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Brown-Hill Morgan, LLC v. Lehrer

A-1069-08T3 (N.J. Super. App. Div. 2010) (Unpublished)

LIMITED LIABILITY COMPANIES; VEIL PIERCING —A limited liability company is subject to veil piercing and a court will do so if its member would be unjustly enriched if the company’s veil could not be pierced.

Two experienced real estate investors entered into a joint venture, organized as a limited liability company, to develop a property that had been purchased by the joint venture from one of the two. The redevelopment plan consisted of transforming an old, vacant warehouse into an upscale mixed-use building with luxury residential spaces, ground floor retail shops, and underground parking. The municipality in which the site was located had enacted a redevelopment plan for that area and also had designated the area as a historic preservation district. The redevelopment plan required that affordable housing units be set aside, necessarily resulting in lower expected profits. Additionally, the historic preservation designation required approval from a commission before any changes to the façade of the building could be made. Expensive alterations to the façade were necessary to make the project marketable and the costs of such alterations could not be recouped by the venture unless it obtained relief from the required set-aside.

The venture’s operating agreement, in relevant parts, provided that one of the investors would be responsible for the details of the construction and its financing and the other would be responsible for obtaining the needed relief. Each party retained a right to extend the agreement or to terminate it if the other party had not fulfilled his duties within a set period of time. The project was never completed and when this looming reality became evident to the member who had not previously owned the property, i.e., the new investor, he refused to advance any more money into the project since he had already satisfied his minimum capital contribution. Both parties brought suits requesting various outcomes that were largely ignored by the lower court. The Court concluded that, to prevent unjust enrichment, the new investor was entitled to reimbursement of his expenses. Despite the original owner entering into the joint venture through a limited liability company owned by his son and nephew, he was held to be personally liable on the judgment. The court ordered the judgment be secured by an equitable mortgage.

The first issue decided on appeal was whether the new investor was entitled to the reimbursement. The Appellate Division upheld the lower court’s decision and agreed with its reasoning that the operating agreement did not require the new investor to receive approval before incurring his expenses. Further, the original property owner-member was fully aware of the expenses as they mounted. The Court refused to read an implied requirement into the agreement that the new investor receive formal approval for expenses not already enumerated.

The second issue concerned the original property owner’s challenge that he could not be personally liable to the new investor for reimbursement since he was neither an actual party to the operating agreement nor had he received any benefit from the new investor’s expenses, and therefore had not been unjustly enriched. The basis of his argument was that neither of the individuals invested in their own name. Each used a wholly-owned limited liability company as the vehicle for their investment. The Court held that, in some instances, the facts may determine that a party who is not legally a party to an agreement may nonetheless be the party whose interests are directly benefitted by it, making it the party liable for any unjust enrichment. The original property owner had necessarily received a benefit in the amount of the expenses incurred by the new investor, as apportioned by the lower court. The fact that developments subsequent to the initiation of the lawsuit resulted in some of those expenses being unnecessary (i.e., the municipality no longer imposing the previous requirements), was of no consequence to the issue since, for policy reasons, intervening acts of an unrelated third party cannot relieve an obliged party.

The Court further disagreed with the original property owner’s argument that piercing the veil is inapplicable to limited liability companies generally, and is only a creature of corporate law. It held that equity demands that substance take priority over form, and in this case the new investor had no remedy at law otherwise available due to the undercapitalization of the original property owner’s limited liability company.

The Court further noted that the equitable lien on the property to secure the judgment was not in error since an express agreement is not necessary to impose such a device.

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