New Jersey Passes Law Repealing Estate Tax By 2018

By Trusts & Estates Group

On October 14, 2016 Governor Christie signed into law the much discussed gas tax hike bill, ultimately repealing the New Jersey estate tax in its entirety.  Beginning on January 1, 2017, a decedent will not be subject to New Jersey estate tax unless his or her taxable estates are greater than $2,000,000 (a significant increase from the current $675,000 New Jersey estate tax exemption).  For individuals dying on or after January 1, 2018, the New Jersey estate tax is repealed entirely.  A decedent domiciled in New Jersey and dying in 2016, however, will remain subject to New Jersey estate tax if the value of his or her taxable estate exceeds $675,000. MORE

New Jersey Supreme Court Provides Test To Determine Whether A Limited Liability Company Member Can Be Judicially Expelled

By Steven Walder, Esq.

The New Jersey Supreme Court recently addressed in IE Test, LLC v. Carroll, ___ N.J. ___ (2016), the circumstances under which the member of a limited liability company (LLC) can be judicially expelled.  The IE Test decision is important as LLC’s are among the more common form of business organization throughout New Jersey.  By providing seven factors for New Jersey trial courts to consider, guidance has now been provided to determine whether it is “not reasonably practicable” for a member to remain associated with an LLC that wishes to continue operating.

The dispute that prompted the IE Test litigation resulted from the failure of a prior business, Instrumentation Engineering, LLC, in which IE Test’s three LLC members were involved. Defendant Kenneth Carroll was the co-owner of Instrumentation Engineering with Patrick Cupo, while Byron James was employed at the company.  In 2009, following a series of financial setbacks, Instrumentation Engineering filed for Chapter 7 bankruptcy.  During the bankruptcy proceeding, Carroll claimed that Instrumentation Engineering owed him more than $2.5 million.  Ultimately, Instrumentation Engineering failed to repay this debt to Mr. Carroll.

As Instrumentation Engineering’s business was failing, its owners contemplated establishing a new business.  Ultimately, IE Test was formed as a New Jersey LLC shortly before Instrumentation Engineering filed for bankruptcy.  IE Test had three members, which included Cupo at 34%, with Carroll and James each at 33%.  From the outset of IE Test, Cupo and James played an active role in the business, while Carroll was a passive member.  While the intention of the three members of IE Test was to enter into an operating agreement, this never came to fruition, primarily due to the fact that Carroll was seeking compensation that would allow him to recover some of his lost investment in Instrumentation Engineering.

By early 2010, as a result of the members’ failure to enter into an Operating Agreement, in addition to the belief of Cupo and James that they could no longer work together with Carroll, IE Test filed a lawsuit against Carroll seeking to remove him as a member.  Specifically,   IE Test alleged in its complaint that Carroll had engaged in conduct which made it “not reasonably practicable” pursuant to N.J.S.A. 42:2B-24(b)(3) of the New Jersey Limited Liability Company Act (“LLCA”) to carry on the activities of IE Test with Carroll as a member.

The trial court agreed that it was not reasonably practicable for IE Test to continue as a business with Carroll as a member and entered an order expelling him from membership.  Carroll appealed the trial court’s decision, which was ultimately affirmed by the Appellate Division.  The basis for the Appellate Division’s ruling in March of 2015 was that N.J.S.A. 42:2C-46(e) of the Revised Uniform Limited Liability Company Act (“RULLCA”), which had replaced N.J.S.A. 42:2B-24(b)(3) of the LLCA in 2013, required that a trial judge engage in predictive reasoning in order to evaluate the future impact of an LLC member’s current conduct.  Utilizing predictive reasoning, the appellate panel found that the continued operation of IE Test with Carroll as a member was “not reasonably practicable” because Carroll’s relationship with Cupo and James never recovered from Carroll’s demand that he be compensated in a manner that permitted him to recoup his lost investment in Instrumentation Engineering.

The New Jersey Supreme Court reversed the Appellate Division ruling that LLC members seeking to expel a fellow member are required to clear a high bar.  The Supreme Court indicated that neither N.J.S.A. 42:2B-24(b)(3)(c), nor its counterpart N.J.S.A. 42:2C-46(e)(3), authorizes a court to disassociate an LLC member merely because there is a conflict.  Instead, both provisions require the court to evaluate the conduct of the LLC member relating to the LLC, and assess whether the LLC can be managed notwithstanding that conduct, in accordance with either the terms of an operating agreement or the default provisions of the statute.

In an effort to guide trial courts in the evaluation whether an LLC member should be expelled under the “not reasonably practicable” standard, the Supreme Court provided seven factors to be considered.  The factors include: (1) the nature of the LLC’s members conduct relating to the LLC’s business; (2) whether, with the LLC member remaining a member, the entity may be managed so as to promote the purposes for which it was formed; (3) whether the dispute among the LLC members precludes them from working with one another to pursue the LLC’s goals; (4) whether there is a deadlock among members; (5) whether, despite that deadlock, members can make decisions on the management of the company, pursuant to the operating agreement or in accordance with applicable statutory provisions; (6) whether, due to the LLC’s financial position, there is still a business to operate; and (7) whether continuing the LLC, with the LLC member remaining a member, is financially feasible.

The Supreme Court summarized its view that a trial court considering an application to expel an LLC member should conduct a case-specific analysis of the record using the seven factors, as well as other considerations raised by the record, with no requirement that all factors support expulsion, and no single factor determining the outcome.

Pashman Stein Walder Hayden’s Corporate Group is available to answer any questions that you may have about the recent New Jersey Supreme Court ruling and its impact on LLC’s facing internal disputes among its members.

Can A Third Mortgage Have Priority Over A First Mortgage?

By Louis Pashman, Esq.

Perhaps surprisingly, the answer is yes, at least under certain circumstances.

Rosenthal & Rosenthal entered into a factoring agreement with a borrower. That agreement allowed Rosenthal to make optional advances in its sole discretion.  On August 21, 2000 the lender recorded its first mortgage.  On April 12, 2005 it recorded its second mortgage.

A law firm providing legal services to the borrower recorded its mortgage on the same property, the third mortgage on the property, on April 13, 2007.  In August 2007 Rosenthal sent an email to the law firm and demanded that the law firm subordinate its mortgage to any new Rosenthal mortgages.  The law firm refused.  Rosenthal continued to make optional advances and the law firm continued to provide legal services.

When the borrower defaulted on its loan obligation Rosenthal filed a foreclosure action naming the law firm as a defendant.  The law firm disputed the priority claimed by Rosenthal.

The trial court granted summary judgment against the law firm.  The appellate division reversed and the case was appealed to the New Jersey Supreme Court.

That court held, in  Rosenthal & Rosenthal v. Benun, 226 NJ 41 (2016) that

When a lender holds a mortgage that secures optional future advances the prior lien loses priority for advances made after actual notice of an intervening mortgage.

Rosenthal had actual notice of the law firm’s intervening lien (indeed requested subordination) yet continued to make optional advances.  Its mortgage securing those optional future advances was subordinated to the law firm’s intervening lien.



Municipal Paid Sick Leave Ordinances

By the Employment Group

One of the more remarkable developments in New Jersey employment law in recent years has been the emergence of city ordinances requiring employers to offer paid sick leave to employees who work in those cities.   These ordinances have been passed in reaction to the failure of the Governor and State Legislature to enact a statewide paid leave statute.  To date, eleven cities have adopted such laws:  Bloomfield, East Orange, Elizabeth, Irvington, Jersey City, Montclair, Newark, New Brunswick, Passaic, Paterson and Trenton.

While there are differences between them, the ordinances are all substantially similar and require most employers to provide one hour of paid sick leave for every 30 to 35 hours worked, up to a maximum of  40 hours per year.  Most of our clients offer at least that much paid sick leave to employees.  However, it is important to know that the ordinances were designed to ensure that paid leave is available to workers at the very bottom of the wage scale.  As such, employees only need to work 80 hours in a year to qualify for some paid leave, which may conflict with your policy on paid time off accrual.   Furthermore, the ordinances require employers to allow employees to “bank” up to 40 hours of paid sick leave for use in future years, which may also conflict with your policy.  Please let us know if you would like us to analyze your policies to ensure compliance with the ordinances in any of the cities where you have operations.

Municipalities have very limited authority to fashion civil remedies for violations of ordinances.  Thus, the paid sick leave ordinances impose quasi-criminal sanctions for violations of paid leave requirements, subjecting employers and employer representatives to fines and potentially even jail time.   Cases are to be brought in municipal courts.

These new ordinances raise many issues and undoubtedly there will be court challenges to their enforceability and perhaps constitutionality.   One important concern is the degree to which municipal courts, certainly not accustomed to such matters, will be asked to weigh in on the question of whether independent contractors are in fact statutory employees entitled to paid leave.  Another issue is whether employees who believe that they were discharged for complaining about the failure to provide paid sick leave will be able to use the ordinances to claim that their terminations were in violation of public policy, thereby providing them with a Superior Court wrongful discharge remedy.   Perhaps most alarmingly, it is possible that cities and towns will now attempt to regulate other aspects of the employee/employer relationship, thus creating numerous new, and possibly even conflicting, standards that will have to be learned and followed.

It is expected that unless the State Legislature acts to pass a statewide paid sick leave law, other cities and perhaps smaller towns will pass such ordinances.   Even if your operations are not covered by a paid sick leave ordinance today, they may be soon.

We are of course available to answer any questions you have about the paid sick leave ordinances.  If you would like a copy of any of the ordinances, please let us know.

Samuel Samaro
Maxiel Gomez
James Boyan



New Overtime Rules in Effect December 1st, 2016

The United States Department of Labor (DOL) recently announced new rules to determine whether an employee is entitled to overtime.  The new rules take effect on December 1, 2016.

Here is the bottom line:  Unless you are paying an employee at least $47,476 per year, he or she will be entitled to overtime (with some limited exceptions). If you pay them less, it does not matter what they do or how you pay them, they get overtime.  You can apply what employees receive in non-discretionary bonuses, commissions, and incentive pay toward 10% of the $47,476 threshold.

However, be aware that just because you pay employees at least $47,476 does not mean that they are exempt from overtime.  Employees must still qualify for one of the overtime exemptions (such as the Executive, Administrative or Professional exemptions).  Most of the exemptions require you to show that the employee is a white-collar employee, paid on a salary basis, who exercises authority or meaningful discretion in his or her daily activities.

There is also an exemption for highly-compensated employees which is easier to satisfy.  However, under the new rules, such employees must be paid at least $134,004 per year.  Also, they must still primarily perform non-manual tasks and so care must still be exercised to ensure that the exemption applies.

Perhaps the most important takeaway is that these new rules have received significant media coverage.  You must assume that your employees will be aware of them, particularly with regard to the new $47,476 salary threshold.  To the extent that you have made overtime determinations with which you are uncomfortable, now would be the time to address them.

For further information about this new rule or any other employment-related issue, please contact: Sam Samaro (, Maxiel Gomez (, or Jim Boyan (

NJ Boards of Directors May Not Alter Shareholder Quorum Requirements Via Amendment to Corporate Bylaws

By Rachel Mills, Esq.

It is not unusual for shareholders in closely held companies to overlook the shareholder quorum requirements.  But such quorum requirements can be either an Achilles’ heel or powerful tool in the event of a shareholder dispute on the direction and operations of the company.  In a recent appellate decision, a New Jersey court ruled that a corporation’s board of directors could not deal with an obstructionist shareholder by modifying the company’s shareholder-quorum requirement through a bylaw amendment.[1]  Instead, any deviation from the New Jersey Business Corporation Act’s default rule on shareholder quorum—that a majority of a corporation’s shares must be represented in person or by proxy at a shareholder meeting in order to constitute quorum—must be provided for in the corporation’s certificate of incorporation.  Companies and shareholders looking to either prevent corporate changes or overcome obstructionist shareholders should carefully consider their options.


The Board of Directors of Laurel Gardens Co-Op, Inc. (“the Co-Op”), a New Jersey corporation, attempted to alter the definition of quorum for purposes of shareholder meetings by amending the Co-Op’s bylaws.  Those bylaws required the majority of the Co-Op’s shares, sold or unsold, to appear in person or by proxy to constitute quorum.

Prior to the Board’s attempt to alter the shareholder-quorum requirement, the Board, in 2012, twice called a shareholder meeting wherein the Board intended to vote on a proposed amendment to the bylaws regarding the Co-Op’s subleasing rules and requirements.   Specifically, the sublease amendment would alter the bylaws to require, as a pre-condition for subleasing an apartment, that the owner wait at least one year after acquiring an apartment before the owner can apply to sublease the apartment.  This amendment would essentially reduce the ratio of rental units to owner-occupied units, which would make it easier for prospective purchasers to obtain financing to purchase Co-Op shares.  The plaintiffs, who included the Co-Op’s sponsor at the time the Co-Op converted to a cooperative from of ownership, raised objections to the sublease amendment, asserting that the amendment would violate the sponsor-protection provision.  That provision provided that the bylaws could not be amended in any manner that would affect the sponsor’s rights/interests.  While the proposed sublease amendment exempted the sponsor from its restrictions, the plaintiffs claimed that the sublease amendment nonetheless ran afoul of the sponsor-protection provision because the amendment had the potential to harm the sponsor’s future attempts to sell its shares to prospective purchasers who may wish to sublease the units rather than occupying the units themselves.

At the two shareholder meetings called by the Board to put the sublease amendment to a vote, an insufficient number of shareholders attended the meetings to establish a quorum.  The Board then called a third shareholders’ meeting, immediately following the Board’s monthly meeting.  At the Board meeting prior to the shareholder meeting, all of the Board members who were present unanimously approved the sublease amendment and also an amendment to the bylaws’ shareholder-quorum requirement.  The shareholder-quorum amendment reduced the necessary quorum from a majority of the Co-Op’s shares to 20% of the shares.

The plaintiffs—the Co-Op’s sponsor and one of the Co-Op’s directors—filed suit, individually and derivatively, against Co-Op and the directors who approved the challenged amendments.  The plaintiffs claimed shareholder oppression, breach of contract, and tortious interference based, in large part, on the bylaws’ sponsor-protection provision.  The plaintiffs argued that the sublease and shareholder-quorum amendments ran afoul of that sponsor-protection provision because they had the capacity to limit the value of the sponsor’s shares to prospective purchasers.

The trial court granted summary judgment in favor of the defendant Co-Op and directors and dismissed the complaint with prejudice.

The Appellate Division Decision

The Appellate Division reversed, concluding that, under the unambiguous text of the New Jersey Business Corporation Act, N.J.S.A. 14A:1-1 to 17-18 (“the Act”), the Board could not unilaterally reduce the shareholder-quorum requirement by bylaw amendment.  N.J.S.A. 14A:15-9 states in relevant part: “Unless otherwise provided in the certificate of incorporation or this act, the holders of shares entitled to cast a majority of the votes at a meeting shall constitute quorum at such meeting.”  The court interpreted this “to mean that, in order to hold a vote amongst the Co-Op’s shareholders, a majority of all shares of the Co-Op must be represented at the meeting.”

The court explained that the only manner to modify the shareholder-quorum requirement under the Act is by amendment to the certificate of incorporation, which can only be approved by a vote of the shareholders under N.J.S.A. 14A:9-2(4).  The Co-Op’s certificate of incorporation did not address quorum for shareholder meetings, and, as a result, the Act’s default majority requirement for shareholder quorum controls.  Under the plain language of N.J.S.A. 14A:15-9, an amendment to the corporation’s bylaws was insufficient to modify the Act’s default quorum requirement.

The appellate court was not persuaded by the defendants’ argument that some shareholders, particularly the sponsor who held a substantial percentage of shares, were preventing the Board from conducting meaningful business by boycotting shareholder meetings.  The court noted that the Board had alternatives to address the perceived obstructive behavior, including by persuading shareholders to attend the annual meeting to amend the certificate of incorporation or by initiating General Equity Litigation under N.J.S.A. 14A:5-2 to obtain a court-ordered shareholder meeting wherein “the majority quorum requirement would have been waived by operation of law.”

The Bottom Line

Quorum requirements are critical to a company’s operations because they determine how many shares must approve material changes to the business and how it functions.  Smaller quorum requirements can empower minority interests to exert significant control.

On the one hand, this case is a powerful example of the ability of a shareholder owning a substantial portion of an entity’s shares to slow and obstruct the business of the corporation to its advantage by merely absenting itself, and other shareholders under its influence, from attendance at shareholder meetings.  Going forward, those forming corporations in New Jersey could consider altering the Business Corporation Act’s default rules in the certificate of incorporation at the time of the corporation’s inception to give the Board of Directors the necessary flexibility to take corporate action in the face of shareholder obstruction, apathy, or inaction.

On the other hand, managers and shareholders may wish to implement and maintain the default majority quorum requirements to prevent a minority group from taking action that affects the entire business without a majority present.  Businesses can deal with obstructionist shareholders in other ways, including, as described in the Appellate Division decision, by instituting General Equity Litigation.

Board members or shareholders considering modifications the default quorum requirements can contact me for further discussion and evaluation of strategies for dealing with individual situations.



[1] Sterling Laurel Realty, LLC, et al. v. Laurel Gardens Co-Op, Inc., No. A-0696-14T4 (N.J. App. Div. April 5, 2016) (approved for publication).

New Jersey Appellate Court Rules That Employers May Not Mandate Psychological Testing of Employees Based on Anonymous Tips

By Rachel Mills, Esq.

The Americans with Disabilities Act (“ADA”) provides, in part, that an employer “shall not require a medical examination and shall not make inquiries of an employee as to whether such employee is an individual with a disability or as to the nature or severity of the disability, unless such examination or inquiry is shown to be job-related and consistent with business necessity.”[1]  A New Jersey appeals court recently interpreted this provision and ruled that an employer violated the ADA when it ordered its employee to undergo psychological testing based on anonymous and uncorroborated claims by the employee’s coworkers.[2]


The Township Manager for the Township of Lakewood received an anonymous letter, purporting to be from a concerned employee of the Department of Public Works (“DPW”), relating to the Appellant, a truck driver for the DPW.  The letter claimed that “everyone knows he has some sort of mental issues” and that he puts other employees “at risk with his tirades and outbursts on a daily basis.”  It further described the Appellant as “a time bomb waiting to explode” and requested that something be done to ensure the safety of the other employees.

The Township took no action until eight months later when the Township advised the Appellant that he would be sent for a psychological examination to determine his fitness for duty.  Citing the ADA, the Appellant refused to submit to psychological testing.  The Township issued him a Preliminary Notice of Disciplinary Action and subsequently a Final Notice of Disciplinary Action, and ultimately, the Township terminated his employment based on his refusal to attend psychological testing contrary to the express directives of his superiors.

The Appellant appealed his termination to the Civil Service Commission, who transferred the matter to an Administrative Law Judge (“ALJ”) for a hearing.  At the hearing, only one witness testified for the Township, the director of the DPW.  The director testified that the DPW had some trouble with him over the years because he was “at times . . . confrontational, and at other times [he walked] away from someone who wished to speak with him.”  However, the director added that he was not afraid of the Appellant and that he was “no different than any other employee.”  The director further admitted that he had not investigated the allegations in the letter, and he was unsure what action, if any, the Township Manager had taken to verify its contents.

Based on the foregoing, the ALJ concluded that the Township’s demand that the Appellant undergo psychological testing was not reasonably “job-related and consistent with business necessity.”  The Civil Service Commission, however, reversed the ALJ and concluded that the Appellant was properly terminated for his insubordination.

The Appellate Division Decision

The Appellate Division reversed, concluding that the Township violated the ADA when it required the Appellant to submit to psychological testing based on the information in the anonymous letter.  His termination for refusing to submit to the psychological evaluation was therefore improper, and the panel remanded for his reinstatement.

The appellate panel reviewed the applicable regulations and interpretative guidance from the Equal Employment Opportunity Commission (“EEOC”) and summarized the governing standards as follows:

[T]he employer must reasonably believe, either through direct observation or through reliable information received from credible sources, that the employee’s perceived medical condition is affecting his or her work performance or that the employee poses a direct threat.  Then, and only then, may the employer lawfully require the employee to undergo a psychological fitness-for-duty examination.

With respect to the Appellant, the court explained that the Township failed to satisfy these standards because there was no evidence that he was unable to perform his essential job functions as a result of any suspected mental condition, that he had threatened other employees, or that he had a history of disciplinary infractions over his nine-year employment, aside from one incident wherein he was disciplined for refusing to help a coworker.  Notably, because the author of the anonymous letter was unknown, the letter did not provide the requisite reliable information from a credible source that the Township would have been justified in relying upon in ordering a psychological examination.  The panel explained that the information contained within the letter “was exactly the type of innuendo and rumor that the EEOC has advised employers is insufficient to support a mandatory evaluation.”  The appellate court advised that, had the Township wished to take action in response to the letter, the Township could have solicited information from the Appellant’s coworkers and supervisors concerning his job performance.

The Bottom Line

While anonymous complaint systems play a vital role in eradicating other forms of discrimination in the workplace, employers must be conscientious in ensuring that these systems themselves do not become a means of discrimination.  Thus, an employer should seek to corroborate and investigate any anonymous allegations of an employee’s mental health issues before requiring the employee to undergo psychological testing.


[1] 42 U.S.C. § 12112(d)(4)(A).

[2] In re Williams, — N.J. Super. —  (N.J. App. Div. Jan. 25, 2016).