The Business Divorce Law Report

June 27, 2016

Goodwill Valuation is Key in Professional Partnership Valuations

The limited liability partnership or LLP is a highly popular form of business association for professional practices including law firms and medical groups. As its name suggests, the LLP combines the attributes of a partnership with the limited liability traditionally associated with corporations, except that professionals in LLPs generally remain personally liable for their own misconduct or negligence.

See How to Avoid Bad Blood Over Goodwill in Professional Partnership Valuations

This is a story about a recent case involving a fight over the inclusion or exclusion of goodwill in valuing the interest of a retired partner in a medical practice organized as a limited liability partnership, and how it easily could have been avoided.

February 11, 2016

Majority Rule Creates Fiduciary Duties

by Jay R. McDaniel, Esq.

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.

January 26, 2016

Supreme Court Will Decide LLC Expulsion Dispute

by Jay R. McDaniel, Esq.

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, LLC 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 The opinion construes N.J.S.A. 42:2B-24(b)(3)(a) of the now repealed Limited Liability Company Act.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

May 26, 2015

Limited Liability Company Breakup: Crossing the Hudson Makes a Difference

by Jay R. McDaniel, Esq.

LLC Divorce: Till Death Do Us Part, or Just Irreconcilable Differences

Should a business divorce be hard or easy? In the world of human divorces, it’s the difference between no-fault divorce and divorce only after a showing of cause. In the world of businesses, it turns on the
concept of court-ordered purchases and sales of minority interests. And in the area of law governing limited liability companies, it is the concept of “involuntary dissociation” – expulsion, if you will, of one of the members.

Involuntary Dissolution of LLC

Two recent cases in the past month demonstrate this concept. East of the Hudson River, we have the First Department of the Appellate Division in New York opinion in Barone v. Sowers, , 2015 NY slip OP 04195 (1st Dept May 14, 2015), in which the court held that allegations of oppressive conduct simply don’t make out a claim for relief under New York’s limited liability statute.

Compare this Empire State decision with one from the Garden State captioned IE Test, LLC v. Carroll, docket No. A-6159 (N.J. Super. App. Div., March 17, 2015)(Opinion Below). Here, the appellate court affirmed the expulsion of a member because it was clear that the parties personal animus prevented them from maintaining a working relationship.

May 15, 2015

Does the LLC Statute Trump Agency Law?

by Jay R. McDaniel, Esq.

Agent Fails to Dislcose Principal Exists, Avoids Liability

Was the limited liability company statute supposed to eliminate basic principles of agency law? That seemsto be the import of a decision by the Appellate Division of Superior Court in Castro v. Giacchi, Docket No. A-6220-12T2 (N.J. Super. App. Div. December 5, 2014)(Opinion Below) that reversed a judgment against an individual who failed to disclose that he was acting on behalf of a limited liability company.

Perhaps just as important as our first question: does it really matter? Here the answer is pretty easy. Absolutely. Understanding agency law – that is the law that governs when one person acts on behalf of another – is critical to understanding how business entities function. The reason is that even though a business entity is a legal person, but it can an only act through its agents. The business entity is distinct from its principals.

Contractor’s Handshake Deal with Sub

The decision arose out of a contruction contract. Castro was subcontracted to do carpentry work on a new home under construction in Southhamptom by Defendants. It was a handshake deal. Plaintiff contended that he never knew Giacchi was acting on behalf of anyone other than himself, but he received two progress payments John & Sons ANG, LLC. The final bill was sent to ANG.

Ordinarily, an agent who fails to disclose he is entering into a contract on behalf of a principal is individually liable on the contract, unless the other party knows or had reason to know the agent was acting on behalf of a principal.

* * *

But N.J.S.A. 42:2B-23 shielded a member or agent of a limited liability company from all of its debts. The statute did not limit the circumstances under which a member or agent was immune from liability, including those where a member or agent of a limited liability company entered into a contract without disclosing the identity of its principal. Being clear and unambiguous, our sole function is to enforce the statute according to its terms.

March 27, 2014

Attachment of LLC Interest in Management Dispute

by Jay R. McDaniel, Esq.

A recent dispute involving the owners of a medical office building demonstrates, once again, how unexpected business governance issues can threaten an ongoing business.

This opinion from the Appellate Division, in New Jersey Realty Concepts, LLC v. Mavroudis, Docket No. A-2013-12T1 (App. Div. March 18, 2014)(opinion here), demonstrates how the failure to put a business enterprise into a business form with limited liability, be it a corporation, limited liability company or limited liability partnership, can make it impossible for the business to continue.

The case itself turned on the scope of authority of a special fiscal agent, which is a court appointee typically found in shareholder or limited liability company litigation. We’ll discuss this in more detail below.

Judgment Creditor Attaches LLC Interest in Rents

The real issue, however, is buried at the end of the opinion in which the Appellate Court held that a debtor could directly attach rents paid by the building tenants because the owners’ interest was itself assignable. And that is the big difference as far as asset protection goes – a joint tenancy offers no real protection to creditors.

Had the owners of the building placed it in some type of holding company, then the remedy against a debt owed by of one of the principals would have been much more limited — and would not have threatened the viability of the enterprise. Here, as a result of the form of the enterprise, a judgment creditor of one of the participants was able to levy against 60 percent of the rent roll, leaving the building itself apparently insolvent.

Had the building been held as a limited liability company, the best the judgment creditor could have done was a charging order against the individual interest of the member that was a judgment creditor. Similarly, in a corporation, the remedy would have been limited to the individual shareholder’s interest – assuming no buy-sell agreement restricted transfer.

March 4, 2014

New Jersey LLC Statute Limits Creditors Rights

by Jay R. McDaniel, Esq.

A recent amendment to New Jersey’s limited liability company law changes the rights of creditors seeking to collect a judgment from a member of a limited liability company, eliminating the creditor’s right to foreclose the member’s interest.

Foreclosure of LLC Member Interests Eliminated

This particular aspect of the Revised Uniform Limited Liability Company Act (RULLC) is one of the more controversial provisions of the newly enacted statute because it eliminated a key asset protection aspect of LLCs. Under the prior statute, a creditor’s right was limited to a “charging order.” The amendment to the statute simply restores the prior law.

Under most state limited liability company statutes, a creditor has the right obtain a charging order that provides that when an LLC distributes money to its members, the debtors share goes to the party holding the charging order. It only works if any money is actually distributed to the members.

The RULLC was based on a model act devised by the Uniform Law Commission and contained a provision that allowed judgment debtors to foreclose an interest under certain circumstances. What that meant was that if the judgment creditor was being paid, it had a right to seek a foreclosure of the interest, meaning that it would be sold at a judicial auction.

October 28, 2013

Ownership Stake Conceded in Business Divorce Case

by Jay R. McDaniel, Esq.

Appellate courts usually defer to a trial court’s factual findings in a business divorce case that
makes 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.

September 19, 2013

No Shareholder Oppression in Refusal to Buy Minority Interests

by Jay R. McDaniel, Esq.

Holding a family business together gets more difficult as time passes, as this recent opinion
from the Appellate Division demonstrates. A rift between the family members still working for, and in control of H. Schultz & Sons, resulted in the minority members who stopped receiving dividends while the company was trying to remake itself from a retailer to a distributor.

No Shareholder Oppression in Exercise of Majority’s Business Judgment

The failure to pay dividends and a refusal to use the assets of the business to buy out the non-employee shareholders, however, in itself is the type of conduct that rises to shareholder oppression.

The group of minority shareholders who claimed that the corporation’s refusal to purchase their interests was shareholder oppression failed to establish a viable claim under New Jersey’s Oppressed Shareholders Act, says the Appellate Division

Affirming the trial court’s opinion in Goret v. H. Schultz & Sons, Inc., Docket No. A-4281-10T1 (App. Div. Sept. 10, 2013), the Appellate Division affirmed the holding that the refusal to repurchase minority interests no longer receiving dividends was an appropriate exercise of the business judgment rule.

May 15, 2013

The Little Big Breach – Restrictive Covenants

by Jay R. McDaniel, Esq.

Most of the cases that we handle – like any other litigation – get settled before trial. One of the incentives to settle is that invariably the departing owner will agree to some sort of restrictive covenant against competing against his former company.

The case that goes to trial, or which is resolved on a substantive motion, leaves this issue wide open. In fact, there is no statutory basis to deter the ousted business owner from setting up a competitor and trying to lure away the business of his former company, and one would suppose with a bankroll secured by the purchase of his or her interest.

Since most business divorce litigation ends with a deal, and restrictive covenants are critical aspects of those transaction, I thought it worthwhile to write about a recent decision of the Appellate Division that gives a stern warning that the restrictive covenant had better been honored.