NJ Entire Controversy Doctrine Bars Claim That Former LLC Member Owns Factory

Without John Murray, the former CEO of Crystex Composites, LLC, the Clifton manufacturer of composite materials would likely not exist.  It was Murray who bought the plant in a bankruptcy sale and ultimately ended up with nothing for his efforts.  Murray’s failure, however, to assert that he was the rightful owner of the Crystex plant was cut off by application of New Jersey’s Entire Controversy Doctrine, which requires that any claim between the parties to a lawsuit be resolved in one action.

This case has a long history.  Murray put together a management team, investors, and arranged financing for the reborn of Crystex in 2003, but he was ousted by the other members of the LLC in May 2004 after failing to make a capital contribution of $200,000.  Murray sued, alleging that his pledge of stock to secure a line of credit satisfied his obligation to the business and challenging his removal from the business.

The case went to trial in state court in 2006, with claims of misconduct by both sides.  Ultimately, the case turned the issue of whether a Memorandum of Understanding, by which Murray agreed to make his contribution by March 2004 or forfeit his interest, was enforceable.  Murray lost, with the court finding that he had “never acquired an interest in Crystex.”  Murray appealed, but was unable to reverse the trial court’s decision on the core issue of his ownership.  Opinion here.

Murray then filed suit in federal court, arguing that if he never had an interest in Crystex, as determined in the state court litigation, then the assets that he acquired personally in the bankruptcy proceeding, belonged to him, not Crystex.  Copy of Complaint here.  Defendants successfully moved the federal court for summary judgment, arguing that New Jersey’s Entire Controversy Doctrine, which requires litigation of all claims between the parties in one action, barred Murray’s attempt to claim ownership of the property.  Opinion here.

In what is likely to be the end of this litigation, Murray’s appeal to the Third Circuit Court of Appeals was rejected.  Murray argued that his claim to be the owner of the Crystex factory did not arise until the state trial court held that he had never acquired an interest in the business and that it was simply unfair to prevent him from pursuing those claims now.  The Third Circuit disagreed holding that the wrongful act of possessing the property began in 2003 and that Murray was not an “uniformed litigant.”  Murray’s interest was in dispute at the time of the state court lawsuit and that as the plaintiff he had to know that that the lawsuit implicated his rights in the Crystex factory.  Because the same parties and factual allegations were involved, the Third Circuit held that Murray was obligated to raise his claim to ownership in the first state court action.

It was a creative theory, but unfortunately for the plaintiff too late to be of use.

A final note in the interest of full disclosure.  I represented John Murray in the earliest days of this case.  With the meeting scheduled to oust Murray, and the outcome already written on the wall, I had the brilliant, but unsuccessful idea, to bring a claim on behalf of Crystex itself seeking a TRO to enjoin the meeting.  As I was making my typically compelling arguments, adversary counsel’s cell phone rang and he took the unusual step of answering it during oral argument.  It was a majority of the members calling, and I was fired.  The client came to the same conclusion some weeks later.