Understanding the Superior Court’s Role in Rescinding LLC Dissolution Certificates

The recent published decision by the New Jersey Appellate Division in the case of Kartik Patel and Shiv Hospitality LLC v. New Jersey Department of the Treasury established that the trial courts – not the Department of Treasury (the “Department”) – possess the authority to rescind a certificate of dissolution and termination of an LLC. This decision highlights a critical practice pointer for legal counsel: when faced with an unintended or unauthorized dissolution, immediate action in Superior Court is essential to prevent undesirable consequences.

Case Background

The case centers around Shiv Hospitality LLC, which owns a Ramada Inn in Rutherford, New Jersey, along with a liquor license. The LLC underwent several changes in membership over the years, with the most recent transfer occurring in 2019 when Kartik Patel purchased the business. However, this transfer and resulting change of membership was not recorded with the Department. In 2020, a former member, Bhavesh Pujara, filed a certificate of dissolution and termination, which was accepted by the Department.

Upon discovering the dissolution, Patel’s counsel asked the Department to rescind the termination as having been unauthorized, but the Department declined, stating it lacked the statutory authority to do so. Consequently, the plaintiffs filed a complaint in the Law Division of the Superior Court, which transferred the matter seeking an order to compel action by a State agency to the Appellate Division.

Appellate Division’s Decision

In its opinion, the Appellate Division clarified that the New Jersey Uniform Limited Liability Act does not empower the Department to rescind dissolution certificates without a court order. However, the court recognized that trial courts have the jurisdiction to grant such relief if justified and with appropriate notice to interested parties. In doing so, the court decided that such actions to compel a State agency should not be brought in the Appellate Division.

The Appellate Division emphasized that trial courts are better suited for such matters than administrative bodies, as they can hold hearings to evaluate the merits of rescission requests. During these hearings, relevant facts and circumstances can be presented, and the court can issue findings of fact and conclusions of law. The court also noted the necessity of providing notice to those who might be materially affected by the rescission.

Significance to Legal Counsel

This decision underscores a crucial practice pointer for attorneys: in situations where an LLC’s dissolution is contested, counsel should immediately file an action in Superior Court rather than attempt to resolve the matter through administrative channels. Delaying court action can result in significant complications, including the potential jeopardy of assets such as liquor licenses, particularly if third parties act in reliance on the LLC’s termination.

Practical Steps

1. Immediate Court Filing: Upon learning of an unintended dissolution, attorneys should promptly file a civil action in the Law Division to seek an order rescinding the dissolution. This step is critical to prevent any lapse that could impact the LLC’s operations and assets.
2. Evidence Preparation: Prepare to present thorough evidence at the hearing, including sworn certifications from current and former LLC members and any other pertinent witnesses. This evidence will be vital in demonstrating the justification for rescission.
3. Notice to Interested Parties: Ensure that appropriate notice is served to all potentially affected parties, such as former members, creditors, and regulatory bodies. The court will determine who should receive notice based on the specifics of the case.
4. Equitable Considerations: Be prepared to argue the equitable grounds for rescission, including any inadvertence, miscommunication, or errors that led to the unauthorized dissolution. The court will evaluate these factors in deciding whether to grant relief.

Conclusion

The Patel v. Treasury decision highlights the necessity for swift judicial intervention when facing an unauthorized LLC dissolution. By promptly seeking court action, attorneys can better protect their client’s interests and avoid the adverse consequences that might arise from administrative delays. This case serves as a vital reminder of the importance of understanding the judicial avenues available for correcting corporate records and ensuring the continued viability of business entities.

Rich Israel advises clients on a wide variety of business and real estate matters. Having worked as in-house counsel for both privately held and publicly traded Fortune 500 companies, Rich is keenly able to view each transaction from his client’s perspective. Rich also helps clients identify, evaluate, and minimize risks inherent in each transaction and business operation (such as human resources procedures and the protection of intellectual property) while never losing sight of his client’s ultimate business objectives.