What is sufficient evidence of membership interest in a limited liability company? It is not uncommon that the intentions of the parties in forming a limited liability company are poorly documented and or non-existent.
The plaintiff in this case argued that documents that indicated his initial interest in the LLC were sufficient to establish his membership. These include emails in which he expressed his interest in participating in the LLC, the fact that he was included as a signatory in an early letter of intent with HUMC, the fact that he was initially included in an email group of members and the receipt of meeting notices.
Appellate Court Considers Evidence of LLC Membership in Ownership Dispute Among Critical Care Doctors
The Court rejected the argument, however, granting summary judgment. The appellate division affirmed in Ashtyani v. Critical Care Unit Res., LLC (N.J. Super. App. Div., 2017) in a case that construes what the prior limited liability company act meant by “records” of the company. We look at the case here and consider the limited liability company “entrance” rules under the prior statute N.J.S.A. 42:2B-1 et seq. and its successor, the Revised Uniform Limited Liability Company Act, N.J.S.A. 42:2C-1.
This case was decided under the old statute. We will take a look at how application of the new statute might well have resulted in a different outcome.
Formation of Limited Liability Company
The dispute at issue in this case grew out of the formation of a specialized medical group that was to provide the medical services for the intensive care and coronary care units at Hackensack University Medical Center (HUMC). The plaintiff here, Dr. Ashtyani, was one of the treating doctors at the hospital. Another physician organized a group of the intensive care physicians treating patients at HUMC to take over these services and quickly prepared a “statement of intent” given to the hospital providing that the group of physicians would immediately take over these intensive care services. The plaintiff was one of the doctors signing the letter.
One of the organizers formed a limited liability partnership was formed for the purpose of negotiating with the hospital. The Plaintiff attended several of its meetings and provided his social security number. After these meetings, a limited liability company was then organized, Critical Care Resources, LLC, and another request was circulated requesting names and social security numbers of those who would become members of the llC and requesting $2,000 each for legal fees. The plaintiff did not make his contribution. The other members ultimately decided not to include him in the new company both as a “disruptive” personality and because he did not have a board certification in intensive care..
Plaintiff Doctor Claims he was Wrongfully Expelled from LLC
Dr. Ashtyani brought suit claiming that he had been wrongfully expelled as a member interest in the limited liability company. He claimed that his signature on the original statement of intent and his inclusion on various email and various meeting notices were all company “records” that demonstrated his membership. He contended that the decision made by the other members to exclude him therefore amounted to expulsion The plaintiff relied on N.J.S.A. 42:2B-21(a) under the now-repealed Limited Liability Company Act:
[A] person acquiring a limited liability company interest is admitted as a member of the limited liability company upon the later to occur of
(1) The formation of the limited liability company; or
(2) The time provided in and upon compliance with the operating agreement or, if the operating agreement does not so provide, when the person’s admission is reflected in the records the limited liability company.
The court first considered whether the materials claimed by the plaintiff – including the emails, the letter to HUMC and the meeting notices. The trial court had held that these were not records of the LLC. This was an error, the appellate court concluded, relying on the Black’s Law Dictionary definition of record:: “1. [a] documentary account of past events . . . designed to memorialize those events; 2. [information that is inscribed on a tangible medium or that, having been stored in an electronic or other medium, is retrievable in perceivable form.”
The fact that these documents were a “record” did not resolve the issue favorably for the plaintiff, however.
[A]ccepting these writings as “records” does not mean plaintiff was ultimately admitted as a member of CCUR. The emails show that membership in CCUR was an ongoing discussion until September 2010. The emails exchanged between CCUR members reference meetings involving the LLC’s possible corporate structure. Some of the emails requested the requisite financial contributions and information from potential members. It was only in Dr. Ting’s [one of the organizers] September 12, 2010 email that the final request for acceptance of the operating agreement’s terms was offered to those wishing to become members. At this critical point, the record shows plaintiff requested a number of material changes to the terms and withheld his unequivocal acceptance. In fact, it is uncontroverted that plaintiff did not accept the terms agreed upon by a majority who voted to form the company.
Different Membership Rules Under Revised Uniform Limited Liability Company Act
The case demonstrates the necessity of being clear about who is and is not a member, as well as the role of the organizers. It is significant to note that the RULLCA expressly contemplates the activities of promoters. The new statute in effect since 2013, N.J.S.A. 42:C-31, provides for a different set of entry requirements.
In the case of a limited liability company with more than one member, the statute provides that admission is “as agreed by the persons before the formation of the company.” The limited liability company at issue in this case was formed well after the parties were well into the negotiations with the hospital and after the plaintiff had been offered and accepted a membership interest in the new enterprise. It was only after the plaintiff was directly involved in the early steps of the company that the certificate of formation was filed.
The issue under the old statute was whether references in the records trumped the failure to accept the operating agreement. The more interesting issue is whether the pre-formation agreement identifying who would be the members of the company – on this issue, the defendants conceded that the plaintiff was offered and had accepted a membership interest in the new entity – was binding on the company after it was formed. The trial court and the appellate division thought not, but under the language of the RULLCA, the outcome is not so certain. The statute gives effect to those agreements.
Pitfall for Organizers of New Limited Liability Companies
Under the new statute, the issue is what happens if individuals agree to form a limited liability company, organize the entity and then cannot agree on aspects of the operating agreement. Does the failure to agree give the limited liability company the right to move on without the dissenting member? Is the operating agreement formed by the members without the participation of the dissenting member bind the limited liability company?
The answer to both of those questions should be a resounding “no.” The better answer would seem to be that the failure to agree on the terms of the operating agreement has to be dealt with as a deadlock among existing members. On this issue, the statute provides for either a judicial dissolution – and all of the remedies available in such a proceeding – or the involuntary dissociation of the member.
Disputes about who is, or is not, a member are not unusual. Nor are the circumstances in which the parties form the limited liability company and then fail to execute an operating agreement.
Contact us with any questions or if you have a business divorce matter that you would like to discuss.