Monthly Archives: January 2014

Application of the Oppressed Shareholder Provisions of the Business Corporations Act to Minority Oppression in other Business Organizations

By David White, Esq.
dwhite@pashmanstein.com

A developing trend toward applying minority shareholder oppression remedies under the Business Corporations Act (“BCA”), to owners of other business entities was curtailed by the Appellate Division.  Tutunikov v. Markov, A-1827-10T3 (August 1, 2013).

N.J.S.A. 14A:12-7, contained in the BCA,  provides a range of remedies to oppressed minority shareholders. “Oppression” is said to occur where the conduct of the majority owners frustrate the minority shareholder’s reasonable expectations in the venture. Where oppression is demonstrated, courts are authorized to order a forced buyout of the oppressed shareholder’s interests and fix the price at “fair value.”  “Fair value” is a judicial construct designed to avoid diminishing the value of an oppressed shareholder’s stock by valuation discounts, such as those for minority or non-marketable interests, which would inure to the benefit of the buyer.

The current Limited Liability Act (the “LLC Act”) does not contain a compulsory buyout remedy.  Instead N.J.S.A. 42: 2B-39 provides that an LLC member may resign and receive fair value for his shares “less all applicable valuation discounts.” Because of similarities in the predicaments of oppressed owners in the corporate and LLC settings, and in the absence of a specific, statutory remedy, Courts had begun to “import” oppression remedies from the BCA to minority members.

In Tutunikov, the Appellate Division flatly held that the BCA is not applicable to LLCs. Thus its oppression remedies were not portable. Nevertheless, the opinion did uphold a buyout at fair value, a concept generally seen in the setting of shareholder oppression.

New Jersey has adopted the Revised Uniform LLC Act (“RULLCA”), which includes an oppression remedy similar to that under the BCA. N.J.S.A. 42:2C-48.  The RULLCA will become effective for all New Jersey LLCs on March 1, 2014. In the short interval before RULLCA becomes effective, the application of the BCA to LLCs is unlikely to receive additional judicial attention.  However, the Tutunikov decision does not necessarily foreclose crafting oppressed owner remedies in the partnership setting by analogy to the BCA. Like the LLC Act, the Partnership Act, N.J.S.A. 42:1A-1, et seq. is silent on remedies for oppression. In precluding BCA remedies for LLC members, the Tutunikov Court relied in part on the fact that an oppression remedy under the RULLCA was imminent.   No such revision in the partnership statutes is pending, and accordingly, the Tutunikov decision does not completely preclude arguments along those lines.

New York Law Could Impose Personal Liability for Misclassifying Drivers as Independent Contractors

By Sean Mack, Esq.
smack@pashmanstein.com

On January 10, 2014, New York enacted the Commercial Goods Transportation Industry Fair Play Act.  The Act amends New York’s labor law to create a presumption that operators of commercial motor vehicles (defined as vehicles in excess of 10,000 lbs under N.Y. Transportation Laws) are employees, unless the employer can demonstrate that the operator can satisfy either the “separate business entity test” or the “independent contractor test.”

The “Separate Business Entity Test” requires the trucking company to demonstrate that the operator is a separate business entity (e.g., a corporation, partnership, LLC or sole proprietorship) and compliance with each of 11 factors: (1) the business entity is performing the service free from the direction or control over the means and  manner of providing the  service, subject  only  to  the  right  of  the  commercial goods transportation contractor for whom the service  is  provided  to  specify  the  desired result or federal rule or regulation; (2) the business entity is not subject to cancellation or destruction upon severance of the relationship with the commercial goods transportation contractor; (3) the business entity has a substantial investment of capital in the business entity, including but not limited to ordinary tools and  equipment; (4) the business entity owns or leases the capital goods and gains the profits and bears the losses of the business entity; (5) the business entity has an option to make its services available to the general public or the business community on a continuing basis; (6) the business entity includes services rendered on a federal income tax schedule as an independent business or profession; (7) the business entity performs services for the commercial goods transportation contractor pursuant to a written contract,  under  the business entity’s name, specifying their relationship to be as independent contractors or separate business entities; (8) when the services being provided require a license or permit, the business entity pays for the license or permit in the business entity’s name  or, where permitted by law, pays for reasonable use of the commercial goods transportation contractor’s license or permit; (9) if necessary, the business entity hires its own employees, subject to applicable qualification requirements or federal or state laws, rules or regulations, pays the employees  without reimbursement from the commercial  good  transportation contractor and reports the employees’ income to the internal revenue service; (10) the commercial goods transportation contractor does not require that the business entity be represented as an employee of the commercial goods transportation contractor to its customers; and (11) the business entity has the right to perform similar services for others on whatever basis and whenever it chooses.

The “independent contractor test,” is essentially the ABC test followed in a number of jurisdictions, which requires demonstrating that each of the following are satisfied: (a) the individual is free from control and direction in performing the job, both under his or her contract and in fact; (b) the service must be performed outside the usual course of business for which the service is performed; and (c) the individual is customarily engaged in an independently established trade, occupation, profession, or business that is similar to the service at issue.

New York has not followed the ABC test, so it is unclear whether New York courts will broadly or narrowly interpret each of those factors.

One of the most important changes in the Act is the potential for personal civil and/or criminal liability of owners and managers of companies that improperly classify operators as independent contractors.  While the Act does not authorize operators to bring lawsuits personally against trucking companies or their owners; operators who believe they are wrongly classified can file complaints with the N.Y. Department of Labor.  If workers are deemed to be misclassified, civil penalties up to $1,500 for the first offense and up to $5,000 for any subsequent offense within 5 years can be imposed.  If it is determined that the misclassification is willful, criminal penalties, including up to 30-days imprisonment, and a $25,000 fine for the first offense.  Company officers, directors and shareholders who control at least 10% of the company stock also can be held personally liable if found to have knowingly permitted the company to misclassify employees.

Given the serious consequences for violating the new Act, New York companies should review their relationships with their operators and determine whether they are properly classified.

Child Support Arrears and the Right of a Deceased Parent’s Estate to Collect

By Tadd Yearing, Esq.
tyearing@pashmanstein.com

It is a well-known principle in family law that, generally, child support is a right belonging to the child. Thus, in the course of negotiating a settlement, it is acknowledged that one parent cannot waive a child’s right to receive support from the other in exchange for, say, the coffee table or sofa, or even increased share of financial accounts.

This well-worn concept was at the heart of the recent case of Roder v. Roder, 2013 N.J. Super. Unpub. LEXIS 3055. In the case, the child’s right to support was analyzed in the context of a deceased parent’s estate’s efforts to recoup unpaid child support. Following a convoluted and messy procedural history, the pertinent facts are as follows: the parties were married in 1987, wherein the husband adopted wife’s son from a previous relationship. The couple divorced in 1997 and wife remained parent of primary residence for the child following the divorce. The child was deemed emancipated in 2008. In January 2011, wife unexpectedly died. At the time of her death, husband owed child support arrears in excess of $40,000.00. Litigation ensued wherein wife’s estate sought to enforce the support obligation and to collect the outstanding debt. Husband objected to the estate’s claim, though not to the debt itself, and sought a court order to make his arrears payments directly to the child. For his part, the child sided with Husband and sought direct payment of the arrears, noting that though he continued to reside with his mother (wife) for approximately six months after graduation his graduation from college, she did not contribute to his college expenses, which he certified he had paid himself.

The trial court denied the estate’s request and ordered that the support arrears be paid directly to the child.  On appeal, the appellate division reversed. It recognized the authority of the trial court to enforce its orders either for or against the estate of a decedent, but noted that in determining distribution it had gone beyond this authority. That issue, because of multiple beneficiaries to the estate (the child’s siblings), should be left to the Probate court, the appellate court stated.

Explaining this rationale, the court noted that, at the time of wife’s death, husband had no ongoing obligation of support to the child, as the child had been emancipated several years earlier. Further, commenting on the principle that child support is functionally a right belonging to the child, the appellate court distinguished that tenet and found that such a right had, “no relevance to payment of a child support debt owed to a custodial parent at the time of that parent’s death, especially where the child is emancipated and has no claim for ongoing support from either parent.” Id. at 13. The appellate division also found irrelevant the child’s claim that he had paid his own college expenses, noting that the arrears in question were for child support and not college costs. Id. Ultimately the appellate division held that the arrears amounted to a debt owed by husband to decedent-wife and that husband had no legal interest in how his support payments were to be distributed.

It is tempting to view this situation as deeply unfair to the child. On its face, it appears he loses out on collecting unpaid child support from his father, and which he did not receive the benefit of while un-emancipated. But, it is important to remember that child support represents a specific contribution toward the child’s use of certain fixed and variable expenses incurred by the custodial parent (heat, water, food, clothing, etc.), all of which wife incurred and effectively “covered” husband’s contribution toward, since he did not timely pay support and one assumes that wife kept her son sheltered, clothed, fed, etc.

The payment of support arrears in this matter are thus most akin to enforcing repayment of a loan, which wife theoretically “lent” to husband. The child received the benefit of being provided for by his mother and the arrears, such as they would reimburse wife for previously covering husband’s share, are a debt owed to wife, and now her estate.

Finally, it is worth noting that to the extent the estate is solvent, as an heir to his mother’s estate, the emancipated child will receive a portion of the arrears, albeit shared in part with any other qualified beneficiaries. As the subject child may receive some or all of these monies as a beneficiary after having already enjoyed what such monies were supposed to pay for (shelter, food, clothing, etc.), is it fair to suggest that it is the child who, upon receipt of any inheritance from his mother, will enjoy a double “payment” of the same support?

Out of State Relocation with Minor Children

By Tadd Yearing, Esq.
tyearing@pashmanstein.com

As society has become increasingly more mobile, more than ever people are moving to take advantage of work or education opportunities, for lifestyle, or because they have remarried, among a host of other reasons. Not uncommonly, these moves are often to a new state. When the individual wishing to move is divorced with children, and where they are the primary parent or custodian, this desire takes on a special importance as one generally cannot up and move without consent from the other parent or court approval.

Custodial parents have long had a right to relocate, however. But the difficulty has always been balancing the needs and desires of the parent wanting to relocate with those of the other parent, as well as accounting for the best interests of the subject children. Baures v. Lewis, 167 N.J. 91, 115 (2001) (noting that the conflict can be viewed as between the parties’ needs and desires as intertwined with the child’s interests) (emphasis added).

Critically, in Baures, supra., the New Jersey Supreme Court declared that, “social science research has uniformly confirmed the simple principle that what is good for the custodial parent is good for the child” and that “[w]hat it does not confirm is that there is any connection between the duration and frequency of visits and the quality of the relationship of the child and the non-custodial parent.”  Id. at 106-107.

With that as a backdrop, it is important to understand that the custodial parent seeking to relocate out-of-state bears the initial two-pronged burden of 1.) presenting a sufficient initial showing of evidence to establish that a good faith reason for the move exists and 2.) that the move will not be inimical to the child’s interests.

In assessing the above threshold questions, the courts have delineated the following factors for consideration:

(1)  the reasons given for the move;

(2)  the reasons given for the opposition;

(3)  the past history of dealings between the parties insofar as it bears on the reasons advanced by both parties for supporting and opposing the move;

(4)  whether the child will receive educational, health and leisure opportunities at least equal to what is available here;

(5)  any special needs or talents of the child that require accommodation and whether such accommodation or its equivalent is available in the new location;

(6)  whether a visitation and communication schedule can be developed that will allow the noncustodial parent to maintain a full and continuous relationship with the child;

(7)  the likelihood that the custodial parent will continue to foster the child’s relationship with the noncustodial parent if the move is allowed;

(8)  the effect of the move on extended family relationships here and in the new location;

(9)  if the child is of age, his or her preference;

(10)       whether the child is entering his or her senior year in high school, at which point he or she should generally not be moved until graduation without his or her consent;

(11)       whether the noncustodial parent has the ability to relocate;

(12)       any other factor bearing on the child’s interest.

Baures, supra., at 118.

Once a sufficient showing has been made, the burden shifts to the noncustodial parent, who, in order to defeat the relocation request, must produce evidence opposing the move as either not in good faith or inimical to the best interests of the child.  After the noncustodial parent has gone forward, the moving party may rest or adduce additional evidence regarding the noncustodial parent’s motives, the visitation scheme, or any other matter bearing on the application.

As with most areas of family law, such determinations are highly fact sensitive. The cases often will include the reports of custody experts to opine on the move’s potential impact on the children. This can be financially burdensome to the parties, as well as stressful for the children involved. Nevertheless, as the case law makes clear, “[t]he custodial parent who bears the burden and responsibility for the child is entitled, to the greatest possible extent, to the same freedom to seek a better life for herself or himself and the children as enjoyed by the noncustodial parent.” Id. at 110 (citing Cooper v. Cooper, 99 N.J. 42, 55 (1984)).