A recent New Jersey appellate decision underscores the need for the leaders of limited liability companies (LLCs) to consider how to eliminate the risk of fraudulent, inaccurate or mistaken filings by former members and managers.

In Kartik Patel and SHIV Hospitality LLC v. New Jersey Department of Treasury, Division of Revenue and Enterprise Services, a Ramada Inn owner discovered his ownership had not been recorded with the Division of Revenue and Enterprise Services (Division). As a result, the members on file with the Division from prior to the 2019 sale remained as the members of record. In its decision on June 18, 2024, the court outlined the pathway to rescind a certificate of dissolution and termination of New Jersey LLCs under certain circumstances, including when the certificate has been filed without proper authorization or in error.

The case illustrates that LLC members and managers should take care to consider how to eliminate future risk of fraudulent, inaccurate, or mistaken filings by former members and managers. Even though the court made clear that the Division cannot and will not make substantive determinations about signatory authority, it is always best practice to maintain timely and accurate documents regarding current LLC members and authorized representatives with the Division.

It is always valuable to have ongoing conversations with counsel about how best to protect the remaining member(s) and entity from unauthorized or fraudulent acts by former members after a transfer of interest by such former member, which could be done through various mechanisms such as termination agreements, restrictive covenants, or simple conversations to clear up potential confusion, among other available options.

The appellate case involved Shiv Hospitality LLC, which was formed in 2003 to operate a Ramada Inn in Rutherford, NJ. During the course of its existence, membership changed several times. In 2019, all of the LLC’s then members transferred ownership of the LLC to Kartik Patel, individually, who then became the sole owner of the LLC. The assignment to Patel was not recorded with the Division of Revenue and Enterprise Services and as a result, the members on file with the Division from prior to the 2019 sale remained as the members of record. For reasons that remain unknown to all parties involved in the litigation, a former member (a member from before the 2019 sale and transfer to Patel) filed a certificate of dissolution and termination with the Division on December 15, 2020. Patel did not discover the filing until the spring of 2021, at which time his attorney submitted a letter to the Division requesting immediate reinstatement of the LLC since the certificate was filed by a former member without proper authorization or the knowledge or consent of Patel. The letter cited ongoing hardship in maintaining a liquor license previously issued to the LLC as the underlying reason for the request for immediate reinstatement of the LLC. The letter went unanswered by the Division.

Having failed to obtain the requested relief from the Division, Patel filed a complaint in lieu of prerogative writs in the Law Division against the Division seeking an order compelling the reinstatement of the LLC. On March 14, 2023, the trial court transferred the matter to the Appellate Division because Patel was seeking “a court order compelling action by a State agency.” Ultimately, Appellate Division Judge Jack M. Sabatino remanded the matter to the trial court, but not before providing a detailed discussion of the analysis that should be considered and applied by the trial court when faced with such an action.

Counsel for Patel, the Division, and the New Jersey State Bar Association, who participated as amicus curiae at the invitation of the Appellate Division, all agreed that there is no current statutory authority for the Division to rescind a certificate of dissolution and termination even if wrongly filed. Moreover, all of the parties also agreed that “there should be a clear avenue for the present members of an LLC to pursue recission of an LLC’s dissolution and termination on equitable grounds, in instances where the certificate has been filed improperly.” The Appellate Division agreed.

In its analysis, the Appellate Division remarked that although there are instances in which a certificate of correction may be filed, that option is limited to mere corrections of inaccurate information or defective signatures and the total recission of a certificate would go beyond the limits of a correction as set forth in N.J.S.A. 42:2c-23(a). Additionally, proper documentation of the 2019 transfer of ownership of the LLC to Patel with the Division alone would not be enough for the Division to unilaterally rescind the certificate absent a court order directing it to take such action. The court noted that the Division is not authorized to act as a substantive decision-maker, and therefore will not check Division records — even if it knows such records exist — to determine if the signatory to a filing actually has such authority.

In its decision to remand the instant matter to the trial court, the Appellate Division stated that there should be a clear path for recission of a certificate in instances where the certificate has been improperly filed and provided certain limited examples of what those instances might be – “inadvertence, miscommunication, confusion, computer error – or even possibly misconduct or fraud by the party who filed the certificate.” It should be noted that the court did not comment on the potential need for an avenue for recission in circumstances when the certificate is properly filed. The court recommended that the trial court hearing should be conducted on an expedited basis, and appropriate notice must be given prior to the hearing to those who may have relied on the filing including the LLC members (as listed in the certificate of formation and latest annual report), the registered agent, the Division, and potentially creditors, regulators (in the instant case for example, the Division of Alcoholic Beverage Control), tax authorities or any other interested parties.

As a final point, the Appellate Division recommended that the trial court, on remand of this matter, consider the following, among other things, during its analysis: (i) why Patel did not record the assignments in a timely manner, which the court notes would have prevented the prior member from terminating the LLC; (ii) the delay in Patel’s discovery of the termination; (iii) any potential impact the termination may have had, or currently has, on the liquor license or any other LLC assets; (iv) any motive the prior member had for filing the certificate; and (v) the existence of any third parties that would be impacted by the reinstatement of the LLC.

[View source.]