The Business Divorce Law Report

November 2, 2012

Buy-Sell Agreement to Arbitrate is Enforceable

Dispute Related to Repurchase of Shares Under Buy-Sell Agreement Subject to Agreement to Arbitrate

Agreements to arbitrate are frequently added to buy-sell agreements and other corporate governance contracts. These agreements will be enforceable in nearly all circumstances and the parties should be certain that arbitration – rather than litigation in court – is what they really want.

In a recent appeal from a court order refusing to enforce an agreement to arbitrate after the parties had already been in litigation for two years, the Appellate Division of Superior Court rejected arguments that the arbitration clause was narrowly drawn. Gatta v. Gatta, Docket No. A-3161-11T (App. Div. October 26, 2012). Because the subject matter of the dispute was also the subject matter of the contract, the agreement to arbitrate was enforceable notwithstanding the delay in asserting the right.

Shareholder Seeks to Enforce Arbitration Right

The appeal was brought by Defendant Joseph Gatta from the trial court’s denial of an application to compel arbitration under a shareholders agreement. Gatta and the company, Joseph Gatta & Sons, Inc., were sued by Gatta’s brother, Anthony Gatta, one of four shareholders in the business. Anthony sued after he was fired and the company did not respond to his demands to purchase his interest.

November 1, 2012

LLC Minority Interest Subject to Levy

by Jay R. McDaniel, Esq.

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.

A 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.

October 25, 2012

New Jersey Limited Liability Company Operating Agreements

by Jay R. McDaniel, Esq.

Operating Agreements for Limited Liability Companies to Change Under Revised Limited Liability Company Act

Part of an ongoing series on the adoption of New Jersey’s revised limited liability company act.

The amendments to the New Jersey’s Limited Liability Company Act, N.J.S.A. 42:2C-1-94 that begin to take effect in March 2013 will bring a new era in the way the members of a limited liabilit industry-agreement y company structure their affairs. The days in which the members must put their agreements in writing will soon be over, and the owners of New Jersey LLCs should take a hard look at their own operating agreements and course of doing business.

In adopting the Revised Uniform Limited Liability Company Act, the state legislature has approved a fundamental change to the way LLCs operate in New Jersey. We are examining these changes in a series of articles and today focus on the effect of the changed definition of operating agreements.

Written Operating Agreements Not Required

The old law may have been rigid, but at least it was clear. It was not required in New Jersey (as in some other states) to have an operating agreement, but if you did, it had to be in writing. If there was no written operating agreement, then the “default” rules provided by the statute governed. That has changed significantly. The new law defines an operating agreement as

“the agreement, whether or not referred to as an operating agree

ment and whether oral, in a record, implied, or in any combination thereof, of all the members of a limited l

iability company …”

To understand just how much of a change is this definition, we can look at a 2004 decision of the Appellate Division in Kuhn v. Tuminelli, 366 N.J. Super. 431, 841 A.2d 496 (App. Div. 2004). In that case, the plaintiff and defendant owned a limosine service and the defendant embezzled funds by endorsing checks to the company and keeping the funds. Kuhn argued that the defendant did not have authority to convert the checks and named as a defendant the check cashing service that had negotiated the checks.

October 10, 2012

Buyout Agreement Enforced

by Jay R. McDaniel, Esq.

Fraudulent Inducement Claims Rejected by Court

In Shareholder Buyout Dispute

The broad release language contained in a buyout agreement is enforced, despite claims of fraudulent inducement, affirms the Appellate Division of Superior Court in Marino v. Twin Rivers Podiatry, P.A., Docket No. A-5630-10T1 (May 19, 2012).

October 8, 2012

Protecting Profit Margins from Employee Saboteurs

by Jay R. McDaniel, Esq.

Employee Held Liable for Actively Competing With Current Employer

The success of businesses in specialized fields often depends on the employees’ ability to deliver consistent-quality service and implement specialized techniques and processes. Business owners in these fields know that the costs of investment in employee training and development can be very high. What is a business owner to do when employees take this costly knowledge and expertise to a new company and begin competing against the former employer? Fortunately, New Jersey offers relief from such acts, as discussed in the recent Appellate Division case of Baseline Services, Inc. v. Kutz, et al., A-5214-09T3.

Baseline provides metrology services involving repair, maintenance, and calibration of laboratory equipment to its clients. The corporation had a substantial annual contract – in the amount of $269,000 – with Global Pharmaceutical Sourcing Group (GPSG), which is a division of Johnson & Johnson, Inc. The contract was primarily serviced from 2002 to 2006 by two Baseline employees – Kutz and Nicoludis.

October 5, 2012

New Jersey Limited Liability Company Laws Undergo Major Revision

by Jay R. McDaniel, Esq.

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

October 4, 2012

No Jurisdiction of Claim Seeking Dissolution of NY Corporations

by Jay R. McDaniel, Esq.

Corporate Dissolution Claims of Foreign Entities Not Proper

Corporations and other business entities are creatures of the law of the state where they were organized. Delaware and Nevada, for example, compete as the state of choice when organizing a new business entity. And the simple fact is that most of the businesses organized under Delaware or Nevada law have no operations in those states.

Does that mean that other courts are limited in the ability to grant relief in the event that litigation develops among the owners over corporate governance issues? That was the issue in a recent decision by Chancery Judge Carroll in Lerner v. Heidenberg, BER-C-64-12 (Chancery Div. June 8, 2012). The decision is a warning that electing to organize a company under a particular state’s law may also be a commitment to have the courts of that state resolve certain disputes if things go wrong.

September 7, 2012

Expelled LLC Member Not ‘Employee’ In Age Discrimination Claims

by Jay R. McDaniel, Esq.

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.

March 13, 2012

Lease Renewals Save Otherwise Time-Barred Breach of Fiduciary Duty Claims in a Partnership

by Jay R. McDaniel, Esq.

The New Jersey Appellate Division affirmed a trial court decision holding that lease renewals would revive stale claims in a partnership dispute. In Munoz v. Perla, et al., A-5922-08T3, the Munoz brought claims, among others, for breach of fiduciary duty for his partners’ failure to charge fair market rates in connection with the lease of the partnership’s property. Despite that the rents were calculated and leases drawn up in 1994, the partnerships acts of renewing the leases in 2003 were found to be separate acts that revived the otherwise time-barred claims.

Formation of the Partnership

Munoz was one of three partners in a real estate venture called The Heritage Partnership. The three partners for started their business relationship in 1983 as principals of a professional engineering firm. Munoz was an inactive partner of Heritage and was not involved in the partnership’s day-to-day operations. The purpose in forming Heritage was to “maintain, operate, manage, sell and/or lease” a commercial building. Each partner contributed capital to the venture and held a one-third ownership interest. The parties’ partnership agreement provided that their rights and obligations were governed by the Uniform Partnership Act, N.J.S.A. 42:1A-1 to -56.

January 16, 2012

Oppressed Shareholder Claim is Arbitrable

by Jay R. McDaniel, Esq.

Disputes Between Shareholders Not Exempt from Arbitration Act

An oppressed shareholder claim is not outside the reach of the New Jersey Arbitration Act, the Appellate Division of Superior Court held in litigation that appears to arise in significant part from a broken promise over the lease of a BMW.

The oppressed shareholder action was filed by dentist David Edenbaum, one of the two owners of State of the Art Smiles, P.A., alleging wrongful conduct under the New Jersey Business Corporation Act’s oppressed shareholder provision, N.J.S.A. 14A:12-7.

Arbitration Clause in Shareholder Agreement

The allegation of shareholder oppression was made in an action filed in Chancery Division as well is an a counterclaim to a lawsuit filed by the other owner, Teresa Addeiego-Moore, claiming that Edenbuam had breached a separate agreement requiring him to transfer to her a portion of his interest in the practice equal to the leased vehicle in the event that he default on the payments.

Dispute Related to Repurchase of Shares Under Buy-Sell Agreement Subject to Agreement to Arbitrate

Shareholder Seeks to Enforce Arbitration Right

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

Charging Order Sole Remedy under LLC Act

Part of an ongoing series on the adoption of New Jersey’s revised limited liability company act.

Written Operating Agreements Not Required

Fraudulent Inducement Claims Rejected by Court In Shareholder Buyout Dispute

Employee Held Liable for Actively Competing With Current Employer

Limited Liability Company Act Transforms Principles of LLCs

Limited Liability Company Becomes Entity Type of Choice for New Businesses

Corporate Dissolution Claims of Foreign Entities Not Proper

LLC Member Who Refused to Retire Was Expelled by Managers

Formation of the Partnership

Disputes Between Shareholders Not Exempt from Arbitration Act

Arbitration Clause in Shareholder Agreement

Fraudulent Inducement Claims Rejected by Court

In Shareholder Buyout Dispute