Thomas Kiely v. William C. Iler ( 2024 )

NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
This opinion shall not "constitute precedent or be binding upon any court." Although it is posted on the
internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3.
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-1363-22
THOMAS KIELY, MICHAEL
MARZOVILLA, and 30 JACKSON
STREET, LLC,
Plaintiffs-Appellants/
Cross-Respondents,
v.
WILLIAM C. ILER,
Defendant-Respondent/
Cross-Appellant.
_____________________________
30 JACKSON STREET, LLC,
and WILLIAM C. ILER,
Plaintiffs,
v.
THOMAS KIELY, MICHAEL
MARZOVILLA, CHRISTOPER
MORAN, and MATTHEW
TAETSCH,
Defendants.
_____________________________
Argued October 2, 2023 – Decided February 12, 2024
Before Judges DeAlmeida and Berdote Byrne.
On appeal from the Superior Court of New Jersey,
Chancery Division, Monmouth County, Docket Nos.
C-000008-19 and C-000011-19.
Joel N. Kreizman argued the cause for appellants/
cross-respondents (Scarinci & Hollenbeck, LLC,
attorneys; Joel N. Kreizman, of counsel and on the
briefs).
Randolph H. Wolf argued the cause for respondents/
cross-appellants (Wolf Law, PC, attorneys; Robert W.
Ruggieri, of counsel and on the brief; Randolph H.
Wolf, on the brief).
PER CURIAM
In these cross-appeals, the parties appeal from a final order after a bench
trial regarding various decisions made concerning their manager-managed,
limited liability company, and a denial of a motion for reconsideration. For the
reasons that follow, we conclude the trial court's failure to make sufficient
findings of fact and conclusions of law warrants reversal and remand.
I.
We glean the following facts from the record. In 2015, Thomas Kiely
(Kiely) and William Iler (Iler) formed 30 Jackson Street, LLC (LLC) with the
intent to purchase a piece of property at that address in the Borough of
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Highlands, New Jersey, refurbish it, and quickly resell it. Prior to forming the
LLC, neither had prior dealings with the other. Iler, an attorney, prepared the
initial agreements. Each became a fifty percent member of the LLC and together
purchased the property for $140,000. Each member paid $20,000 towards the
property acquisition, and together they took on a mortgage for $100,000 at six
percent interest. Each agreed to pay fifty percent of the mortgage. Efforts to
quickly resell the property were unsuccessful. In late 2016, Michael Marzovilla
(Marzovilla), who also had no prior dealings with either founding member,
approached the LLC to join their business venture as an investor.
On December 24, 2016, Marzovilla became a member of the LLC. The
three members signed and executed an Amended Operating Agreement (AOA)
and a Purchase Agreement, with Iler retaining a fifty percent membership
interest and Kiely and Marzovilla each obtaining a twenty-five percent
membership interest. In the AOA, the parties agreed to provide additional
contributions to fund improvements and repairs to the property and operate the
property as a hotel cottage ("SummerHouse"). Kiely and Marzovilla agreed to
contribute $105,000 each. Iler would contribute another $105,000, oversee the
improvements and repairs to SummerHouse, and manage the LLC.
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According to the Purchase Agreement terms, Iler would be paid $30,000
by the LLC for management of renovations to the SummerHouse and an
additional five percent of the gross rental income, before expenses, for rental
management of the first operational season. The AOA also addressed how loan
contributions and capital contributions were to be treated by the LLC. It states,
in pertinent part:
9) Loans. All contributions advances or other
infusions of cash by any Member into the Company,
however made, and whether or not made by direct
payment of Company obligations or expenses, shall
conclusively be deemed loans to the Company. . . . .
[A]ny asset transferred to the Company shall be
presumed to be a loan rather than a capital contribution.
Loans shall be repaid by the Company on a pro rata
basis to the Members as cash becomes available after
paying all other current obligations of the Company.
It also states:
10) Front Loans, Dilution of shareholders interest. In
the event that any Member cannot or does not provide
the Member's pro rata share of the funding required by
the Company within 14 (fourteen) days after a funding
requirement is communicated between the Managers,
then the Member(s) who is/are able to provide the
amount (who is then called a "Fronting Member") shall
have the right to lend an additional amount on behalf of
the non-paying member (who is then called a "Fronted
Member"). This loan on behalf of another Member
shall be called a ("Fronted Loan"). If a Fronted Loan is
made, that Fronting Member has the right to notify the
other member(s) that the amount of that Fronted Loan
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shall be treated under this Agreement as a loan to the
Fronted Member and shall bear interest at 7% per year
until repaid. In the event that the Fronted Member has
not fully paid the loan within 30 days after it is made,
and after demand by the Fronting Member(s) for
repayment, then the Fronting Member shall have the
right, but [sic] the obligation, by written notice to the
non-paying Member, to dilute the Non-paying
Member's ownership interest in the Company, and
transfer a portion of the Nonpaying Member's interest
to the loaning party. The percentage of ownership
interest in the Company which the Loaning Member
may elect to transfer is calculated by dividing the
principal amount of the loan by a sum equal to one-half
of the total of all loans made to the Company by the
Non-paying Member. Any transfer of ownership
interest from any Member to another shall not affect the
manner in which the Managers operate the Company
unless and until a Member, by reason of such transfers
of ownership interest, owns more than 60% of the total
ownership interest in the Company. If and when this
happens, the Manager serving the Company at the
behest of the loaning Member shall thereupon have the
right to manage and conduct the operations of the
Company himself, except that the following decisions
will still require the affirmative vote of both Managers
[sic]:
a) A decision that the Company should borrow
money from any other source, except from a Member.
b) Any Amendment to the Operating Agreement.
c) The amending of the Development Plans so as
to increase the original, estimated cost of the restoration
and refurbishment of the property by more than
$30,000.00.
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The Manager serving at the behest of the Members shall
also have the right to sign checks or expend monies and
enter into contracts, without the requirement of any
additional signatures. In the event that a Fronted Loan
is eventually converted to an ownership interest in the
Company, any interest due from the non-paying
Member during the fronted period, shall be forgiven,
and the loan shall be treated as principal-only in order
to calculate the transfer of share value.
11) . . . . No Member shall make any in-kind
contribution to the Company without the prior written
approval of the other Member, which shall include an
exact valuation of that contribution.
....
15) Disputes. In the event of a dispute, the members
agree to attempt to mediate it immediately and then
arbitrate if no resolution can be reached. Prior to
mediation or arbitration, the parties must first confer
and discuss any dispute directly in good faith. If
meeting in this manner does not succeed in resolving
the dispute, then the parties agree to mediate, then,
arbitrate the dispute. . . . The parties shall equally
divide the cost of the arbitration, and the prevailing
party shall be entitled to an award of its attorney and/or
filling fees from the non-prevailing party. . . .
16) Dissolution Voluntary and Involuntary. The
Company may be voluntarily dissolved upon the
affirmative vote of a per capita-based simple majority
of the Members. Upon dissolution, the Company shall
wind up its affairs, and pay its creditors, including the
Members on a pro-rata basis, unless any remaining
members choose to pay the value of the company to the
Members who wish to voluntary dissolve in which case
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the company may continue without the members who
have been paid out.
The SummerHouse opened in 2017 and had its first full summer in 2018.
During that time, the members made various contributions and disbursements.
They testified, because they did not know or trust each other, they sometimes
made payments directly to contractors or suppliers. The SummerHouse repairs
and expenses exceeded the $315,000 combined contributions of the three
members as outlined in the AOA and the LLC began experiencing problems with
cash flow. Iler, as managing member, made payments from accounts comingled
with his personal accounts and other, unrelated project accounts.
In the beginning of 2018, Kiely and Iler were required to make the first
mortgage payment, split between them. Kiely paid his portion of the mortgage,
but Iler was not able to make the payment. He asked Kiely and Marzovilla to
allow him to refinance the property to meet the obligation, but they declined.
Instead, Marzovilla paid approximately $56,000 -- Iler's portion of the mortgage
then due and owing.
The parties' relationship deteriorated further in summer 2018, when,
without notifying the other two members, Iler left New Jersey to spend July and
August in Florida instead of being physically present to manage the
SummerHouse during its first summer. Iler testified he believed he did not need
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to tell his partners or ask for permission, and he hired someone to be on-site.
After that summer, Kiely and Marzovilla grew increasingly unhappy with Iler's
performance as managing member. The members testified they experienced
continuous cash flow issues and continuous issues involving Iler's accounting of
expenditures and revenue.
On November 3, 2018, Kiely and Marzovilla held a meeting where they
terminated Iler as the manager of the LLC and re-allocated the percentage of
ownership amongst the members. Iler failed to attend the meeting, although he
was given notice through multiple emails. At the meeting, Kiely and Marzovilla
first "recognized" that Marzovilla's shares in the LCC had increased from 25%
to 33% "through his February 2018 $56,000 payoff of 50% of the mortgage on
the LLC's property." The minutes state:
Because this payment was originally intended to be
paid off by William Iler and he subsequently could not
make that payment, Iler's shares were reduced from
50% to 42%. Therefore, the shareholders present
represented a majority of [t]he LLC's shares. It was
also recognized that while there [was] more work to do
on the rebalancing of shares in [t]he LLC, that this
subject would not be taken up at this time.
Keily and Marzovilla, having established majority voting power, then
voted to remove Iler as managing member and appoint Kiely as the sole manager
of the LLC.
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Kiely and Marzovilla, both individually and derivatively, then filed a
complaint against Iler, alleging breach of fiduciary duty, breach of contract, and
tortious interference. Their six-count complaint did not seek dissolution of the
LLC pursuant to N.J.S.A. 42:2C-48, but did seek injunctive relief against Iler,
including his removal as manager and member. Iler filed a separate complaint
a few days later, individually, and derivatively on behalf of the LLC, seeking a
declaration that Kiely and Marzovilla had improperly diluted his shares,
improperly removed him as managing member, and improperly amended the
operating agreement. He sought reinstatement as the manager and other
injunctive relief but did not claim minority member oppression pursuant to
N.J.S.A. 42:2C-48(a)(5)(b) and did not seek dissolution of the LLC. The two
complaints were consolidated.
After hearing oral arguments on the return of the order to show cause, the
trial court entered an order: (1) naming Kiely as the managing member of the
LLC, pending trial; (2) requiring Iler turn over certain LLC property; and (3)
continuing restraints against Iler. The court also ordered the parties to engage a
joint accountant to audit the business and meet and confer with each other in
attempts to reach agreement. The parties jointly retained a real estate appraiser,
Robert Gagliano, who determined the value of the LLC's real property was
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$830,000 as of April 25, 2020, specifically noting the value had been affected
by the worldwide global COVID-19 pandemic.
Trial began in June 2021 before a different judge, but due to the COVID-
19 pandemic, did not conclude until June 2022. The trial court issued a written
decision on June 29, 2022.
In its findings, the trial court noted Iler sought a declaration that the
actions taken by his co-members on November 3 be declared null and void; the
percentage reallocation of ownership interest at that meeting be vacated; he be
reinstated as the manager of the LLC; and any amendments to the governing
documents be declared void. The trial court denied the requests and found,
without further elaboration, the actions of Kiely and Marzovilla at the meeting
were valid, done in the best interest of the LLC, and Iler had adequate and
sufficient notice of the meeting but failed to attend. The trial court stated :
It was clear to anyone even remotely involved with this
LLC that actions were going to be taken regarding the
management and the moving forward of the -- of the
business. And the relationship between the three
partners: particularly Kiely and Marzovilla's and Mr.
Kiely's relationship with Iler was not good, and
certainly, not one that would be in accordance with the
proper functioning of the LLC.
Although Iler argued the $56,000 payment by Marzovilla was a loan to
the LLC pursuant to the terms of the AOA, the trial court found the payment
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was an exchange by Marzovilla "for him receiving a percentage of Mr. Iler's
ownership interest in the LLC," without reference to language of the Purchase
Agreement or AOA.
The court found Iler was left with a 43.26% ownership interest,
Marzovilla with 31.74%, and Kiely with 25% ownership interest, but failed to
analyze, discuss, or even mention the explicit contractual language in the AOA
or Purchase Agreement.
The court considered the testimony and reports of two CPA expert
witnesses: Brad Balmuth from Smolin, the parties jointly retained forensic
accountant, and Christopher Whelan, Iler's expert. The accountants both tried
to reconcile the LLC's financial reports. The court found the Smolin report more
credible, in terms of loans and contributions. However, the court found Mr.
Whelan more helpful and clear in his testimony. During trial, the court asked
Mr. Whelan to make certain additional calculations the court relied upon to
conclude the aforementioned ownership interest percentages were accurate and
"the buyout per partner share of estimated property value [,] including loans due
with interest[,]" was $250,677 for Iler, $212,022 for Marzovilla, and $367,301
for Kiely, based upon the estimated value of the property of $830,000.
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Next, the court addressed the breach of fiduciary duty. It stated: "Both
parties argued breach of fiduciary duty, . . . that their respective partners had
breached the contract; that they were oppressed shareholders based on the
conduct of the other parties." The court noted the actions of all members were
"less than optimal." It found Kiely and Marzovilla "appropriately" removed Iler
as managing member because of Iler's actions, without documenting what those
actions were, but found the other members' actions were also not "up to
standards." The court noted Iler's "subpar conduct" included "[g]oing to Florida
for the last couple of months, hiring someone without advising his partners,
[and] not keeping separate ledgers." It also found plaintiffs were likely aware
or "based on reasonable inquiry" would have known about these issues and
failed to act.
Despite these findings, the court did not find that the "conduct of any of
the members rise to the level of conduct that gives rise to an independent and
separate cause of action" pursuant to the Revised Uniform Limited Liability
Company Act ("RULLCA"), N.J.S.A. 42:2C-1 to -94, or the Oppressed
Shareholder Act, N.J.S.A. 14A:12-7(1)(c), neither of which were pled by any
party. It did find both Kiely and Iler were less than diligent in pursuing their
respective responsibilities when compared to Marzovilla.
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The court spent a considerable amount of time documenting the high level
of anger, animosity, and distrust between the parties that thwarted any effort at
settlement. It stated:
I don't think that these three members can adequately
discuss anything. I saw their demeanor in the
courtroom. I saw their conduct in the courtroom, and
quite frankly, I don't think they could agree on
anything. Therefore, I will give them the opportunity
to buy out willingly each other's share of the LLC, but
they are not limited to the [property] valuation in the
Gagliano report.
If they do not come to an agreement for the sale,
then I'm going to order that the parties place this
property for sale with a broker on the open market, and
that they distribute the proceeds in accordance with the
[c]ourt's findings as reflected in [the ownership interest
submission.] They just simply need to -- that contains
an estimated property value. There will be a real
property value if the parties cannot agree.
After the trial court entered its written decision on June 29, 2022, Kiely
and Marzovilla filed a motion for reconsideration of certain paragraphs of the
court's order. First, they argued the court's assessment of the ownership
percentage was not based on the parties' agreement because the AOA and
Purchase Agreement set forth ownership interest based on capital contributions,
but the court treated the disbursements they made as loans instead of
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contributions. Additionally, they argued Iler agreed in an email to the dilution
of his shares.
Second, Kiely and Marzovilla argued Iler per se breached his fiduciary
duty to the LLC because he commingled his personal and other project funds
with the LLC's funds and could not account to them. The court in fact found he
commingled the LLC's funds on five separate occasions and, based upon
N.J.S.A. 42:2C-39, they argued the court should have found Iler breached the
AOA and his fiduciary duty to the LLC.
Third, Kiely and Marzovilla argued the court's decision to require
unanimity with respect to the valuation or otherwise SummerHouse would be
put up for sale was ultra vires because no party sought dissolution of the LLC.
Iler argued the trial court found each member was at fault for the
accounting issues and they all managed the LLC as amateurs, so no one had
clean hands. Each paid out of their personal bank accounts and directly to the
LLC. He noted, by having submitted their claims to a court of equity, they were
now bound by the trial court's "fair" decision.
The court denied the motion for reconsideration in its entirety, and found
it unfair, particularly to Iler, to be "stuck with a stale valuation and as the
minority member, he would be forced to sell at a substantially deflated and
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unfair price." The trial court also ultimately decided it was not going to revisit
Kiely's percentage of ownership. In its holding, the court stated:
So, . . . as a court of equity, I sit here and see an
incredibly stale valuation. I think the valuation was
actually . . . $830,000 for interest in property? And that
is obviously a stale valuation. So, I think that I
equitably provided that the parties should have a
discussion between themselves to see if they can work
out something. Apparently, [Iler's counsel's] position
is let’s list it for sale, and [the other members] have the
right of first refusal. That sounds like a reasonable
accommodation, but I can’t see any way that they’re
going to agree on a new valuation. I can’t see any way
that they’re going to agree on anything. So, I think that
my decision that if they can’t agree, that the property
be sold was a good and valid one based on the evidence
and the inner relationship between these three partners.
The trial court later modified its order by adding that upon sale, each party
would have a right of first refusal. These appeals followed. We granted a stay
of the part of the order requiring the parties to unanimously agree upon a new
appraisal for the LLC's real property, or the property would be listed for sale,
pending final resolution of the appeal.
II.
Kiely and Marzovilla appeal from the trial court's final order after trial
and denial of their motion for reconsideration, arguing the court erred: 1) in
finding Iler did not breach his fiduciary duty; 2) in ordering the sale of LLC's
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sole asset, 3) in setting aside a valuation by a jointly retained appraiser; and 4)
in finding each party would bear the cost of their own attorney fees.
Iler filed a cross-appeal where he "conditionally appeal[ed]" the final
judgment, but his brief only opposes Kiely and Marzovilla's appeal and
recommends affirmance.
Our review of a trial court's fact-finding in a non-jury case is limited.
Seidman v. Clifton Sav. Bank, S.L.A., 205 N.J. 150, 169 (2011). "The general
rule is that findings by the trial court are binding on appeal when supported by
adequate, substantial, credible evidence." Ibid.However, we owe no deference to a trial court's interpretation of the law,
and review issues of law de novo. State v. Parker, 212 N.J. 269, 278 (2012)
(citing State v. Handy, 206 N.J. 39, 45 (2011)); Cumberland Farms, Inc. v. N.J.
Dep't of Env't Prot., 447 N.J. Super. 423, 438 (App. Div. 2016). Mixed
questions of law and fact are also reviewed de novo. In re Malone, 381 N.J.
Super. 344, 349 (App. Div. 2005).
Similarly, "[t]he interpretation and construction of a contract is a matter
of law for the trial court, subject to de novo review on appeal." Cumberland
Farms, 447 N.J. Super. at 438; Kieffer v. Best Buy, 205 N.J. 213, 222-23 (2011);
see Serico v. Rothberg, 234 N.J. 168, 178 (2018). This court is to look upon a
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contract with "fresh eyes," owing no special deference to the interpretation of
the trial court. Kieffer, 205 N.J. at 222-23.
We review the denial of equitable remedies for abuse of discretion. Sears
Mortg. Corp. v. Rose, 134 N.J. 326, 354 (1993); see Kaye v. Rosefielde, 223
N.J. 218, 231 (2015) ("Chancery judge has broad discretionary power to adapt
equitable remedies to the particular circumstances of a given case") (quoting
U.S. Bank Nat'l Ass'n v. Guillame, 209 N.J. 449, 476 (2012)). "An abuse of
discretion occurs when a trial court makes 'findings inconsistent with or
unsupported by competent evidence,' utilizes 'irrelevant or inappropriate
factors,' or 'fail[s] to consider controlling legal principles.'" Steele v. Steele,
467 N.J. Super. 414, 444 (App. Div. 2021) (alteration in original) (quoting
Elrom v. Elrom, 439 N.J. Super. 424, 434 (App. Div. 2015)).
Likewise, the decision to award counsel fees is within "the sound
discretion of the trial court." Wear v. Selective Ins. Co., 455 N.J. Super. 440,
459 (App. Div. 2018) (quoting Maudsley v. State, 357 N.J. Super. 560, 590
(App. Div. 2003)).
We conclude the court failed to make sufficient findings from the record
evidence to support its conclusions. Rule 1:7-4(a) obligates the trial court to
"find the facts and state its conclusions of law thereon in all actions tried without
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a jury . . . ." Our review is severely inhibited when the trial court fails to
elaborate upon the reasons for its opinion. Romero v. Gold Star Distrib., LLC,
468 N.J. Super. 274, 304 (App. Div. 2021) (quoting Giarusso v. Giarusso, 455
N.J. Super. 42, 53 (App. Div. 2018)). Naked conclusions cannot satisfy the
requirements of Rule 1:7-4(a). Ibid. (quoting Giarusso, 455 N.J. Super. at 54);
see also J.D. v. M.D.F., 207 N.J. 458, 488 (2011).
We are constrained to remand the matter to the trial court for findings of
fact and conclusions of law, and, if necessary, additional briefing or hearings.
See Band's Refuse Removal, Inc. v. Borough of Fair Lawn, 64 N.J. Super. 1, 5
(App. Div. 1960) (The Appellate Division may attach conditions "to a reversal
where the circumstances and the demands of justice require."). This includes
the ability to remand a case to the trial court for review of the record, and, if
found necessary by the trial court, for further proceedings. In re Tr. Created by
Agreement Dated Dec. 20, 1961, ex rel. Johnson, 194 N.J. 276, 284 (2008); see
State v. Henderson, 433 N.J. Super. 94, 105 (App. Div. 2013) (conditioning the
grant of a new trial to success at a plenary hearing to exclude certain evidence).
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III.
A. Breach of Fiduciary Duty.
A managing member of an LLC owes a fiduciary duty to his co-members.
N.J.S.A. 42:2C-39; Silverstein v. Last, 156 N.J. Super. 145, 152 (App. Div.
1978). This includes the duty "to account to the company and to hold as trustee
for it any property, profit, or benefit derived by the member . . . in the conduct
. . . of the company's activities . . . ." N.J.S.A. 42:2C-39(b)(1)(a). The trial
court's bare findings, treating all three members equally for purposes of
determining whether any breached their fiduciary duty to one another, without
differentiating Iler's status as manager, and without reference to Iler's statutory
obligations, are insufficient. See N.J.S.A. 42:2C-39(i)(1) (limiting the fiduciary
duties in a manager-managed LLC to "the manager or managers and not the
members" of the LLC).
The court found only that none of the conduct by any member "rise[s] to
the level of conduct which gives rise to an independent and separate cause of
action" pursuant to RULLCA. It found "the conduct of all of the members was,
in retrospect, unfortunate, and certainly under the circumstances, not entirely
reasonable, but [the court did not believe] it was done with malice. . . . [or] with
the intent to hurt any of the other members." Instead, it thought the parties'
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actions "were out of a sense of conduct that was not up to standard. It's more in
the tune of negligent conduct, and this is true on the multiple examples that have
been given." However, neither malice nor negligence is required by the statute.
Likewise, the court's findings that Iler comingled the LLC's funds, and
Keily and Marzovilla had a valid, legal basis to remove Iler as manager,
contradicts its prior finding that Iler did not breach any fiduciary duty to his co-
members and is not supported by reference to statute, caselaw, or the operating
documents.
Further, the court's upholding of the dilution of Iler's shares without
determining whether his co-members followed procedures outlined in the AOA
or governing law cannot stand because the trial court failed to address whether
Keily and Marzovilla breached any fiduciary duty they owed Iler.
B. Dissociation and Dissolution.
Kiely and Marzovilla argue the trial court had no contractual or statutory
basis to order the sale of the LLC's only asset, effectively dissolving the LLC.
We agree the trial court failed to make findings sufficient to allow it to order the
sale of the LLC's only asset.
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The AOA1 from 2018 did not include a change to the parties' 2016
dissolution and dissociation provisions. The 2016 AOA provided a provision
addressing involuntary dissolution: The "involuntary removal of the [m]ember
from participation, shall cause that [m]ember's ownership to immediately revert
to the remaining [m]embers in pro rata share to other [m]embers interest at that
time." However, Marzovilla was not a signatory to that operating agreement.
If the governing documents do not address a specific situation amongst
members, the default provisions of the RULLCA govern the operation and
structure of a limited liability company and the relations among the members in
situations not addressed. N.J.S.A. 42:2C-1; see Union Cnty. Improvement Auth.
v. Artaki, LLC, 392 N.J. Super. 141, 152 (App. Div. 2007). RULLCA limits
dissolution of an LLC to six specific circumstances. N.J.S.A. 42:2C-48(a). The
court is empowered to order dissolution only in four of those instances, each
requiring the petition by a member. N.J.S.A. 42:2C-48(a)(4), (5). It states:
a. A limited liability company is dissolved, and its
activities shall be wound up, upon the occurrence of any
of the following:
1
The record does not provide the second amended operating agreement with
revisions made by Kiely and Marzovilla at the November 3, 2018 meeting.
However, they provide the minutes from the meeting where the parties include
the relevant changes to the AOA.
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(4) on application by a member, the entry by the
Superior Court of an order dissolving the company on
the grounds that:
(a) the conduct of all or substantially all of the
company's activities is unlawful; or
(b) it is not reasonably practicable to carry on the
company's activities in conformity with one or both of
the certificate of formation and the operating
agreement; or
(5) on application by a member, the entry by the
Superior Court of an order dissolving the company on
the grounds that the managers or those members in
control of the company:
(a) have acted, are acting, or will act in a manner that is
illegal or fraudulent; or
(b) have acted or are acting in a manner that is
oppressive and was, is, or will be directly harmful to
the applicant.
[N.J.S.A. 42:2C-48(a)(4), (5).]
Similarly, dissociation by judicial order requires prior application by the
LLC or a member and is permitted only where the member:
(1) has engaged, or is engaging, in wrongful conduct
that has adversely and materially affected, or will
adversely and materially affect, the company's
activities;
(2) has willfully or persistently committed, or is
willfully and persistently committing, a material breach
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of the operating agreement or the person's duties or
obligations under [N.J.S.A. 42:2C-39]; or
(3) has engaged, or is engaging, in conduct relating to
the company's activities which makes it not reasonably
practicable to carry on the activities with the person as
a member . . . .
[N.J.S.A. 42:2C-46(e) (footnote omitted).]
By finding no party proved his case, the court did not provide a valid legal
basis to order dissociation or dissolution. Evidence the parties did not get along,
or the court's authority as a court of general equity, is not sufficient. A court of
equity must still follow the law and courts of equity "will generally conform to
established rules and precedents, and will not change or unsettle rights that are
created and defined by existing legal principles." W. Pleasant-CPGT, Inc. v.
U.S. Home Corp., 243 N.J. 92,108 (2020) (quoting Dunkin' Donuts of Am., Inc.
v. Middletown Donut Corp., 100 N.J. 166, 183 (1985)); see IE Test, LLC v.
Carroll, 226 N.J. 166, 182-83 (2016) (finding dissociation of a member pursuant
to N.J.S.A. 42:2C-46 proper only when it is "unfeasible, despite reasonable
efforts, to keep the LLC operating while the disputed member remains affiliated
with it").
Kiely and Marzovilla petitioned the court to "expel Iler from the LLC"
although they did not allege a specific count for dissociation. This arguably
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afforded the trial court the ability to dissociate Iler from the LLC upon a finding
of specific cause. However, if the court had made that finding, it would be
empowered to order only that the co-members buy out Iler's shares at fair value,
not dissolve the LLC. N.J.S.A. 42:2C-47(c). Having found no illegal or
unlawful conduct, and no party having sought dissolution of the LLC or the sale
of the LLC's property, the trial court was without authority to order the sale of
the property, which would effectively dissolve the LLC.
The court ordered the parties to unanimously agree to a valuation of the
LLC's real property, which it equated to share value. Without referring to the
operating documents, if the parties could not agree, it ordered the sale of the real
property, the LLC's sole asset. In doing so the trial court employed a technique
often used in mediation to avoid resolving a disputed material issue before it —
the fair value of Iler's shares for the court-ordered buy-out of his percentage of
ownership.
C. Valuation of the LLC's Shares.
Assuming dissociation was appropriate, with respect to the valuation of
the LLC's shares, each member's contributions, and each member's percentage
of ownership, the trial court made no references to the AOA, Purchase
Agreement, or evidence admitted at trial in its determination as to how it arrived
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at its conclusions. Both documents are specific with respect to which
contributions are attributable to percentage of ownership and which
contributions are deemed loans. We give contracts "their plain and ordinary
meaning" and courts will not make a different or better agreement for the parties
than they made for themselves. Kieffer, 205 N.J. at 223 (quoting M.J. Paquet,
Inc. v. N.J. Dep't of Transp., 171 N.J. 378, 396 (2002)); (citing Zacarias v.
Allstate Ins. Co., 168 N.J. 590, 595 (2001)). Instead, the court made credibility
determinations of the experts, relied on portions of one expert's testimony and
findings of another, without further explanation, and without reference to the
controlling documents.
The court also disregarded the valuation of the real property without
referring to case law regarding the proper date of valuation for purposes of
dissociating Iler. To the extent the minority shareholder oppression act may
apply, although it was not pled, it provides in pertinent part: "[t]he purchase
price of any shares so sold shall be their fair value as of the date of the
commencement of the action or such earlier or later date deemed equitable by
the court, plus or minus any adjustments deemed equitable by the court . . . ."
N.J.S.A. 14A:12-7(8)(a). Generally, the date of commencement of the action is
the presumptive date of valuation. Musto v. Vidas, 333 N.J. Super. 52, 63 (App.
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Div. 2000). see also Torres v. Schripps, Inc., 342 N.J. Super. 419, 437 (App Div.
2001). Trial courts are permitted to change the date of valuation in the interest
of equity. Torres, 342 N.J. Super. at 437 (citing Vidas, 333 N.J. Super at 63);
see Sipko v. Koger, Inc., 251 N.J. 162, 181, 183 (2022) (reiterating that equitable
principles permit the court to "apply a discount to the value of the dissenting
shareholders' stock") (quoting Lawson Mardon Wheaton, Inc. v. Smith, 160 N.J.
383, 400 (1999)).
The presumptive date for valuation of the shares of the LLC, not the value
of the real property, was January 2019, the filing month of both complaints, and
well before the COVID-19 pandemic affected the real estate market. Although
the trial court had the discretion to deviate from that date, it was required to
expound on its reasons for doing so.
D. Attorney's Fees.
"In the field of civil litigation, New Jersey courts historically follow the
'American Rule,' which provides that litigants must bear the cost of their own
attorneys' fees." Innes v. Marzano-Lesnevich, 224 N.J. 584, 592 (2016).
"However, 'a prevailing party can recover those fees if they are expressly
provided for by statute, court rule, or contract.'" Litton Indus., Inc. v. IMO
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Indus., Inc., 200 N.J. 372, 385 (2009) (quoting Packard-Bamberger & Co., Inc.
v. Collier, 167 N.J. 427, 440 (2001)).
Kiely and Marzovilla argue the trial court failed to award them attorney's
fees although the court found in their favor and their AOA, amended after they
removed Iler, provides for the award of attorney's fees to the prevailing party in
a lawsuit. They argue the trial court found their actions at the November 2018
meeting were appropriate and their newly amended agreement states:
any member, or the LLC upon the majority vote of the
percentage interest of the members, may commence the
appropriate action in the New Jersey Superior Court. In
any such action, the prevailing party shall be entitled to
an award of reasonable counsel fees as part of any relief
awarded.
The prior AOA discussed the award of attorney fees only at arbitration.
Paragraph fifteen stated the "parties shall equally divide the cost of . . .
arbitration, and the prevailing party shall be entitled to an award of its attorney
. . . fees from the non-prevailing party."
In its decision the court stated, "the conduct of all three members
contributed to th[e] dispute and unquestionably contributed to the submission of
over one hundred (100) trial exhibits and days of testimony of both lay and
expert witnesses resulting in the costs of th[e] litigation increasing beyond a ny
reasonable expectation."
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The LLC's newly amended operating agreement includes a change to its
dispute section. To the extent the trial court found the amendment of the AOA
was appropriate after Iler's dilution of shares, it failed to state why the provision
did not apply. On remand, the court should assess the validity of any award of
attorney fees in accordance with what it concludes are the governing documents.
In sum, we reverse and remand for specific findings of fact and
conclusions of law. The trial court may rely upon the evidence adduced at trial,
but is not limited to that evidence, and may request additional briefing or
testimony, if necessary. We take no position regarding the outcome of any of
the substantive issues raised in this appeal other than the trial court's failure to
make adequate findings.
Reversed and remanded for findings consistent with this opinion. We do
not retain jurisdiction.
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