limited liability company act

The Accounting Remedy – II

Statutory Provisions under New York Law

As discussed in our last Blog post, the right to an accounting exists under common law and, in some instances, according to statute

The accounting remedy is codified in New York Partnership Law § 44 and New York Business Corporation Law § 720.  Section 44 of the Partnership Law provides that:

            Any partner shall have the right to a formal account as to partnership affairs:

1. If he is wrongfully excluded from the partnership business or possession of its property by his copartners,

2. If the right exists under the terms of any agreement,

3. As provided by section forty-three[1],

4. Whenever other circumstances render it just and reasonable.

Fiduciary Duties in LLCs and Limited Partnerships

It has long been a truism that partners in joint endeavors owe each other certain responsibilities to look out for one another. Justice Benjamin N. Cardozo stated the proposition as follows:

Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.

Meinhard v Salmon, 249 NY 458 (1928). Although Justice Cardozo elucidated this rule over 90 years ago, it still rings true today. In Birnbaum v Birnbaum, the court reaffirmed this strong duty stating:

This is a sensitive and ‘inflexible’ rule of fidelity, barring not only blatant self-dealing, but also requiring avoidance of situations in which a fiduciary's personal interest possibly conflicts with the interest of those owed a fiduciary duty (Matter of Ryan, 291 N.Y. 376, 407). Included within this rule's broad scope is every situation in which a fiduciary, who is bound to single-mindedly pursue the interests of those to whom a duty of loyalty is owed, deals with a person "in such close relation [to the fiduciary] * * * that possible advantage to such other person might * * * consciously or unconsciously" influence the fiduciary's judgment.

Is a Limited Partnership Forever?

Remedies for Aggrieved Limited Partners in New York

Before the advent of the limited liability company in the mid-1990s, limited partnerships were a preferred vehicle for the organization of pooled investments.  Most individuals who invested in limited partnerships did so with certain expectations, such as receiving tax benefits in the early years, profit distributions later on as the partnership assets cash flow increased, and a return of their investment plus a profit when the underlying assets were sold.

But, what if the investor has been a limited partner for many years and he or she has yet to receive any distributions and the general partner has shown no interest in selling the underlying assets?  What if the general partner has been able to take out whatever cash flow has been generated over the years in the form of management fees and other distributions?  What if the partnership has been managed for the benefit of the general partner, and not the investors?

Under these circumstances, what is a limited partner to do?  Without doubt, there will be many obstacles standing in the way of his or her ability to sell the partnership interest, even at a discount.  Finding a buyer will be difficult, since there is no public market for the interest.  Buyers are usually not looking for investments without a steady return and without any reasonable prospect of an exit.  Further, the limited partnership agreement will likely contain restrictions on both the limited’s right to transfer and on the rights of anyone who acquires the interest.  

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.