In New Jersey, legal disputes between co-members of a limited liability company or co-shareholders of a closely-held corporation are often resolved in the Chancery Division. In the Chancery Division, assignments of cases go to a Superior Court Judge.  Sometimes equitable claims are resolved by a Judge in the Law Division. Likewise, the Law Division has an equal power to decide such claims.  These cases typically turn on what are called equitable rights.  In essence, rights grounded in fairness and justice.

And there are several maxims in the law which have developed over hundreds of years. One such maxim is he who seeks equity must do equity. Another related maxim is the “clean hands” doctrine:  He who comes into equity must come with clean hands.  Today, we address the importance of these equitable maxims in determining the rights of LLC members or shareholders.

We have written in the past about the need to follow your agreement carefully. In doing so, you position yourself well for any potential litigation.  Judges are people too, and they form ideas and impressions about the litigants in front of them.  These equitable principles give the Judge broad discretion to deny relief to a person not deserving of equity.

A recent opinion from New Jersey’s Appellate Division

The case, Decandia v. Rinaldi, shows how these concepts work.  In the case, a member of an LLC sued the LLC and its managing member seeking to be compensated for an alleged minority interest in the LLC.  The evidence at trial showed that the plaintiff had, in the midst of negotiations over a new agreement, expressed concern with potential liability from his member interest. Because of this concern, he turned in his certificate to the company’s attorney.  He claimed he did so as part of the negotiations. On the other hand, the company claimed that he had disassociated himself from the LLC.  Therefore, the company terminated his employment.  The evidence showed that before his termination, he obtained confidential information belonging to the LLC. He then shared it with a new employer.  The Court found, among other things, that these actions constituted unclean hands, and denied all relief to the plaintiff.

Whenever you are concerned about disputes making their way to Court, always keep in mind that you will need to persuade a Judge that your actions were above-board and proper, and that the unclean hands doctrine is there as a potential obstacle to recovery.

Keep your hands clean. If you have any doubt, please give me a call.