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IE TEST, LLC, Plaintiff-Respondent,

v.
KENNETH CARROLL, Defendant-Appellant.
DOCKET NO. A-6159-12T4
SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION
Argued October 15, 2014
March 17, 2015
NOT FOR PUBLICATION WITHOUT THE
APPROVAL
OF
THE
APPELLATE
DIVISION
Before Judges Messano and Ostrer.
On appeal from the Superior Court of New
Jersey, Chancery Division, Essex County,
Docket No. C-0029-10.
Paul A. Sandars, III, argued the cause for
appellant (Lum, Drasco & Positan, L.L.C.,
attorneys; Mr. Sandars, of counsel; Scott E.
Reiser, on the brief).
Eric J. Szoke argued the cause for respondent
(Steven Robert Lehr, P.C., attorneys; Mr. Szoke,
on the brief).
PER CURIAM
This appeal requires us to construe a
provision of the Limited Liability Company Act,
N.J.S.A. 42:2B-1 to -70 (the LLCA), in
particular, N.J.S.A. 42:2B-24(b)(3), which
permits under certain circumstances the
expulsion of a member of a
Page 2
limited liability company (LLC) "by judicial
determination."1 A member may be expelled by
"judicial determination" if he "engaged in
wrongful conduct that adversely and materially
affected the [LLC's] business." N.J.S.A. 42:2B24(b)(3)(a). Additionally, and specifically at
issue here, the LLCA permits expulsion of a
member "by judicial determination" if "the
member engaged in conduct . . . which makes it
not reasonably practicable to carry on the

business with the member as a member of the

[LLC]." N.J.S.A. 42:2B-24(b)(3)(c).
Defendant Kenneth Carroll (Carroll)
appeals from 1) the Chancery Division's October
27, 2010 interlocutory order that granted partial
summary judgment to plaintiff, IE Test LLC,
and expelled Carroll from membership in the
LLC pursuant to subsection 3(c) of the LLCA;
and 2) the July 11, 2013 final judgment that
followed trial and awarded Carroll thirty-three
percent of the value of plaintiff, $227,497, plus
interest.2
Page 3
We discern the following facts from the
motion record in this case. Carroll and Patrick
Cupo were co-owners of Instrumentation
Engineering, LLC (IE), with Carroll owning a
fifty-one percent interest. The two had worked
together since the mid-1990s. IE offered
consulting, engineering, and manufacturing
services for various industries. Byron James
served as IE's business development manager,
and eventually its vice president.
Carroll testified in his deposition that,
by early 2009, IE was in "steep financial
difficulties." In February 2009, Cupo wrote to
Carroll expressing concern over the company's
future and recommended that IE reduce its staff
and relocate to a smaller facility. Cupo
suggested that "only a complete restructuring"
could "save the company from failure."
In late spring 2009, IE retained Strategic
Leadership LLC (SL), a consulting firm, to
evaluate the company. SL's June report
estimated IE's total assets were $636,704, and

projected its total liabilities to be $3,786,670,

which included $2,543,318 in debt owed to
Carroll personally, or to entities he wholly
owned.3 SL recommended that IE file for
bankruptcy. Cupo filed a Chapter 7 bankruptcy
petition on behalf of IE on July
Page 4
27, 2009, although he testified in his deposition
that Carroll actually made the decision.
According to Carroll:
[W]e realized that [IE] as it was currently
[structured] would . . . never be able to repay me. So
the belief was that we would start a new business
and through the profits of that new business, through
the successes of the new business, we would be
made whole from our losses from [IE].

On July 1, 2009, Cupo formed plaintiff-LLC; the

certificate of formation indicated Cupo was its
sole member. Cupo certified that on September
10, he agreed to sell James a 50% interest in
plaintiff. However, on September 28, 2009,
Carroll, Cupo and James signed an agreement
that read:
While we intend to agree upon and sign a formal
Operating Agreement with respect to [plaintiff] (the
"Company")[,] this is to acknowledge that from the
inception of the Company and continuing to the date
hereof, the Members of the Company and their LLC
Percentage Interests have been and are:
Kenneth Carroll 33%
Pat Cupo

34%

Byron James

33%

his transfer of that property to plaintiff, and

Cupo disputed the transfer ever occurred.
Cupo and James expected that Carroll's
day-to-day role in plaintiff's business would be
quite limited. He did not maintain an office at
plaintiff's facility, and Cupo and James stated
that he participated in only one sales call,
something Carroll acknowledged.
The parties' relationship began to
deteriorate within weeks. Cupo and James
attributed this to Carroll's "demand" during an
October 13, 2009 meeting that plaintiff's
operating agreement include a provision for
repayment of IE's debt to Carroll. Cupo certified
that Carroll demanded he and James "be
personally responsible for paying or
guaranteeing the payment of [IE] [d]ebts to
[Carroll], and that a provision . . . be
incorporated into the as-yet unwritten operating
agreement" providing for such payments.
There apparently was a meeting
between James and Carroll on October 28, and,
in an email to Cupo the next day, James
recounted Carroll's proposals regarding the IE
debt: either plaintiff would give him equal
distribution of profits, and some premium for the
prior debts; or, Carroll would receive a salary
Page 6
and equal distribution of profits, but no premium
on the IE debt. James testified that in an email
the next day, Cupo told Carroll that he no longer
wanted him in the business.4

In his answers to interrogatories, Carroll

claimed he purchased the assets and intellectual
property of IE from the bankruptcy trustee and
transferred them to plaintiff. The motion record
included a bill of sale from the bankruptcy
trustee to Carroll transferring certain property of
IE for the

Carroll testified, however, that plaintiffs

were reluctant to recognize his ownership
interest in plaintiff-LLC and simply refused to
enter into an operating agreement. Carrol also
testified that Cupo and James stopped "sharing
data" with him and neglected to include him in
the "sales pipelines."

Page 5

Things remained unresolved when, on

January 5, 2010, James and Cupo exchanged
emails regarding an impending meeting with
Carroll, the focus of which was to discuss an
amicable resolution of the problem that would
result in Carroll's disassociation as a member of

sum of $5000. In his deposition testimony,

however, Carroll acknowledged that he
possessed no documentary evidence indicating

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plaintiff-LLC. According to James, the emails

addressed "many concerns" regarding Carroll's
membership, including the lack of an operating
agreement and Carroll's demand for repayment
of the IE debt. When asked to identify his
"greatest concern," James testified at deposition
that it was "[c]lear[] . . . the three of us can't work
together and probably will never work together
in the future."
Similarly, Cupo testified:
We have three members of an LLC that have not
been able to come to any kind of

Page 7
agreement, and at the initial outset of [the]
disagreement lawyers were engaged by [Carroll's]
side. We don't feel that there is anything left for us
to go forward with. We tried many times to try and
settle that part; and there was no desire to do that
reasonably, so I don't see [how] there is any way to
come to an agreement right now.

James testified that plaintiff was harmed by the

members' inability to "come to an operating
agreement . . . [and] therefore . . . govern the
company."
Plaintiff filed its initial complaint on
January 25, 2010, seeking, among other relief,
Carroll's expulsion from the LLC. It is unclear
what, if anything, happened between that date
and June 2, 2010, when plaintiff filed its
amended complaint. The record fails to disclose
any further meetings or documents regarding the
controversy. Carroll answered on June 14, and
asserted a counterclaim and third-party
complaint against Cupo and James, alleging a
prior agreement that plaintiff and its members
would compensate Carroll for $2.5 million
dollars of IE's prior indebtedness. 5
On August 24, 2010, plaintiff moved for
partial summary judgment on count one of its
amended complaint that sought Carroll's
expulsion pursuant to N.J.S.A. 42:2B-24(b)(3).
Page 8
Carroll cross-moved for summary judgment on
September 27, 2010, seeking dismissal of
plaintiff's complaint and counsel fees pursuant

to New Jersey's frivolous litigation statute,

N.J.S.A. 2A:15-59.1.
In support of plaintiff's motion, Cupo
additionally certified that "[t]he absence of an
operating agreement ha[d] prevented [plaintiff]
from securing a bank line of credit, as the
potential lender advised . . . that a valid operating
agreement would be required as part of the loan
application process." Cupo claimed this inability
to obtain bank financing led to "less desirable
means of financing [plaintiff's] operations,"
including the extension of personal loans to the
company. He also certified that "material issues"
regarding the management of plaintiff remained
unresolved without an operating agreement,
including "issues of corporate governance,
succession, buyouts, and compensation."
James
filed
a
nearly-identical
certification. We do note that during his
deposition, James admitted that plaintiff had not
sought financing during the litigation and only
"had communications" with one bank in late
2009.
In support of his cross-motion, Carroll
submitted a letter from his counsel to plaintiff's
counsel, dated September 7, 2010, attaching a
proposed operating agreement. It is apparent
Page 9
from the letter that no proposed operating
agreement had ever been previously exchanged.
Plaintiff's counsel rejected the proposed
operating agreement on September 14, 2010,
specifically pointing to various provisions that
accorded Carroll significant veto power over
decision making and compensation, and
included waivers of any right to seek "partition"
of the LLC or judicial intervention.
Oral arguments on the motion and
cross-motion were heard by Judge Harriet
Farber Klein on October 22, 2010. Plaintiff
argued that Carroll's demand for repayment of
IE's debt amounted to wrongful conduct,
warranting expulsion under N.J.S.A. 42:2B24(b)(3)(a). Alternatively, counsel argued that
Carroll's conduct and the parties' inability to
consummate an operating agreement made it not
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"reasonably practicable" for the relationship to

continue. N.J.S.A. 42:2B-24(b)(3)(c).
Carroll argued there was no evidence
supporting the contention that he had interfered
with the business, noting that the company
earned a profit.6 Carroll also argued that, since
Cupo and James understood and agreed to his
limited role in the day-to-day operations of
plaintiff, Carroll's continued status
Page 10
as a member would not detrimentally affect the
operations of the company. Additionally, Carroll
argued that the inability to reach consensus on
the operating agreement was not per se grounds
for his expulsion, and plaintiff failed to
demonstrate that the lack of an operating
agreement prevented it from obtaining
financing.
In rendering her oral opinion
immediately following argument, Judge Klein
found that plaintiff failed to establish Carroll
engaged in wrongful conduct that adversely and
materially harmed plaintiff. N.J.S.A. 42:2B24(b)(3)(a). However, the judge concluded that,
pursuant to N.J.S.A. 42:2B-24(b)(3)(c), it was
not reasonably practicable to continue the
business with Carroll as a member. Judge Klein
noted that subsection (c) was "more liberal and
much broader [than subsection (a)] and . . . does
not require . . . that there ha[ve] been any adverse
or material effect on the company's business."
She stated:
I think that in every sense of the word to allow this
to go on the way [Carroll] would like it to is not in
anyone's best interest . . . .
. . . [The parties] can't talk to each other. They can't
agree on anything and we all know that there will
be, it's not a possibility, it's a virtual certainty that
there will be situations where they will be required
to sign documents, and I'm not just talking about an
operating agreement. You

Page 11
have a 33 percent shareholder. There will be those
times when they have to concur and they have to
agree and we know that's not going to happen when

people really hate each other, where they dig in their

heels, and it's perverse.

She entered an order expelling Carroll from the

LLC. This appeal was timely-filed following the
valuation trial and entry of final judgment.
Before us, in essence, Carroll argues
that plaintiff's proofs were insufficient, because
the LLCA does not permit expulsion of a
member based upon speculative "future
disagreements or disputes between members."
Plaintiff counters by arguing that the judge's
findings and conclusions were amply supported
by the record, and the statute "does not prohibit
consideration of the potential for future conflict
. . . once a finding of existent conduct has been
made."7
We have considered these arguments in
light of the record and applicable legal
standards. We affirm.
The standards governing our review are
well-known. "An appellate court reviews an
order granting summary judgment in accordance
with the same standard as the motion judge."
Bhagat v. Bhagat, 217 N.J. 22, 38 (2014) (citing
W.J.A. v. D.A., 210
Page 12
N.J. 229, 237-38 (2012); Henry v. N.J. Dep't of
Human Servs., 204 N.J. 320, 330 (2010)). We
"must review the competent evidential materials
submitted by the parties to identify whether
there are genuine issues of material fact and, if
not, whether the moving party is entitled to
summary judgment as a matter of law." Ibid.
(citing Brill v. Guardian Life Ins. Co. of Am.,
142 N.J. 520, 540 (1995); R. 4:46-2(c)).
[A] determination whether there exists a "genuine
issue" of material fact that precludes summary
judgment requires the motion judge to consider
whether the competent evidential materials
presented, when viewed in the light most favorable
to the non-moving party, are sufficient to permit a
rational factfinder to resolve the alleged disputed
issue in favor of the non-moving party.
[Brill, supra, 142 N.J. at 540.]

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See also Ji v. Palmer, 333 N.J. Super. 451, 46364 (App. Div. 2000) (limiting our review to the
record that existed before the motion judge).
We then decide "whether the motion
judge's application of the law was correct." Atl.
Mut. Ins. Co. v. Hillside Bottling Co., 387 N.J.
Super. 224, 231 (App. Div.), certif. denied, 189
N.J. 104 (2006). In this regard, "[w]e review the
law de novo and owe no deference to the trial
court . . . if [it has] wrongly interpreted a statute."
Zabilowicz v. Kelsey, 200 N.J. 507, 512 (2009).
"The practical effect . . . is that neither
Page 13
the motion court nor an appellate court can
ignore the elements of the cause of action or the
evidential standard governing the cause of
action." Bhagat, supra, 217 N.J. at 38.
The only terms that define the nature
and quality of conduct by a member that justifies
judicial expulsion under subsection (b)(3)(c) are
found in the statutory language itself, i.e., the
member's conduct must "relat[e] to the limited
liability company business," and it must "make[]
it not reasonably practicable to carry on the
business with the member as a member."
N.J.S.A. 42:2B-24(b)(3)(c). The distinctions
between subsection (a) and (c) are obvious, and
those differences provide as overarching
framework that guides our interpretation.
As Judge Klein noted, the conduct that
permits a judicial expulsion of a member under
subsection (c) is "more liberal and much
broader" than that required under subsection (a).
A member could be expelled under subsection
(a) only if his conduct was "wrongful" and
actually harmed the LLC in a "adverse[] and
material[]" manner. N.J.S.A. 42:2B-24(b)(3)(a).
Subsection (c) on the other hand does
not require proof that the member committed
any wrongful conduct whatsoever. Additionally,
instead of requiring proof of a past event
adverse and material harm to the LLC
subsection (c) is
Page 14

forward-looking, requiring only proof that the

member's conduct makes it "not reasonably
practicable to carry on the business" if the
member remains. N.J.S.A. 42:2B-24(b)(3)(c)
(emphasis added). In order to reach a "judicial
determination" under subsection (c), the judge
must engage in predictive reasoning. The judge
must decide if the current conduct of the member
and the circumstances that resulted therefrom
will make continued operation of the business
reasonably impractical. In this regard, the statute
does not require a finding of complete
impracticality; it only requires that the continued
operation of the LLC with the member as a
member be "not reasonably practicable." Ibid.
The parties have directed us to some
unpublished decisions, but there are no reported
decisions in New Jersey interpreting subsection
(b)(3)(c) of the LLCA, which incorporates
verbatim the language of Section 601(6)(iii) of
the Uniform Limited Liability Company Act
(1996). As noted, the RULLCA adopted
virtually identical language, providing that a
member maybe expelled "by judicial order"
"because the person . . . has engaged, or is
engaging in conduct relating to the company's
activities which make it not reasonably
practicable to carry on the activities with the
person as a member[.]" Our research was unable
to locate a reported decision interpreting this
provision
Page 15
from any of our sister states which adopted
verbatim the language of the Uniform Acts.
The LLCA and the RULLCA, however,
also permit the judicial dissolution of an LLC
"whenever it is not reasonably practicable to
carry on the business in conformity with an
operating agreement." N.J.S.A. 42:2B-49. See
also N.J.S.A. 42:2C-48(a)(4)(b) (permitting
judicial dissolution if "it is not reasonably
practicable to carry on the company's activities
in conformity with one or both of the certificate
of formation and the operating agreement").8 In
the context of a judicial dissolution, it will no
longer be "reasonably practicable to carry on the
business of the LLC" when "the LLC's
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management has become so dysfunctional or its

business purpose so thwarted that it is no longer
practicable to operate the business, such as in the
case of a voting deadlock of where the defined
purpose of
Page 16
the entity has become impossible to fulfill." 51
Am. Jur. 2d Limited Liability Companies 35
(2011).
In Gagne v. Gagne, 338 P.3d 1152, 1159
(Colo. Ct. App. 2014), the court construed for
the first time Colorado's LLC act, which
permitted judicial dissolution "if it is established
that it is not reasonably practicable to carry on
the business of the limited liability company in
conformity with the operating agreement of said
company, (quoting Colo. Rev. Stat. 7-80810(2)(2014)." The court construed the
language as requiring the party seeking
dissolution to "establish that the managers and
members of the company are unable to pursue
the purposes for which the company was formed
in a reasonable, sensible, and feasible manner."
Id. at 1160 (citation omitted). "[T]he test is
whether it is reasonably practicable to carry on
the business of the LLC, not whether it is
impossible to do so." Ibid. (citations omitted).
The Colorado court set forth "a number
of factors" to be considered, including but not
limited to:
(1) whether the management of the entity is unable
or unwilling reasonably to permit or promote the
purposes for which the company was formed; (2)
whether a member or manager has engaged in
misconduct; (3) whether the members have clearly
reached an inability to work with one another to
pursue the company's goals; (4) whether there is
deadlock between the members; (5) whether the
operating agreement provides a means of

Page 17
navigating around any such deadlock; (6) whether,
due to the company's financial position, there is still
a business to operate; and (7) whether continuing
the company is financially feasible.
[Ibid. (citations omitted).]

We find the analysis in Gagne

persuasive and, applied to the facts of this case,
we conclude that Judge Klein correctly granted
plaintiff partial summary judgment. The facts
demonstrate that discord among the parties arose
immediately after the LLC's formation. Within
two weeks of executing a rudimentary
agreement regarding shares of the LLC that
contained no reference to payment of IE debt,
Carroll admittedly insisted on repayment of the
debt, justifying this posture as acceptable
business negotiations among sophisticated
businessmen. Although he at one time asserted
Cupo and James agreed to the repayment and
were legally bound to do so, Carroll
subsequently admitted that he possessed "no
legally enforceable right to seek repayment."
Even if the genesis of the disagreement
arose from hard-edged negotiations, it is
undisputed that the relationship between Cupo,
James and Carroll never recovered from the
initial exchange. Prior to the filing of plaintiff's
summary judgment motion, no proposed
operating agreement was every circulated, and
there is no indication in the record that Carroll
ever
Page 18
altered his position that he was due
compensation for IE's debt, whether in the form
of a salary draw or in some "premium" payment
from the LLC's distributions. Under these
circumstances, the motion record supported
Judge Klein's decision that the continued
operation of plaintiff with Carroll as a member
was "not reasonably practicable" under N.J.S.A.
42:2B-24(b)(3)(c).
To the extent they are not otherwise
specifically addressed, the arguments raised by
Carroll lack sufficient merit to warrant
discussion in a written opinion. R. 2:113(e)(1)(E).
Affirmed.
I hereby certify that the foregoing is a true copy
of the original on file in my office.

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CLERK
DIVISION

OF

THE

APPELLATE

-------Footnotes:
The LLCA has since been repealed. See L.
2012, c. 50, (effective March 18, 2013) (enacting the
Revised Uniform Limited Liability Company Act
(the RULLCA), making the RULLCA applicable to
all LLCs formed after the legislation's effective date,
and replacing the LLCA with the RULLCA as to all
existing LLCs as of March 1, 2014). The provisions
at issue here remained essentially unchanged in the
RULLCA. See N.J.S.A. 42:2C-46.
1.

Carroll specifically does not challenge the

valuation of plaintiff-LLC or his share. The appeal is
limited, therefore, to only whether Carroll's expulsion
was proper.
2.

The debt consisted of: (1) a $525,000 loan

obtained and guaranteed by Carroll from Mellon
Bank; (2) $518,000 in accrued rent; and (3) a $1.5
million personal loan from Carroll to IE.
3.

4.

These emails are not in the record.

6.
The parties disputed the import of
plaintiff's profit and loss statement showing revenue
and expenses from the LLC's formation until June
2010. Plaintiff claimed the LLC lost money during
that time.
7.
Plaintiff's contention that Carroll failed to
raise certain aspects of his appellate argument before
Judge Klein lacks sufficient merit to warrant
discussion. R. 2:11-3(e)(1)(E).

In Sebring Associates v. Coyle, 347 N.J.

Super. 414, 428 (App. Div. 2002), we considered a
provision of the Uniform Partnership Law,
specifically N.J.S.A. 42:1-32(1)(d), which permitted
judicial dissolution of a partnership when a partner
"so conducts himself in matters relating to the
partnership business that it is not reasonably
practicable to carry on the business in partnership
with him[.]" We found that the partner's "failure to
respond to cash calls" violated provisions of the
partnership agreement and also justified dissolution
under this provision, as well as N.J.S.A. 42:32(1)(c),
which permits dissolution when a partner's conduct
"affect[ed] prejudicially" the conduct of the business.
Id. at 430.
8.

--------

5.
By a stipulation of dismissal with
prejudice entered on August 23, 2010, the parties
agreed to dismiss Carroll's counterclaim and thirdparty complaint.

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