Surrender of Membership Certificates Was Dissociation from LLC

  • A limited liability company member withdraws by voluntary dissociation, which occurs when the company has notice of his ‘express will” to withdraw.  Voluntary dissociation terminates management rights, but not economic rights.

  • A court may refuse relief on a claim when the plaintiff has acted with unclean hands with regard to the subject matter of the action.  The doctrine applies to an evil practice or wrong conduct in the particular matter for which the court has been asked to provide a remedy.

  • A member in a manager-managed limited liability company owes no statutory duty of loyalty to the company, but will owe a statutory duty of loyalty under the common law if he or she is also an employee.

A sales representative who held a non-equity percentage interest in a New Jersey limited liability company effectively withdrew as a member of the company by leaving his “share certificates’ with the company’s lawyer, a trial and appellate court have agreed.building-lot-3391379_1920-e1610995346583-1024x402

This withdrawal, known under New Jersey’s version of the Revised Uniform Limited Liability Company Act (RULLCA) as a voluntary dissociation occurred even though the circumstances surrounding that act – leaving a certificate with a lawyer – was disputed.  Dissociation in limited liability and partnership law is an act by which an individual owner’s association with the business is severed, voluntarily or involuntarily.  It may apply in either a resignation or an expulsion.

The Appellate Division case at issue, Decandia v. Anthony T. Rinaldi, LLC (see opinion here) involved a dispute between a sales representative who received a commission styled as a membership interest in a construction company, but which was actually a non-equity profit interest in his own originations.  The sole equity owner of the firm, Rinaldi, retained all of the management rights in the business.

The relationship soured and ultimately the plaintiff not only resigned, but also attempted to leak confidential information to his new employer.  He then filed suit alleging a declaration of his 20 percent interest in the LLC.  The lawsuit alleged minority member oppression and sought a declaration of the plaintiff’s claimed 20 percent interest in the company.

The trial court in this action had held a bench trial and dismissed the plaintiff’s claims and granted judgment in favor of the defendant on two of its counterclaims, holding that the plaintiff had breached common law and statutory breach of fiduciary duty claims.  On appeal, the trial judge was affirmed, except on the issue of a finding of liability and the award of nominal damages for a breach of the statutory duty under the RULCA.

The case presented the issue of what it takes to withdraw, or voluntarily dissociate oneself, from a New Jersey limited liability company.  The plaintiff had surrendered copies of membership certificates to the company’s lawyer.  The testimony on why he turned in the shares was the subject of disputed proofs at trial.  The plaintiff contended that he left the shares so that they could be attached to a new membership agreement that he was negotiating with the owner of the company.

The defense, meanwhile, asserted that the plaintiff had made it clear that he did not want either the financial or criminal liability associated with being an owner in the public construction trade and that he had made it clear that he was only interested in receiving a profit from the sales he generated.  The trial judge found for the defense.

As an initial matter, the trial court applied the provisions of the RULLCA governing voluntary dissociation of a member by “express will.”  The relevant statute, N.J.S.A. 42:2C-46 provides that:

A person is dissociated as a member from a limited liability company when:

a. The company has notice of the person’s express will to withdraw as a member, but, if the person specified a withdrawal date later than the date the company had notice, on that later date.  (statute here)

Exactly what constitutes “notice of the person’s express will to withdraw” is not well-developed in the case law in New Jersey or elsewhere.  In the handful of cases that have considered the issue, the determination of withdrawal, or not, turned on specific facts.  So, too, in this case.  The trial court noted that the plaintiff had done nothing to further the execution of a subsequent agreement and did not ask again about the interest.  That behavior, the trial court observed, was consistent with the plaintiff’s stated intention to avoid liability as an owner and the fact that plaintiff had no management rights or responsibilities.

Dissociation, however, even if voluntary does not automatically dispose of an ownership interest.  When a member is voluntarily or involuntarily dissociated from a New Jersey limited liability company, the dissociated member retains the economic interest associated with the interest, which is the right to receive distributions of profit when made.  The plaintiff here argued that even if he had dissociated himself, he still had  his interest in the company.

The trial court held, however, and the appellate court affirmed, that the plaintiff was barred from any affirmative recovery under the unclean hands doctrine.  This doctrine is an equitable principle that prevents a wrongdoer from being rewarded with a recovery.  It provides that a court should not give relief to one who is a wrongdoer with respect to the subject matter in suit.  It is a principle of equity, which generally describes principles of inherent justice.

Unclean hands is often raised by litigants, but rarely applied and subject to narrow limits.  As the Appellate Division noted:

The inequity which deprives a suitor of a right to justice in a court of equity is not general iniquitous conduct unconnected with the act of the defendant which the complaining party states as his ground or cause of action; but it must be evil practice or wrong conduct in the particular matter or transaction in respect to which judicial protection or redress is sought.

Application of the unclean hands doctrine is discretionary and the appellate court held that the trial judge had not acted in appropriately in holding that plaintiff’s attempt to misappropriate confidential information and breach of his duties as an employee barred his claims in the case.

A final holding of the appellate court was to reverse the trial court’s holding that plaintiff had breached a duty of loyalty when he leaked information to a competitor.  The RULLCA provides statutory duties of loyalty apply to members and managers.  The plaintiff had been held to have violated his common-law duty of loyalty as an employee when he turned over business information to a competitor as well as the statutory duty of loyalty.

The defendant company, however, was manager-managed and the plaintiff specifically did not have any management responsibilities whatsoever.  The owner of the company had retained all of the management discretion in the company.  The statutory provision on which the defendants relied in their counterclaim distinguishes between the duties that members owe as members in a member-managed limited liability company, and the duties that members do not owe when the company is manager-managed.  (statute here)  Specifically, someone who is only a member in a limited liability company that is managed by a manager or managers, does not owe a duty of loyalty to the company.  Thus, while the former employee many have breached his duty of loyalty as an employee, he had no duty of loyalty as a member and nothing to breach.

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