Articles Posted in Dissociation | Explusion

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  • Advances or capital contributions made to a limited liability company without authorization may be a source of conflict.

  • Using unauthorized advances or capital contributions as a means to exert control may be a breach of fiduciary duty.

  • A well-drawn operating agreement addresses how and when the owners put additional money into a limited liability company.

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.

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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.

Member Who Made Unauthorized Advances is Expelled from LLC

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.

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  • Shareholder disputes in a closely held business threaten the business and personal financial interests of the owner.

  • New Jersey law provides the owners of a closely held corporation with rights and remedies that assure access to information and the financial benefits of ownership.

  • Closely held corporations can use effective planning and negotiated solutions to avoid litigation.

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: It Isn’t Just Business, It’s Personal

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.

New Jersey Shareholder Disputes Attorney | Minority Oppression Attorney New Jersey CorporationWhether 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.

The Common Causes of Shareholder Disputes

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

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  • When one partner fails to respond to a notice of breach from the other partner, the relationship may be so damaged that dissolution is required.

  • Courts may apply the ‘not reasonably practicable’ standard in determining whether a business can continue in its present form.

  • The ‘not reasonably practicable standard’ is incorporated in the partnership statutes of most states.

An appellate court orders the dissolution of a general partnership after taking up the question of what exactly the statutory standard of “not reasonably practicable” means for the second time in a reported opinion.

The issue of what it means for particular conduct or circumstances to make it “not reasonably practicable” isOcean_Resort_Casino_-_Atlantic_City_01 often a critical issue in business divorce cases. We see it in both in judicial dissolution cases and in those states that permit judicial expulsion (i.e., dissociation) of owners.

Yet, the case law excamining the contours of the reasonably practicable is sparse, relatively speaking, despite the fact that the standard is applied in the limited liability company and partnership laws of most states.

AC Ocean Walk, LLC v. Blue Ocean Waters, LLC, the Appellate Division affirmed the judicial dissociation of Blue Ocean Waters, LLC from its partnership with AC Ocean Walk, LLC, and the subsequent dissolution of the partnership.

The court affirmed the lower court’s decision that Blue Ocean Waters’ failure to respond to a notice of breach constituted grounds for judicial dissociation under the Revised Uniform Partnership Act (RUPA) as adopted in New Jersey. Continue reading

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  • Divorcing couples that own a business together must address business ownership issues as part of the matrimonial issues, in particular the distribution of assets.

  • An important issue when a couple divorces is how to address the family owned business in which one of the spouses was involved before the marriage.  Courts may  distribute the value of owner’s share to the non-owner spouse.

  • The divorcing couple may also have individual equity interests in a jointly owned business and must decide whether to buy out one of the spouses or continue on together as co-owners.

The divorcing couple that owns a business together has to manage the family and business relationships simultaneously. That typically involves terminating their relationship as well.

And if one of the parties owned the business before the marriage, such as a stake in a family business, it means dissecting the interests of the divorcing spouses in a way that may implicate the interests of still others.

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Portrait of a confident young man and woman working together on a farm.

In a recent case before the Supreme Court in Montana, the issue was how to deal with a distribution of property when one of the sons of a ranching family was divorced from his wife after more than 30 years of marriage.

Business Divorce Issues Related to Divorcing Business Owners

The wife claimed an interest in the limited partnership that owned the ranch and argued that it should be valued for the purposes of the parties’ property settlement and not as a family business. The limited partnership vigorously disputed that she had any interest in the business.

Contact us for more information or to discuss your issue on business governance issues. 

The case, In re Frost, relies on the liberal provisions of state law that provide that anything owned in whole or in part by the married individuals is distributable in a divorce. The trial court rejected the claim of ownership, but the award in some ways treated the rancher’s wife as if she had. Continue reading

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  • The effective date of an LLC member’s expulsion may be a critical issue in business divorce litigation and may be tied to critical events or the litigation.

  • Courts will look at the facts and circumstances of the case before determining the effective date, but are often guided by the parties’ own intent.

  • A court may give the expulsion a retroactive date, often the date that litigation was commenced.

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?

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  • The failure of the parties to submit evidence on an issue during arbitration caused a failure to decide all of the issues of the dispute.

  • A Court may modify an arbitration award rather than vacate and permit partial enforcement while permitting litigation of claims were not included in an arbitration hearing.

  • Failure to clearly define the mechanics of an arbitration and to agree on the issues that the arbitrator is to decide can make an award unenforceable.

This court decision addresses a recurring issue when parties agree to resolve their dispute by arbitration: exactly what was it that we agreed to arbitrate? Unless the answer to that question is clear and unambiguous, trouble is likely to follow. Continue reading

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  • 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.New Jersey dissociated LLC member may refuse to cooperate | New Jersey LLC disputes attorney

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. Continue reading

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  • A plaintiff seeking to bring a derivative claim on behalf of a corporation, limited liability company or limited partnership must be “suitable” and represent the interests of the business.

  • A member of a limited liability company may sue individually to recover or protect the member’s individual right.  New Jersey law does not, however, permit a member to bring a claim for involuntary dissociation, or expulsion, as a direct claim.

  • Courts have discretion to treat derivative claims as direct claims under New Jersey law, but may bar a derivate claim brought by a limited liability company that is antagonistic to the other owners.

Derivative claims in limited liability company lawsuit

Family in South Jersey Sand and Gravel Business Torn by Claims of Wrongdoing in Derivative Action

Hostility among the owners of a limited liability company is a staple in business divorce litigation, as are the derivative claims commonly asserted by the minority against the majority.  But one New Jersey court has dismissed minority derivative claims because that hostility, the court said, made the member an unsuitable derivative plaintiff.

Is this case, Cave v. Cave, from the Superior Court in Burlington County, an outlier?  Or does it merely reflect a more thorough analysis of the requirements for a derivative action.  If this decision were to be widely followed, it could change the landscape of litigation among the owners of closely held businesses. Continue reading

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  • The removal of a member from a limited liability company, known as involuntary dissociation, is permitted by statute in most states and may also be permitted in an operating agreement.

  • Removal is permitted when a member has engaged in wrongful conduct that has or will materially affect the company or when the member has repeatedly breached the operating agreement.

  • Removal may also be permitted when a member files for bankruptcy or if it is not reasonably practicable for the LLC to continue with them as a member.

There are plenty of choices that we make in our lives that we would like to undo. Some we can and some we can’t. Breaking up with a business partner is the topic of this discussion. More particularly, how a member of a limited liability company can be expelled from the business. We’ll cover the circumstances in which members can be expelled, when it’s easy and when it’s not.

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    • A business divorce is the process by which the owners of a business separate their business interests.  The process involves negotiation and may also require litigation.

    • These cases can be divided into four phases: the emergent phase, the examination phase, the valuation phase and the resolution phase.

    • Most owner lawsuits end in a negotiated transaction because it gives the parties more flexibility over the manner in which the case is resolved.

We’re going to look at business divorce in terms of the four phases that the typical case goes through from its start to the time that is resolved, either through settlement or trial.We should start with the most basic definition of what is a business divorce. I use the term to describe the process by which people who were in a business together disentangle themselves. Continue reading

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