August 2, 2016

Court May Force Sale of Member’s Shares in LLC Upon Dissociation for Breach of Fiduciary Duties

By John P. Mitchell

In a case of first impression, the New Jersey Appellate Division has held that a court has inherent equitable power to force the sale of a dissociated member’s shares to the limited liability company or a surviving member. All Saints University of Medicine, Aruba v. Chilana, (Oct. 2015). The Revised Uniform Limited Liability Company Act, N.J.S.A. 42:2C-46e(3), now expressly provides for the forced sale of a dissociated member’s interest if “such an order would be fair and equitable to all parties under all of the circumstances of the case.” ASUMA involved the prior LLC statute, which did not contain such a provision. Despite the absence of an express statutory authorization for the sale of a dissociated member’s interest, the ASUMA court suggests that, under their inherent equitable powers, courts will be able to import the same equitable remedy available to oppressed minority shareholders under the New Jersey Minority Shareholders Act.

The ASUMA case had a long and complicated procedural history. The lawsuit was filed in 2008 following operational and financial problems at the ASUMA medical school and discord among the LLC members. After a special fiscal agent was appointed and a trial was held in 2009, the chancery judge ordered that control of the entity be vested in the defendant, Chilana, and ordered the dissociation of the other members, Yusef and Paulpillai, because they had acted recklessly and purposely to undermine the interests of the LLC and had refused to make any financial contributions to keep the medical school afloat.  Chilana, on the other hand, had acted with fidelity, contributing $350,000 in funding. Although it found that the dissociated members were entitled to fair value for their interests, the court concluded from the valuation testimony that ASUMA had no positive value on the effective date of the dissociation. 

On Yusef’s appeal in 2012, the Appellate Division remanded for further development of the record. On remand, the trial judge stated that he lacked the power to order the transfer of the dissociated members’ shares to Chilana because the operating agreement precluded an involuntary transfer and the dissociation provisions of the LLC Act did not expressly provide such a remedy. On the second appeal, the Appellate Division read the LLC agreement to not preclude such a forced sale to the entity, and interpreted the LLC Act as allowing for such an equitable remedy.

The Appellate Division noted that “[a]lthough the Act did not compel the sale of shares of a dissociated member, N.J.S.A. 42:2B-24b, we see no reason to conclude that it precluded such a remedy for a member’s breach of his fiduciary duties and duty of loyalty as occurred here.” Slip op. at 18. Citing to a seminal minority shareholder case, the Appellate Division relied on the court’s equitable power to provide adequate relief: “equity demands that the trial court not be precluded from considering a non-statutory remedy that terminates Yusef’s economic interest on dissociation in addition to removing him from management.”

ASUMA provides a strong signal that New Jersey courts will continue to use their inherent equitable powers to mold flexible remedies in LLC member disputes even in the absence of clear statutory authority.

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