Closely Held Business - Loans to Directors, Officers or Employees

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New Jersey law permits loans to directors, officers or employees only if a benefit to the corporation can be reasonably expected. That section also requires the approval of the board of directors. Based upon the statutory language and the general duties of care and loyalty which applies to members of the board of directors they may only approve these loans if there is reasonably expected to be a benefit to the corporation.  The members of the board who are seeking the loan should be cognizant of potential conflicts of interest which could subject themselves to a breach of fiduciary duty or minority oppression claims.  If possible, they should abstain from voting on issues which directly effect them. 


There may be times when a majority shareholder enters into an unfavorable loan or lease agreement which negatively impacts the minority shareholder. New Jersey courts have established law for when such loans and lease agreements are biased against the minority shareholder and unenforceable.

The Right to Resign under the New Jersey Limited Liability Company Act

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As more and more business owners are forming limited liability companies ("LLC's") to operate their businesses, familiarity with the statute that governs limited liability companies (which in New Jersey is the New Jersey Limited Liability Company Act (the "LLC Act")) is important.  Most provisions of the LLC Act can be preempted by the LLC's Operating Agreement, which is the agreement among the members of the LLC that governs its conduct and affairs.  If the LLC's Operating Agreement does not address a particular issue, the LLC Act governs. 
 
 
Sections 42:2B-38 and 39 of the LLC Act, which addresses what happens  if an LLC resigns, often takes LLC owners by surprise.  These provisions provide that unless a limited liability company's operating agreement provides otherwise, a member of an LLC can resign upon providing at least six months' prior written notice, and upon the member's resignation, the member is entitled to receive, within a reasonable time after resignation, the fair value of his limited liability company interest as of the date of the resignation, less all applicable valuation discounts.
 
 
These provision are essentially a "put", meaning that any member of an LLC can resign from the LLC and require the company to pay the member for his or her ownership interest. 
 
 
Many owners of LLC's are surprised by these provisions, since, especially in the context of a closely-held company that is being operated by its members, the owners do not expect that one owner can merely resign and get paid the value of his or her interest.
 
 
Unless the members of an LLC intend for this provision of the LLC Act to apply, they should make sure that in drafting their Operating Agreement, a specific provision is included which expressly provides that no member has a right to resign and be paid the fair value of his or her limited liability company interest. 

Campus Associates v. Zoning Board of Adjustment: Property Owner may have Standing to Challenge Denial of Application Brought by Contract Purchaser

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In Campus Associates v. Zoning Board of Adjustment, a contract purchaser brought an application before the local zoning board of adjustment for a use variance to construct affordable housing.  The zoning board ultimately denied the application and the contract purchaser opted not to appeal.  When the property owner sought to appeal, instead, the zoning board filed a motion to dismiss the complaint on grounds that the owner lacked standing.  The trial court granted this motion dismissing the complaint (and denied a motion by the plaintiff for reconsideration and for leave to amend the complaint).  On review, the New Jersey Superior Court, Appellate Division, reversed the trial court’s decision to dismiss the complaint on account of standing and issued an opinion on June 4, 2010, __ N.J.Super. __, __ (App. Div. 2010) (slip op. at 2).           
 

The Appellate Division began its analysis of the issue by noting that “[i]n appeals from decisions of boards of adjustment on applications for variances, standing is not limited to the applicant before the board.” Id. at 6.  Objectors may sue and “in limited circumstances,” so may the municipal governing body and property owners in adjacent communities.  “Thus, the fact that plaintiff was not the applicant does not necessarily deprive it of standing.” Ibid.  On the contrary, “[a]s the owner of the land, plaintiff is directly affected by the variance application[]” and has “a sufficient stake in the outcome to confer standing.” Ibid.
 

There is real adverseness here with respect to the subject matter since plaintiff seeks to pursue the development of its property along the lines of the [contract purchaser’s] application, either on its own or by involving another developer in the project.  This is something that it cannot do without a variance.
Id. at 7.
 

The Court then went on to distinguish a prior appellate case entitled Spinnaker Condominium Corp. v. Zoning Board of Sea Isle City, reported at 357 N.J.Super. 105 (App. Div.) certif. denied 176 N.J. 280 (2003), which ruled against a property owner, who sought to challenge the denial of a use variance for the installation of wireless antennas where the contract lessee - a telecommunications carrier - chose not to appeal, “because the variance sought was unique to the applicant and ‘would not adhere to the land in the traditional zoning sense.’” Id. at 8 (quoting Spinnaker, supra, 357 N.J.Super at 114).  In this regard, the Court reasoned that in order to utilize a use variance for wireless telecommunications purposes, an applicant must be licensed by the Federal Communications Commission so, unlike the applicant, the plaintiff “could not install the facility on its own[ and, therefore,] it was not substantially harmed by the denial.” Id. at 8.
 

Further, in considering this type of application, a board is required to take into account factors unique to the applicant, namely whether the variance was needed in order to allow that particular wireless telecommunications provider to fill a coverage gap.  A subsequent wireless telecommunications provider seeking to install a wireless facility at the same location would have ‘its own discrete, coverage gap’ requiring a separate analysis by a board.”
Id. at 8. (quoting Spinnaker, supra, at 114). 
 

In the instant case, unlike the application in Spinnaker, the use variance applied for was in the nature of “a traditional land use application dependent upon property specific proofs[]”and, therefore, the plaintiff had sufficient standing to appeal from the zoning board’s denial. Id. at 2, 8.

Police Lay-offs In New Jersey Contemplated

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According to last week’s Trenton Times, 50% of the State’s municipalities plan to lay off police officers this fiscal year, with most of the lay-offs occurring before June 30, 2010.  A layoff of police officers would seem to be the last thing a municipality would want to do, however, the individuals who make these kind of choices are generally not police officers. The lack of resources caused by these upcoming layoffs builds pressure on already straining resources. Undoubtedly, some of the most useful and beneficial police work, such as placement of police officers in schools, will suffer as a result of these cutbacks. Only time will tell what impact these cutbacks will have on “management/police" relations over the next year or two.
 

Coordinating Green Building Design Goals with Historic Preservation

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A developer should be especially careful when constructing a new green building within an historic district or within the viewshed of an historic building and when renovating an historic building into an energy-efficient structure.  Not only should a developer want to harmonize modern, energy-efficient design with the attributes of an historic building or neighborhood, but a developer may have to do so depending on the circumstances.  For example, if a project includes or otherwise impacts a property that is listed on (or is eligible to be listed on) the National Register of Historic Places and requires a federal permit or license or is the recipient of federal funding, it may be subject to review by the State Historic Preservation Office pursuant to Section 106 of the National Historic Preservation Act of 1966. 16 U.S.C. §470(f).  Similarly, a developer whose restoration plan for an historic building includes the installation of energy-efficient improvements must be certain that design and construction will comply with the Secretary of the Interior’s Standards for Rehabilitation published in the Code of Federal Regulations at 36 C.F.R. § 67.7 and the applicable provisions of the Internal Revenue Code (IRC) if the developer seeks both the rehabilitation tax credit under Section 47 of the IRC and the energy efficient commercial buildings deduction provided by Section 179D of the IRC or the nonbusiness energy property tax credit (for residential dwellings) provided by Section 25C of the IRC.

Minority Oppression: Conflicts of Interest - Taking Advantage of a Business Opportunity

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A common theme through out previous blog posts is the basic concept that majority shareholders, officers and directors are fiduciaries. As a result of that position they owe to the corporation itself along to the other shareholders duties of care, loyalty and good faith. One area which often results in minority oppression and breach of fiduciary duty claims is when an officer, director or majority shareholder personally takes advantage of a business opportunity to the detriment of the corporation and its shareholders.
 

The corporate opportunity doctrine in New Jersey was defined in the seminal case of Valle v. North Jersey Automobile Club, 141 N.J. Super. 568, 573-574 (App. Div. 1976), mod on other ground, 74 N.J. 109 (1977).  In Valle, the Plaintiff’s principal claim was that the directors had violated their fiduciary duties to the North Jersey Automobile Club by acquiring an insurance agency for their own interest.  The Appellate Division upheld the trial court’s ruling that the defendant directors, in diverting business to themselves, committed a breach of trust which wrongfully deprived the Automobile Club of a corporate opportunity.  In doing so, the Valle Court recognized that at “common law and by current authority in England and the United Stats directors of a private corporation are considered by equity to be in a fiduciary relationship with the corporation and its shareholders.” Moreover, the Court held that the corporate opportunity concept is one aspect of the general rule that a fiduciary’s loyalties may not be divided.  
 

Hence, if a shareholder, officer or director is presented a corporate opportunity which the underlying corporation is financially able to undertake; is in line with the underlying corporation’s business; or to which the underlying corporation had an interest or reasonable expectation of receiving that opportunity, then the fiduciary must present that opportunity to the underlying corporation to whom the fiduciary duty is owed. Failure to present that opportunity to the underlying corporation could be the basis of a breach of fiduciary duty and minority oppression claims.

Albert Stark - Writer, Mentor, Cheerleader

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 The Sunday Trenton Times recently published an article featuring our Shareholder Albert Stark.

It was the satisfaction he derived from becoming involved in people's lives that drew him into personal injury law. He had set out to practice urban planning and land development law but changed his mind after sudden and dramatic setbacks.

You can read the article in its entirety here.

 

 

Card Check Legislation Languishes

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Before the Great Recession pounced on us in the summer of 2008, the hottest legislation to hit Capitol Hill was “card check,” otherwise known as the Employee Free Choice Act.  In general, the Act would make union organization much simpler, eliminating formal voting and replacing it with members simply filling out cards until the requisite number was reached to justify the formation of a union local.  Legislation seemed to be on a rapid trajectory to President Obama’s desk but has gotten lost in the various wars, recession, oil spill and health care reform. 

 

With finance reform now being the hot topic of the day, “card check” has apparently been left behind.  Although attempts were made at the beginning of the year to attach it to other pieces of legislation, it was clear that the bill must raise or fall on its own merit.  Given the “centrist” position that President Obama has taken with regard to financial/economic matters, it seems unlikely that he will champion what is arguably the most favorable pro-union bill to be considered in decades.  Still, the President and his party cannot rely on union support forever if they fail to take action on what has been the Union’s legislative “baby.”  They may pay a price at the polls.
 
 

Are Your Franchisees Your Employees?

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Stark & Stark Franchise attorney, Adam J. Siegelheim, presented a seminar Wednesday June 9, 2010 entitled, Are Your Franchisees Your Employees? The webinar discussed the recent case, Awuah v. Coverall N. Am., Inc., in which the court held that certain franchisees were the franchisor's employees. In determining that the franchisees were employees, the court applied the "ABC" test, which is used by 26 states, including New Jersey. Mr. Siegelheim discusses the Coverall case, and how this decision may impact franchisors who sell franchises in Massachusetts and other states.

 

Are Your Franchisees Your Employees? from Stark & Stark on Vimeo.

Hot and Green Legal Topics: Round 2

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The following is an article entitled Hot and Green Legal Topics: Round 2 written by Vincent J. Mangini taken from the May 2010 edition of The Cutting Edge:
 

There has been quite a flurry of legislative activity this year in the arena of green building and renewable energy. A few examples of new and proposed laws follow below.

Solar Installations

  • On January 16, 2010, just prior to leaving office, Governor Jon Corzine signed the "solar farm bill" (P.L. 2009, c. 213) which, among other things, authorizes a person who owns preserved farmland to install and operate biomass, solar or wind energy generation facilities, structures and equipment on the farm for the purpose of generating power or heat and adds "the generation of power or heat from biomass, solar, or wind energy" to the list of permitted activities that may be conducted on commercial farms.
  • On April 22, 2010, Governor Chris Christie approved a new law (P.L. 2010, c.4), which amends a number of existing State laws, including the Municipal Land Use Law, to require that solar panels be excluded from the calculation of impervious coverage. The term “solar panel” is defined to include “an elevated panel or plate, or a canopy or array thereof, that captures and converts solar radiation to produce power, [but] excludes the base or foundation of the panel, plate, canopy or array."
  • While on the topic of solar, it is important to note that before installing a solar energy system, the owner or operator of the facility should confirm that it will have unobstructed access to sunlight and secure this resource for the future. This can be accomplished by acquiring an easement across adjacent properties. Fortunately, New Jersey recognizes easements for solar energy facilities and has set forth the minimum content requirements for such easements in the Solar Easements Act, N.J.S.A. 46:3-24, et seq.
     

Property Assessment Clean Energy
During the current session, many green bills have been introduced in the State Legislature. One of the more interesting legislative proposals being considered is Senate bill S1406 which, if adopted, would create a property assessment clean energy municipal financing program. Under the proposed program, the New Jersey Economic Development Authority in consultation with the Board of Public Utilities would provide money through low-cost sources of financing, such as qualified energy conservation bonds, to municipalities interested in loaning funds to property owners for the purchase of solar equipment. Property owners receiving these funds would pay back their loans through a special assessment and the assignment of solar renewable energy certificates.

 

New Energy Efficient Home Credit
At the federal level, Congress recently passed a bill (H.R. 4213) that extends the life of the New Energy Efficient Home Credit, which provides a $2,000.00 tax credit for a qualified new energy efficient home and a $1,000.00 credit for a qualified manufactured home, through December 31, 2010. However, the bill must still go through reconciliation and be signed by the President.

 

Conclusion
Clearly, the aforesaid legal developments will impact the real estate industry. Therefore, it is important to become familiar with these, and other new and proposed legislation.

Developing Interior Fit-out Guidelines for Tenant Spaces in Green Building

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A landlord who has constructed or renovated a building to meet a given green building certification protocol, such as the U.S. Green Building Council's Leadership in Energy and Environmental Design (LEED) Green Building Rating System, should develop interior fit-out guidelines for incoming tenants to achieve and sustain energy efficiency goals and preserve the integrity of the building. 

 

These guidelines might specify, for example, that construction in tenant spaces shall conform to LEED for Commercial Interiors and must be performed by experienced green contractors and subcontractors contained on a pre-approved list.  A landlord might also want to include in the interior fit-out guidelines for the building product and material specifications and a requirement that tenants employ a construction manager who is a LEED accredited professional.  In any event, the owner of a green commercial building, who is planning to rent it out, should carefully think though and plan the interior fit-out guidelines.
 

Bad Contracts Between Shareholders - Unfavorable Loans and Lease Agreements

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Often majority shareholders will enter into various kinds of unfavorable contracts between the closely held company and themself or a business owned by them in order to siphon off corporate earning or assets.  Generally, directors and majority shareholders are fiduciaries and owe to the minority shareholders along to the corporation itself certain duties of care, loyalty and good faith. Majority shareholders must place the interests of the corporation and its shareholders above their own. Moreover, the majority shareholder or directors must act to further the best interest of the corporation and may not utilize their powers to further a personal interest. Based upon those duties minority shareholder who are mistreated as a result of the majority entering into unfavorable contracts may have recourse.

 

Unfavorable loans and leases are two types of contractual arrangements commonly used by the oppressor to drain off corporate earnings.   Courts have found the following to be forms of unlawful oppression and/or breach of fiduciary duty:


1)    a majority shareholder in a closely held New Jersey corporation abused his power when he caused the company to rent his condominium in Puerto Rico, Street v. Vitti, 685 F.Supp. 379 (S.D.N.Y. 1988);
2)     renting corporate assets to another corporation for below market rents, Marian v. Mariani, 276 A.D. 205 (1st Dept. 1949); 
3)    failing to collect rental fees from another corporation due under the governing contract, Apicella v. PAF Corp., 479 N.E.2d. 315 (8th Dist. Cuyahoga County, 1984);
4)    a majority shareholder unlawfully caused the corporation to renew the shareholder’s lease of corporate property without making a change in lease terms, thus permitting the majority shareholder to retain the property for a long period of time at the original rent though the rental value of the property greatly increased, Peri-Gil Corp v. Sutton, 84 Nev. 406, 442 P.2d 35 (1968);
5)    a majority shareholder borrowed large sums of money from a closely held New Jersey corporation without paying interest and providing little to no security for said loan, Street v. Vitti, 683 F. Supp. 379 (S.D.N.Y. 1988); see also, Xerox Corp. v. Genmoora Corp. 888 F.2d. 345, 351 (5th Cir. 1989);
6)    a corporation made large loans to some of its shareholders despite the fact it had to borrow substantial funds to meet it own operating expenses, Merritt v. Colonial Foods, Inc., 505 A.2d 757 (Del. Ch. 1986); and
7)    a majority shareholder used funds borrowed from the corporation to establish a business that competes with it, Bresnick v. Franklin Capital Corporation, 10 N.J. Super. 234 (App. Div. 1951); Kean v. Johnson, 9 N.J. Eq. 401 (Ch. 1853); New England Inv. Corp. v. Sandler, 329 Mass. 230 (1952); see also, Valle v. North Jersey Automobile Club, 141 N.J. Super. 568, 573-574 (App. Div. 1976), mod. on other grounds, 74 N.J. 109 (1977) (holding a director or officer may not take personal advantage of a business opportunity if the opportunity is within the corporation’s scope of business; the corporation has the financial capability to take advantage of the opportunity; and the director/officer by taking the opportunity for themself will assume a position adverse to their duties to the corporation).
         

Minority shareholders who find themselves in a situation where the majority shareholder is taking funds from the business through loans or leases have recourse available.

2010 CAI Law Seminar

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I recently returned from the Annual CAI Law Seminar in Tucson. As is the norm at these gatherings, attorneys (and some managers) from across the country assemble to take part in a three-day forum on cases of interest from the past year, and breakout sessions for legal seminars on a variety of topics.
 

From my point of view, one of the more beneficial facets of the Law Seminar is the morning sessions for case updates.  Two speakers provide a synopsis of reported cases in various areas of community associations (such as restrictive covenant issues, assessment collections, etc.).  These are always good to hear (and have copies of the cases) as it provides a reference for those issues that I may have to deal with in New Jersey.  It certainly provides a starting point for issue recognition in certain cases.
 

Of course, there are always cases discussed that leaves one shaking one’s head and saying to oneself, “Are you kidding me?”  One thing community association living does not have is a shortage of good stories that makes one smile.  A sample of the best of 2009 (none of these are from New Jersey, proving sanity did rule for the most part  in New Jersey this past year):
 

Lake Charleston Maintenance Association, Inc. v. Farrell, 16 So. 3d 182 (Fla. App., 2009.  A homeowner submitted an application to the development review board of the homeowner’s association requesting permission to repaint her house.  She received a letter stating that her application was pending and requested additional information.  She then attended a meeting of the development review board where she was advised that her application had been denied.  A couple of weeks later, the homeowner painted her house in the color she originally submitted in her application.  The association filed suit.  The court found that the defendant had violated the declaration by painting her house without first obtaining approval of the design review board.  The court found that she was informed of the denial of her application when she attended the meeting of the design review board which was held within the 30 day period within which the design review board was to approve or disapprove an application.
 

Schwartz v. Banbury Woods Homeowners Association, Inc., 675 S.E. 2d382 (N.C. App., 2009).  A homeowner’s association assessed fines against a lot owner for violating the parking restrictions in the recorded covenants.  The covenants stated that owners of lots shall not be permitted to park boats, trailers, campers and all similar property on the streets in the development.  The homeowner claimed that his motor home did not fall within the definition of “campers and all similar property” as stated in the covenants.  The court held that although the term “motor home” was not expressly listed in the covenants, based on the natural meaning of the term “camper” at the time the covenants were drafted and recorded, the court concluded that it would defeat the plain and obvious purposes of the restriction to exclude plaintiff’s motor home.