Tag Archives: LLC Act

The New LLC Act Will Eventually Apply to All Limited Liability Companies – Part One

By Bruce Ackerman, Esq.
backerman@pashmanstein.com

The new law affecting every limited liability company (“LLC”) in New Jersey, dubbed the Revised Uniform Limited Liability Company Act (“RULLCA”), took effect September 19, 2012.  The prior law, generally known as the LLC Act, was largely unchanged since 1994.  This new Act is a major revision and brings changes to many aspects of forming and operating LLC’s in New Jersey.  This Part One will highlight a few of the first portions of the new Act, namely who the law affects and when, and the impact of the LLC Operating Agreement upon the members and managers.

The new Act, RULLCA, says that it applies to all LLC’s formed on or after March 18, 2013.  It will also apply to “all LLC’s”, regardless of the date of formation, eighteen months after its adoption on September 19, 2013.  Therefore, the critical date for all LLC managers and members in existing LLC’s is March 19, 2014.  At that time, all LLC’s in New Jersey will be governed by the new RULLCA.

Under the old law, the LLC’s “operating agreement” was defined as being a written agreement among the members as to how to conduct its business.  In contrast, the new law defines it as being an agreement that is “oral, in a record, implied, or in any combination thereof.”  This is a significant change, which now allows any writings, conversations, emails, verbal or other historical permissions or business practices to become, in effect, the operating agreement for the LLC.

Significantly, RULLCA now governs various parts of the operating agreement and even imposes rights and obligations where not otherwise specifically written by its members.  As an example, RULLCA provides that where the LLC operating agreement does not cover the listed items (relationship between members and the company, rights and duties for the manager, the company’s activities, and amending the agreement), RULLCA will control those items.  RULLCA also prohibits certain items from being altered, except within specified limits, such as changing a member’s duty of loyalty to the LLC, or the duty of good faith and fair dealing, or the vaguely stated “unreasonably restrict the duties and rights stated in section 40 [Right of Members, Managers, and Dissociated Members to Information]” or the right of a member to maintain a direct or a derivative action.

The initial provisions in RULLCA address the need to have LLC members that may operate other competitive businesses or deal with competitors.  Section 11(d) now permits the LLC operating agreement to specifically restrict or even eliminate the duty of loyalty of the members to the LLC and change the indemnification of the members and/or managers.

Just to make it less predictable, a catchall provision leaves it up to the court to decide whether the restriction or elimination of the duty of loyalty is “manifestly unreasonable”.

Lastly, RULLCA provides that any person that becomes a member of the LLC automatically agrees to the LLC operating agreement.  Look for Part Two to address the relationships between members and managers with the LLC and with each other.

Link to Part Two

Disassociation of LLC Member

By David White, Esq.
dwhite@pashmanstein.com

The Appellate Division recently construed the disassociation provisions of the LLC Act in a way that ostensibly eliminates the need for fault to expel a member.  In All Saints University of Medicine Aruba v. Chilana, 2012 N.J. Super. Unpub. LEXIS 2797  (2012), the Court held that judicial disassociation under N.J.S.A. 42:2B-24 b (3) may be granted, without more, where the member ‘s business conduct makes the prospect of continuing the LLC’s activities reasonably impractical.

In All Saints, plaintiffs and defendants formed a New Jersey LLC in connection with their operation of a medical school in Aruba.  Disputes arose among the members over financial issues and management of the company, including signing authority for checking accounts.  Plaintiffs’ complaints about the signatories resulted in the company’s  banks freezing its accounts.  Inability to access the accounts aggravated the already dire financial status of the medical school and threatened its operation.  The answering Defendant elicited capital contributions from the other members to continue the operation.  Plaintiffs declined to contribute and brought an order to show cause seeking relief for breaches of the Operating Agreement.  Defendant counterclaimed seeking authorization to operate the LLC unilaterally.  While the matter proceeded, defendant funded the company and sought to judicially disassociate plaintiffs from the LLC.

N.J.S.A. 42:2B-24(b) controls judicial disassociation of LLC members.  Sub section (3) (a) provides for expulsion where the member “engaged in wrongful conduct that adversely and materially affected the limited liability company’s business.”   Sub section (3)(c) permits expulsion where the member’s business related conduct “makes it not reasonably practicable to carry on the business with the member as a member of the limited liability company.”

The trial court determined that plaintiffs’ conduct met both tests, finding that it was wrongful under sub section (3)(a) and, under sub section (3)(c ), that it made impractical carrying on the business together.

On appeal, the Appellate Division observed that the statutory grounds were expressed disjunctively.  It further noted that N.J.S.A. 42:2B-24 uses the generally mandatory verb, “shall,” in providing for disassociation on the occurrence of one of the specified bases.  Accordingly, it found that either basis would suffice, calling them “equally dispositive.”

While the decision sidesteps whether the fault alleged against plaintiffs was “wrongful,” it carefully notes “the reality” of the adverse consequences.  The court limited its holding “to the facts of this rather unusual case.”  Notwithstanding the apparent equation of the wrongfulness and impracticality grounds for disassociation here, the sub-text of the Appellate decision suggests that in general, fault remains at least a background factor.