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Manganaro v. Martin

A-3203-02T2 (N.J. Super. App. Div. 2004) (Unpublished)

LIMITED LIABILITY COMPANIES; PERSONAL LIABILITY—Absent gross negligence or willful misconduct, a limited liability company’s operating agreement may eliminate a member’s personal liability for failing to comply with its terms.

After being fired, an employee-owner sued his limited liability company, alleging that the company breached an implied covenant of good faith and fair dealing in connection with its operating agreement. The company alleged that the employee neither acted professionally nor carried out his duties according to the agreement, and that he was terminated due to “persistent failures to perform the material duties of [his] employment.” The employee testified that prior to signing the agreement, he told the company that he would work from his home on Fridays during the summer, and the company did not object. The company testified that the employee had taken a lot of time off. However, the employer admitted that it failed to notify its employee of the consequences of taking Fridays off during the summer. Likewise, the employee testified that he never received any complaints prior to his discharge.

The lower court held that the company had breached its implied covenant of good faith and fair dealing, and held the company’s other members jointly and severally liable. On appeal, the other members contended that the member-employee failed to show evidence of bad faith or dishonesty on their part or on the company’s part. The Appellate Division disagreed, holding that there was sufficient evidence to find a lack of good faith and fair dealing. Even though there was no direct evidence of such, circumstantial evidence will support a bad faith finding.

On the other hand, the Court reversed the lower court’s decision to hold the other members jointly and severally liable. The fired member-employee did not prosecute his case on the basis of personal liability, but rather on the basis of the company’s liability through its agents. New Jersey’s Limited Liability Company Act provides that no limited liability company member shall be personally liable for any debt or obligation as a result of being a member of the company. Furthermore, the Act provides that, absent gross negligence or willful misconduct, an operating agreement may eliminate a member’s personal liability for failing to comply with its terms. The company’s operating agreement also provided that a member would not be liable to any other member other than for fraud, gross negligence or an intentional breach of the agreement. Therefore, the Court found no evidence that any member was grossly negligent, acted fraudulently or intentionally breached the operating agreement. Consequently, the Court held that both the statute and the agreement protected these members from personal liability


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