In a recent decision, the New Jersey Appellate Division confirmed that the New Jersey Oppressed Shareholder Statute, N.J.S.A. 14A:12-7(1)(c) does not apply to limited liability companies.[1]
Hopkins v. Duckett (N.J. App. Div. January 17, 2012) involved a long-running dispute between members of an LLC over, among other things, whether the founder could be expelled after he changed his mind on a promise to retire. The founder sued claiming that his ouster constituted “oppression.”
The Court held that the founder could not assert an oppression claim because the LLC, Nightingale & Associates, L.L.C. (N&A) was a Delaware LLC and Delaware did not recognize a claim for oppression (more on this below).
However the Court also ruled that even if N&A had been governed by New Jersey law, the founder’s claim would fail because New Jersey’s oppression cause of action applies only to corporations, and not to LLC’s. The Court was very clear and concise on this point in its January 17, 2012 decision:
In this regard, we note that, at the time that plaintiffs' dispute with N&A arose, N&A was a limited liability company to which N.J.S.A. 14A:12-7, the oppressed minority shareholder statute, is inapplicable. …
It is interesting that in reaching this decision, the Court emphasized that the New Jersey Limited Liability Company Act “gives members of such companies great discretion to establish structure and procedures, with the statute controlling in the absence of a contrary operating agreement.”
New Jersey's Limited Liability Company Act, N.J.S.A. 42:2B-1 to -70 (LLCA), was enacted to enable members of such companies "'to take advantage of both the limited liability afforded to shareholders and directors of corporations and the pass through tax advantages available to partnerships.'" …
Here, the second amended operating agreement, adopted by the members of N&A on September 30, 2002, sets forth in a provision entitled "Distributions to Former Members" the rights of a member who is removed without cause. The agreement does not address the rights of a minority member who claims oppression. But then, neither does the LLCA, which has no provision that relates to oppressed minority shareholder-type claims. As a consequence, no relief is available to plaintiffs pursuant to New Jersey law.
Controversy Continues as to whether Delaware Recognizes a Cause of Action for Shareholder Oppression
Hopkins v. Duckett is also significant for its finding that New Jersey law does not recognize a cause of action for shareholder oppression. This conclusion is consistent with earlier decisions in New Jersey and other jurisdictions, but is inconsistent with decisions in other States that hold that Delaware law recognizes such a cause of action. See for example the well-reasoned decision of Judge Jeff Bohm, a Houston Federal Bankruptcy Judge in Schermerhorn v. Centurytel, Inc. (In re Skyport Global Communications, Inc.) (Bankr. S.D. Tex. January 13, 2011).[2]
[1] Samuel Goldman & Associates has a case pending before the New Jersey Appellate Division involving, precisely this issue. In that case, SG&A represents an LLC against claims of oppression by two minority LLC members.
[2] Samuel Goldman & Associates is counsel to the plaintiffs in this case, in which the Court ruled that oppression causes of action could be brought under Delaware law..