What New York LLC Owners Can Learn from Long-Standing Feud

A New York LLC dispute that has lasted nearly three decades shows what happens when co-owners never sign an operating agreement: the court, not the members, ends up deciding how the business is valued and divided. Rosenblum v. Rosenblum is a cautionary tale for every closely held business, family-owned or not.

Key takeaways

• Without an operating agreement, New York’s LLC Law fills the gaps, including how to value a withdrawing member’s interest.
• The court applied a marketability discount partly because the parties’ own refusal to compromise had reduced what the companies were worth.
• Undocumented loans between related entities added years of dispute over terms that could have been written down at the start.
• A litigation strategy has to begin with what the client actually wants to protect. In Rosenblum, neither side could answer that.

The latest decision in Rosenblum v. Rosenblum, Index No. 654177/2015 (Sup. Ct., N.Y. County 2024), citing Rosenblum v. Rosenblum, 214 A.D.3d 440 (1st Dep’t 2023), involved a fair value appraisal proceeding to determine the parties’ interests in two limited liability companies. The proceeding was necessary because the parties never executed operating agreements for either business.

The case is a fair warning to all closely held business owners that it is always best to observe corporate formalities, no matter how closely related the principals are or how good their relationship appears at the outset. Consulting a knowledgeable attorney to prepare proper bylaws, operating agreements, or partnership agreements that set forth each owner’s interest in the business assets is far less costly than a lengthy dispute over ambiguities that could have been resolved when the entity was formed.

How did the New York LLC dispute in Rosenblum begin?

The New York LLC dispute at the center of Rosenblum has been ongoing since 1996. Before Justice Melissa A. Crane’s latest decision, the litigation involved dozens of motions and court hearings, several appeals, and two trials. In the latest chapter, Justice Crane described the feud as follows:

This case is notable for being a particularly acrimonious, multi-generational family dispute. It has also been lengthy. The parties have been fighting since 1996. They agree on practically nothing, are uncompromising, and change legal positions as it suits them in the moment. This court is confident this decision will only fuel further litigation, both here and on appeal. No one has a real interest in resolving this matter.

According to court documents, Kenneth Rosenblum and his mother, Bernice Rosenblum, formed two LLCs to hold real estate. 132 Realty LLC and Village Realty LLC own several properties in New York City’s West Village. 132 Realty owns a property at 132 Thompson Street, while Village Realty owns two properties at 35 Christopher Street and 37-39 Christopher Street.

In 2013, the Rosenblums entered into a settlement agreement to resolve Bernice’s allegations that Kenneth improperly transferred funds out of their partnership, Standard Realty Associates, LLC (“Standard”), for his personal use and deprived Standard of certain business opportunities. Before Kenneth made full payment under the settlement agreement, he filed an action seeking to dissolve the parties’ joint businesses, including the two LLCs at issue. Bernice filed several counterclaims, including a breach-of-contract claim related to the settlement agreement. Bernice passed away while the litigation was pending, and her estate is now the named defendant.

Following a 2022 bench trial, the court granted judgment to Kenneth on his withdrawal claim and determined that his withdrawal date from the two LLCs was September 20, 2019. The Appellate Division, First Department, affirmed. The next step was a valuation hearing to determine the “fair value” of Kenneth’s interests in each LLC as of the withdrawal date.

What happens when a New York LLC has no operating agreement?

In most cases, an LLC’s operating agreement will outline what happens if a member seeks to withdraw, including the process for distributing that member’s share of the business. In the absence of an operating agreement, New York’s Limited Liability Company Law controls. Pursuant to Section 509:

[U]pon withdrawal as a member of the limited liability company, any withdrawing member is entitled to receive any distribution to which he or she is entitled under the operating agreement and, if not otherwise provided in the operating agreement, he or she is entitled to receive, within a reasonable time after withdrawal, the fair value of his or her membership interest in the limited liability company as of the date of withdrawal based upon his or her right to share in distributions from the limited liability company.

How did the court value the LLC interests?

In her decision, Justice Crane addressed four issues on which the parties and their experts disagreed.

Net operating income

Justice Crane found that the rent projections offered by Kenneth’s expert were “inflated and speculative,” because instead of using the rent rolls the units actually collected, the expert used amounts he believed reflected fair market value for a reasonable investor. By contrast, the Estate’s net operating income calculation relied on actual contract rents, which the court found more reliable.

Capitalization rates

Both parties’ experts relied on comparable sales to determine their respective capitalization rates. The court found Kenneth’s cap rate more reliable, noting that the comps the Estate offered were either located outside the West Village, differently sized, or had incomparable mixes of commercial use and rent-regulated designations. The court also found the precipitous drop in the Estate’s appraisals between the 2016 valuation at the previous trial and the current 2019-based valuation to be “highly suspicious.”

Treatment of loans owed to the LLCs

The court rejected the Estate’s argument that loans owed to the LLCs should be eliminated because the parties’ partnership, Standard Realty, is insolvent. As Justice Crane explained, the loans remain fully collectible because Standard Realty is a partnership and partners are personally liable for its debts. Any loan the partnership could not pay would be covered half by Kenneth and half by the Estate, which, in practical terms, should cancel out.

Marketability discount

The court agreed with the Estate that a discount for lack of marketability was warranted, given the protracted litigation between the parties and the absence of an operating agreement that had contributed to it.

“The amount of time and money that has been wasted due to an unwillingness to compromise reflects poorly on the value of these companies,” Justice Crane wrote. “Compounded by the lack of an operating agreement and a set process for withdrawal, a third-party investor would be unlikely to risk buying into this business at all, much less without a discount.”

In applying the discount at the holding company level, the court rejected Kenneth’s argument that the LLCs were mere “wrappers” for the underlying real estate and that any marketability discount was already “baked in at the property level.”

What does this New York LLC dispute teach about litigation strategy?

The most striking line in the decision is not about cap rates. It is the court’s observation that the parties “agree on practically nothing” and show “no real interest in resolving this matter.” After nearly thirty years, neither side could articulate what it was actually trying to protect: the properties, the income, a family relationship, or simply the satisfaction of winning. When the objective is undefined, litigation has no natural endpoint, and the court’s marketability finding shows that the fight itself became a cost the business had to absorb.

Before a dispute among co-owners reaches that stage, it is worth asking what a good outcome looks like. Is the goal to stay in the business, to exit at a fair price, to protect a specific asset, or to preserve a relationship that will outlast the company? The answer shapes whether the right path is a negotiated buyout, mediation, or a filed claim, and it is the first question a litigator should ask, long before the experts are retained. For the buyout and valuation side of these disputes, see Navigating Disputes: Hire a Partnership Dispute Lawyer.

What should a New York LLC operating agreement address?

Family-owned companies often forgo legal formalities because they assume any disputes will be readily resolved, or because they cannot foresee disputes between the members at all. Unfortunately, disputes among family members can be even more acrimonious than disputes between unrelated business partners.

In the Rosenblums’ LLCs, both businesses lacked formal operating agreements and therefore lacked written guidelines for how the entities’ assets should be divided if the businesses had to be dissolved. Further complicating matters, the parties never documented the loans between their business entities in writing, leaving the loan terms open to interpretation. Both oversights made the litigation more complex, contentious, and costly. To avoid a similar fate, LLCs should adopt operating agreements that address the following:

• Business activities: the purpose and scope of the LLC and any limitations on its operations.
• Contributions: each member’s ownership percentage and any ability or obligation to make additional contributions. Define future capital contributions or capital calls clearly, and amend the agreement when they occur.
• Governance: members’ voting rights and responsibilities and the day-to-day management of the LLC, including the duties and powers of officers, managers, and other employees.
• Distribution of profits and losses: the timing, type (capital versus profits), and amount of all allocations, with specific circumstances in which profits will be distributed.
• Members: how and when members may withdraw or be admitted, whether members may transfer interests to trusts, family members, or third parties, and whether the other members have a right of first refusal.
• Obligations of members: confidentiality, intellectual property, and non-competition obligations owed to the LLC.
• Dissolution: when the LLC can be dissolved and how assets are distributed, including whether the death of a member triggers dissolution.
• Disputes: procedures to resolve deadlocks, such as mediation or arbitration, and the terms of a buy-sell agreement.
• Fee shifting: whether the losing party in a dispute over the agreement itself pays the prevailing party’s attorneys’ fees, costs, and expenses.
• Indemnification: provisions indemnifying members from claims by third parties and against claims by each other.

As Rosenblum makes clear, LLCs formed to hold real property should pay particular attention to provisions addressing valuation and distribution. Negotiate these provisions carefully with an attorney experienced in New York LLCs.

Frequently asked questions

What happens if my New York LLC has no operating agreement and a member wants out?

New York’s LLC Law fills the gap. Under Section 509, a withdrawing member is entitled to the fair value of their interest as of the withdrawal date. If the members cannot agree on that value, a court will decide it, often after a contested hearing with competing experts.

Can a court reduce the value of my interest because of the dispute itself?

Rosenblum shows that it can. The court applied a marketability discount in part because years of litigation and the lack of a withdrawal process made the companies less attractive to an outside buyer.

Are undocumented loans between related companies enforceable?

They may be, but proving the terms is far harder. In Rosenblum, the loans were ultimately treated as collectible, but only after years of argument over amounts and repayment that a written note would have settled.

Is it too late to sign an operating agreement once a dispute has started?

Not necessarily. Members can still agree on a withdrawal or valuation process as part of resolving the dispute, and doing so often narrows the issues a court would otherwise have to decide. Counsel can advise on whether that is realistic in a given case.

How Scarinci Hollenbeck can help

Michael B. Mietlicki, Counsel in the firm’s Litigation practice, represents members, managers, and closely held companies in ownership, control, and withdrawal disputes, including those that arise when the parties never documented their arrangement. His approach begins with understanding the business, the interests driving the dispute, and what the client is ultimately trying to protect. If you are facing a dispute with a co-owner, contact Mr. Mietlicki or another member of the firm’s Commercial Litigation Group. For help drafting or updating an operating agreement before a dispute arises, the firm’s LLC attorneys routinely prepare agreements designed to prevent exactly this kind of protracted battle.