It is always wise to have the terms governing the owners’ of a business’s relations and the management of the business spelled out in writing, whether this be a shareholder agreement for a corporation, a partnership agreement for a partnership, or an operating agreement for a
Adoption of Operating Agreements Under the New Jersey Revised Uniform Limited Liability Company Act
The New Jersey Revised Uniform Limited Liability Company Act defines an operating agreement thus:
‘Operating agreement’ means the agreement, whether or not referred to as an operating agreement and whether oral, in a record, implied, or in any combination thereof, of all the members of a limited liability company, including a sole member, concerning the [affairs of the LLC and its owners]. The term includes the agreement as amended or restated.
There is a lot packed into that one paragraph, but the key is that an LLC operating agreement need not be in writing, and thus need not be signed, but that the existing members of the limited liability company must actually agree. The Act also provides that “A person that becomes a member of a limited liability company is deemed to assent to the operating agreement.” The interplay of these two sections of the New Jersey Uniform Revised Limited Liability Company Act form the crux of the dispute in the recently published decision by the Appellate Division of the New Jersey Superior Court in the case of Premier Physician Network, LLC vs. Maro.
Background: The Maro Case
In the Maro case, a group of doctors decided to merge their practices to capitalize on efficiencies by combining billing and administrative functions, and receive potentially higher insurance payments. They all signed a letter of intent, which was not binding. They also formed a limited liability company for the new practice, Premier Physician Network, LLC (known as “PPN”). There were negotiations over an LLC operating agreement, and a draft was circulated, and finally the majority of the doctors signed it.
However, four doctors did not sign the operating agreement. They all operated within the PPN practice for a little over a year, and then abruptly left the practice. Litigation in the Law Division of the Superior Court ensued. Essentially, the remaining doctors argued that the departing ones were bound by the operating agreement, and owed the practice damages for “shortfall amounts” because they left without giving the ninety day notice required under the Operating Agreement. The departing doctors denied that they were bound by the operating agreement and filed counterclaims for damages they claimed to have incurred.
All of the parties moved for summary judgment on the issue of whether the departing doctors were bound by the Operating Agreement. The trial judge ruled that they were bound by the LLC Operating Agreement even though they had not signed it because of the provision that provides that “A person that becomes a member of a limited liability company is deemed to assent to the operating agreement.”
The departing doctors appealed to the Appellate Division of the Superior Court.
The Appellate Division’s Opinion
The Appellate Division reversed the trial judge’s order In a published opinion.
The Appellate Division found that the trial judge had focused on the wrong section of the New Jersey Revised Uniform Limited Liability Company Act. While it is true that “A person that becomes a member of a limited liability company is deemed to assent to the operating agreement,” the Appellate Division explained that the trial judge had put the cart before the horse. Before an operating agreement can be enforced against a joining member, it must be agreed to by all the existing members. As the Act provides,
‘Operating agreement’ means the agreement, whether or not referred to as an operating agreement and whether oral, in a record, implied, or in any combination thereof, of all the members of a limited liability company, including a sole member, concerning the [affairs of the LLC and its owners]. The term includes the agreement as amended or restated.
Thus, before a joining member can be deemed to have adopted the operating agreement, two things must be true. First, the operating agreement must have been validly adopted, which means all of the existing members must have agreed to it. Second, the members sought to be deemed to be bound must be joining after the operating agreement was validly adopted, not members existing when it was.
Therefore, since the departing doctors were already existing members when the agreement was allegedly adopted, they cannot be deemed to have accepted it; in whatever form, they must have actually accepted it. In this case, therefore, before the court could enforce the agreement against the departing doctors it would have had to have found that the departing doctors had actually agreed to it. Although the fact that they did not sign the Operating Agreement does not mean they did not agree to it, there has to be evidence proving that they did agree before the LLC Operating Agreement could be enforced against them.
Therefore, the Appellate Division reversed the trial judge’s order and remanded the case for a trial on all of the issues, including whether or not the departing doctors had agreed to the Operating Agreement.
The Takeaways
There are several important takeaways from this opinion.
- First, under the New Jersey Revised Uniform Limited Liability Company Ac, a limited liability company operating agreement does not need to be signed to be “agreed to” and enforceable, but agreement is necessary (the better practice is to have a written signature).
- Second, a limited liability company’s operating agreement can be enforced against a new member joining the LLC because they are deemed to have accepted it (although, again, the better practice is to have a written signature).
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