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Michael Gaines, Individually and As A Shareholder of Gaines v. John Luongo

March 25, 2011

MICHAEL GAINES, INDIVIDUALLY AND AS A SHAREHOLDER OF GAINES, GOLDENFARB AND LUONGO, LLC, PLAINTIFF-APPELLANT,
v.
JOHN LUONGO, INDIVIDUALLY AND AS A SHAREHOLDER OF GAINES, GOLDENFARB AND LUONGO, LLC, DEFENDANT-RESPONDENT.



On appeal from Superior Court of New Jersey, Chancery Division, Middlesex County, Docket No. C-276-08.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Submitted March 1, 2011 - Decided

Before Judges Parrillo, Yannotti and Espinosa.

In this oppressed minority shareholder litigation, N.J.S.A. 14A:12-7, involving dissolution of a limited liability partnership, plaintiff, Michael Gaines, appeals from a February 22, 2010 order of the General Equity Part refusing to: (1) enforce a restrictive covenant against defendant, John Luongo; and (2) include clients as "assets" subject to distribution upon dissolution. We affirm.

Some background is in order. In 1997, Gaines began working with accountant Gerald Goldenfarb until 2003 when Gaines effectuated a buyout of Goldenfarb's business for approximately $500,000 paid to Goldenfarb over a five year period (the Goldenfarb Note). In August 2004, Luongo left his position as principal at Schonbraun, Safris, McCann, Bekritsky & Co., LLC (Schonbraun), to join Gaines in forming Gaines, Goldenfarb and Luongo, LLC (GGL, the Company, or the Partnership) an accounting firm governed by the New Jersey Limited Liability Company Act, N.J.S.A. 42:2B-1 to -70 (LLCA or the Act). Gaines and Luongo formalized this entity in an Operating Agreement executed in October 2004. While the Operating Agreement provided Gaines with seventy percent ownership in the entity and Luongo with thirty percent ownership, the two would share profits, losses and net cash flow equally.

The Operating Agreement provided that dissolution would be triggered by certain events, including the parties' unanimous agreement to dissolve the Company, the bankruptcy of GGL, or other events making it "impossible, unlawful or impractical" to carry on the business:

8.1 Events Triggering Dissolution. The Company shall dissolve and commence winding up and liquidating upon the first to occur of any of the following ("Liquidating Events"):

(a) the unanimous agreement of all of the Members that the Company should be dissolved;

(b) the insolvency or bankruptcy of the Company;

(c) the sale of all or substantially all of the Company's assets; or

(d) ninety (90) days after the date of any act that causes the Company to have less than the minimum number of members required under the Act . . . ; or

(e) any event that makes it impossible, unlawful or impractical to carry on the business of the Company.

The Members agree that the Company shall not be dissolved or liquidated prior to the occurrence of a Liquidating Event, as set forth in this Article 8.

[(emphasis added).]

Initially, the parties worked only on Gaines's and Goldenfarb's clients because Luongo was obligated under a two year restrictive covenant with Schonbraun. Luongo did, however, refer a substantial client, USLR, to Gaines. In this regard, the Operating Agreement, in Section 10.3, contained a restrictive covenant prohibiting Luongo, upon termination, from competing with GGL for one year and within a ten mile radius and from soliciting GGL's clients or employees. If, for instance, Luongo left GGL and retained any of Goldenfarb's former clients, he would be responsible for a proportionate share of the Goldenfarb Note.

Within a few years of forming GGL, the relationship between the partners began to deteriorate. This much is undisputed. The parties, however, disagree over how and why the process of dissolution occurred.

Luongo claims that the parties mutually agreed to dissolve, and amicably did so, until a dispute regarding telephone call forwarding and use of the GGL website. According to Luongo, starting in late 2007 and early 2008, he exchanged memos and letters, and engaged in discussions with Gaines on a potential reworking of the Partnership. To this end, Luongo drafted an Amended and Restated Operating Agreement in January 2008; however, the document was never signed by the parties. Apparently, the inability of all of the parties, including Spencer Tucker, a non-equity partner of GGL, to reach an accord on a client fee splitting arrangement rendered GGL's dissolution all but inevitable.

According to Luongo, on August 13, 2008, he and Gaines agreed to dissolve GGL. Spencer Tucker confirmed that Gaines told him he was leaving GGL. Gaines arranged for new office premises, advising that he was vacating the current location by October 1, 2008. Consequently, on August 27, 2008, Luongo established a new firm, Luongo, Tucker & Associates, LLC, with Tucker. Luongo claims that he and Gaines mutually agreed to retain their own clients. They also agreed, during the months of September and October 2008, on the allocation of furniture, computer equipment and personnel, and for Luongo to assume the lease of the existing office space.

Gaines offers a conflicting version. He denies ever telling Luongo that he wanted to dissolve GGL. Instead, Luongo, without discussing dissolution, formed a new company with Tucker and began taking GGL clients in violation of the Operating Agreement. Gaines, on the other hand, made every effort to continue operating GGL, billing clients and depositing customer payments into the GGL operating account. Meanwhile, however, Luongo "cleaned out" the jointly maintained account by cashing checks totaling more than $20,000 without Gaines's knowledge or approval, resulting in returned checks for insufficient funds. These actions forced Gaines to arrange for new office premises, only then to have Luongo refuse to allow him access to GGL business records and computer data, including ...


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