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Gaines v. Luongo,

A-3600-09T3 (N.J. Super. App. Div. 2011) (Unpublished)

LIMITED LIABILITY COMPANIES; DISSOLUTION — If an operating agreement provides that the parties are to look to the company’s books to determine the value of in-kind distributions at dissolution, and the company’s books do not carry its clients as assets, then the clients of the dissolving company are not assets subject to distribution.

An accountant purchased a business to add to his own. The accountant then joined with another one and formed a limited liability company. He had a seventy-percent interest and the new accountant had a thirty-percent interest. However, the operating agreement specified that the two would share profits and losses equally. The agreement also provided that dissolution would be triggered by various events. Initially, the two worked only on the majority member’s clients because the minority member was bound by a restrictive covenant from his old firm. The minority member did, however, refer a large client to the majority member. The operating agreement contained a clause prohibiting the minority member, upon leaving the company, from competing with the firm for one year within a ten-mile radius and from soliciting firm clients or employees.

The minority member claimed that the parties mutually agreed to dissolve the company, with both retaining their clients. The majority member instead claimed that the minority member had formed a new practice without discussing dissolution and then cleaned out the jointly-maintained company accounts. The majority member never sought to enforce any of the provisions of the operating agreement, including the restrictive covenant. He did not try to terminate the minority member.

The majority member sued the minority member. The lower court bifurcated the trial into one phase concerning the issue of dissolution and the second concerning the remaining issues of winding up the company’s operations and distributing assets. The lower court found that the parties had, in fact, agreed to dissolve and, thus, the agreement’s restrictive covenant ceased to apply to the minority member. It found important the fact that each member took their respective files, and that the majority member waited months before filing an action. The lower court then held that the restrictive covenant ceased to be enforceable because there was no company with which the minority member could then compete. It then determined that clients were not assets subject to distribution because the company’s books did not carry clients as assets, and the agreement provided that the parties would look to the company’s books to determine the value of in kind distributions at dissolution.

On appeal, the Appellate Division affirmed for substantially the same reasons as the lower court used. It ruled that the record provided ample support for the lower court’s finding that the parties mutually agreed to dissolve the company. Similarly, the Court determined that the lower court properly concluded that the firm’s clients were not assets; they were never carried on the books as assets; no value was ever assigned to them on the balance sheet; and they were free to do business with either member or neither member.

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