On May 22, 2014, the New Jersey Appellate Division reversed a trial court’s denial of a motion to compel deadlocked members of a limited liability company to arbitrate their disputes in accordance with the governing operating agreement. Comando v. Nugiel, 2014 N.J. Super. Unpub. Lexis 1167 (App. Div. 2014). The Comando decision: (1) provides a good overview of the law in New Jersey governing arbitration of disputes; and (2) concludes the disagreements present in the dispute constituted “deadlock.”
The Comando case centered on a dispute between Elizabeth Comando (“Comando”) and Mary Nugiel (“Nugiel”) regarding a New Jersey limited liability company, 10 Centre Drive, LLC (“the LLC”). The two of them contributed money and co-signed a mortgage, to aid the LLC in purchasing a building located at 10 Centre Drive in Mercer County, New Jersey. The building was purchased to be used by another company (RCP Management Company) they worked together for. Although RCP Management Company was initial owned solely by Nugiel, the two agreed that Comando would eventually become a co-owner.
Comando and Nugiel executed an operating agreement for the LLC. Section 5.5 of the operating agreement addressed the circumstance of a members’ deadlock on management decisions (deadlock provision), which stated:
In the event the [m]embers are unable, for any reason, to agree regarding any matter or decision requiring the approval of a majority or more of the [m]embers, (a "[d]eadlock"), then the [m]embers shall mutually agree upon an individual with appropriate expertise to cast a vote to break any [d]eadlock (the "[r]eferee"). The [r]eferee shall be appointed by the [m]embers within three (3) days after the date of the [d]eadlock. The [r]eferee will make such inquiry into the [d]eadlock as it, in its sole discretion, deem appropriate. The [m]embers may agree on any rules to govern such inquiry, and in the absence of an agreement, the rules of the American Arbitration Association shall apply. Within five (5) days after the date of the appointment of the [r]eferee, the [r]eferee shall present a written decision regarding the resolution of the [d]eadlock to the [m]embers which shall be final and binding upon the [m]embers. The [r]eferee shall have the authority to decide all matters presented to it. In the event either [m]ember fails or refuses to act in accordance with the [r]eferee’s decision for any reason, then the other [m]ember may seek all remedies permitted under the law in order to enforce the decision. The [c]ompany shall pay the fees and reasonable out-of-pocket expenses of the [r]eferee. Except as otherwise set forth herein with respect to [r]eferee expenses to be paid by the [c]ompany, each [m]ember shall be responsible for their own costs and expenses association with the resolution of any [d]eadlock hereunder.
Difficulties and disagreements developed between them concerning RCP Management Company. By January 2013, the two reached an impasse over RCP’s ongoing operations. In February 2013, Nugiel informed Comando she desired to sell RCP to a third-party. Comando replied, expressing her desire to exercise her right to purchase RCP, which Nugiel rejected. Comando resigned on April 1, 2013. Beginning in June 2013, Comando urged the sale of the LLC’s real property, a request which Nugiel refused.
On July 13, 2013, Comando, individually and derivatively filed a lawsuit against Nugiel in the Superior Court of New Jersey, Bergen County, Law Division. Included among the numerous claims against Nugiel and RCP are an assertion of Comando’s de facto ownership interest in RCP Management Company and breach of contract, as well as a claim Nugiel wrongly diverted corporate profits for her sole benefit and committed fraud. Nugiel filed a counterclaim, alleging Comando overbilled clients to inflate her salary and percentage of profits, Comando revealed RCP Management Company’s confidential information to her new employer, and if Comando is found to be a shareholder of RCP Management Company, she breached her fiduciary duty to the corporation and fellow shareholder, Nugiel.
Comando filed a motion pursuant to the above-mentioned “deadlock provision” seeking to have the case remanded to binding arbitration. Nugiel opposed that motion. In her opposition, Nugiel argued that the “deadlock provision” was inapplicable and that Comando waived arbitration when she filed a lawsuit in Court. The trial court agreed with Nugiel.
The Appellate Division reversed that decision. In doing so, the Comando Court cited governing case law favors enforcing parties’ contractual agreements to arbitrate. Garfinkel v. Morristown Obstetrics & Gynecology Assocs., P.A., 168 N.J. 124, 131 (2001); Alamo Rent A Car, Inc. v. Galarza, 306 N.J. Super. 384, 389 (App. Div. 1997); Angrisani v. Fin. Tech. Ventures, L.P., 402 N.J. Super. 138, 148-49 (App. Div. 2008).
The Comando Court found that the disagreements between Nugiel and Comando concerning the sale of the LLC’s real property constituted “deadlock” which triggered the arbitration clause contained in the Operating Agreement.
Finally, the Comando Court held that the commencement of the litigation in Court did not constitute a waiver of the arbitration clause. In reaching that conclusion, the Court recognized “"[t]here is a presumption against waiver of an arbitration agreement [.]" Spaeth v. Srinivasan, 403 N.J. Super. 508, 514 (App. Div. 2008). Moreover, “party’s waiver must be expressed "clearly, unequivocally, and decisively.” Camando (quoting, Cole v. Jersey City Med. Ctr., 215 N.J. 265, 277 (2013)). There is no single test for the type of conduct that may waive arbitration rights." The Camando Court following the New Jersey Supreme Court’s Cole decision set forth that the factors should be evaluated when undertaking the necessary are:
(1) the delay in making the arbitration request; (2) the filing of any motions, particularly dispositive motions, and their outcomes; (3) whether the delay in seeking arbitration was part of the party’s litigation strategy; (4) the extent of discovery conducted; (5) whether the party raised the arbitration issue in its pleadings, particularly as an affirmative defense, or provided other notification of its intent to seek arbitration; (6) the proximity of the date on which the party sought arbitration to the date of trial; and (7) the resulting prejudice suffered by the other party, if any.
Cole v. Jersey City Med Ctr., 215 N.J. at 280-81
After applying those factors, the Camando Court held that there was not a waiver and reversed the Trial Court’s decision. The case was ripe for arbitration.