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Jerseyyork Apparel, LLC v. Platovsky

BER-C-314-07 (N.J. Super. Ch. Div. 2008) (Unpublished)

LIMITED LIABILITY COMPANIES; RECEIVERS — The standards for appointing a receiver for a limited liability company are the same as for a corporation.

Two limited liability companies (LLCs) were in the business of manufacturing, distributing, and selling apparel products bearing licensed trademarks and trade names. Class A members of both LLCs held sixty percent of the membership interests in each company. They sued two former officers of both LLCs, alleging breach of their employment agreement, breach of fiduciary duty, and breach of implied duty of good faith and fair dealing. The members alleged the officers became members of the LLCs based on their knowledge of the industry, but ultimately misled the companies as to projected sales of licensed apparel prior to the formation of the LLCs and as to the need for capital to acquire certain trademarks. The officers countered that the Class A members failed to heed their advice as to timely investments, and that their sales projections were revised in good faith. Ultimately, the parties were unsuccessful in reaching an agreement to terminate the joint venture after it became obvious the business was not going to succeed. The officers had wanted a severance package.

In response to the suit, the officers requested appointment of a liquidating receiver to take title and sell the assets of the two LLCs, wind up its affairs, and dissolve the entities. The lower court acknowledged that a court of equity has discretionary statutory power to appoint such a receiver, but pointed out that such discretion must be exercised rarely and sparingly because appointment of a receiver is an extraordinary remedy. It held that an action for appointment of a receiver must be based upon the following grounds: (a) the corporation (or, in this case, the LLC) is insolvent; (b) the corporation (LLC) has suspended its ordinary business for lack of funds; and (c) the business of the corporation (LLC) is being conducted at a great loss. Here, the Court found that none of these factors applied. It held there was little to no evidence that the LLCs lacked funds, were operating at a loss, or were being mismanaged by the Class A members. The Court found that the record fell fatally short of the imposing and persuasive proof necessary to establish that the LLCs lacked funds to continue in the ordinary course of business. Accordingly, it denied the officers’ application to appoint a receiver for the LLCs to liquidate the companies.

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