July 23, 2009
BRICK PROFESSIONAL, L.L.C., NEIL SORRENTINO AND JOSEPH SORRENTINO, PLAINTIFFS-APPELLANTS,
ANTHONY NAPOLEON, JR., DEFENDANT-RESPONDENT.
On appeal from the Superior Court of New Jersey, Law Division, Ocean County, Docket No. L-946-05.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued: June 9, 2009
Before Judges Axelrad and Winkelstein.
At issue in this appeal is whether the notice, election and valuation procedures of Section l5 of the LLC's operating agreement are unenforceable as contrary to the provisions of the New Jersey Limited Liability Company Act (LLC Act), N.J.S.A. 42:2B-l to -70. The trial court held they were and entered an Order for Judgment entitling the decedent's designee to a one-third share of allocations and distributions rather than a distribution based on the date of death value of decedent's interest as determined by the LLC. Plaintiff LLC and its two surviving members appealed. We reverse and remand.
Plaintiff Brick Professional, LLC (LLC), a New Jersey limited liability company, was formed in 2002 by plaintiffs Neil and Joseph Sorrentino, as well as Anthony Napoleon. In accordance with the operating agreement, each person was entitled to a 33.333% interest in the LLC. On May 7, 2004, Napoleon died. Pursuant to Section l5 of the operating agreement, the decedent's interest in the LLC was to be offered to his son, defendant, Anthony Napoleon, Jr., as the "Designee" in the event of his death. Section l5 sets forth the specific procedure and time frames for the designee to accept the interest after the occurrence of that withdrawing event. It also instructs the remaining members of the LLC to act if the designee did not, and defines the valuation procedure. The LLC's procedure provides, in part, in the event of a member's death, that member's interest "shall first be offered" to a named "designee." Should the designee not accept the interest within thirty days after the member's death, "then such inaction shall conclusively be deemed a rejection of the interest" after which the interest can be offered to a non-member. If no non-member has been identified within thirty days, the remaining members of the LLC "shall elect to accept the offer and the interest being sold . . . ."
In accordance with the procedure set forth in Section l5 of the operating agreement, on July 20, 2004, the Sorrentinos hand-delivered a letter to Napoleon, Jr. which, in part, notified him that he had thirty days to accept or reject his father's interest in the LLC. According to appellants, after granting Napoleon, Jr. two extensions of time to consider whether to accept his designee status, he then failed to respond to the notice, thus triggering an automatic rejection of the offer pursuant to Section l5 of the agreement. In accordance with the procedure set forth in the agreement, the Sorrentinos then accepted the offer of the LLC to acquire an equally divided share of decedent's interest, the LLC had decedent's interest valued as of his date of death and Napoleon, Jr. was offered that appraised value of $64,000 for his interest in the company.
According to appellants, Napoleon, Jr. failed or refused to execute an assignment for the appraised amount or otherwise cooperate. Therefore, they instituted suit against Napoleon, Jr. seeking: a declaratory judgment that he had no interest in the LLC; that the consideration due to him for his father's interest in the LLC was $64,000, the date of death valuation obtained by the LLC; and that the Sorrentinos succeeded to decedent's interest in the LLC.
Following a bench trial, the court issued a written opinion on September l7, 2007, finding that Napoleon's interest had passed to Napoleon, Jr. upon his death. The court found, in part,*fn1 that two provisions of Section l5 of the operating agreement contradicted New Jersey law and thus were unenforceable. Specifically, the court held that the LLC's requirement that Napoleon, Jr., as the decedent member's designee, respond within thirty days or conclusively be deemed to have rejected the interest, violated the provisions of N.J.S.A. 42:2B-24.1 and N.J.S.A. 42B:2B-39 by "attempt[ing] to affect . . . Napoleon, Jr.'s status as an assignee under the statute." The court explained that the LLC Act treats the death of a member as a disassociation, N.J.S.A. 42:2B-24, granting the disassociated member "only the rights of an assignee of a member's limited liability interest," subject to N.J.S.A. 42:2B- 39,*fn2 N.J.S.A. 42:2B-24.1. Thus, the court concluded that under the statute, on the date of death of his father, Napoleon, Jr. became an assignee of his father's interest, irrespective of what occurred regarding the thirty-day notice under Section l5.
The court was likewise not convinced by appellants' suggestion that Napoleon, Jr.'s interest terminated on his father's death and that the distribution of his father's interest was based upon the date of death value determined by the LLC pursuant to the procedure set forth in Section l5. Rather, the court found:
However, N.J.S.A. 42:2[B]-44(b) provides that an assignment entitles the assignee to receive the distribution or distributions, and to receive the allocation of income, gain, loss, deduction, or credit or similar items to which the assignor was entitled to, to the extent assigned . . . . There is nothing in the statute that cuts off the assignee's rights on the date of the withdrawal event. Rather, it is obvious that the legislature permits the assignee to continue with his interest in the L.L.C., but excludes him from management prerogatives, unless conforming to the terms of the statute. Thus, Mr. Anthony Napoleon, Jr. has a 33-1/3 interest in Brick Professional L.L.C. presently.
The court's ruling was memorialized in an Order for Judgment entered on November 5, 2007. Plaintiffs appeal only from that portion of the order that invalidated the notice, election and valuation procedures set forth in Section l5 of the operating agreement.
On appeal, we owe no deference to the legal rulings of the trial court. Manalapan Realty, L.P. v. Manalapan Twp. Comm., 140 N.J. 366, 378 (1995). Based on the plain language of the statute, the legislative intent of the statute and the case law recognizing that the LLC Act only governs in the absence of an operating agreement, we are satisfied that members of limited liability companies can adopt their own procedures for notice, election and valuation of a member's interest upon his death that deviate from the statutory scheme. As the trial court's conclusion with respect to Section 15 of the LLC's operating agreement was to the contrary, we thus reverse and remand for the court to make factual determinations pursuant to the LLC's operating agreement.
We have consistently held that New Jersey's statute governing LLCs, N.J.S.A. 42:2B-1 to -70, controls only in the absence of an operating agreement. Union County Improvement Auth. v. Artaki, LLC, 392 N.J. Super. 141, 152 (App. Div. 2007); Kuhn v. Tumminelli, 366 N.J. Super. 431, 440 (App. Div.), certif. denied, 180 N.J. 354 (2004). This is done pursuant to the LLC Act's legislative intent, which requires it to be "liberally construed to give the maximum effect to the principle of freedom of contract and to the enforceability of operating agreements." N.J.S.A. 42:2B-66.
As we have recognized:
[w]hen executing an operating agreement . . . the members are free to structure the company in a variety of ways and are free to restrict and expand the rights, responsibilities and authority of its managers and members. . . .
The LLC Act is, therefore, quite flexible and permits the LLC members great discretion to establish the company structure and procedures, with the statute controlling in the absence of a contrary operating agreement. [Kuhn, supra, 366 N.J. Super. at 440.]
As a general matter we have upheld the terms of an operating agreement for which the members expressly bargained.
See, e.g., DeNike v. Cupo, 394 N.J. Super. 357, 386 (App. Div. 2007) (upholding a trial court's ruling against an LLC member seeking a method of payment contrary to the terms of an operating agreement), rev'd on other grounds, 196 N.J. 502 (2008).
The LLC Act, including the provisions cited by the trial court, is replete with reminders that the operating agreement supersedes the statute. For example, the LLC Act sets forth an LLC's ability to establish rights for its members or assignees under its operating agreement, in pertinent part, as follows:
a. An operating agreement may provide for classes or groups of members having such relative rights, powers and duties as the operating agreement may provide, and may make provision for the future creation in the manner provided in the operating agreement of additional classes or groups of members having such relative rights, powers and duties as may from time to time be established, including rights, powers and duties senior to existing classes and groups of members. . . . [N.J.S.A. 42:2B-22(a).]
Contrary to the trial court's finding, neither N.J.S.A. 42:2B-24.1, which refers to N.J.S.A. 42:2B-39, nor N.J.S.A. 42:2B-44 restricts the members of an LLC from including a provision in an operating agreement that will be followed upon the death of a member. N.J.S.A. 42:2B-24.1, addressing the rights of a disassociated member, incorporates by reference N.J.S.A. 42:2B-39, which provides for a default mechanism only if provision for distribution to a member who has resigned is "not otherwise provided or permitted in an operating agreement . . . ." See also N.J.S.A. 42:2B-38 ("A member may resign from a limited liability company at the time or upon the happening of events specified in an operating agreement and in accordance with the operating agreement.").
Moreover, by its very terms N.J.S.A. 42:2B-44 permits the members of an LLC to deviate from that statute when they devise a procedure for the assignment of a membership interest. The statute states:
a. A limited liability company interest is assignable in whole or in part except as provided in an operating agreement. The assignee of a member's limited liability company interest shall have no right to participate in the management of the business and affairs of a limited liability company except as provided in an operating agreement and upon:
(1) The approval of all of the non-assigning members of that interest, if any, of the limited liability company; or
(2) Compliance with any procedure provided for in the operating agreement. [N.J.S.A. 42:2B-44(a) (emphasis added).]
The Sorrentinos and decedent availed themselves of the flexibility offered by the LLC Act and customized the procedures to be followed upon the death of a member, which they set forth in Section l5 of the LLC's operating agreement. See Kuhn, supra, 366 N.J. Super. at 440 (members of an LLC are free to restrict or expand the rights of its members). The members clearly indicated their intent to have this procedure take precedence over the LLC Act, expressly stating in Section 22 that the operating agreement "shall govern even when inconsistent with, or different from, the provisions of any applicable law or rule."
Section l5 of the LLC's operating agreement is enforceable as a matter of law. Thus the court was not free to disregard the agreement because it required a different mechanism for the assignability of a deceased member's interest; i.e, that election of assignee status required an affirmative action, and to impose the statutory formula set forth in the default provision of the LLC Act. On remand, the court shall make a factual determination as to whether Napoleon, Jr. accepted or rejected his father's economic interest in the LLC pursuant to Section l5, and depending on its conclusion, address the valuation issue.
Reversed and remanded. We do not retain jurisdiction.