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Teitlebaum v. Halleck St. Properties, LLC

A-6383-03T1 (N.J. Super. App. Div. 2006) (Unpublished)

LIMITED LIABILITY COMPANIES—A limited liability company is separate from its members, so a member cannot file a lis pendens against property owned by the company based upon a concern that another member will divert the proceeds of that property’s sale.

A limited liability company, with two equal members, owned a parcel of real property. One of the members entered into a contract to sell the property. The other member, fearful that the member who had executed the contract would not share the proceeds appropriately, filed suit in the Chancery Division and deposited a lis pendens with the County Register. A hearing on an order to show cause was held four days after the lis pendens was filed. At the conclusion of the hearing, the complaint was dismissed without prejudice to allow it to be refiled in the Law Division. The lis pendens was discharged. In the meantime, on the same day that the lis pendens was filed, but at least a few hours later, a closing took place. Nine months later, the disgruntled member filed suit in the Law Division asking that the transaction be undone. The lower court analyzed the situation as follows. The first question raised was whether the lis pendens, having been discharged by court order after the sale took place, was to be considered a nullity in the first place. The lower court concluded that such was the case. It then rejected the allegation by the disgruntled member that the other member did not have the authority to sell the property. The lower court also recognized that the owner of the property was the limited liability company, not its members. Therefore, the disgruntled member did not actually have an interest in real property. A lis pendens may only be filed in connection with a claim to real property, not in connection with a claim for money damages. Here, the underlying claim by one member against the other was that the member who had executed the sales agreement did so without proper authority and never shared the funds. Essentially, the disgruntled member was claiming that the other member had “stolen” the sales proceeds. Under any circumstances, whether the lis pendens was void by reason of it having been discharged , albeit after the closing, or should never have been filed in the first place because it was never related to a interest in real property, the disgruntled member lost. On appeal, the Appellate Division agreed with the lower court. Both the lower court and the Appellate Division recognized that each member of a member-managed limited liability company has the full authority to bind the company even though doing so might constitute a breach of the agreement between the members. In such cases, there is no recourse against the other party to the contract (in this case, the buyer) even though there may be recourse against the member who may have acted in violation of the limited liability company’s operating agreement.

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