Advances made by a member to a limited liability company can lead to disputes among the owners. Is the payment a capital contribution, an advance, or an interest-bearing loan? Was it authorized?
Payments made by one member in a three-brother limited liability company were at the core of a dispute over control of the finances of two LLCs that led to the expulsion of one brother and forfeiture of nearly $300,000 in unilateral payments made by the dissociated member.
Cropped image of lawyer showing evidence he found in papers to coworker
The payments were not the subject of any agreement, the court held, and therefore were neither capital contributions nor loans or advances. And therefore, the court held there was no basis to find that the companies simply keeping the money was inequitable.
The court applied much the same approach to approximately $125,000 that was claimed by the dissociated member for unpaid compensation, again reasoning that there was no contract in force and that the dissociated member was not entitled to be paid during the time that he was in breach of his fiduciary duties.
This case, decided by the Vermont Supreme Court, is interesting not so much for its take on the law of limited liability governance—it breaks no new ground here—but for the way in which it applied basic principles of contract and agency law.
It’s a cautionary tale for any member that puts money into a jointly owned business. Make sure there is agreement among the owners on how it is to be treated—preferably in writing—and do not act unilaterally.
Shareholder disputes are often disruptive, emotional, and, if left unresolved, devastating to the closely held corporations that are the backbone of New Jersey’s economy. When these disagreements arise in a closely held business with only a handful of key stakeholders, they can escalate quickly, placing the company’s operations — and the personal futures of the owners — at risk.
Shareholder disputes aren’t just about financial disagreements. They often stem from deeply personal frustrations, competing visions, or the inherent complexity of running a business in which power and resources are shared by a few individuals.
Whether the conflict involves voting deadlocks, allegations of unfair treatment, or disagreements over financial management, the stakes are high for all involved.
Understanding the common causes of these disputes—and the legal remedies available—can make the difference between a resolution that preserves the business and a breakdown that leads to its dissolution.
Every closely held corporation is unique, but the disputes they face tend to follow familiar patterns. Recognizing these common issues is the first step in addressing them effectively. Continue reading
One of the issues that is often near the center of a dispute over the removal of a member from a limited liability company is when the expulsion should be effective. In other words, if the plaintiff succeeds in getting an order expelling a member, is it effective when the order is first entered or does it relate back to some other event or date?
For many minority owners of closely held businesses, the finances are sometimes a black box. There is a result, but where that result came from is unknown. The cause of action for an equitable accounting is a tool that gives the owners who don’t have day-to-day management roles a look inside the black box of the closely held company’s finances.
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The term black box comes from engineering and describes devices or systems that give a result from a set of inputs, but the process inside is a mystery. This lack of transparency makes it challenging to troubleshoot issues or make modifications to the black box without specialized knowledge or access to its internal components.
The same may be true of the finances of the closely held corporation, limited liability company, or partnership, particularly when there are questions about the majority’s behavior. Where, for example, there is a question about the misuse of an LLC’s assets, the minority may be able to sue and hire its own forensic accountants to reconstruct the workings of the black box. But if they can prevail in a cause of action for an equitable accounting, they shift the responsibility for the process to those in charge of the books.
There is a significant difference between putting the responsibility to explain the use of the assets of the LLC and pay back what was improperly taken and simply getting access to records. That has been the central point of a number of cases involving claims for equitable accounting. We examine some of those cases here under New York and New Jersey law, including a very recent decision from a federal court in the Southern District of New York applying state law.
Profit distributions are a frequent source of dispute among the members of a limited liability company. The fundamental question of who decides when distributions are made, how much is made, and how to deal with the tax issues related to distributions, profits and losses can all be the source of conflict.
More Questions? Learn More. You can call me at 973-602-3915 or use our Contact form to reach me by email.
The short answer to the question of when a limited liability company must distribute profits is that ‘it depends.’ And many minority owners of LLC interests are frustrated to learn that they have less control over the process than they anticipated.
Entrepreneurs choose limited liability companies as the form of a new business far more often than corporations or partnerships. They are cheap and easy to form and do not require the type of documentation and formalities that you generally see associated with other entities, corporations in particular. Continue reading
Jeanne Qin Lamme was a “passive” owner in the businesses owned by her late husband, Joseph Lamme. Her status was as a dissociated member under New Jersey’s Revised Limited Liability Company Act meant that she had no management rights in the business.
So when Jean Lamme refused to assist the business in securing a federal Paycheck Protection Program (PPP) loan during the Covid pandemic, did she set herself up for a lawsuit and damages? Not if she had no duty to cooperate.
That’s the holding in an Appellate Division opinion in Lamme v. Client Instant Access, a lawsuit between Lamme and her late husband’s business associate, Joseph Vacarella. It’s worth considering the decision because members of small businesses say “no” – frequently to the detriment of the business – simply because they can. Continue reading
In Sipko v. Kroger, the New Jersey Supreme Court declined to apply a minority discount in valuing the interest of a minority shareholder.
There was no real surprise there. New Jersey courts are reluctant to apply a minority discount in the valuation of closely held businesses, which reduces the value of the minority interest. Those discounts, which can signicantly lower the value of an interest — often by a third, or more — tend to reward wrongdoers. Continue reading
For 22 years Robert Dick worked in a growing accounting firm before he left for a competitor, taking with him a number of clients. Before giving his resignation, however, Dick put together an estimate of his billings and a description of his client base, although apparently not providing any details on client identify. This discussion – common in a professional move – was one of the principal defenses to a lawsuit that Dick brought to compel his former employer to repurchase his
shares.
Dick was a 30 percent shareholder in Koski Professional Group, P.C. who had built a following among health care clients, having purchased shares in the professional corporation on multiple occasions since 2005. In 2015 he moved his practice to a competitor, Bland and Associates under an arrangement in which he received base compensation plus a percentage commission on his client’s billings. At the time of his departure, Dick was one of four owners. He was followed by a number of clients, leading to the litigation and ultimately an appeal to the Nebraska Supreme Court. (Opinion here) Continue reading
Some cases make you wince when you think about the underlying relationship. This case in which a son sued his father over the repayment of a mortgage is one of them. It comes from the Iowa Court of Appeals and is interesting from my perspective because the underlying statute is the same as applies here in New Jersey and because it demonstrates the scope of equity to reframe disputed issues into a more manageable solution.
The dispute in Erwin v. Erwin (opinion here) addressed the dispute between Michael Irwin and his son, Richard, that grew out of the father’s attempt to pass the family farm without incurring tax liability. The father and Richard’s mother, who owned the farm individually, formed a limited liability company, Erwin Farms II, LLC, in 2012 and passed the land to the company. At the time of the transfer, the land was subject to a mortgage. Richard received a block of non-voting membership units. The remaining membership units, including all of the voting units, were owned by the parents.
The operating agreement of the company named Michael Erwin as manager. In addition to the existing mortgage, after the land was transferred to the LLC, the Erwin parents took two loans for improvements. By the time of the trial, those loans had all been paid. Continue reading
The Business Divorce Law Report