A ‘passive’ member with no rights or responsibilities in the management of a limited liability company cannot be held liable for refusing to participate in a PPP loan application.
Dissociated LLC members with no management rights can withhold their voluntary consent to proposed actions.
The waiver of fiduciary duties in an operating agreement is enforceable under New Jersey law if it is not manifestly unreasonable.
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.
Widow of Owner Refuse Request for PPP Loan Application
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.
Lamme and Vacarella had been in litigation after Joseph Lamme’s death in 2013, resulting in a settlement in which Jeanne became a 50 percent owner of the business Client Access, LLC and Joseph, who owned the other half, became the sole managing member. In April 2020, Vacarella sought copies of Jeanne’s identification as a member of the company as part of an application for a PPP loan. (PPP loan regulations require the applicant to provide copies of government-issued identification of those owning more than 20 percent of the business entity as part of the application and draw process.)
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Jeanne refused, saying she didn’t trust Vacarella and that she was worried that he would misuse the money. Vacarella sued Jeanne alleging that she tortiously interfered with the company’s prospective economic advantage, that she breached a contract and that she breached the implied covenant of good faith and fair dealing inherent in the Operating Agreement.
Tortious Interference Claimed Against Dissociated LLC Member
The court focused on the tortious interference claim, which arises when one party intentionally and without justification or excuse interferes with the prospective economic damage of another. Often these cases involve interference in a contract or other economic relationship. The conduct as to be “transgressive of generally accepted standards of common morality or of law.”
Jeanne, however, had neither the right nor the obligation to participate in the management of the business. She could give her consent as she chose, even if her motives seemed unreasonable.
Jeanne was a dissociated LLC member with no legal right to take part in management decisions. In short, she was a passive investor. As such, she had no affirmative legal duty to assist in the managerial interests from which she was foreclosed by contract. It is well-settled that “[t]hat which one has a right to do cannot become a tort when it is done.” … Similarly, that one has a right not to do something also cannot become a tort when not done.
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Joseph and the LLC acknowledge Jeanne had no right to “exert operational control over” the LLC. In insisting Jeanne had no right to participate in the LLC’s management, defendants cannot now complain that she did not do something she preferred not to and had a right to refrain from doing/
Waiver of Fiduciary Duties in Operating Agreement is Enforced
Jeanne had filed a counterclaim against Vacarella, alleging that he had breached his fiduciary duties by operating a competing business and engaged in various acts of mismanagement. The trail court had dismissed her claims as well, and the Appellate Division agreed. The provision provided that:
Nothing in this Agreement shall be deemed to restrict in any way the freedom of any Member to conduct any business or activity of whatever nature including, without limitation, the acquisition, development, exploitation or sale of real property even if such activity is in conflict with the [LLC’s] activities … without any accountability to [the LLC] or to the other Members, and no Member shall have any interest in any such other business or activity by virtue of this Agreement.
The waiver of fiduciary duties was not “manifestly unreasonable” and therefore enforceable under the Revised Uniform Limited Liability Company Act, N.J.S.A. 542:2C-11. The court reasoned that the waiver was approved by Jeanne’s late husband and the Vacarella had operated a competing business with his approval for several years before his death.