Hanlon Niemann Blog | A Freehold, New Jersey Law Firm

By Fredrick P. Niemann, Esq., NJ LLC Attorney
                              
 
How to perfect a security interest in an LLC membership interest depends on whether the membership interests are certificated (evidenced by certificates).

If the interests are certificated and the LLC has “opted in” to have UCC Article 8 apply to the membership interests in the operating agreement, then the best way for the secured party to perfect its interest is through “control” of the interest by taking possession of the certificate.  The secured party can also perfect against certificated membership interests by filing a UCC financing statement (UCC-1) against the member with respect to the interest, but if another secured party acquires control of the interest by taking possession of the certificate, the secured party with possession of the certificate will have priority, even if the financing statement was filed before the other secured party acquired control.  Many secured parties perfect a security interest in certificated membership interests by both methods, taking possession of the certificate and filing a financing statement.  In many financings, the lender requires that the LLC membership interests be certificated and that the LLC opt in to Article 8.

If the interests are not certificated, they are usually treated as general intangibles, meaning that the secured party must perfect by filing a financing statement against the member with respect to the interest.  Note that, if the membership interests are later certificated and the LLC opts in to Article 8, and another secured party perfects a security interest not certificated at the time the original secured party filed its financing statement.  Therefore, you will want a covenant in your security agreement that the membership interests cannot become certificated (nor can the LLC opt in to Article with the secured party’s consent. 

For more information regarding Security Interests in a LLC, please contact Fredrick P. Niemann, Esq. toll-free at (888) 800-7442 or email him at fniemann@hnlawfirm.com for a low cost consultation.  For further information, go to http://www.youtube.com/user/NJBusinessLaw#p/search/0/pKIalQAdprY to learn more.

By: Fredrick P. Niemann, Esq.
         
Convinced that the economy will improve sometime again, you decide it’s time to take the plunge and buy a business as an investment. As the saying goes, buy low and (hope to) sell high.  In such ventures, one of the earliest and most important decisions concerns which type of ownership entity is best suited for raising capital and securing the financing to fund the acquisition or improvement of the business.

There is an extensive array of possible forms of ownership.  They include individual ownership, tenancy in common, joint venture, general partnership, limited liability, limited partnership, corporation, S Corporation, limited liability company (LLC).

Here is a brief summary of the most common types of ownership entities:

Outright Ownership

Simply holding the business in the name of an individual buyer gives maximum control and flexibility in calling all the shots, assuming the individual has the financial resources to go it alone in making the investment.  In this situation, having adequate liability insurance should be a high priority.

Joint Ownership

Married couples especially may like the option of joint ownership.  When one spouse dies, the property can pass directly to the surviving spouse, avoiding the expense and time involved in going through probate.  Of course, the other side of the same coin is that the business cannot be inherited by another heir when a spouse dies.

General Partnership

Using a collection of partners increases buying power and, with it the range of properties that be bought.  As with any general partnership, there may arise some discord and disagreement among the partners concerning all manner of decisions that need to be made, and each partner’s personal assets could be at risk to satisfy partnership debts.

Limited Partnerships

The legal statues of limited partners may appeal to some real estate investors.   Limited partners have no say in the management of partnership assets, but they also have potential liability only for any notes they sign.  Any real estate losses are allocated to the limited partners, for tax purposes.

Limited Liability Companies (LLC’s)

An LLC offers some of the best features from all of the possible choices.  An LLC member benefits from the “pass through” of any income or loss from the real estate to his or her tax return, LLC members also enjoy the same kind of limited liability that a corporation’s shareholders have, thus safeguarding their other personal assets.

Any determination of this kind should always involve careful balancing of the specific competing tax, financing, and legal attributes that characterize each entity.  What is otherwise suitable from a legal standpoint is often a nonstarter from a tax prospective, or vice versa.  Given the sums of money that can be in play, prospective investors are well advised to spend some additional money on professional advice when choosing the ownership vehicle as they take on the role of a new business ownership.

For information on NJ partnerships, please go to http://www.youtube.com/user/NJBusinessLaw#p/u/12/GECCmnmbcNY. For further information contact Fredrick P. Niemann, Esq. at (888) 800-7442 or email him at fniemann@hnlawfirm.com

By Fredrick P. Niemann, a New Jersey Shareholder Attorney

Many New Jersey Corporations are considered “Closely-Held” Corporations. These types of corporations consist of a small amount of owners or shareholders, sometimes family members, who work together to run the business. Usually these corporations run smoothly, but unfortunately conflicts sometimes arise and situations develop where shareholders disagree on certain issues. As most are aware, the majority shareholder has the right to make the final decision related to the business.

What many are not aware of is that the majority shareholder may not make decisions that benefit themselves at the detriment or exclusion of the minority shareholders. This is due to what lawyers call the “Fiduciary Duty of Loyalty” that the majority shareholder owes to minority shareholders. This duty is placed on all majority shareholders and requires them to act in the best interests of the corporation. This of course encompasses all of the shareholders, including the minority shareholders. All transactions entered into by the majority shareholder on behalf of the corporation must meet a test of objective fairness. If a minority shareholder challenges a corporate decision, the court will look to the objective fairness of the decision to decide whether majority shareholder was indeed living up to their fiduciary duty of loyalty. If the majority shareholder breaches this duty to minority shareholders, courts may award minority shareholders damages or, if it’s not too late, tell the majority shareholder they cannot act a certain way in a specific transaction.

Simply because you are a minority shareholder does not mean that the majority shareholder is entitled to take advantage of you in your closely-held corporation. Majority shareholders owe a fiduciary duty of loyalty to the minority shareholders within the corporation and New Jersey Courts will make sure this duty is followed. Please contact Fredrick P. Niemann, Esq. an experienced NJ Shareholder Attorney if you have any questions regarding shareholder rights or the fiduciary duty of loyalty. Mr. Niemann can be reached at 732-863-9900 or by email at fniemann@hnlawfirm.com. He would be happy to meet with you to answer any questions you may have.  For more valuable information, go to http://www.youtube.com/user/NJBusinessLaw#p/search/0/pKIalQAdprY to learn more.

By Fredrick P. Niemann, Esq., a NJ Shareholders Attorney

Closely-held corporations have a small number of shareholders who comprise the ownership of the business. Minority shareholders are those who own less than 50% of the shares and therefore are unable to dictate business decisions by themselves, something a majority shareholder can do. However, despite not solely being able to indicate how they want the corporation to be run, minority shareholders in New Jersey do have rights, mainly the right not to be “oppressed” by majority shareholders.

An oppressed minority shareholder is one who does not get along with the majority shareholders of the corporation, yet upon request to be bought out by the other shareholders, is denied. This essentially leaves the oppressed minority shareholder stuck owning shares in a corporation that they do not have a voice in and do not wish to be in. New Jersey has a specific statute pertaining to oppressed minority shareholder. The statute states that corporations and majority shareholders may not act in a manner that is detrimental to the interests of the oppressed and minority shareholders. Oppression has been defined as an act directed at a minority shareholder personally that frustrates their reasonable expectations of the role they play in the management, operation, and other general affairs of the corporation.

Oppressed minority shareholders must show two things in order to obtain relief under New Jersey law. First, they must show misconduct on the part of the corporation and majority shareholders that amounts to oppression. The court will consider this on a case-by-case basis, since every situation is unique. Second, the minority shareholder must show the oppression is connected to harm suffered by them due to having their interests or reasonable expectations in the corporation hindered. Minority shareholder’s interests in the corporation not only include monetary interests, but non-monetary interests as well, such as having a voice in the operation of the business and direction of the corporation.

If you are a minority shareholder in a closely-held New Jersey corporation and think your interests are being oppressed, please contact Fredrick P. Niemann, Esq. today. Mr. Niemann is an experienced NJ Shareholders attorney and would be happy to assist you in your claim. He can be reached at 855-376-5291 or by email at fniemann@hnlawfirm.com. He looks forward to hearing from you.

By Fredrick P.Niemann, a NJ Corporate Lawyer

A buy-sell agreement is one between shareholders of a corporation that states terms and conditions of the sale of a departing individual’s shares in the corporation.   These agreements outline specifics such as a price for the departing member’s interest in the corporation, a purchaser for the shares, and the cash for funding the purchase. By agreeing to these terms beforehand, shareholders avoid many of the controversial issues that often arise when a member departs from a corporation and there is no buy-sell agreement in place. These agreements thus provide for not only a less-burdensome sale of interest for departing shareholders, but also a smoother transition for the remaining shareholders as well.

There are two main types of buy-sell agreements. A “redemption” buy-sell agreement is one in which the corporation, as an entity, purchases the shares of the departing member. A “cross-purchase” buy-sell agreement, on the other hand, is one in which the other shareholders personally acquire the shares of the departing members. The corporation as an entity is not involved in a cross-purchase agreement. Hybrid agreements also exist which combine the elements of the two main types.

There are numerous benefits to a buy-sell agreement for shareholders and corporations. By guaranteeing and naming a purchaser for the departing shareholder’s shares, the individual does not have to scramble to find someone to buy them. These agreements also assure the heirs of a deceased shareholder will be given a fair price for the interest in the corporation. Buy-sell agreements can also establish the value of the corporation for estate tax purposes, therefore the fair market value does not have to be determined and there will be no dispute as to the value of the shares between the buyer and seller. By providing the funding for the purchase price, buy-sell agreements allow those involved in the transaction to avoid other unknown financial methods that may be more complicated and not provide instant liquidity for the seller. By guaranteeing continued ownership of the shares, they also assure the remaining shareholders and anyone else involved with the corporation that business will continue to operate as usual and avoid any interruptions a dispute over the transfer would have caused.

As mentioned, buy-sell agreements can establish the value of a corporation for tax purposes. However, the government will defer to such a value only if three strict requirements are followed:
I. The buy-sell agreement must be a bonafied business agreement.
II. The terms of the buy-sell agreement must be comparable to other buy-sell agreements that non-parties have entered into.
III. The buy-sell agreement must clearly not be an attempt to transfer shares to family members for less than full value.

A properly drafted buy-sell agreement is key to future planning for your corporation in New Jersey.  When written correctly, they can assure the successful transfer of your corporation while minimizing the disputes typically involved in the transfer of shares of a departing member. If you have an questions regarding the benefits of a buy-sell agreement or would like to talk about planning for the future of your corporation, please call Fredrick P. Niemann, Esq. toll-free at 732-863-990 or email him at fniemann@hnlawfirm.com. He welcomes all of your inquiries and would be happy to assist you with your NJ corporate matter.  For additional information, please go to http://www.youtube.com/user/NJBusinessLaw#p/search/0/ZWx2P0MQWwA to learn more.

By Fredrick P. Niemann, a NJ Parnership Law Attorney

When people create a corporation, limited liability company, or limited partnership as their business, they often do so to try and avoid personal liability. Generally, an owner, shareholder, or partner can’t be held personally liable for actions made by the company. One exception to this is the principle of “piercing the corporate veil”, which means that someone involved with the business can be held personally liable if the Court finds the business is not kept entirely separate from the person’s personal life. Until recently,  piercing the corporate veil principle applied only to corporations and LLCs, but the New Jersey Court of Appeals has stated otherwise.

In a recent case, the NJ State Appeals court extended the principle of piercing the corporate veil to limited partnerships, meaning that if it finds certain conditions are present, the limited partners CAN be held personally liable. New Jersey law creates a “safe harbor” for general partners, shareholders, etc. The Court stated that personal liability comes when a partner exceeds this safe harbor. Similar to all veil-piercing cases, the plaintiff must show that the partners co-mingled funds or some other evidence that the limited partnership was not truly separate from the partners personal accounts. The NJ Courts also allow piercing if a party can show the partnership was created for fraudulent purposes. This is not just applicable to general partners, but limited partners as well if a plaintiff can show that the limited partner actually dominated the partnership and used it in furtherance of injustice or fraud.

Keeping your business and personal life separate are key to avoiding personal liability. An experienced partnership law attorney can teach you the keys to avoiding personal liability for your partnership.  Please call Fredrick P. Niemann, Esq., a knowledgeable New Jersey partnership lawyer, today at 855-376-8291 or email him at fniemann@hnlawfirm.com. He looks forward to hearing from you.

By: Christopher J. Hanlon, Esq.

New Jersey law has recognized the remedy of “Piercing a Corporate Veil” for almost as long as the corporation has existed. Normally individuals or parent corporations that own a corporation are not responsible for the corporation’s debts. “Piercing” is the process of proving a claim related to a corporation’s debt which the corporation owners will be responsible for. The general rule related to a piercing claim is that a court will look at various factors, “including whether or not the company is grossly undercapitalized, the day to day involvement of the company’s directors, officers and personnel,” or whether personnel from affiliates operate within an LLC without failing to distinguish between the corporate entities. Courts will also consider whether the company fails to observe corporate formalities, pays no dividends, is insolvent, lacks corporate records, or is merely a façade for an individual’s or parent company’s operations.

In a recent unreported decision handed down by the Appellate Division of the State of New Jersey, Brown Hill Morgan v. Lehrer, this Appellate Panel applied the doctrine of piercing the corporate veil to a limited liability company. The Court concluded “we can perceive no reason in logic or policy why the principles should not be fully applicable in the context of a limited liability company…”

If such a claim is made, the parties seeking to pierce the corporate veil have the burden of establishing that the corporate forum should be disregarded. A careful study of the New Jersey doctrine related to piercing the corporate veil indicates that experts on this subject matter have rendered the opinion that the cases are inconsistent, and quite often the result will depend upon the particular trial judge’s sense of fairness.

Despite this ambiguity in the law, certain rules can be relied upon to assist those who operate with an LLC in maintaining the protections afforded by that corporate structure (which is probably the sole if not the primary purpose of forming an LLC and operating under its structure in the first place).

Careful attention should be made to the corporate structure and to the positions held by the respective representatives of the LLC. Members and managing members should pay careful attention to the use of job titles (e.g., “member” or “managing member”). Documents (checking accounts, business cards, letterhead, designations on contracts) should be carefully attended to and used. If various properties are owned by various entities but managed by affiliated groups all involved personnel should pay careful attention to their respective titles, and most important, never never never comingle funds or fail to operate in a way that separate corporate identities are acknowledged and maintained. For example, one affiliate should never pay the financial obligation of another. That type of behavior could lead to the “well intended” LLC becoming responsible for the debts of the less solvent affiliate. Careful attention should be paid to the operating agreement which governs the LLC. Required meetings (perhaps annual – if so provided for in the operating agreement) should be conducted. Minutes should be maintained. Files should be “papered” and attention should be paid to details related to the maintenance of separate identities.

Generally the purpose of operating under an LLC is to avoid individual liability for the debts of the business properly operating within the confines of the LLC and to shield other assets. Maintaining that shield (or veil) requires more than just the initial formation and payment of the registration fee. One must operate carefully within the veil to maintain the veil.

Justices place burden of proof on employers

The Supreme Court enhanced the ability of older workers to bring job discrimination claims, in a decision that comes as the nation’s workforce is aging and many companies are downsizing and lying off workers.

By a 7-1 vote, the court ruled that when a company asserts layoffs of older workers that were based on factors other than the worker’s age, the company has the burden of proving those factors are valid.

The U.S. Equal Employment Opportunity (EEOC), which handles age complaints, reports that age claims have increased steadily over the past decade.  About 19,000 are filed annually.

Lawyers who represent employees cheered the decision, as business groups termed it a disappointment.  “Any other result would have made it virtually impossible for employees to successfully challenge (seemingly) neutral corporate policies… such as reductions-in-force… that some employers have used to target older workers”, said Fredrick P. Niemann, Esq., an elder law attorney in Freehold, NJ.

Employers can defend themselves by showing that the lopsided impact was based on “reasonable factors” other than age, such as performance criteria or needed skills.  The question was whether the employer bears the burden of proving that a policy was based on such non-age factors, or whether it is up to the worker to prove the factors were illegitimate.

Who wins or loses often hangs on who has the burden of proof.

Thursday’s dispute traced to the mid-1990s and the end of the Cold War.  Knolls Atomic Power Laboratory in Upstate New York, which had helped maintain nuclear-powered warships, was forced to scale back.  About 100 workers took a buyout offer, and 31 others were laid off.  Thirty of those laid off were at least 40 years old.  Clifford Meacham was among those who alleged that the layoffs were aimed at older employees.

Knolls had said they were based on objective factors such as performance, flexibility and critical skills.  Meacham won a jury verdict, but the U.S. Court of Appeals for the 2nd Circuit eventually ruled Meacham had not proven that Knolls’ justification was invalid.

In an opinion by Justice David Souter, the high court reversed based on the standard of proof used.  He said the act’s text and structure put the burden of proof on employers.

“There is no denying that putting employers to the work of persuading (judges) that their choices are reasonable makes it harder and costlier to defend” various policies, Souter wrote.  He added, however, that Congress “set the balance where it is” and that those who object to that interpretation should take it up with Congress.

The court adopted the position of the EEOC, which had sided with Meacham.  Justice Clarence Thomas was the lone dissenter.  Thomas, who was chairman of the EEOC during the Reagan administration, said he did not think the law extends to coverage for policies that do not directly discriminate.

Justice Stephen Breyer took no part in the ruling.

New Jersey courts have long sought to protect the right and ability of a person “to pursue one’s own business, calling or occupation free from undue influence or molestation.”  In the latter part of the 19th century, the courts recognized that a “wrongful and malicious combination to ruin a man in his trade may be ground for [legal action].”  Similarly, in a line of cases spanning the middle of the 20th century, New Jersey courts protected the rights of real estate brokers whose clients surreptitiously cut them out of a transaction to avoid paying a brokerage commission.  The courts have continued their oversight of business dealings through the present, and now call this an action for tortuous interference.

Tortious Interference With Contract
There are two separate causes of action for tortuous interference:  tortious interference with contract and tortious interference with prospective economic advantage.  The primary distinction between the two torts is the existence of a contract.  Each tort results from the need, or society’s desire, to protect certain types of business relationships.

To establish a claim for tortious interference with contractual relations, a plaintiff must prove: (1) actual interference with a contract; (2) that the interference was inflicted intentionally by a defendant who is not a party to the contract; (3) that the interference was without justification; and (4) that the interference caused damage.

To have acted “intentionally”, a client must have known of the contract,” but cannot have been a party to that contract.  Thus, this tort does not redress a breach of contract.  Rather, this tort addresses the separate injury caused by a third party inducing the breach.  Viewed from the perspective of plaintiff’s counsel, having a claim against party B for inducing that breach provides two potential pockets from which to recover.

The law governing this tort is relatively straightforward, inasmuch as the protected relationship between the parties is defined by contract.

Tortious Interference 
To prevail on a claim for tortious interference with prospective economic advantage, a plaintiff must prove: a reasonable expectation of advantage from a prospective contractual or economic relationship; that the defendant interfered with this advantage intentionally and with malice – that is, without justification or excuse; that the interference caused the loss of the expected advantage; and that the injury caused damage.

New Jersey’s emphasis on adequate proof of a reasonable probability of success is consistent with the national trend.  Summing up the standard for determining the existence of a reasonable expectation of economic advantage, one group of commentators has concluded:

[I]t is vital for the plaintiff – when pursuing a claim – to make certain that there is a bona fide and reasonable expectancy of a continuing and reasonable expectancy of a continuing and prosperous relationship, not just the mere desire or possibility for one.  In a prospective advantage case, the plaintiff must demonstrate that expected benefit with a reasonable degree of specificity.  More than a mere hope or optimism is needed; although the law does not require reasonable probability of economic benefit from a valid prospective relationship.

Malice
New Jersey courts describe malice in a variety of ways.  First, the courts make clear that malice does not mean ill will.  Rather, malice means that the conduct was engaged in without justification or excuse.  In the typical business case, competition between the parties may constitute justification.  The courts, however, require more than the assertion of competition:  A defendant must have a legitimate motive, such as success in the marketplace, and employ legitimate means to obtain that goal.

In Ideal Dairy, the Appellate Division specifically addressed proof of malice when competition is invoked as a justification.  The Ideal Dairy court held that there was nothing wrong with targeting a competitor, and that targeting a competitor by offering lower prices was, in fact, “the very essence of competition.”

New Jersey case law does not permit a competitor to use wrongful means.  New Jersey courts use the term “malice” to describe conduct that is “injurious and transgressive of generally accepted standards of common morality or of law.”

The New Jersey courts have reduced this inquiry to whether the conduct was sanctioned by the “rules of the game.”  The rules of the game standard first appeared in 1957 in DiCristofaro v. Laurel Grove Memorial Park, and has become the standard for determining malice in tortious interference cases.  The DiCristofaro court found that a cause of action might lie based on allegations that the defendant cemetery owners imposed excessive charges and costs upon patrons who obtained monuments and memorials from someone other than the cemetery when, as a result, the outside company was prevented from realizing its “normal business expectancies.”

The tort of tortious interference with prospective economic advantage requires that business competitors act within the moral and ethical framework required by society, as well as their own industry.  The rules of the game depend on the customs, practices or code of ethics of the industry, which have typically been vetted time and again by what is necessary to achieve efficiency in the marketplace.

New Jersey courts, harkening back to the advice dispensed by all mothers in our society that “just because someone else is doing it doesn’t make it right,” require that conduct during the course of competition must not only be consistent with the rules of the game, it also must not be “fraudulent, dishonest, or illegal.”

The New Jersey courts have enumerated several examples of what may constitute fraudulent, dishonest or illegal conduct, but the list is by no means exhaustive.  For example, liability will ensue where a competitor uses “violence, fraud, intimidation, misrepresentation, criminal or cruel threats, and/or violations of the law.”  Moreover, the conduct complained of must be independently actionable.  For example, one of the issues analyzed by the Appellate Division in Ideal Dairy was whether the defendant had violated the antitrust laws through the use of extremely low pricing.

The Ideal Dairy court held that, absent a violation of the antitrust laws, a claim of tortious interference could not be premised on “extremely low, or unprofitable prices” because that conduct was not independently actionable.”

Conclusion
The painful irony is that you may not have done anything wrong, and may have been engaging in intense, but legitimate, competition in the marketplace, but you may, nonetheless, have to endure months of expensive discovery to prove that this conduct does not subject him/her to liability so goes the capitalist way.