The Internal Affairs doctrine requires a court to apply the law of the state where a business was formed, or organized, to disputes between the owners regardless of the circumstances.
New Jersey courts have applied a more traditional analysis of conflict of laws issues and may refuse to apply the law of another state if the parties or the issues have no connection to the state of formation.
The Revised Uniform Limited Liability Company Act provides that the law of the state of organization governs the rights of members and their liability to third parties.
A New Jersey need not necessarily honor a Delaware choice of law provision in an operating agreement if the company has no substantial relationship to the state where it was organized, the Appellate Division holds in a case involving a Delaware limited liability company and an Israeli corporation.
This holding in which the appellate court reversed and remanded a trial court’s decision rejected the per se application of the “internal affairs” doctrine in which courts apply the law of the state where a business was organized to internal disputes without regard to the other principles that often govern choices about which state’s law applies to a lawsuit.
The Importance of Choice of Law Decisions
This is a technical issue, but an important one that has some very practical decisions. Business entities are formed under the laws of individual states, but have the right to do business in any state. That means as a practical matter that corporations and limited liability companies often do business in states, or even countries, other than whether they were formed. When a dispute arises in one state among the owners of a business formed in another state, the choice of law and authority of the court to act can be a thorny issue. Continue reading