Ie Test, LLC v. Kenneth Carroll(075842) , 226 N.J. 166 ( 2016 )

SYLLABUS
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience
of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interest of
brevity, portions of any opinion may not have been summarized).
IE Test, LLC v. Kenneth Carroll (A-63-14) (075842)
Argued February 2, 2016 -- Decided August 2, 2016
PATTERSON, J., writing for a unanimous Court.
In this appeal, the Court considers the Limited Liability Company Act (LLCA) and the circumstances under
which N.J.S.A. 42:2B-24(b)(3)(c)(subsection 3(c)) authorizes the expulsion of a member of a limited liability company
(LLC).
This appeal arises from a conflict among the three members of IE Test, LLC (IE Test), a business formed as an
LLC. After a dispute between defendant Kenneth Carroll (Carroll) and the other members, Patrick Cupo (Cupo) and
Byron James (James), IE Test filed an action to expel Carroll, pursuant to the LLCA. The dispute stemmed from the
failure of a prior business in which IE Test’s three LLC members were involved. In 2004, Carroll and Cupo formed
Instrumentation Engineering, LLC (Instrumentation Engineering). Carroll owned a fifty-one percent interest in
Instrumentation Engineering, and Cupo owned the remaining forty-nine percent. James was employed by
Instrumentation Engineering, initially as Business Development Manager and later as Vice President.
In July 2009, Instrumentation Engineering filed for Chapter 7 bankruptcy. In that proceeding, Carroll claimed
that Instrumentation Engineering owed him and his companies $2,543,318. As Instrumentation Engineering’s business
failed, its owners contemplated a new venture. Shortly before Instrumentation Engineering filed for Chapter 7
bankruptcy, Cupo formed IE Test as a New Jersey LLC. According to Cupo, two months after IE Test was formed, he
sold a fifty-percent interest in the LLC to James. Carroll purchased the intellectual property and hardware that had been
used in the business of Instrumentation Engineering from the trustee of that entity’s estate in bankruptcy. Carroll claims
that he transferred those assets to IE Test, but Cupo disputes that contention.
Carroll, Cupo, and James entered into a preliminary agreement stating intention to enter into an operating
agreement for IE Test. They acknowledged that from the inception of IE Test, “the Members of the Company and their
LLC Percentage Interests have been and are: Kenneth Carroll (33%), Pat Cupo (34%) [and] Byron James (33%).” IE
Test reported revenue in the amount of $1,232,078 during the first half of 2010. Carroll’s claim that Instrumentation
Engineering owed substantial sums to him and his companies became a point of contention among Cupo, James, and
Carroll soon after they agreed to share ownership of IE Test. Carroll acknowledged that IE Test had no legal obligation
to repay him for losses sustained because of Instrumentation Engineering’s bankruptcy, but pressed for compensation
that would allow him to recover some of his lost investment. By early 2010, Cupo and James were actively pursing a
strategy to use the LLCA to expel Carroll as a member of the LLC. Thereafter, IE Test filed this action, asserting claims
for breach of fiduciary duty of loyalty, breach of fiduciary duty of care, breach of contract and breach of the implied
covenant of good faith and fair dealing, and sought the expulsion of Carroll as an LLC member pursuant to N.J.S.A.
42:2B-24(b)(3)(a) (subsection 3(a)) or, in the alternative, under subsection 3(c).
Following discovery, IE Test filed a motion for partial summary judgment, in which it sought judgment in its
favor based on two theories. First, invoking subsection 3(a), IE Test contended that Carroll had engaged in wrongful
conduct that adversely and materially affected the LLC’s business. Second, IE Test claimed that Carroll had engaged in
conduct which made it not reasonably practicable to carry on IE Test’s business and that he should be expelled from the
LLC under subsection 3(c). The trial court rejected the subsection 3(a) claim, finding that Carroll’s insistence on
specific compensation terms did not amount to “wrongful conduct” within the meaning of subsection 3(a). The trial
court, however, found in IE Test’s favor on its claim based on subsection 3(c), reasoning that the “not reasonably
practicable” language of subsection 3(c) imposed a less stringent standard than did subsection 3(a). The trial court
granted IE Test’s motion for partial summary judgment and expelled Carroll as an LLC member. Carroll appealed. In
an unpublished opinion, an Appellate Division panel affirmed that judgment. The panel construed N.J.S.A. 42:2B-
24(b)(3), and its counterpart provision in the Revised Uniform Limited Liability Company Act (RULLCA), N.J.S.A.
42:2C-46(e), to mandate that a trial judge engage in predictive reasoning in order to evaluate the future impact of an LLC
member’s current conduct. The panel found that Carroll’s relationship with Cupo and James never recovered from
Carroll’s demand that he be compensated in a manner that permitted him to recoup his lost investment.
This Court granted Carroll’s petition for certification. 222 N.J. 15 (2015).
1
HELD: A disagreement among LLC members over the terms of an operating agreement does not necessarily compel
the expulsion of a dissenting LLC member. If an LLC’s members can manage the LLC without an operating agreement,
invoking as necessary the default majority-rule provision of the LLCA, then a conflict among LLC members may not
warrant a member’s expulsion under the LLCA. Subsection 3(c) does not warrant a grant of partial summary judgment
expelling Carroll from IE Test.
1. Subsection 3(c), the provision at issue here, is part of the LLCA, which is a comprehensive statutory scheme that
governed all New Jersey LLCs for two decades and was in effect when the trial court granted partial summary judgment.
The statute was intended to be liberally construed to give the maximum effect to the principle of freedom of contract and
to the enforceability of operating agreements. It also provided several methods by which an LLC member could be
disassociated from the LLC. A member could be disassociated under the following circumstances: (a) the member
engaged in wrongful conduct that adversely and materially affected the LLC’s business; (b) the member willfully or
persistently committed a material breach of the operating agreement; or (c) the member engaged in conduct relating to
the LLC’s business which makes it not reasonably practicable to carry on the business with the member as a member of
the LLC. If a court determines that an LLC member meets the standard of one of the three subsections, it must grant the
remedy of expulsion. (pp. 12-15)
2. When courts interpret statutes, words shall be read and construed to be given their generally accepted meaning. The
LLCA did not define the term “not reasonably practicable,” or specifically describe the conduct that implicates
subsection 3(c). Comparing subsection 3(c) with subsection 3(a), which provided an alternative ground for the expulsion
of an LLC member by judicial determination, helps discern the Legislature’s intent. To disassociate a member under
subsection 3(a), a court must find that the member’s wrongful conduct has adversely and materially affected the
company’s business. In contrast, under subsection 3(c), the court prospectively analyzes the impact of that conduct on
the LLC’s future. In short, LLC members seeking to expel a fellow member under subsection 3(c), or its counterpart in
the RULLCA, N.J.S.A. 42:2C-46(e)(3), are required to clear a high bar. In that inquiry, a trial court should consider: (1)
the member’s conduct relating to the LLC’s business; (2) whether, with the member remaining a member, the entity may
be managed so as to promote the purposes for which it was formed; (3) whether the dispute precludes them from
working with one another to pursue the LLC’s goals; (4) whether there is a deadlock; (5) whether, despite that deadlock,
members can make decisions on the management of the company, pursuant to the operating agreement or in accordance
with applicable statutory provisions; (6) whether there is still a business to operate; and (7) whether continuing the LLC,
with the member remaining a member, is financially feasible. (pp. 16-21)
3. Here, the trial court’s task was to view the evidence in the light most favorable to the non-moving party, and to decide
whether the record was sufficient to permit a rational factfinder to resolve the alleged disputed issue in favor of the non-
moving party. The record reveals genuine issues of material fact that warrant the denial of partial summary judgment
and preclude the remedy of expulsion. By his own admission, Carroll had no legal right to recover his lost investment in
Instrumentation Engineering through his interest in IE Test. The record is devoid of evidence that Carroll actively
interfered with IE Test’s business. Despite his insistence on generous compensation, Carroll permitted the LLC to
operate unimpeded. Applying the second and third factors, it appears that the business operated with increasing revenue
despite the deteriorating relationship between Carroll and the other LLC members. The fourth and fifth factors also
weigh against the grant of partial summary judgment in this case. IE Test has not claimed, let alone established, that the
three LLC members reached a deadlock regarding the company’s management. Moreover, even Carroll’s failure to
agree on a counterproposal would not, without more, justify his expulsion as an LLC member. In accordance with the
LLCA, IE Test has been effectively managed without an operating agreement. With all inferences drawn in favor of
Carroll, the record does not demonstrate that any deadlock among the LLC members threatened IE Test’s business.
Thus, the fourth and fifth factors do not support the trial court’s grant of partial summary judgment. Under the sixth and
seventh factors, the court considers whether, due to the LLC’s financial position, there is still a business to operate, and
whether it is fundamentally feasible for the company to continue in business with the LLC member remaining a member.
Those factors similarly weigh against the trial court’s grant of summary judgment on the record of this case. There is no
dispute that when the trial court ruled on IE Test’s motion, the business remained in operation; indeed, its revenue
evidently increased despite Carroll’s continued involvement. (pp. 22-26)
4. In sum, when the record is viewed in accordance with the summary judgment standard of Rule 4:46-2(c), it does not
support the trial court’s finding that it was “not reasonably practicable” to carry on IE Test’s business with Carroll
remaining an LLC member. Accordingly, the trial court’s grant of partial summary judgment constituted error. (p. 26)
The judgment of the Appellate Division is REVERSED. The matter is REMANDED to the trial court for
further proceedings consisted with this opinion.
CHIEF JUSTICE RABNER; JUSTICES LaVECCHIA, ALBIN, FERNANDEZ-VINA, and SOLOMON;
and JUDGE CUFF (temporarily assigned) join in JUSTICE PATTERSON’S OPINION.
2
SUPREME COURT OF NEW JERSEY
A-63 September Term 2014
075842
IE TEST, LLC,
Plaintiff-Respondent,
v.
KENNETH CARROLL,
Defendant-Appellant.
Argued February 2, 2016 – Decided August 2, 2016
On certification to the Superior Court,
Appellate Division.
Paul A. Sandars, III, argued the cause for
appellant (Lum, Drasco & Positan, attorney;
Mr. Sandars and Scott E. Reiser, of counsel
and on the brief).
Eric J. Szoke argued the cause for
respondent (Steven Robert Lehr, attorney).
JUSTICE PATTERSON delivered the opinion of the Court.
This appeal arises from a conflict among the three members
of IE Test, LLC (IE Test), an engineering consultant business
formed as a limited liability company (LLC). In the wake of a
dispute about the terms of an operating agreement between
defendant Kenneth Carroll (Carroll) and the LLC’s other members,
Patrick Cupo (Cupo) and Byron James (James), IE Test filed an
action to expel Carroll as an LLC member, pursuant to the
Limited Liability Company Act, N.J.S.A. 42:2B-1 to -70 (LLCA).
1
The trial court granted partial summary judgment and ordered
that Carroll be disassociated from IE Test. It based its ruling
on a provision of the LLCA that authorized the expulsion of an
LLC member by “judicial determination” if the court finds that
the member has engaged in conduct relating to the LLC’s business
“which makes it not reasonably practicable to carry on the
business” with the LLC member remaining part of the LLC.
N.J.S.A. 42:2B-24(b)(3)(c) (subsection 3(c)). The Appellate
Division affirmed the trial court’s judgment.
We construe the Legislature’s intent when it enacted
subsection 3(c) of the LLCA, and an analogous provision in the
LLCA’s successor statute, the Revised Uniform Limited Liability
Company Act, N.J.S.A. 42:2C-1 to -94 (RULLCA). We hold that a
disagreement among LLC members over the terms of an operating
agreement does not necessarily compel the expulsion of a
dissenting LLC member. If an LLC’s members can manage the LLC
without an operating agreement, invoking as necessary the
default majority-rule provision of the LLCA, then a conflict
among LLC members may not warrant a member’s expulsion under the
LLCA. To assist trial courts in determining whether it is “not
reasonably practicable” to operate an LLC in light of the LLC
member’s conduct, we adopt a series of factors.
Applied to the record of this case, the standard of
subsection 3(c) does not warrant a grant of partial summary
2
judgment expelling Carroll from IE Test. Accordingly, we
reverse the Appellate Division’s judgment and remand this matter
to the trial court.
I.
We derive our summary of the facts from the summary
judgment record.
The dispute that prompted this litigation stemmed from the
failure of a prior business in which IE Test’s three LLC members
were involved. In 2004, Carroll and Cupo formed Instrumentation
Engineering, LLC (Instrumentation Engineering) pursuant to
Delaware’s LLC laws. By agreement, Carroll owned a fifty-one
percent interest in Instrument Engineering, and Cupo owned the
remaining forty-nine percent. James was employed by
Instrumentation Engineering, initially as Business Development
Manager and later as Vice President.
In July 2009, following a series of financial setbacks,
Instrumentation Engineering filed for Chapter 7 bankruptcy in
the United States Bankruptcy Court for the District of New
Jersey. In the bankruptcy proceeding, Carroll claimed that
Instrumentation Engineering owed him and his companies
$2,543,318. Although the record does not reveal whether
Instrumentation Engineering’s debt to Carroll was discharged in
bankruptcy, the parties agree that the company did not repay the
debt.
3
As Instrumentation Engineering’s business failed, its
owners contemplated a new venture. Shortly before
Instrumentation Engineering filed for Chapter 7 bankruptcy, Cupo
formed IE Test as a New Jersey LLC. The LLC’s business is the
design of testing systems used by manufacturers to evaluate
their products.
Cupo was initially IE Test’s sole member. According to
Cupo, two months after IE Test was formed, he sold a fifty-
percent interest in the LLC to James. Carroll purchased the
intellectual property and hardware that had been used in the
business of Instrumentation Engineering from the trustee of that
entity’s estate in bankruptcy. Carroll contends that he
transferred those assets to IE Test, but Cupo disputes that
contention.
Carroll, Cupo, and James entered into a preliminary
agreement. In that document, Carroll, Cupo, and James stated
their intention to enter into an operating agreement for IE
Test. They acknowledged that from the inception of IE Test,
“the Members of the Company and their LLC Percentage Interests
have been and are: Kenneth Carroll (33%), Pat Cupo (34%) [and]
Byron James (33%).”
The LLC members were assigned divergent roles in the
business of IE Test. Cupo managed the engineering,
manufacturing, and financial components of the business. James
4
was responsible for business development. Carroll’s role was
limited; he was not expected to become involved in the day-to-
day management of IE Test, and the record confirms that he did
not do so. Carroll maintained no office at IE Test’s facility
and participated in only one sales call. IE Test does not
contend that Carroll ever intervened, or attempted to intervene,
in IE Test’s day-to-day operations.
IE Test developed an increasingly successful business
throughout the period in which it operated with Carroll as an
LLC member. After a modest beginning in 2009, during which it
earned $396,597, IE Test reported revenue in the amount of
$1,232,078 during the first half of 2010. Cupo and James drew
salaries in the amount of $170,000 per year, and several $10,000
bonuses. IE Test paid Carroll no salary or bonus at any time.
Carroll’s claim that Instrumentation Engineering owed
substantial sums to him and his companies became a point of
contention among Cupo, James, and Carroll soon after they agreed
to share ownership of IE Test. Carroll acknowledged that IE
Test had no legal obligation to repay him for losses sustained
because of Instrumentation Engineering’s bankruptcy. He
pressed, however, for compensation that would allow him to
recover some of his lost investment in Instrumentation
Engineering.
5
An e-mail exchange between Cupo and James in October 2009
described the two options proposed by Carroll as alternative
frameworks for an operating agreement: either an arrangement
whereby Carroll would be paid an equal share of IE Test’s
profits with a premium, or the payment of a salary to Carroll
plus an equal share of the profits. James and Cupo then agreed
that they did not want to work with Carroll. James commented,
however, that Carroll would not “walk away” from the business
unless Cupo and James agreed to one of his alternative proposals
for his compensation.
It is unclear precisely when Cupo and James decided to file
an action to disassociate Carroll as an LLC member pursuant to
N.J.S.A. 42:2B-24(b)(3). By early January 2010, however, they
were actively pursuing that strategy. In a January 5-6, 2010 e-
mail exchange about the best way to remove Carroll as an LLC
member, Cupo and James discussed the option of filing a lawsuit
to expel him from the company. James wrote that “[n]o one is
getting rich here and a third partner will most likely lead to
the failure of the business.”
The three LLC members met on January 7, 2010. According to
Cupo and James, their plans for IE Test did not align with those
of Carroll, and the company could not, then or in the
foreseeable future, afford a third member. Carroll contends
that Cupo and James declined to honor his ownership interest in
6
IE Test and refused to enter into an operating agreement. At
that point, the three LLC members ceased communicating about the
operation of their business.
II.
IE Test filed this action on January 25, 2010, less than
four months after Carroll, Cupo, and James signed their
agreement allocating ownership of IE Test. It asserted claims
for breach of fiduciary duty of loyalty, breach of fiduciary
duty of care, breach of contract and breach of the implied
covenant of good faith and fair dealing, and sought the
expulsion of Carroll as an LLC member pursuant to N.J.S.A.
42:2B-24(b)(3)(a) (subsection 3(a)) or, in the alternative,
under subsection 3(c).1
Through his counsel, Carroll proposed an operating
agreement to Cupo and James on September 7, 2010. The record
contains no evidence that Cupo or James produced a draft
operating agreement after rejecting Carroll’s proposal. It is
undisputed that no operating agreement for IE Test was ever
executed.
1 Carroll filed a counterclaim against IE Test and a third-party
complaint against Cupo and James, alleging that they agreed to
compensate him for the money owed to him by the prior business,
Instrumentation Engineering; that counterclaim was dismissed by
stipulation.
7
Following the depositions of Carroll, Cupo, and James, and
other discovery, IE Test filed a motion for partial summary
judgment. It sought judgment in its favor on its claim for
expulsion based upon two alternative theories. First, invoking
subsection 3(a), IE Test contended that Carroll had engaged in
“wrongful conduct that adversely and materially affected the
limited liability company’s business.” N.J.S.A. 42:2B-
24(b)(3)(a). Second, IE Test claimed that Carroll had engaged
in conduct which made it “not reasonably practicable” to carry
on IE Test’s business, and that he should be expelled from the
LLC pursuant to N.J.S.A 42:2B-24(b)(3)(c). In a cross-motion,
Carroll sought summary judgment dismissing plaintiff’s claims
with prejudice and awarding counsel fees pursuant to the
Frivolous Litigation Statute, N.J.S.A. 2A:15-59.1.
The trial court rejected IE Test’s claim based on
subsection 3(a). The court noted that Cupo and James wanted no
further interaction with Carroll. It stated that it was
skeptical that Carroll could remain a passive member of the LLC.
Nonetheless, the court found that Carroll’s insistence on
specific compensation terms did not amount to “wrongful conduct”
within the meaning of subsection 3(a). It concluded that
although Carroll’s demands may have been unreasonable, those
demands were not unlawful, and inflicted no harm on IE Test.
8
The trial court, however, found in IE Test’s favor on its
claim based on subsection 3(c). It reasoned that the “not
reasonably practicable” language of subsection 3(c) imposed a
less stringent standard than did subsection 3(a). In its
application of that standard, the trial court focused on
problems that could arise in the future. The court stated that
because of the LLC members’ continuing dispute, it might prove
impossible for Cupo and James to secure Carroll’s approval of
essential documents. The court concluded that Carroll’s
continued involvement would generate more controversy and
further litigation. It therefore ruled that it was not
“reasonably practicable” for the business to continue with
Carroll involved, and that IE Test had satisfied the standard of
subsection 3(c).
The trial court granted IE Test’s motion for partial
summary judgment and denied Carroll’s cross-motion for summary
judgment. It expelled Carroll as an LLC member, effective
immediately. At Carroll’s request, the court stayed its
judgment of expulsion pending appeal. The trial court conducted
a bench trial to determine the value of IE Test, and valued the
LLC at $683,173.2 The court then entered final judgment for
Carroll in the amount of $227,497, representing thirty-three
2 The trial court’s valuation of IE Test is not before the Court
in this appeal.
9
percent of the total value of IE Test, plus prejudgment interest
in the amount of $14,976.
Carroll appealed the trial court’s judgment. In an
unpublished opinion, an Appellate Division panel affirmed that
judgment. The panel construed N.J.S.A. 42:2B-24(b)(3) and its
counterpart provision in the RULLCA, N.J.S.A. 42:2C-46(e), to
mandate that a trial judge engage in predictive reasoning in
order to evaluate the future impact of an LLC member’s current
conduct. The panel found that Carroll’s relationship with Cupo
and James never recovered from Carroll’s demand that he be
compensated in a manner that permitted him to recoup his lost
investment. It reasoned that as a consequence of that rift, the
continued operation of IE Test with Carroll as a member was not
“reasonably practicable” under subsection 3(c).
We granted Carroll’s petition for certification. 222 N.J.
15 (2015).
III.
Carroll argues that the trial court’s order disassociating
him from IE Test deprived him of protections that the
Legislature conferred on minority investors when it enacted the
LLCA. He contends that the LLCA resolves any concerns about
disruption in the company’s management, because the statute
provides for majority rule in management decisions in the
absence of an operating agreement. Carroll notes the absence of
10
evidence that he interfered with the day-to-day running of the
business, that he disparaged Cupo or James to employees, vendors
or clients, or that he withheld necessary signatures on papers
or information essential to the running of the business. He
argues that Cupo and James expelled him as an LLC member because
it was financially advantageous for them to do so, and that they
used the alleged impasse over an operating agreement as a
pretext. Carroll states that prior to the summary judgment
proceedings, he was never advised that IE Test had difficulty
securing financing and represents that he would be willing to
assist in the financing of IE Test in the event that the lack of
an operating agreement impedes the company’s effort to obtain
financing from a bank.
IE Test counters that the trial court’s finding -- that it
was not “reasonably practicable” for IE Test to continue in
business with Carroll remaining an LLC member -- was firmly
grounded in the record. It argues that subsection 3(c) requires
a trial court to anticipate future conflicts that may make it
impossible to conduct the business with a dissenting LLC member.
IE Test represents that the parties’ impasse has already proven
to be a significant impediment to its business. It claims that
in the absence of an operating agreement, it is unable to secure
a line of credit or financing from a bank.
11
IE Test acknowledges that there are default provisions in
the LLCA that permit an LLC to be managed by majority rule, but
notes that there are some decisions, such as the admission of
new LLC members or dissolution, that require unanimous consent.
IE Test contends that it was inevitable that Carroll’s dispute
with the other LLC members would undermine IE Test’s operations,
and that the trial court and Appellate Division properly applied
the LLCA’s expulsion remedy.
IV.
A.
The provision at issue in this case, subsection 3(c), is
part of the LLCA, a comprehensive statutory scheme that governed
all New Jersey LLCs for two decades, and was in effect when the
trial court granted partial summary judgment.3 Pursuant to the
LLCA, an LLC formed under its provisions or qualified to do
business in New Jersey would be “classified as a partnership
unless classified otherwise for federal income tax purposes, in
which case the limited liability company shall be classified in
3 The LLCA governed LLCs in New Jersey from its effective date,
January 26, 1994, until March 18, 2013. L. 2012, c. 50, § 95.
The LLCA was then repealed and replaced by the RULLCA, “a
comprehensive, fully integrated ‘second generation’ LLC statute
that takes into account the best elements of ‘first generation’
LLC statutes (such as [the LLCA]) . . . and two decades of legal
developments in the field.” Sponsors’ Statement to Assembly No.
1543 (2012). All LLCs in New Jersey are now subject to the
RULLCA. L. 2013, c. 276, § 9.
12
the same manner as it is classified for federal income tax
purposes.” N.J.S.A. 42:2B-69. The statute was intended “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(a).
The LLCA authorized LLC members to enter into an operating
agreement governing “the affairs of [an LLC] and the conduct of
its business.” N.J.S.A. 42:2B-2; see also N.J.S.A. 42:2B-22(a)-
(b) (providing for operating agreement that sets forth classes
or groups of members and prescribing rights, powers and duties
of classes or groups of members); N.J.S.A. 42:2B-29(a)-(b)
(authorizing operating agreement that sets forth classes and
groups of managers and rights granted to them). The statute
thus encouraged LLC members to collectively devise an
individualized governance and management plan that best advanced
the goals of their business.
The Legislature, however, understood that LLC members are
not always in a position to agree on the terms of an operating
agreement; it included in the LLCA default provisions for the
management of an LLC without such an agreement. See Union Cty.
Improvement Auth. v. Artaki, 392 N.J. Super. 141, 152 (App. Div.
2007) (“In the absence of an operating agreement, the [LLCA]
provisions control.”); Kuhn v. Tumminelli, 366 N.J. Super. 431,
440 (App. Div.) (same), certif. denied, 180 N.J. 354 (2004).
13
The LLCA required unanimous consent for the admission of new
members pursuant to N.J.S.A. 42:2B-21(b)(1), or for the
dissolution of the LLC in accordance with N.J.S.A. 42:2B-48(c).
The statute, however, authorized the day-to-day management of
the LLC by majority rule:
Unless otherwise provided in an operating
agreement, the management of [an LLC] shall be
vested in its members in proportion to the
then current percentage or other interest of
members in the profits of the [LLC] owned by
all of the members, the decision of members
owning more than 50 percent of the then
current percentage or other interest in the
profits controlling[.]
[N.J.S.A. 42:2B-27(a)(1).]
Thus, the Legislature ensured that even in the absence of
an operating agreement, decisions regarding an LLC’s operations
could be made by majority rule, based on the percentage of each
member’s interest in the company. Ibid.
The LLCA provided for several alternative methods by which
an LLC member may be disassociated from the LLC. One such
procedure was expulsion of an LLC member by “judicial
determination” under N.J.S.A. 42:2B-24(b)(3).4 The statute
4 Alternatively, an LLC member could be expelled in accordance
with the terms of the operating agreement. N.J.S.A. 42:2B-
24(b)(1). Unless otherwise provided in an operating agreement,
or with the written consent of all members, an LLC member could
be disassociated by resignation, N.J.S.A. 42:2B-24(a)(1); by
virtue of an event “agreed to in the operating agreement as
causing the member’s dissociation,” N.J.S.A. 42:2B-24(a)(2); or
by the occurrence of the member’s bankruptcy and other events
14
provided that a member shall be disassociated from a limited
liability company under the following circumstances:
[O]n application by the limited liability
company or another member, the member’s
expulsion by judicial determination because:
(a) the member engaged in wrongful conduct
that adversely and materially affected the
limited liability company’s business;
(b) the member willfully or persistently
committed a material breach of the operating
agreement; or
(c) the member engaged in conduct relating to
the limited liability company business which
makes it not reasonably practicable to carry
on the business with the member as a member of
the limited liability company[.]
[N.J.S.A. 42:2B-24(b)(3)(a)-(c).]
Accordingly, if a court makes a judicial finding that an
LLC member meets the standard of one of the three subsections,
it must grant the remedy of expulsion. Ibid. In the wake of a
judicial determination disassociating the LLC member from the
LLC, that member’s interest is immediately limited to the
“rights of an assignee of a member’s limited liability
enumerated in the statute, N.J.S.A. 42:2B-24(a)(3)(a) to –(d).
In addition, by unanimous vote of the LLC members, a member
could be expelled from the LLC if “it is unlawful to carry on
the [LLC] with that member;” in the event of certain transfers
of the LLC member’s interest in the LLC; within 90 days of
certain events affecting the legal status of a corporate LLC
member; or in case of the dissolution and windup of an LLC
member that is itself an LLC or partnership. N.J.S.A. 42:2B-
24(b)(2)(a)-(d).
15
interest[,]” subject to the provisions of N.J.S.A. 42:2B-39,
which addressed determination of the fair value of the LLC
distribution. N.J.S.A. 42:2B-24.1. In that event, the member
may no longer take part in decisions affecting the company, and
may lose part or all of his or her investment in the business.
B.
We construe subsection 3(c), which authorized the expulsion
of an LLC member by judicial determination, based on the
member’s “conduct relating to the [LLC] which makes it not
reasonably practicable to carry on the business with the member
as a member of the [LLC.]” N.J.S.A. 42:2B-24(b)(3)(c).
The Legislature directs that when we interpret its
statutes, “words and phrases shall be read and construed with
their context, and shall, unless inconsistent with the manifest
intent of the legislature or unless another or different meaning
is expressly indicated, be given their generally accepted
meaning, according to the approved usage of the language.”
N.J.S.A. 1:1-1. If the statutory language is clear, the inquiry
ends, because “the sole function of the courts is to enforce
[the statute] according to its terms.” Velasquez ex rel.
Velasquez v. Jiminez, 172 N.J. 240, 256 (2002) (quoting Hubbard
ex rel. Hubbard v. Reed, 168 N.J. 387, 392 (2001)).
The LLCA did not define the term “not reasonably
practicable,” or specifically describe the conduct by an LLC
16
member that implicates subsection 3(c). Its legislative history
was also silent with respect to that question. L. 1997, c. 139
§ 13 (adding language of “not reasonably practicable” to
N.J.S.A. 42:2B-24(b)(3)(c)).5 Moreover, when the Legislature
repealed the LLCA and replaced it with the RULLCA, retaining the
“not reasonably practicable” language in the new statute, it did
not define the term. L. 2012, c. 50 § 46.6
We are, however, assisted in discerning the Legislature’s
intent by comparing subsection 3(c) with subsection 3(a), which
provided an alternative ground for the expulsion of an LLC
member by “judicial determination.” N.J.S.A. 42:2B-24(b)(3)(a),
(c); see also L.A. v. Board of Educ. of Trenton, 221 N.J. 192,
201 (2015) (noting that “[w]hen, as here, an issue concerns more
than one statutory provision, ‘[r]elated parts of an overall
scheme can . . . provide relevant context.’”) (second and third
alterations in original) (quoting Beim v. Hulfish, 216 N.J. 484,
5 The “not reasonably practicable” language of subsection 3(c)
closely tracks the language of Section 601(6) of the Uniform
Limited Liability Company Act (Uniform Act). The Uniform Act
includes no commentary addressing the meaning of that term.
Unif. Ltd. Liab. Co. Act § 601(6) (Nat’l Conference of Comm’rs
on Unif. Laws 1996).
6 In the RULLCA, the Legislature retained the text of N.J.S.A.
42:2B-24(b)(3), amended only to substitute the term “judicial
determination” for “judicial order” and to make other minor
changes. Compare N.J.S.A. 42:2B-24(b)(3), with N.J.S.A. 42:2C-
46(e)(3). For purposes of the “not reasonably practicable”
standard analyzed in this opinion, the two statutes are
identical.
17
498 (2014)). Subsection 3(a) required finding that “the member
engaged in wrongful conduct that adversely and materially
affected the limited liability company’s business[.]” N.J.S.A.
42:2B-24(b)(3)(a). Subsection 3(c) did not require that the LLC
member’s conduct be “wrongful” in order to warrant expulsion of
that member. In that regard, subsection 3(c) was more expansive
than subsection 3(a).
The language of subsection 3(c) differed from the language
of subsection 3(a) in a second respect. Subsection 3(a) involved
any “wrongful conduct” by an LLC member that has “adversely and
materially affected [the LLC’s] business.” N.J.S.A. 42:2B-
24(b)(3)(a). Under subsection 3(c), a court considers only
conduct by the LLC member “relating to the limited liability
company business.” N.J.S.A. 42:2B-24(b)(3)(c). Thus, the
Legislature clearly did not intend that disagreements and
disputes among LLC members that bear no nexus to the LLC’s
business will justify a member’s expulsion under subsection
3(c).
Subsections 3(a) and 3(c) used different language to
describe the impact that the LLC member’s “conduct” must have on
the LLC in order to warrant expulsion. To disassociate an LLC
member from the LLC under subsection 3(a), a court must find
that the member’s wrongful conduct has “adversely and materially
affected” the company’s business. N.J.S.A. 42:2B-24(b)(3)(a).
18
That language suggests that to justify expulsion under
subsection 3(a), the member’s “wrongful conduct” must have
damaged the LLC’s business in the past. Ibid. In contrast,
subsection 3(c) did not mandate a finding that the LLC member’s
conduct has materially affected the business. N.J.S.A. 42:2B-
24(b)(3)(c). Under subsection 3(c), the court prospectively
analyzes the impact of that conduct on the LLC’s future.
Significantly, the Legislature did not authorize a court to
premise expulsion under subsection 3(c) on a finding that it
would be more challenging or complicated for other members to
run the business with the LLC member than without him. Nor does
the statute permit the LLC members to expel a member to avoid
sharing the LLC’s profits with that member. Instead, the
Legislature prescribed a stringent standard of prospective harm:
the LLC member’s conduct must be so disruptive that it is “not
reasonably practicable” to continue the business unless that
member is expelled. N.J.S.A. 42:2B-24(b)(3)(c).
Interpreting the statutory text, “[w]e ascribe to the
statutory words their ordinary meaning and significance[.]”
DiProspero v. Penn, 183 N.J. 477, 492 (2005) (citing Lane v.
Holderman, 23 N.J. 304, 313 (1957)). Black’s Law Dictionary
defines “reasonable” to mean “fair, proper or moderate under the
circumstances; sensible.” Black’s Law Dictionary 1456 (10th Ed.
2014). It defines “practicable” to denote “reasonably capable
19
of being accomplished; feasible in a particular situation.” Id.
at 1361. Thus, the pivotal language suggests that it must be
unfeasible, despite reasonable efforts, to keep the LLC
operating while the disputed member remains affiliated with it.
A review of other components of the LLCA statutory scheme
confirms that subsection 3(c) is not necessarily satisfied by
the mere existence of a conflict among LLC members. See In re
D.J.B., 216 N.J. 433, 440 (2014) (noting “[s]tatutes must also
‘be read in their entirety’”) (quoting Burnett v. Cty. of
Bergen, 198 N.J. 408, 421 (2009)). The LLCA’s default
provisions authorized majority rule in such matters as merger or
consolidation, day-to-day management, and wind-up of affairs of
an LLC, even if the LLC members failed to reach consensus on the
conduct of the business. N.J.S.A. 42:2B-20(b)(1), -27(a)(1), -
50(a). Consequently, disputes among LLC members on most issues
relating to their business could be resolved by majority vote.
Ibid. Thus, it is possible that, despite an impasse among LLC
members regarding the company’s management, an LLC could be
effectively operated pursuant to the default provisions of the
LLCA.
In short, LLC members seeking to expel a fellow member
under subsection 3(c), or its counterpart in the RULLCA,
N.J.S.A. 42:2C-46(e)(3), are required to clear a high bar.
Neither provision authorizes a court to disassociate an LLC
20
member merely because there is a conflict. N.J.S.A. 42:2B-
24(b)(3)(c); N.J.S.A. 42:2C-46(e)(3). Instead, both provisions
require the court to evaluate the LLC member’s conduct relating
to the LLC, and assess whether the LLC can be managed
notwithstanding that conduct, in accordance with the terms of an
operating agreement or the default provisions of the statute.
Ibid.
In that inquiry, a trial court should consider the
following factors, among others that may be relevant to a
particular case: (1) the nature of the LLC member’s conduct
relating to the LLC’s business; (2) whether, with the LLC member
remaining a member, the entity may be managed so as to promote
the purposes for which it was formed; (3) whether the dispute
among the LLC members precludes them from working with one
another to pursue the LLC’s goals; (4) whether there is a
deadlock among the members; (5) whether, despite that deadlock,
members can make decisions on the management of the company,
pursuant to the operating agreement or in accordance with
applicable statutory provisions; (6) whether, due to the LLC’s
financial position, there is still a business to operate; and
(7) whether continuing the LLC, with the LLC member remaining a
member, is financially feasible.7
7 These factors are substantially based on a standard distilled
from case law in various jurisdictions by a Colorado appellate
21
A trial court considering an application to expel a member
under N.J.S.A. 42:2B-24(b)(3)(c) of the LLCA, or the analogous
“not reasonably practicable” standard of the RULLCA, N.J.S.A.
42:2C-46(e)(3), should conduct a case-specific analysis of the
record using those factors, and other considerations raised by
the record, with no requirement that all factors support
expulsion, and no single factor determining the outcome.
C.
In considering IE Test’s motion for partial summary
judgment, the trial court’s task was to view the evidential
materials presented in the light most favorable to the non-
moving party, and decide whether the record was “sufficient to
permit a rational factfinder to resolve the alleged disputed
issue in favor of the non-moving party.” Brill v. Guardian Life
Ins. Co. of Am., 142 N.J. 520, 540 (1995); see also R. 4:46-2(c)
(authorizing grant of summary judgment if record “show[s] that
court in Gagne v. Gagne, 338 P.3d 1152, 1159-60 (Colo. App.
2014). The court in Gagne construed a Colorado statute that
addressed dissolution of an LLC, not the expulsion of an LLC
member. That statute required, as a prerequisite to
dissolution, a finding that it was “not reasonably practicable
to carry on [an LLC’s] business.” Gagne, supra, 338 P.3d at
1159-60 (citing Colo. Rev. Stat. § 7-80-810(2) (2015)). Two of
the factors addressed in Gagne, whether the management of the
entity is unable or unwilling reasonably to permit or promote
the purposes for which the company was formed, and whether a
member or manager has engaged in misconduct, are inconsistent
with subsection 3(c) of the LLCA, and we accordingly amend those
factors to conform to our statute. Id. at 1160.
22
there is no genuine issue as to any material fact challenged and
that the moving party is entitled to a judgment or order as a
matter of law”). When the factors relevant to subsection 3(c)
are applied here, with the facts construed in favor of Carroll
in accordance with Rule 4:46-2(c), the record reveals genuine
issues of material fact that warrant the denial of partial
summary judgment and preclude the remedy of expulsion.
We first review the nature of Carroll’s conduct relating to
the LLC’s business. By his own admission, Carroll had no legal
right to recover his lost investment in Instrumentation
Engineering through his interest in IE Test. Nonetheless, he
sought a compensation arrangement that would accomplish that
goal. He unsuccessfully attempted to persuade Cupo and James to
sign an operating agreement to that effect, and thereby provoked
a distracting dispute among the LLC members that was never
resolved. The record, however, is devoid of evidence that
Carroll actively interfered with IE Test’s business, or that he
used the impasse over the compensation issue as an excuse to
undermine that business by failing to cooperate when needed. He
sought no role in the LLC’s management, and participated in only
one sales call on its behalf. There is no indication that he
undermined IE Test to employees, vendors, or clients. In short,
despite his insistence on generous compensation, Carroll
permitted the LLC to operate unimpeded. Based on the summary
23
judgment record, the first factor does not weigh in favor of a
finding that continuing IE Test’s business with Carroll
remaining an LLC member was “not reasonably practicable.”
Applying the second and third factors, the court considers
whether the entity may be managed with the LLC member remaining,
so as to promote the purposes for which it was formed, and
whether the dispute among the LLC members precludes them from
working with one another to pursue the LLC’s goals. As to those
issues, there are genuine issues of material fact in the record.
It appears that the business operated with increasing
revenue despite the deteriorating relationship between Carroll
and the other LLC members. Although IE Test maintains that
because it has no operating agreement, it has been unable to
secure a line of credit or bank financing, the proofs that it
submitted to the trial court did not substantiate that claim.
Moreover, Carroll contends that before the question was disputed
in court, he was never informed by Cupo or James that IE Test
had difficulty in obtaining a line of credit or financing.
Carroll offers to assist in the LLC’s financing, if necessary.
In short, the parties dispute whether Carroll’s insistence on
being compensated for his prior losses precluded the LLC
members’ common pursuit of IE Test’s goals, or prevented the
successful management of their business by obtaining necessary
financing.
24
The fourth and fifth factors require a determination of
whether there is a deadlock among the members and whether,
notwithstanding such a deadlock, members can make decisions on
the management of the company, pursuant to the operating
agreement or in accordance with applicable statutory provisions.
Those factors also weigh against the grant of partial summary
judgment in this case. IE Test has not claimed, let alone
established, that the three LLC members reached a deadlock
regarding the company’s management. Although IE Test contends
that there is an impasse over the terms of an operating
agreement, there is no evidence that Cupo and James proposed an
alternative draft after rejecting Carroll’s proposal. Moreover,
even Carroll’s failure to agree on a counterproposal would not,
without more, justify his expulsion as an LLC member; in
accordance with the LLCA, IE Test has been effectively managed
without an operating agreement. With all inferences drawn in
favor of Carroll, the record does not demonstrate that any
“deadlock” among the LLC members threatened IE Test’s business.
Thus, the fourth and fifth factors do not support the trial
court’s grant of partial summary judgment.
Under the sixth and seventh factors, the court considers
whether, due to the LLC’s financial position, there is still a
business to operate, and whether it is fundamentally feasible
for the company to continue in business with the LLC member
25
remaining a member. Those factors similarly weigh against the
trial court’s grant of summary judgment on the record of this
case. There is no dispute that when the trial court ruled on IE
Test’s motion, the business remained in operation; indeed, its
revenue evidently increased despite Carroll’s continued
involvement. Thus, the sixth and seventh factors do not favor
the remedy imposed by the trial court.
In sum, when the record is viewed in accordance with the
summary judgment standard of Rule 4:46-2(c), it does not support
the trial court’s finding that it was “not reasonably
practicable” to carry on IE Test’s business with Carroll
remaining an LLC member. N.J.S.A. 42:2B-24(b)(3)(c). IE Test
was not entitled to a judicial determination expelling Carroll
as an LLC member. Accordingly, the trial court’s grant of
partial summary judgment constituted error.
V.
The judgment of the Appellate Division is reversed, and the
matter is remanded to the trial court for proceedings consistent
with this opinion.
CHIEF JUSTICE RABNER; JUSTICES LaVECCHIA, ALBIN, FERNANDEZ-
VINA, and SOLOMON; and JUDGE CUFF (temporarily assigned) join in
JUSTICE PATTERSON’S OPINION.
26