Client Alerts & Publications

NJ Supreme Court Outlines Test for Forced Expulsion of LLC Member

In the first significant opinion to interpret New Jersey’s Revised Uniform Limited Liability Company Act (“RULLCA”), New Jersey’s Supreme Court ruled on August 2, 2016 that members of an LLC seeking to expel another member have a “high bar” to meet. In IE Test, LLC v. Carroll, 2016 WL 4086260 (N.J. Aug. 2, 2016), Justice Patterson outlined the test to be applied when suing to expel another LLC member.

New Jersey adopted the RULLCA, which became fully effective in early 2014. The statute, like the predecessor statute, allows for expulsion of an LLC member on several grounds, including where that member

“(1) has engaged, or is engaging, in wrongful conduct that has adversely and materially affected, or will adversely and materially affect, the company’s activities;

(2) has willfully or persistently committed, or is willfully and persistently committing, a material breach of the operating agreement or the person’s duties or obligations under section 39 of this act; or

(3) has engaged, or is engaging, in conduct relating to the company’s activities which makes it not reasonably practicable to carry on the activities with the person as a member” [N.J.S.A. 42:2c-46(e)].

In IE Test, three members (Defendant Carroll, and Third-Party Defendants Cupo and James) formed the LLC to carry on a business that had previously operated as a Delaware entity but had gone into bankruptcy. The prior bankruptcy had caused Carroll to lose a substantial amount of money. After they formed the new LLC, they tried to agree upon an operating agreement but were unable to do so, largely because Carroll insisted on being paid back for his prior losses through the new venture. The members bickered and could not agree on how Carroll should be compensated or whether he should receive profits.

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