Just recently, in the matter of Flor v. Greenberg Farrow Architectural Inc., New Jersey business owners were reminded of the importance of preceding LLC formation with clear membership or operating agreements.

In this case, the plaintiff, an experienced civil engineer, was approached by the defendant and offered a job helping to extend the company’s interests to public sector projects.  Conversations surrounding that offer ultimately resulted in negotiations related to the formation of a new company in which the plaintiff understood she would have 51% ownership and management interest and the defendant company would bankroll the newly formed company for two years and maintain 49% equity interest therein.  These terms, among others, were ultimately memorialized in a document signed by the parties which stated that it would be supplemented by the LLC’s operative documents.

Once the LLC was formed, however, it soon became clear that where the plaintiff expected the terms of the executed document to be honored, the defendant did not have the same opinion and sent a subsequent nonbinding letter of intent in anticipation of preparing formal agreements.  Not only did the letter of intent contain terms that were not previously anticipated, but the plaintiff had already expected certain payments and actions to be taken by the defendant in accordance with their prior agreement, which had not taken place.

Ultimately, the defendant informed the plaintiff it was no longer interested in pursuing 49% equity interest in the new LLC; citing failed negotiations as leading to its decision to terminate both its interest and any relationship it had with the new endeavor.  The plaintiff sued the defendant for breach of contract and sought a declaration to have the defendant expelled from the LLC.

Despite the defendant’s arguments that a binding agreement did not exist, the trial court found that the plaintiff had an enforceable contract with the defendant, awarding the plaintiff and the LLC compensatory damages.  The trial court also issued a declaratory judgment directing the defendant’s expulsion and disassociation from the LLC without compensation due to its wrongful conduct which frustrated the purpose of the LLC and abandonment of its membership interest pursuant to the Revised Uniform Limited Liability Company Act (RULLCA).

The appellate division affirmed the trial court’s decisions, thereby emphasizing the danger of doing business outside the scope of clear operating agreements or in violation of the terms of the RULLCA.

(This blog, prepared by Campanella Law Office, is for general informational purposes only and is not intended to convey specific legal advice, nor is it intended to create or constitute an attorney-client relationship.)