Thomas Kearns Publishes Article in NYREJ on LLC Interest Forfeiture

New York Real Estate Journal recently published an article authored by Co-Chair of Olshan’s Real Estate Law practice Thomas Kearns entitled “LLC Interest Forfeiture is Disfavored.” (The article is also available on our blog.) In the article, Tom explains an LLC member’s interest under New York law cannot typically be forfeited for failing to make a required capital contribution, as New York courts have consistently upheld this principle. Notable cases, such as Atlantis v. Nabe and Quinn v. Stuart Lakes, have denied forfeiture attempts. However, he explains that LLC managers have alternative mechanisms to address capital contribution defaults. These include rescue loan provisions, where the manager arranges high-interest loans to cover the default, often resulting in the dilution of the defaulting member’s equity. Additional tools include the loss of voting rights, buy/sell provisions, and fair market value adjustments, all of which can be enforced under New York law. In conclusion, Tom states that despite the inability to directly forfeit a member's interest, these methods ensure that the LLC can continue to operate effectively and equitably.