second step, namely written consent to the admission of the transferee as a member. With respect to the consent that was given:
Significantly, however, the consent letter is completely devoid of any express (or implied) reference to the transfer of a membership interest in T. Park, and nothing in that letter may be interpreted as a consent to the transfer of membership. From there, applying the rule that “only a member of an LLC at the time of the alleged wrong to the LLC has standing to bring a derivative claim on behalf of that company,”, citing Cordts-Auth. v. Crunk, LLC, 815 F. Supp. 2d 778, 786-787 (S.D. N.Y. 2011) (citing New York Law), affd 479 Fed. Appx. 375 (2d Cir. 2012), it was held that:
Because it has failed to show that 95% of the members of T. Park gave written consent to MFB becoming a substituted member of T. Park, MFB lacks standing to sue on T. Park’s behalf.

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