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Grand View Developers, Inc. v. Celentano

BER-C-297-05 (N.J. Super. Ch. Div. 2006) (Unpublished)

LIMITED LIABILITY COMPANIES; DEADLOCK—Instead of using the definition of “deadlock” in the corporate statutes, a court applies a reasonableness test to a dispute between members of a limited liability company that lasted more than two months without resolution.

A limited liability company was formed for the purpose of building and selling houses. Its members entered into a written operating agreement to govern the company’s business. There was a dispute between the two members, one of whom claimed the other wrested control of the limited liability company from him, and sued for dissolution. The members agreed to allow the sale of one of the houses provided that all of the net proceeds, after deducting the customary closing costs, were deposited in trust until their dispute was resolved. They also agreed that the cost of providing the buyer with a homeowner warranty policy would be considered a customary closing cost. The house was sold and the net proceeds were deposited into the closing attorney’s trust account. One of the members then demanded reimbursement of the cost of the homeowner warranty by producing a credit card statement from a company credit card. He also sought reimbursement for outstanding expenses to vendors which he claimed were incurred in connection with the sale of the property. The other member objected to the reimbursement of the homeowner warranty fee, claiming that there was no proof that the money was actually paid to the credit card company. The Court ordered the payment of the bill directly to the credit card company. It reasoned that the failure to do so would have negative implications on the member’s credit. The objecting member also challenged the other member’s request for reimbursement of the other expenses, claiming that there was no proof that those expenses were incurred in connection with the house they sold as opposed to another house that was in the process of construction. The Court agreed that the invoices did not clearly state if the expenses were related to the property just sold (in which case reimbursement from the escrow was proper) or if they were related to another property. Lastly, the parties also disagreed as to the manner of resolving their dispute with respect to the distribution of the net proceeds. One member claimed that their dispute should be resolved through binding arbitration. The operating agreement provided for arbitration if the members were “deadlocked with regard to any issue involving the LLC.” The operating agreement did not define the term “deadlock.” The Court did not apply the definition used in the corporate statute, as requested by one member, since it was inapplicable to a limited liability company. Rather, the Court used a reasonableness test. It found that the net proceeds had been held in the closing attorney’s trust account for more than two months without any resolution. Therefore, the Court determined that the members were deadlocked with respect to the distribution of the funds and ordered the matter to arbitration.

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