New Jersey Legislature Creates Oppression Remedy Applicable to LLCs

The Revised Uniform Limited Liability Company Act (RULLCA), signed into law by Governor Christie on September 19, 2012, creates an oppression remedy for New Jersey limited liability companies.  Until now, New Jersey courts have held that the oppression remedy contained in the New Jersey Corporation Law, N.J. Stat. § 14A:12-7, did not extend to LLCs – because this remedy did not appear in the LLC Act.  See, e.g., Hopkins v. Duckett, 2012 N.J. Super. Unpub. LEXIS 93, at *33 (App. Div. Jan. 17, 2012).

The RULLCA added the following provision:

A limited liability company is dissolved, and its activities shall be wound up, . . . on application by a member, the entry by the Superior Court of an order dissolving the company on the grounds that the managers or those members in control of the company . . . have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the applicant.

2012 Bill Text NJ A.B. 1543, Art. 7, par. 48(5)(b) (Dissolution and Winding Up).  This formulation is different from the one in the Corporation Law, which provides:

The Superior Court, in an action brought under this section, may appoint a custodian, appoint a provisional director, order a sale of the corporation’s stock as provided below, or enter a judgment dissolving the corporation, upon proof that[, in] the case of a corporation having 25 or less shareholders, the directors or those in control have acted fraudulently or illegally, mismanaged the corporation, or abused their authority as officers or directors or have acted oppressively or unfairly toward one or more minority shareholders in their capacities as shareholders, directors, officers, or employees.

N.J. Stat. § 14A:12-7(1)(c).  Note that the RULLCA requires not only that the controlling members or managers acted or are acting in an oppressive manner, but also requires a showing of harm: that oppressive conduct “was, is, or will be directly harmful to the applicant.”  In contrast, the Corporation Law makes oppression a per se violation that, independent of harm, gives rise to the remedies provided  by the Act.

The two acts differ in another material respect.  Under the Corporate Law, a court may award counsel fees if it “determines in its discretion that such an order would be fair and equitable to all parties under all of the circumstances of the case.”  Id. at § 14A:12-7(1)(c).  Under the RULLCA, the court must also find that a party acted “vexatiously, or otherwise in not good faith,” before it can award counsel fees.  2012 Bill Text NJ A.B. 1543, Art. 7, par. 48(c).

Notably, courts have construed the Corporate Law to allow for remedies that are less drastic than ordering a sale of a corporation’s stock, dissolutions, or custodial appointment.  See, e.g., Brenner v. Berkowitz, 134 N.J. 488, 505 (N.J. 1993) (“Based on the permissive wording of the statute, when a statutory violation occurs, a court retains its discretion to fashion equitable remedies. Such equitable remedies are valuable because they allow relief to be fashioned directly to redress the statutory violations shown.”). 

While courts have not yet had the opportunity to address similar issues with respect to the RULLCA, the same legislative intent behind the Corporate Law seems to have driven the legislature’s crafting of the new LLC Act.  A pre-enactment report from the New Jersey Law Revision Commission underscores this point: 

The New Jersey Bar Association and Senator Sarlo proposed a stronger deadlock provision that has been modeled on [the Corporate Law].  Equity courts currently have the authority to order a broad range of remedies other than dissolution. NJSBA and Senator Sarlo felt that these powers were rarely exercised and in their proposal expressly authorize the court to grant additional remedies. These include the appointment of a custodian or more provisional managers, if it appears in the best interest of the LLC. Unlike the RULLCA proposal, the current bill expressly authorizes the court to award counsel fees if it determines that a party has acted vexatiously or otherwise not in good faith. The bill also makes it explicit that a party may seek remedies other than dissolution.

N.J. Law Rev’n Comm’n, Tentative Report Relating to Uniform Limited Liability Company Act (Nov. 18, 2011).