Dissociation | Explusion Category Archives — The Business Divorce Law Report Published by Business Lawyer

August 12, 2024

Court Dissolves Casino Partnership When Notice of Breach is Ignored

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” is Ocean_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

March 3, 2024

Human Divorce, Meet Business Divorce

by Jay R. McDaniel, Esq.

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.

portrait-of-a-confident-young-man-and-woman-workin-2023-11-27-05-08-51-utc-1024x683

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

November 8, 2023

Retroactive Expulsion of LLC Member

by Jay R. McDaniel, Esq.

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?

October 24, 2023

Arbitration Fails to Resolve Business Divorce Dispute

by Jay R. McDaniel, Esq.

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

June 15, 2023

No Foul in Dissociated LLC Member’s Refusal to Cooperate in PPP Loan

by Jay R. McDaniel, Esq.

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

February 7, 2023

Hostility Among Owners Blocks LLC Derivative Lawsuit

by Jay R. McDaniel, Esq.

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

October 4, 2022

When Can a LLC Member Be Expelled?

by Jay R. McDaniel, Esq.

How to Expel a Member from a Limited Liability Company

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.

October 1, 2022

Anatomy of a Business Divorce Lawsuit

by Jay R. McDaniel, Esq.

- 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

January 18, 2021

Surrender of Membership Certificates Was Dissociation from LLC

by Jay R. McDaniel, Esq.

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. Continue reading

February 2, 2020

How to Expel an LLC Member

by Jay R. McDaniel, Esq.

There are circumstances in which a member of a limited liability company in most states may be expelled as a member from the company. This is known as involuntary dissociation.
An action may be brought by the LLC seeking a court order of involuntary dissociation on the basis that the member has engaged in wrongful conduct that has or will harm the company, has repeatedly breached the operating agreement, or because it is not ‘reasonably practicable’ for the company to continue with him or her as a member.
Dissociated members lose their rights to participate in management, but retain their financial interest and a right to receive distributions.
In litigation over an involuntary dissociation, a court may order a sale of the interests of a member to the LLC or to any other party to the litigation.

The expulsion of a member is likely the most litigated issue in disputes involving members of a member of a limited liability company. The expulsion, or involuntary dissociation, is a remedy for wrongful conduct or breach of the operating agreement. We represent majority owners when they are trying to remove a member and we represent the minority member who is fighting removal. Not all states permit removal or expulsion for misconduct and some recent decisions indicate that in the states that do, it will likely be harder than once thought.

Involuntary Dissocation of a Limited Liability Company Member

There was a belief, perhaps unreasonably so, that Courts were unwilling to keep people in business together when plainly the owners were no longer capable of maintaining a working relationship. The New Jersey Supreme Court, in the first decision by any state supreme court on the topic, held that the concept of “not reasonably practicable” to stay in business together means more than a personality conflict. It requires a structural inability to act, such as ongoing deadlock or significant wrongful conduct. Continue reading

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.

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.

Business Divorce Issues Related to Divorcing Business Owners

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.

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.

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.

Widow of Owner Refuse Request for PPP Loan Application

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.

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.

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.

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.

There are circumstances in which a member of a limited liability company in most states may be expelled as a member from the company. This is known as involuntary dissociation.

Dissociated members lose their rights to participate in management, but retain their financial interest and a right to receive distributions.

In litigation over an involuntary dissociation, a court may order a sale of the interests of a member to the LLC or to any other party to the litigation.

Involuntary Dissocation of a Limited Liability Company Member