Divorcing With A Small Business
- November 25, 2015
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Business partner disputes can become so contentious as to lead to dissolution of the business or expulsion of a partner, and things can become even more complicated in the event the business partners are divorcing spouses. Many small businesses are started by one spouse and ultimately, as the business grows, both spouses become full-time employees. With these businesses starting as a simple idea that grows, it is rare to find an operating agreement in place. During divorce it often becomes impracticable for the parties to cooperate on any level as a result hurt feelings and the raw emotions which arise thereafter. Limited Liability Company (LLC) is one of the most common forms of business today. Formerly governed by the Ne w Jersey Limited Liability Company Act (LLCA), partners could be removed from the business for enumerated reasons including wrongful conduct, significant breach of the LLC’s operating agreement or it unreasonable to expect the business to continue with the member involved. The LLCA was replaced by the Revised Uniform Limited Liability Company Act (RULLCA) in 2013, leaving the expulsion provisions substantially intact as can be seen by review of N.J.S.A. 42:2C-46(e). The unpublished case, IE Test LLC v. Carroll, A-6159-12T4, 2015 N.J. Super. Unpub. LEXIS 567 (Mar. 17, 2015), heard in the Essex County Chancery Division, was a case of first impression in New Jersey regarding removal of a member of an ongoing and viable LLC that the other members wished to continue. The members failed to enter into an operating agreement upon formation of the business, leaving the N.J. Appellate Division to interpret N.J.S.A. 42:2B-24(b)(3)(c) noting that expulsion of a member does not require past wrongful conduct but rather charges the court with determining whether it is feasible for the business to continue with any viability if the member is not expelled. The court found that the it need not find it impossible for the business to continue but rather that the business cannot carry out its purpose without substantial dysfunction if the member remains. The NJ Appellate Division also looked to Gagne v. Gagne, 338 P.3d 1152 (Colo. Ct. App. 2014), wherein the Colorado Court of Appeals interpreted the same factors as wet forth in RULLCA resulting in a 7 factor test for determining whether expulsion is appropriate. The factors set forth in Gagne include 1) whether management is unwilling or unable to reasonably promote the reasons for which the company was formed; 2) whether there was misconduct on the part of the member the others are seeking to expel; 3) whether the members are clearly unable to work together for the benefit of the company; 4) whether there is a deadlock between the members; 5) whether there are provisions in the operating agreement that can resolve a deadlock; 6) whether the business remains viable; and 7) whether it will be financially feasible to continue the company after any harm from the dispute and payment to the expelled member. After considering the language of N.J.S.A. 42:2B-24(b)(3)(c), the factors set forth by the Colorado Court of Appeals in Gagne and the fact that the members had failed to prepare an operating agreement to govern their acts, the N.J. Appellate Division upheld the decision of the Essex County Chancery Division Judge that the minority member should be expelled. If you are involved in, or considering, divorce and own a small business with your spouse, it is critical that you speak with an experienced attorney to ensure you are aware of your rights. Whether you will be paying or receiving alimony or child support, the continued viability of the business will likely be critical to your and your family’s economic future. For more information about small business divorce, high net worth divorce, partner and shareholder agreements or other matters involving divorce or business in New Jersey visit DarlingFirm.com. This blog is for informational purposes only and not intended to replace the advice of an attorney.