Wednesday, October 9, 2019

Appointment of Receiver for LLC Affirmed

Appointment of Receiver for LLC Affirmed

A recent New Jersey decision affirmed the appointment of a receiver for an LLC. However, the opinion does not make clear the status of the plaintiff in seeking the appointment of that receiver. Mastin v. 74-76 & 78-80 Carmer Avenue Associates, LLC, Docket No. A-5196-17T1, 2019 WL 4230696 (N.J. App. Div. Sept. 6, 2019).

Most of this decision is focused upon the efforts by Salvatore Milazzo to seek a constructive trust so as to protect his purported interests in connection with the appointment of a receiver and ultimate dissolution of this LLC. Based upon prior statements that he had made that he had no interest in the LLC, the court denied the remedy of a constructive trust. In doing so, it is well affirmed the trial court's grant of a receiver for the LLC.

Salvatore and his wife had three children, Thomas, Bartolomeo and Josephine. Thomas was at one time married to Mastin, the plaintiff in this action. In the course of their divorce, by court order his one-third interest in the LLC was transferred to Mastin in satisfaction of outstanding child support obligations. Mastin requested the receiver, who is charged to among other things manage the company and arrange for the sale of its assets, on the basis that Thomas’ siblings had, notwithstanding the transfer of his interest, operated the company for their own benefit and his with, apparently, no payments being made in support of his children.

[T]here is ample evidence (including Salvatore's admissions) that Josephine Russo and Salvatore Milazzo mismanaged and misappropriated the LLC's assets over the past two decades. The pair flouted the court order conveying Thomas Milazzo’s one-third interest in the LLC to plaintiff (for the benefit of his own children) by failing to make a single distribution to plaintiff, while wrongfully distributing LLC profits to Thomas. They also diverted at least $70,000 to Salvatore for his personal use. This gross mismanagement and abuse of the trust of the other members more than justified the judge’s appointment of a receiver. 2019 WL 4230696, *3.

All that is well and good, but there is an open question as to how we got here. Perhaps this is addressed in the decision of the trial court, which is not available on Westlaw. The question is what is Mastin’s (the plaintiff’s) status to seek the appointment of a receiver and the ultimate dissolution of the company. New Jersey’s current LLC Act, adopted in 2013, does not directly address the appointment of a receiver for an LLC. An action for judicial dissolution may be brought by a member. But in most circumstances, a transferee pursuant to an order of the court in connection with a divorce/child-support would be an assignee, not a substitute member. Generally speaking, an assignee would not have the capacity to seek the appointment of a receiver, and under the New Jersey LLC Act does not have the capacity to move for judicial dissolution.

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