Articles Tagged with LLC

Fiduciary Duty of Majority Owners

The three majority members of a five-member limited liability company decide that they want to take a major action, such as selling the assets of the business or buying another business. They present the decision to the minority and proceed over their objections (We’ll assume for the moment that the action is permitted by the Operating Agreement.) The minority are bitterly opposed. Is this a problem? Often, it is.

Majority Rule and Minority Rights

The line between what is a right as an equity owner and what is a breach of fiduciary duty to the minority members is often blurry. We presume that as the owner of equity in a business, be it a limited liability, partnership, or a corporation, that we have the right to vote our economic self interest.

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The New Jersey Supreme Court will consider the standards for expulsion of a member from a limited liability company.  The Court granted certification   in  IE Test, LL27518-ie-logo-colorC v. Carroll, Docket NO. A-6159-12T4 (N.J. Super. App. Div., March 17, 2015)(see our discussion here.) The opinion construes N.J.S.A. 42:2B-24(b)(3)(a) of the now repealed Limited Liability Company Act.

The language, however, is nearly identical to that found in New Jersey’s current LLC law, the Revised Uniform Limited Liability Company Act (RULLCA) N.J.S.A. 42:2C-46(e)(3), which governs the involuntary dissociation of members.  Here the court affirmed the expulsion of the defendant based on the impracticability of the business continuing with him as member. the now-repealed Limited Liability Company Act.

Seven-Factor Test Applied to Expulsion

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Appellate courts usually defer to a trial court’s factual findings in a business divorce case that
25204-surgem_logomakes it to trial.  Here is a rare decision, however, in which the Appellate Division reversed the factual determinations of the trial judge, finding that the disputed ownership interest had been conceded by one of the parties.

Limited Liability Company Decision is Reversed

The case, Surgem LLC v. Adhievmed, Inc., Docket No-A4198-11T! (October 16, 2013) involved a dispute between a successful surgeon, John Hajjar, who established a chain of same day surgical centers and his former business partner, John Seitz.  The businesses, and the relationships, were poorly documented, however, and the outcome turned on the issue of whether the parties had made an oral agreement.

We represent clients in the formation stages of limited liability companies  as well as during disputes.  Consult with us about limited liability operating agreements and disputes between members.

LLC Operating Agreement

Notably absent from the Appellate Division opinion is any mention of the terms of the LLC’s operating agreement.  It appears that this is another case in which the owners of a business failed to document the basic details of their relationship and the trial court had to fashion a decision from evidence that was equivocal – or so the trial court thought.

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Revised Uniform Limited Liability Company Act Changes Legal Landscape

The effective date of New Jersey’s Revised Uniform Limited Liability Company Act is approaching.  The law will be effective on March 18, 2013 for newly formed LLCs and will be applied to all LLCs effective March 1, 2014.

There is a laundry list of changes in the new statute.  Our view in the firm is that it’s a significant improvement over New Jersey’s current statute, modeled under Delaware law with some fairly significant additions.  But the statute is also more complicated, and for those accustomed to drafting under the old law, it’s time get started revising those model clauses.

It’s also time to start warning the owners of existing LLCs about the impending change.  The differences are significant enough that some LLCs may have problems with Operating Agreements drafted under the old statute that will have significant problems under the new act.

Although the law does not apply to a new LLC until March 18, we are incorporating the new statute in the LLCs that we are forming.  It will apply in just over a year anyway so it makes sense to include a clear choice of law selection, at least until next month.

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Court Issues Writ of Execution on Minority LLC Interest of Ex-Spouse

One of the perceived benefits of the limited liability form of doing business is the limited remedy that a creditor has when attempting to use the LLC member’s interest as a source to satisfy a judgment.  The majority position has been that the judgment creditor may be able to secure a charging order, but can neither foreclose on the interest (that is a force a judicial sale) or  divest the debtor of their management rights.

minorityA decision by a Chancery judge in Ocean County involving a New Jersey limited liability company affirms that the “sole remedy” is the charging order – something that is about to change under recent amendments to the LLC statute – but finds that a court may issue a writ of execution. Leonard v. Leonard, Docket No. FM:15-450-05 (App. Div. June 13, 2012)(approved for publication).

Charging Order Sole Remedy under LLC Act

Under the current law, a judgment creditor that receives a charging order is entitled to receive the distributions that the the debtor-LLC member would otherwise receive, if anything.  However, beginning with limited liability companies organized after March 2013, and the following year with all New Jersey LLCs, judgment creditors will be able in some circumstances foreclose the interest of the LLC member.

The issue in this case was the ability of a judgment creditor — in this case a custodial parent seeking to enforce a child support award – to levy against the interest of a minority member of a New Jersey limited liability company.  The plaintiff and defendant divorced in 2004, with the plaintiff agreeing to pay alimony and child support.  The plaintiff, however, alleged that as of 2012, the defendant had unpaid support totaling $110,000.  Plaintiff moved to secure a judgment and a writ of execution against the defendant’s 10% interest in a real estate limited liability company, Blydan Okay Group, LLC.

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Limited Liability Company Act Transforms Principles of LLCs

A new set of laws governing New Jersey limited liability companies will become effective in March. The changes are profound.  The Limited Liability Company Act fundamentally changes a number of bedrock principles about the manner in which limited liability companies are organized and managed.

Limited Liability Company Becomes Entity Type of Choice for New Businesses

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LLC Member Who Refused to Retire Was Expelled by Managers

The challenges in making the transition from the the founding members of a successful enterprise to the second generation of managers are often difficult, as this litigation involving that has endured for nearly a decade demonstrates.  It may be that the business has moved in a new direction, or perhaps it is simply that the founding member no longer inspires the same type of confidence as when he or she was younger. The second generation of owners often has its own ideas about the way the business should run, but the founders are loathe to cede control.

And of course there are those cases in which the founding member simply refuses to retire long after they have ceased to be a productive contributor to their business. It is not particularly unusual that the more active members of a business, whether it is a partnership, limited liability company, or a close-corporation, will ultimately seek to expel the founder from the business.

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Promoters of LLC Subject to Breach of Fiduciary Duty Claims

Limited liability companies are clearly the vehicle of choice for new, closely held businesses.  That means that more often than not the principals have some existing relationship before they take up their new business together.  Can that prior relationship create fiduciary duties even before the company has begun operations?

A decision out of the New York Court of Appeals indicates that there may be fiduciary duties in such a relationship, in particular duties of full disclosure and fair dealing.  Moreover it appears that these duties may exist before the limited liability company is formed or membership interests are acquired.  In Roni LLC v. Arfa, 2011 N.Y. Slip Op. 09163 (Dec. 20, 2011),  The court held that the existence, or not, of a fiduciary relationship depends up the relationship of the parties and whether it meets the traditional criteria necessary to create fiduciary obligations.

Real Estate Investments by LLC

This case involved the conduct of promoters, the individuals who organize a new business and seek out other participants or investors.  The defendant promoters organized seven limited liability companies under New York law for the purpose of buying and renovating buildings in the Bronx and Harlem for resale.  The plaintiffs were a number of Israeli investors who acquired interests in the LLCs.

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When a limited liability company dissolves, it pays its creditors and distributes the remaining assets in the winding-down process. Many professional practices are organized as LLCs, and their principal assets are the clients they serve.  That does not mean, however, that the professional limited liability company in dissolution has to divide up the clients.

This is an important holding for lawyers, accountants, doctors and other professionals that are practicing in New Jersey as a limited liability company. According to a New Jersey appeals court, the clients that the professionals, such as an accountant, bring to the LLC represent personal goodwill that belongs to the individual professional, rather than goodwill belonging to the enterprise.  Thus, clients of professional limited liability companies are not considered assets of the LLC and on dissolution are not subject to distribution.

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