A Bergen County, New Jersey Chancery Court held that the case law applicable to New Jersey corporations also relates to limited liability companies. The Court followed the well-established principal of shareholder oppression law that Courts are permitted to fashion equitable remedies. 
Bikoff v. Garcia, 2011 N.J. Super. Unpub. Lexis 1502 (May 27, 2011), involved a legal dispute between two medical doctors who each owned membership interests in two New Jersey Limited Liability Companies, North Jersey Ambulatory Surgical Center, LLC (“North Jersey”) and Tower Real Estate Holdings, LLC (“Tower”).  
On October 13, 2009, Plaintiff Dr. Bikoff filed individual and derivative claims on behalf of North Jersey and Tower. In his Civil Complaint, he sought the right to redeem Dr. Garcia’s interests in Tower and North Jersey pursuant to the terms and conditions of the governing operating agreements. Shortly thereafter, Dr. Garcia filed his Answer and Counterclaims. In Dr. Garcia’s Counterclaims, he sought that Tower and North Jersey be dissolved, their affairs wound up, and their assets distributed to the members. In the alternative, Dr. Garcia sought to have Tower and North Jersey buy out his interests in those companies.  Dr. Garcia also asserted that both his and Dr. Bikoff’s contributions to the companies were in the form of loans as opposed to equitable contributions.   If the Court agreed with the same, the member loans to the companies were approximately $1.7 M. 
The case was tried over the course of several months. After considering the testimony of lay and expert witnesses the Court determined that (1) North Jersey had no value because its debts exceeded its assets, (2) the property owned by Tower was worth $4,706,957 with debts against that property that totaled $3,863,760; and (3) the members each contributed loans to Tower in excess of $1.7 M, which consume the remaining equity in Tower’s property, which in essence left Tower with no equity to redeem Dr. Garcia’s interests.
The Court then had to fashion an appropriate remedy.  The issues for the Court in fashioning the remedy needed to consider: (1) should the loans be paid if the repayment of the same would result in the company being unable to carry on its affairs (making it insolvent); (2) what should the Court do when the member loans exceeded the value of the companies? (3) what should the court do in terms of the repaying of loans to third-parties?
In addressing the aforementioned issues, the Court first considered Knecht v. Mandek Corp., 281 N.J. Super. 439 (App. Div. 1995), which touched upon the inherit common law equitable power of the Chancery Division to achieve equity in concluded, under the facts of that case, that the Court in a “buy out” situation possessed the equitable power to order prepayment of debt.  In Knecht, the Appellate Division held, “in ordering the repayment of debt, the corporations’ ability to survive cannot be left on the verge of insolvency’ to the detriment of their surviving shareholders and creditors, and at the risk of jeopardy to repayment of the same debt owed the individual defendants.  In essence, the ‘buy-out’ including the repayment of debt, ‘is warranted only when it would be fair and equitable to all parties.’”  Knecht v. Mandek Corp., 281 N.J. Super. at 448 (citing, Brenner v. Berkowitz, 134 N.J. 488, 514 (1993).  The Court also considered Brenner v. Berkowitz, supra, which noted that Courts are not necessarily limited to salutatory remedies; rather, they “have a wide array of equitable remedies available to them.  Id. at 516. 
Despite the fact that Knecht and Brenner dealt with corporate entities as opposed to limited liability companies such as North Jersey and Tower, the Bergen County Chancery Court found that the holdings in those two seminal cases were analogous and illustrative of the Court’s inherent authority to fashion an appropriate equitable remedy.  The Court went on to ultimately hold:
  1. There were insufficient funds to immediately repay the entire $1.7 M loan. The repayment of the entire loan would leave Tower on the verge of insolvency or push it over the brink a result which Knecht and Brenner undoubtedly viewed with disfavor.  
  2. The repayment of the full loan would be unfair to Dr. Bikoff which the Court also found to be entitled to repayment of his loans to the company. Moreover, the Court found it would be unfair for the Court to allow Dr. Garcia to remove all of the equity in the company for the repayment of his loan while leaving Dr. Bikoff’s loan unpaid. 
  3. The Court then went to use its equitable powers to divide the remaining $843,196, in equity (or $421,598), which was held by the Court to be used to repay Dr. Garcia for his loan.   
As I’ve stated in previous blog posts, there are no clear and fast rules as to what a Court will do when it uses its equitable powers to remedy a situation. What’s interesting about this case is that the problems between Doctors Garcia and Bikoff started around September 2009, when Dr. Garcia’s medial license was suspended as a result of an arrest. Although the Court did not provide any information as to why Dr. Garcia was arrested, the Judge mentioned the arrest many times during the course of Judge Carroll’s decision. It is possible that the Court considered that fact when it fashioned the equitable remedy mentioned above.
Scott Unger is a Shareholder in Stark & Stark’s Lawrenceville, New Jersey office concentrating in Shareholder & Partner Dispute Litigation. For questions, or additional information, please contact Mr. Unger.