By Mark Soifer, Esq.
Let’s say you are, or think you will soon be, litigating a claim against the officers and directors of your closely held corporation for mismanagement or fraud. Or you are a minority member or shareholder of an LLC or Corporation whose reasonable expectations of your role in the company have been frustrated by the controlling members of the company. Or you have evidence of inadequate accounting practices or questionable self-dealing by the officers or directors of the company. The point is you feel you have been the victim of minority shareholder oppression, but you want the business to continue to thrive while you litigate your claims. What can you do? You do not want to disrupt the business by seeking the appointment of a custodial receiver. Instead, to avoid injuring the business and its relations with the public, you need a less drastic remedy. One effective approach may be to seek the appointment of “a special fiscal agent.” This “ingenious equitable” device can afford your business some measure of protection while at the same time minimizing interference with normal operations.1
But what can special fiscal agents do and how long can they continue to do it? The fiscal agent’s role is primarily “investigative and protective.” For example, the fiscal agent may be empowered to review all disbursements proposed to be made by the company and report any questionable ones to the parties who can then bring them to the attention of the court for relief. The fiscal agent can also advise the court as to the status of the company and its prospects for survival. The fiscal agent can protect the assets and oversee the operations of the company. The fiscal agent may also act as a mediator to resolve disputes and thus avoid more costly applications to the court. 2 (The fiscal agent, however, may not act in an adjudicative or decision-making role.)3
For example, in a case we are handling, our client holds an equitable mortgage on a sightseeing boat. The boat was operating, but the mortgage was not being paid. We successfully sought the appointment of a special fiscal agent to oversee the boat’s operation, collect the revenues, and recommend what disbursements should be made, including payment of the client’s mortgage before distributing any income to the owner of the boat.4
The appointment of a special fiscal agent is limited in its duration. In another case, the fiscal agent had been appointed to manage rental properties owned by the litigants as tenants in common and had held the position for eight years. The court held that the fiscal agent’s function must be limited not only with respect to the fiscal agent’s role, but also the duration of that role. The exercise of the fiscal agent’s duties is limited to the pendency of the litigation.5
In conclusion, whenever the need arises to monitor the revenues or expenses of a company, prevent suspicious wrongful behavior, or prevent inequitable self-dealing, the appointment of a special fiscal agent should be considered because of the great flexibility this remedy possesses while at the same time avoiding more stringent measures.
Based in Atlantic City, Mark Soifer, Esq. is a partner at Cooper Levenson with more than 30 years of experience litigating commercial and business disputes.
1 Roach v Margulies, 42 N.J. Super 243 (App Div 1956)
2 Guidebook to Chancery Practice in New Jersey (6th Ed 2005) at 104.
3 Advance Residential Communities, 2009 N.J. Super., Unpub. LEXIS 2042 (App Div 2009)
4 Barrus v Barrus, CPM-C-000053-16 (Ch.Div)
5 Kassover v Kassover, 312 N.J. Super 96 (App. Div. 1998)