On March 17, 2015, the Appellate Division issued an important decision which provides guidance to New Jersey Trial Courts asked to judicially expel a member of a Limited Liability Company. IE Test, LLC v. Kenneth Carroll (App. Div. 2015)

N.J.S.A. 42:2B-24(b)(3) permits the expulsion of a member of a New Jersey Limited Liability Company under certain circumstances. The Appellate Division in IE Test, LLC v. Kenneth Carroll, provides a wonderful analysis of expulsion of a member based upon wrongful conduct (N.J.S.A. 42:2B-24(b)(3)(a)) or that the continued membership was not practicable to continue the business (N.J.S.A. 42:2B-24(b)(3)(c)).

The material facts of the case were undisputed and straightforward. Defendant Carroll and Mr. Cuppo were co-owners of a predecessor limited liability company, Instrumental Engineering, LLC (“IE”). Unfortunately, in or about 2009, IE was experiencing serious economic problems. As a result of those problems, Carroll and Cuppo decided that IE should file a Chapter 7 petition for bankruptcy.

According to Carroll, he purchased some of IE’s assets from the bankruptcy trustee and transferred them to Plaintiff, IE Test, LLC for $5,000, which remained due and owing to him. Cuppo refuted the same. Unfortunately, there was no documentation supporting Carroll’s contention.

IE Test, LLC had three members, Carroll (33%); Cuppo (34%) and James (33%). In addition to the disagreement relating to the $5,000, sale of assets from IE, the three members could not reach agreement as to the terms and conditions of an Operating Agreement. In addition, several of the members testified during the course of their depositions that they could not work together and did not speak with one another.

The Trial Court Judge found that IE Test, LLC could not establish that Carroll engaged in wrongful conduct that adversely and materially harmed the company. Nevertheless, the Trial Court found that pursuant to N.J.S.A. 42:2B-24(b)(3)(c), it was not reasonably practicable to continue the business with Carroll as a member. Carroll appealed the Trial Court’s decision. In its decision, the Appellate Division provided a wonderful analysis of judicial considerations when determining whether or not to expel a member.

The Appellate Court first provided guidance on the standard for judicial expulsion of a member of a New Jersey Limited Liability based upon “wrongful” conduct. Pursuant to N.J.S.A. 42:2B-24(b)(3)(a), a Court may only expel a member if it finds that the member’s conduct was “wrongful” and “actually harmed” the limited liability company in an “adverse and material manner.”

Next, the Appellate Court discussed the standard to expel a member because the continued inclusion of that member may not be practicable to carry on the business. The Court held that N.J.S.A. 42:2B-24(3)(c), does not require proof that the member committed any wrongful conduct whatsoever. Rather, subsection (c) is forward looking, only requiring proof that the member’s conduct makes it “not reasonably practicable to carry on the business if the member remained.”

The Appellate Division articulated the following seven factors when deciding whether or not to expel a member based upon the not reasonably practicable on the business statute:

  1. Whether the management of the entity is unable or unwilling reasonably to permit or promote the purposes for which the company was formed;
  2. Whether a member or manager has engaged in misconduct;
  3. Whether the members have clearly reached an inability to work with one another to pursue the company’s goals;
  4. Whether there is deadlock between the members;
  5. Whether the operating agreement provides a means of navigating around any such deadlock;
  6. Whether, due to the company’s financial position, there is still a business to operate; and
  7. Whether continuing the company is financially feasible.

The Appellate Division, applying those factors, affirmed the Trial Court’s decision expelling Carroll pursuant to N.J.S.A. 42:2B:24(b)(3)(c).