Court Opinion

ID: 4572983
Source: CourtListenerOpinion
Date Created: 2020-10-05 14:08:23.631765+00
Date Added: 2024-06-11T09:28:04.005118
License: Public Domain

NOT FOR PUBLICATION WITHOUT THE
                               APPROVAL OF THE APPELLATE DIVISION
        This opinion shall not "constitute precedent or be binding upon any court." Although it is posted on the
     internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3.

                                                         SUPERIOR COURT OF NEW JERSEY
                                                         APPELLATE DIVISION
                                                         DOCKET NO. A-4651-18T4

GIORDANO DECANDIA, a/k/a
JORDAN DECANIDIA,

          Plaintiff-Appellant,

v.

ANTHONY T. RINALDI, LLC
d/b/a THE RINALDI GROUP, a
New Jersey Limited Liability
Company, and ANTHONY
RINALDI (as an individual and
member),

          Defendants/Third-Party
          Plaintiffs-Respondents,

v.

ELAINE DECANDIA,

     Third-Party Defendant.
_____________________________

                    Submitted September 14, 2020 – Decided October 5, 2020

                    Before Judges Hoffman and Suter.
            On appeal from the Superior Court of New Jersey,
            Chancery Division, Union County, Docket No. C-
            000124-17.

            Spinella Law Group, attorneys for appellant (Jack T.
            Spinella and Jessica M. Wilde, on the briefs).

            Baron Samson LLP, attorneys for respondents (Andrew
            Samson, of counsel and on the brief).

PER CURIAM

      Plaintiff appeals from the May 14, 2019 Chancery Division order entered

in favor of defendants, Anthony T. Rinaldi, LLC (the LLC), and its owner,

Anthony Rinaldi. In 2017, plaintiff sued defendants, alleging they wrongfully

deprived him of his ownership interest in the LLC, without compensation.

Following a bench trial, the trial judge denied plaintiff's claims for relief and

granted defendants' request for judgement on two counterclaims.           Having

considered the parties' contentions in light of the record and the applicabl e

principles of law, we affirm in part, and vacate in part. Specifically, we vacate

only the trial judge's determination that plaintiff's conduct constituted a breach

of the statutory duty of loyalty set forth in N.J.S.A. 42:2C-39.

                                       I

      We derive the following facts from the trial record. The LLC engages in

construction management and general contracting services, primarily in New

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Jersey and New York. Rinaldi formed the LLC in 2003. Plaintiff began working

for the LLC in 2011, signing a limited liability operating agreement on February

14, 2011 (the 2011 Agreement). This document amended the prior operating

agreement, which had designated Rinaldi "the sole Member and Chief Executive

Manager of the [LLC]." The 2011 Agreement provided that Rinaldi "has elected

to admit one additional Member, [p]laintiff," but also stated that Rinaldi "shall

continue to serve[] as the [LLC]'s only Manager and Chief Executive Manager

. . . ." Addressing management of the LLC, the 2011 Agreement provided:

             Members that are not Managers shall take no part
             whatsoever in the control, management, direction, or
             operation of the [LLC]'s affairs and shall have no power
             to bind the [LLC]. The Managers may from time to time
             seek advice from the Members, but they need not accept
             such advice, and at all times the Managers shall have
             the exclusive right to control and manage the [LLC].

      The 2011 Agreement included, as Exhibit C, a schedule labeled "Capital

Contributions," which allocated ninety percent ownership to Rinaldi and ten

percent ownership to plaintiff. The schedule included a note clarifying that

plaintiff's "ownership interest is performance based rather than through capital

contributions, and . . . shall be increased to, as incentive, [twenty percent] of the

net profits made on the business procured by him for the [LLC]." Plaintiff also

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received a corresponding certificate denoting his ten percent membership

interest.

      Rinaldi testified that when he hired plaintiff, the parties agreed plaintiff

would receive compensation in the form of a salary and "[ten] percent profit

sharing." According to Rinaldi, profit-sharing is a prevalent and customary

compensation mechanism within the commercial construction industry. The

LLC's comptroller likewise testified at trial that the parties advised her of

plaintiff's non-equity profit-sharing arrangement in 2011. The comptroller also

testified that she herself had a twenty percent profit-sharing arrangement with

the LLC and that plaintiff received the same deal, just with a lesser share.

      On September 25, 2013, the parties signed an amended operating

agreement (the 2013 Agreement), adding two other members and allocating to

them similar percentage interests in the LLC.        The Capital Contributions

schedule to the 2013 Agreement changed plaintiff's percentage in the LLC from

ten percent to twenty percent and noted plaintiff's "ownership interest is

performance based rather than through capital contribution, based upon his

abilities to procure and bring in business to the [LLC]." Plaintiff also received

a corresponding certificate denoting his twenty percent membership interest, and

the LLC voided the previously-issued certificate.

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      In 2015, plaintiff and Rinaldi began negotiating a buy-sell agreement that

would enable either Rinaldi or plaintiff to buy out the other's wife, in the event

one of them died. Rinaldi testified that the purpose of the buy-sell agreement

was to make plaintiff a twenty percent equity partner in the LLC. The parties

met to discuss the proposed agreement in July 2015. The initial draft stated

plaintiff would own twenty percent of the common stock of the LLC upon

signing the agreement. Plaintiff rejected these terms, believing he already

owned twenty percent of the LLC and thus the agreement granted him no

additional equity.

      On October 19, 2015, the parties met to review a revised draft of the buy-

sell agreement. Rinaldi and two other employees who attended the meeting all

testified that the purpose of the meeting was to discuss making plaintiff an equity

partner. The LLC's accountant, who was present at the meeting, testified that

the parties discussed the tax implications and financial liability associated with

becoming an equity partner. According to the accountant, plaintiff expressed

interest in "profits, not taxes" and wanted to avoid any personal liability on the

LLC's bonds.

      The discussions at this meeting then turned to other liabilities associated

with ownership. Rinaldi disclosed to plaintiff that the LLC was currently under

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criminal investigation by the Manhattan District Attorney's office, after the New

York Department of Buildings concluded that numerous safety violations caused

a death at a LLC construction site. Rinaldi and the LLC's comptroller, both

present at this meeting, testified that upon hearing of the safety violations and

criminal investigation, plaintiff grew concerned that his certificate might expose

him to criminal liability for the construction site death. In response, Rinaldi told

plaintiff that if the potential liability worried him, he should resign and return

his certificate to the LLC's lawyer. Plaintiff told Rinaldi that he did not have

the certificate with him at that time, but he would return it to the LLC's lawyer.

      Shortly after this meeting, plaintiff provided his membership certificate to

the LLC's attorney; however, at trial, plaintiff insisted that he did so because he

believed turning over the certificate was necessary to execute the buy-sell

agreement.    Plaintiff claimed he believed the parties would resolve their

differences over the agreement's terms and dropped off the certificate so it could

be properly notated and attached to the agreement. Plaintiff did not sign the

certificate or provide an explanatory writing. The parties never finalized the

buy-sell agreement, and plaintiff never reclaimed his certificate. Following the

surrender of his certificate, plaintiff received bonuses instead of the profit-

sharing compensation he received in the past.

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       Plaintiff and Rinaldi's relationship soured in March 2017, leading Rinaldi

to terminate plaintiff's employment with the LLC. According to plaintiff, on

March 21, 2017, his last day working at the LLC, Rinaldi and another employee

met with plaintiff and assured him they would "work out a buyout of [plaintiff']'s

membership interest in the [LLC]." Rinaldi denied making such a statement to

plaintiff.

       In 2016, the year before he left the LLC, plaintiff began discussions with

McGowan Builders (McGowan), a direct competitor of the LLC. McGowan

eventually offered plaintiff a job, and he signed an employment agreement with

the firm on April 28, 2017. Notably, in the employment agreement, plaintiff

confirmed he was not a "partner, stockholder, director, manager [or] member"

in "any business that competes with the business of" McGowan. Even before

signing this agreement, on his last day of employment with the LLC, plaintiff

forwarded to his wife a proposed budget prepared by the LLC as part of a bid to

provide construction management services to a firm called Silverback Properties

(Silverback). Plaintiff's wife then sent this budget to McGowan, which later

submitted its own competing bid to Silverback. Plaintiff thereafter met with

Silverback, unsuccessfully attempting to persuade the firm to accept McGowan's

bid.

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      On September 15, 2017, plaintiff filed a complaint against the LLC and

Rinaldi, seeking various forms of relief, including a declaration that plaintiff

had a twenty-percent ownership interest in the LLC, the appointment of a

custodian to protect plaintiff's ownership interest, an order requiring defendants

to purchase plaintiff's ownership interest, and an award of damages and

attorneys' fees. Plaintiff based his claims for relief on the following legal

theories: 1) minority member oppression, under N.J.S.A. 42:2C-48; 2) breach of

fiduciary duties; and 3) piercing the corporate veil. Defendants filed an answer,

which included affirmative defenses and counterclaims, as well as a third-party

complaint against plaintiff's wife. The counterclaims alleged 1) breach of the

common law duty of employee loyalty; 2) breach of duty of loyalty, pursuant to

N.J.S.A. 42:2C-39; and 3) defamation. The claims against plaintiff's wife were

dismissed before trial.

      The trial judge held a bench trial over various dates in February and March

2019. On May 14, 2019, the judge issued a twenty-one-page written opinion

accompanied by an order denying all of plaintiff's requests for relief.

Additionally, the order granted two of defendants' counterclaims, finding

plaintiff breached both the common law duty of employee loyalty as well as the

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                                        8
statutory duty of loyalty set forth in N.J.S.A. 42:2C-39; however, the order

denied defendants' defamation counterclaim.

      In the accompanying written decision, after discussing at length the

evidence and testimony presented at trial, the judge concluded that plaintiff did

not have an ownership stake in the LLC. Rather, the judge determined that

plaintiff was merely an employee who received additional compensation

through a profit-sharing arrangement. The judge found that plaintiff’s act of

turning over his certificates to the LLC's attorney "demonstrated his express will

to withdraw as a member," thus effecting his disassociation from the LLC under

N.J.S.A. 42:2C-46.

      Next, the trial judge invoked the doctrine of "unclean hands," as the basis

for rejecting plaintiff's claims of minority member oppression, breach of

fiduciary loyalty, and shareholder liability.    The judge found that plaintiff

sending the LLC's confidential information to his new employer placed him

"before the court with unclean hands," and therefore he could not recover in

equity. The judge also noted that she has the discretion to invoke the unclean

hands doctrine sua sponte.

      Finally, addressing defendants' counterclaims, the trial judge explained

that plaintiff transmitting the LLC's proposed budget for the Silverback bid to

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                                        9
McGowan constituted a breach of the common law duty of employee loyalty as

well as the statutory duty of loyalty owed by LLC members, under N.J.S.A.

42:2C-39; however, the judge found insufficient proof to award damages to

defendants on their counterclaims; as a result, she awarded "nominal damages

of $1.00." The judge also rejected defendants' counterclaim for defamation,

citing the absence of any "direct testimony of defamation."

      This appeal followed.

                                            II

      "Final determinations made by the trial court sitting in a non-jury case are

subject to a limited and well-established scope of review."        D'Agostino v.

Maldonado, 216 N.J. 168, 182 (2013) (quoting Seidman v. Clifton Sav. Bank,

S.L.A., 205 N.J. 150, 169 (2011)). "Findings by the trial judge are considered

binding on appeal when supported by adequate, substantial and credible

evidence." Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474,

484 (1974). Moreover, we only disturb the credibility determinations of the trial

judge if "convinced that they are so manifestly unsupported by or inconsistent

with the competent, relevant and reasonably credible evidence as to offend the

interests of justice." Metuchen Sav. Bank v. Pierini, 377 N.J. Super. 154, 161

(App. Div. 2005)(citation and internal quotation marks omitted). Moreover, we

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                                      10
defer to the trial court's credibility determinations because it "'hears the case,

sees and observes the witnesses, and hears them testify,' affording it 'a bett er

perspective than a reviewing court in evaluating the veracity of a witness.'"

Gnall v. Gnall, 222 N.J. 414, 428 (2015)(quoting Cesare v. Cesare, 154 N.J. 394,

412 (1998)).

      Plaintiff first argues the trial judge committed legal error in finding that

he "disassociated himself" from the LLC by turning over his shares to the LLC's

attorney. Plaintiff argues that, pursuant to N.J.S.A. 12A:8-304(c), the mere

delivery of his certificate to the LLC's attorney, without plaintiff indorsing the

certificate, cannot constitute legally competent evidence of his intent to transfer

his shares back to the LLC.

      Initially, we note it is not clear that N.J.S.A. 12A:8-304, which concerns

security certificates, is applicable to plaintiff's return of his profit-sharing

documents. Regardless, plaintiff's argument ignores section (d) of the statute, which

states, "against a transferor, a transfer is complete upon delivery." N.J.S.A. 12A:8-

304(d). Thus, plaintiff's delivery of the certificate to the LLC's attorney completed

the transfer of his profit-sharing interest, notwithstanding the lack of indorsement.

Pursuant to section (d), the absence of a necessary indorsement simply prevents a

transferee from becoming a "protected purchaser." N.J.S.A. 12A:8-303.

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                                        11
      While plaintiff's unendorsed surrender of his certificate prevented the LLC

from attaining protected purchaser status and allows plaintiff to challenge the

validity of the transfer, it did not render the transfer invalid. The trial judge, after

assessing the credibility of witnesses and weighing the evidence presented, found

that plaintiff's surrender of his certificate "demonstrated his express will to withdraw

as a member." Under N.J.S.A. 42:2C-46(a), a person becomes dissociated as a

member from a limited liability company when "[t]he company has notice of the

person's express will to withdraw as a member." N.J.S.A. 42:2C-46(a). Therefore,

plaintiff's surrender of his shares disassociated him from the LLC and validly

transferred his profit-sharing interest back to the LLC.

      The trial judge's decision turned on two key findings. First, the judge

found that plaintiff did not have an ownership interest in the LLC. While the

operating agreement and certificate denoted plaintiff owned a twenty-percent

membership interest, the judge found this referred to plaintiff's arrangement to

receive a twenty percent share of the business he brought in.               The judge

acknowledged there was evidence supporting both positions, but ultimately, the

judge's assessment of witness testimony and credibility revealed that plaintiff

relinquished whatever ownership interest he may have held in the LLC.

Specifically, the judge relied on the testimony of other employees , who stated

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plaintiff wanted profits instead of the increased tax burden and potential

criminal and financial liability associated with ownership. The judge also relied

on the fact that plaintiff did not indicate he had an ownership interest when filing

his taxes and balked at the idea of personally guaranteeing the LLC's credit and

bonds. Further, the operating agreement precluded plaintiff's participation in

management of the LLC and in fact, plaintiff was not involved in the

management. The judge also found plausible Rinaldi's explanation that he

referred to plaintiff as a partner to third parties only to enhance the LLC's stature.

We defer to the judge's finding here as it was supported by substantial evidence

and based on her assessment of the credibility of the evidence presented.

      The trial judge's second critical finding was that plaintiff's act of turning

over his certificates to the LLC's attorney "demonstrated his express will to

withdraw as a member." Under N.J.S.A. 42:2C-46(a), such an act constitutes an

event causing a person to be "dissociated as a member from a limited liability

company." Thus, the judge's conclusion that plaintiff dissociated from the LLC

turned on this factual finding. In her decision, the judge explained how her

assessment of the evidence and witness credibility led her to make this finding:

             Shortly after the October meeting [plaintiff] dropped
             off his shares at the office of the corporate attorney. He
             says this was to enable the shares to be notated and
             attached to the proposed agreement. At this point in

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                                        13
            time there was no agreement. Rinaldi believes he did it
            due to concerns regarding the criminal investigation.
            While his actions could be consistent with either point
            of view, the court finds the fact that [plaintiff] left no
            instructions and did not again inquire about the shares
            strongly supports the point of view that he was turning
            his shares in. He also represented to McGowan that he
            had no ownership in Rinaldi. He received a bonus, not
            a distribution in December 2015. The court finds
            [plaintiff] disassociated himself from the [LLC] as of
            the date he dropped the shares off. This demonstrated
            his express will to withdraw as a member.

      Again, we defer to the credibility determinations of the trial judge in

assessing the evidence and testimony presented. There was substantial evidence

supporting the finding that plaintiff expressed his intent to dissociate as a

member of the LLC, including testimony showing plaintiff sought to avoid

criminal liability, testimony that plaintiff turned in his membership certificate

after Rinaldi suggested he do so to effect his resignation, and evidence showing

plaintiff did not receive profit sharing compensation after he surrendered his

certificates. We discern no basis to disturb the judge's finding. We conclude

the trial judge's determination that plaintiff was not a part-owner of the LLC was

supported by substantial, credible evidence.

      Plaintiff next argues that, even if he did dissociate from the LLC when he

turned in his membership certificate, he did not lose his "economic rights" and

thus remains entitled to receive compensation for the fair value of his ownership

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                                       14
interest. As previously noted, the trial judge properly found that plaintiff did

not have an ownership interest in the LLC.          Because plaintiff retained no

compensable ownership interest upon his dissociation from the LLC, his

argument fails.

      Plaintiff further argues the trial judge misapplied the unclean hands

doctrine, which precluded the consideration of his equitable claims.            We

disagree.

      In order to recover in equity, a party "must be with clean hands." Heuer

v. Heuer, 152 N.J. 226, 238 (1998). The unclean hands doctrine provides, "a

court should not grant relief to one who is a wrongdoer with respect to the

subject matter in suit." Faustin v. Lewis, 85 N.J. 507, 511 (1981). However, there

are limits to the doctrine's application. Heuer, 152 N.J. at 238. For example,

the unclean hands doctrine "should not be used as punishment but to further the

advancement of right and justice." Pellitteri v. Pellitteri, 266 N.J. Super. 56, 65

(App. Div. 1993)(citing Heritage Bank, N.A. v. Ruh, 191 N.J. Super. 53, 71-72

(Ch. Div. 1983)). The doctrine:

            [D]oes not repel all sinners from courts of equity, nor does
            it apply to every unconscientious act or inequitable
            conduct on the part of the complainants. The inequity
            which deprives a suitor of a right to justice in a court of
            equity is not general iniquitous conduct unconnected with
            the act of the defendant which the complaining party states

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                                       15
             as his ground or cause of action; but it must be evil practice
             or wrong conduct in the particular matter or transaction in
             respect to which judicial protection or redress is sought.

             [Heuer, 152 N.J. at 238 (quoting Neubeck v. Neubeck,
             94 N.J. Eq. 167, 170 (E. & A. 1922)).]

"'It is the effect of the inequitable conduct on the total transaction which is

determinative whether the maxim shall or shall not be applied.'" Heuer, 152 N.J. at

238 (quoting Untermann v. Untermann, 19 N.J. 507, 518 (1955)).

      Applying the doctrine of unclean hands is within the court's discretion.

Borough of Princeton v. Bd. of Chosen Freeholders, 169 N.J. 135, 158 (2001). Trial

courts are permitted to invoke the doctrine sua sponte in order to further the interests

of justice and public policy. Trautwein v. Bozzo, 39 N.J. Super. 267, 268 (App. Div.

1956).

      Plaintiff asserts the court's application of the unclean hands doctrine was

inappropriate because there was no correlation between his wrongful conduct and

the underlying controversy, and because defendants suffered no injury.

      Here, the plaintiff's wrongful conduct was towards defendants, in that he

misappropriated the LLC's confidential information and provided it to a direct

competitor. This was not wrongful conduct towards an unrelated third party.

Instead, plaintiff's conduct derived directly from his employment relationship

with defendants and from their underlying employment dispute. Plaintiff also

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                                         16
contends defendants suffered no injury since McGowan failed to win the

contract despite having access to the LLC's confidential information while

preparing its competing bid. This argument lacks merit. The act of plaintiff

misappropriating the LLC's confidential information constituted a breach of

loyalty and an injury, notwithstanding the absence of provable damages. The

trial court recognized this in its award of nominal damages to defendants. We

are satisfied the trial judge properly applied the unclean hands doctrine in this

case.

        Finally, plaintiff challenges the trial court's determination that plaintiff

breached the statutory duty of loyalty, contrary to N.J.S.A. 42:2C-39, in granting

defendants' second counterclaim. Specifically, plaintiff asserts the statute only

imposes a duty of loyalty upon members of member-managed LLCs and on

managers of manager-managed LLCs. Plaintiff argues that he was a member of a

manager-managed LLC and therefore, the statute did not apply to him. We agree,

as a plain reading of the statute indicates that it applies to members of "member-

managed" limited liability companies. N.J.S.A. 42:2C-39(a).

        The   limited   liability   operating   agreement   governing    plaintiff’s

employment with the LLC clearly stated it was a manager-managed LLC and

explicitly provided that Rinaldi was "the [LLC]'s only Manager and Chief

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                                         17
Executive Manager." The agreement further stated, "Members that are not

Managers shall take no part whatsoever in the control, management, direction,

or operation of the [LLC]'s affairs and shall have no power to bind the LLC."

The trial record clearly established that plaintiff was not involved in the day-to-

day management of the LLC. The facts clearly showed the LLC was a manager-

managed LLC and plaintiff was only a member. Therefore, N.J.S.A. 42:2C-39

imposed no duty upon plaintiff; as a result, we vacate the judge's determination

that plaintiff breached this statutory duty. While we vacate that portion of the

judge's order, we note that she did not award defendants any damages for the

statutory violation; in all other respects, we affirm the order under review.

      Affirmed in part and vacated in part.

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