What You Need to Know

• Improper (secret) meetings invalidate major LLC decisions - In Keily v. Iler, the court ruled that Kiely and Marzovilla's decision to remove the Managing Member without proper notice violated fiduciary duties and rendered their actions ultra vires, demonstrating that proper meeting procedures are essential for valid LLC governance.
• "Majority of ownership interest" requires more than 50% when specified in operating agreements - The Keily court rejected the argument that two members holding 50% combined ownership constituted a majority, emphasizing that courts will strictly interpret operating agreement language rather than apply default statutory rules when parties have contracted around them.
• Excess capital contributions don't automatically adjust ownership percentages - The Keily decision shows that once "contracted-for contributions" are made and ownership percentages vest, additional contributions are treated as loans to the LLC rather than adjustments to membership interests, protecting members from having their ownership diluted by others' excess funding.
• Courts will enforce informal membership transfers on equitable grounds despite procedural defects - Even though Iler's 8% membership transfer to Marzovilla lacked required written formalities, the Keily court enforced it based on equitable principles since Marzovilla had already performed his part of the bargain by paying off the mortgage debt.
• Reasonable business judgment protects managing members from fiduciary duty claims - The Keily court's rejection of claims against Iler for fund commingling, vacation timing, and other management decisions illustrates that courts will defer to reasonable business judgment when financial records are maintained and actions serve legitimate business purposes.

Introduction

In a recent decision, the New Jersey Appellate Division resolved a contentious dispute between three members of a limited liability company on whether: (1) the members adequately fulfilled their contributions to achieve their membership percentages and (2) the Managing Member could be removed from his position when two other members failed to provide him with notice of the meeting. The Court ultimately found that while all three members fulfilled their contribution requirements, both the meeting and the removal of the Managing Member were ultra vires acts due to the two members’ deceitfulness and their failure in forming a majority of the limited liability company at the meeting. Keily v. Iler, Mon-C-8-19, 2025 N.J. Super. Unpub. LEXIS 621 (App. Div. Apr. 17, 2025).

Background

Thomas Kiely, Michael Marzovilla and William C. Iler were members of 30 Jackson Street, LLC (the “LLC”), a limited liability company that held title to and managed property consisting of a two-story house and ten cottages, which was used as a hotel complex. Iler first became interested in purchasing and renovating the property in 2015, and later met Kiely who also expressed interest in the property. Instead of competing with each other, Iler and Kiely joined forces to become the only, and equal, members of the LLC.

Iler and Kiely quickly recognized that they lacked sufficient funding for renovations. They marketed the property and eventually attracted Marzovilla’s attention in November 2016. Marzovilla, based on his ability to finance the development, later became the LLC’s third member. In December 2016, all three members completed a purchase agreement and an amended operating agreement. The purchase agreement stated that the three parties intended “to create an LLC with a net capital value of $420,000,” with each member having a different contribution. The agreement explained that the LLC’s membership percentages would become Iler 50%, Kiely 25%, and Marzovilla 25%, after each member completed a contribution of $210,000, $105,000, and $105,000 respectively. Iler and Kiely each contributed their preexisting half memberships in the LLC, valued at $105,000. Thus, Iler still needed to provide an additional $105,000 and Marzovilla needed to contribute an initial $105,000. Despite Iler and Marzovilla’s incomplete contributions at the time, the parties’ conduct suggested that they agreed on the membership percentage divisions stated in the executed purchase agreement. Moreover, Iler had additional responsibilities as the Managing Member and principally ran the hotel.

After some time, the parties became embroiled in a dispute. In the Fall of 2018, Kiely and Marzovilla requested an LLC meeting with Iler, which he agreed to participate in, but a firm date and time were never set. In November 2018, Kiely and Marzovilla conducted a meeting without advising Iler, where they removed him as the LLC’s Managing Member and reduced his membership percentage by eight percent. Additionally, Kiely and Marzovilla had a laundry list of complaints claiming that Iler commingled funds, misled them about financial matters and the use of funds, vacationed during a particularly busy time for the LLC, negatively affected the LLC by providing a discount to a friend, purchased and developed another rental property in the area, and mismanaged bookings.

The First Trial and Remand from the Appellate Decision

The issues between the parties resulted in two consolidated lawsuits decided at a bench trial in June 2022. At the close of the trial, the judge described the actions of all three parties as “less than optimal,” and ultimately ordered one side to buy out the other. When the parties cross-appealed, the Appellate Division concluded that the trial judge had reached inadequate findings. Kiely v. Iler, No. A-1363-22 (App. Div. Feb. 12, 2024) (slip op. at 2,28). However, the appellate court emphasized that it had not taken a position on any other substantive issue raised in the appeal.

Since the trial judge had retired and was therefore unavailable to make the required findings on remand, the Court contemplated how to best discharge the judicial duties. After considering several options, the Court decided it was most appropriate to allow each of the three parties to testify again so that the Court could gauge their credibility and better understand the previously presented evidence. The parties proceeded to testify at a second trial in January 2025.

The Second Trial

A. Membership Interests at Inception

In analyzing the issues, the Court first addressed each parties’ membership interests. The Court began by emphasizing that the parties’ purchase agreement explicitly stated that the parties’ ownership percentages in the LLC would only “fully vest[],” when they paid the entire “contracted-for contribution[s].” Although no deadline for the contributions was clearly stated in the agreement, the Court determined that the main purpose of the contributions was for renovations and it therefore assumed that the contributions were expected around September 2017 when the renovations were substantially completed.

While there was no dispute that Marzovilla made his required contribution in a timely manner, the Court considered the evidence presented to determine whether Iler satisfied his contribution. Although Kiely and Marzovilla agreed that Iler satisfied his $105,000 contribution, they argued that he was required to contribute more to successfully maintain his 50% interest. Their argument was based on the idea that for every dollar they contributed, Iler had to contribute at least double that amount. Hence, since their own contributions exceeded the required amount, they argued that Iler’s required contribution needed to increase too. The Court disagreed with Kiely and Marzovilla’s position that the members’ ownership percentages fluctuated with each contribution, and instead interpreted the purchase agreement as meaning that when the “contracted-for contributions” were made, the parties’ ownership percentages fully vested and could not change afterward based on additional contributions provided at a later date. Thus, the Court found that Iler provided $105,000 and satisfied his required contribution by the time the renovation was finished. The Court further concluded that Kiely and Marzovilla’s excess contributions were to be considered loans to the LLC. In light of the purchase agreement’s ambiguity, the Court relied on Kampf v. Franklin Life Ins. Co., 33 N.J. 36, 43 (1960) to assume its role of not rewriting the parties’ agreement, but instead providing an interpretation that most likely coincided with the parties’ intentions.

B. The Clandestine LLC Meeting

In evaluating the validity of Kiely and Marzovilla’s decisions at the meeting where Iler was not present, the Court found that it was beyond dispute that Iler was not given adequate or indeed any notice of the meeting. Since the operating agreement was silent about matters relating to when a meeting shall occur or be scheduled, the Court relied on N.J.S.A. 42:2C-39(d) (the Revised Uniform Limited Liability Company Act), general contract principles, and case law to explain that “equity, fairness, and the covenant of good faith and fair dealing firmly apply.” The Court further noted that N.J.S.A. 42:2C-39(a) and (b) provide that LLC members owe each other fiduciary duties, including the duties of loyalty and care. The Court found that Kiely and Marzovilla breached those duties in conducting a meeting where the primary point of the meeting was to remove Iler as Managing Member and reduce his membership interest, without giving notice to Iler.

The Court further held that even if the meeting had been validly scheduled, the parties’ operating agreement called for a majority of the LLC’s ownership interest in order to act. The Court rejected Kiely and Marzovilla’s argument that they made up two-thirds of the owners and were thus a majority. While N.J.S.A. 42:2C-37(c)(5) appeared to support Kiely and Marzovilla’s view, it also allows for members to contract around the default rule in their operating agreement. Here, the agreement specified that the consent of a majority “of the ownership interest” in the LLC is required. The Court concluded that Kiely and Marzovilla’s collective 50% interest did not equate to a majority.

C. Iler’s Alleged Breach of Fiduciary Duties

The Court next addressed Kiely and Marzovilla’s claims that Iler breached the fiduciary duties he owed to them or the LLC by wrongfully commingling the LLC’s funds with his personal funds. The Court held that although Iler may not have handled the money in an optimal way, there was no evidence suggesting that he used the money for matters unrelated to the LLC’s business and renovations. In addition, Iler provided periodic accountings, which Kiely and Marzovilla never previously objected to. The Court further concluded that any errors in Iler’s accountings were inconsequential and “the discrepancies amounted to less than one percent of the expenditures.”

Kiely and Marzovilla also argued that Iler breached his fiduciary duty by going on an out-of-state extended vacation during the hotel’s peak season. They claimed that due to Iler’s physical absence, he could not tend to guests, mitigate potential emergencies, or fulfill his other managerial responsibilities on-site. The Court disagreed and held that although Iler was away, he satisfied his duties by remaining involved in the LLC’s business matters and continuously communicating by laptop and phone when necessary. Ultimately, after considering these claims along with Kiely and Marzovilla’s other assertions related to Iler’s alleged breach of fiduciary duty, the Court found each claim to be meritless.

D. Reduction in Iler’s Membership Interest

Over and above his $105,000 contribution, Marzovilla had paid $56,000 to terminate the mortgage held by the property’s prior owner. Although the purchase agreement provided that Kiely and Iler were solely responsible for this debt, Iler was unable to pay his part. Iler claimed that Marzovilla’s payment constituted a loan to LLC. The Court, however, found that the parties’ communications at the time of the transaction suggested that Iler viewed the situation as him compromising part of his membership percentage in return for relief from his $56,000 obligation to the mortgagee. That said, the operating agreement allowed for a change in the degree of membership only “by written instrument signed with the same formality as his [a]greement, upon a vote of a majority of the ownership interest in the [c]ompany.” It follows that although Iler and Marzovilla collectively held a majority of the ownership at 75%, a writing was still required for the transaction to be valid. Nevertheless, the Court concluded that since Iler and Marzovilla entered an agreement in which Marzovilla already fully performed his part of the bargain, part of the judgment should reflect the considered transfer. The Court relied on equitable principles to hold that Iler must perform his obligations of the agreed on transaction from which he benefited, and thus transfer eight percent of his membership in the LLC to Marzovilla.

Takeaways

With its discussion of members’ ownership interests in a limited liability company and their authority to make certain decisions regarding their shares and the company’s management, this case demonstrates that parties should understand the terms of their operating agreements and the requirements they must fulfill to ensure that they are acting in accordance with their potential fiduciary duties. In addition, this case highlights a court’s role in interpreting ambiguous language within operating agreements and balancing the equities.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Matthews Florez at mflorez@riker.com or Shelley Wu at swu@riker.com. We acknowledge our Summer Associate Meghna Gohil, Wake Forest University School of Law, for her valuable contribution to this post.