SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
A-5066-96T2
R & R MARKETING, L.L.C.,
ROYAL DISTRIBUTORS AND
IMPORTERS, LTD., INC.,
AND REITMAN INDUSTRIES, INC.,
Petitioners-Appellants,
v.
BROWN-FORMAN CORPORATION,
Respondent-Respondent.
Argued November 12, 1997 - Decided January
27, 1998
Before Judges Long, Kleiner and Kimmelman.
On appeal from the New Jersey Department of
Law and Public Safety, Division of Alcoholic
Beverage Control.
Frederick E. Gerson argued the cause for
appellants (D'Alessandro, Jacovino & Gerson,
attorneys; Mr. Gerson and Edward G.
D'Alessandro, on the brief).
Ross A. Lewin argued the cause for respondent
(Jamieson, Moore, Peskin & Spicer, attorneys;
Mr. Lewin, of counsel and on the brief;
Michael G. Petrone and David F. Swerdlow, on
the brief).
Analisa Sama Holmes argued the cause for
amicus curiae New Jersey Department of Law
and Public Safety, The New Jersey Division of
Alcoholic Beverage Control (Peter Verniero,
Attorney General; Ms. Holmes, Deputy Attorney
General, of counsel and on the brief).
The opinion of the court was delivered by
KLEINER, J.A.D.
This case of first impression requires us to interpret
N.J.S.A. 33:1-93.6, New Jersey's wholesaler anti-discrimination
statute, as it may affect licensed liquor wholesalers who have
been authorized to distribute liquor supplier's products, and who
elect to incorporate under the Limited Liability Company Act,
N.J.S.A. 42:2B-1 et seq. (the Act).
To more fully define the parameters of the issues presented
on this appeal from a decision of the Director of the Division of
Alcoholic Beverage Control, we must first analyze the factual
background predating a decision by petitioners Royal Distributors
and Importers, LTD., Inc. (Royal), and Reitman Industries, Inc.
(Reitman), to form a limited liability company.
For over twenty years Royal and Reitman were wholesalers,
each authorized by Brown-Forman Corporation, a wholesale
supplier, to distribute its nationally advertised distilled
spirits. Neither Royal nor Reitman have a written contract with
Brown-Forman. The relationship of each petitioner with Brown-Forman was protected by N.J.S.A. 33:1-93.6, which prohibits:
discrimination in the sale of any nationally
advertised brand of alcoholic beverage other
than malt alcoholic beverage, by importers,
blenders, distillers, rectifiers and
wineries, to duly licensed wholesalers of
alcoholic beverages who are authorized by
such importers, blenders, distillers,
rectifiers and wineries to sell such
nationally advertised brand in New Jersey.
In the summer of 1993, Royal and Reitman began discussing
the possibility of combining their respective businesses.
Ultimately, as discussed in greater detail infra, those
discussions led to the formation of R & R Marketing, L.L.C.
(R&R), also a petitioner herein.See footnote 1 The major issue that
apparently pervaded these discussions was the form or structure
of the proposed venture. It seems evidently clear from the
record that the corporate representatives and their respective
counsel considered the advantages or disadvantages of a
partnership, limited liability company, and holding company.
Each party weighed tax considerations of the potential
prospective structures. Of greater significance to each company,
though, was whether a new entity would retain the protection
afforded Royal and Reitman under N.J.S.A. 33:1-93.6.
In exploring this central issue, Neil Wassner, a Reitman
financial consultant, spoke with Charles Sapienza, then-Executive
Director of the New Jersey Wine and Spirits Wholesalers
Association. From Wassner's notes, it is apparent that Sapienza
opined that if there were a "change in control" of a wholesaler,
the statutory protection would continue, but if a new entity was
established, the new entity would "probably lose" the statutory
protection.
After fully exploring their options, both companies
concluded that either a partnership or a limited liability
company structure provided the "optimum" tax advantages, but that
a holding company structure might provide the optimum benefit of
preserving the existing franchises and the statutory protection
under N.J.S.A. 33:1-93.6. Both companies also discussed the
issue of whether Royal and Reitman could "continue their
ownership rights and "sub-job" to the partnership in the event
that R&R could not become an authorized wholesaler.
In November 1993, prior to reaching a decision as to the
structure of R&R, Reitman's attorney sought an advisory opinion
from the Director of the Division of ABC regarding whether the
creation of an "operating partnership" would deprive the
petitioners of their statutory protection. In a subsequent
communication to the Director, counsel also informed the Director
of the possibility that petitioners would form a limited
liability company. Director John Holl refused to issue an
advisory opinion because he believed the same issue could arise
as a contested case before the Division in the future.
During the investigatory stage preceding their formation as
a limited liability company, petitioners discussed with and
obtained the consent from some of their other liquor suppliers
regarding the transfer of their wholesaler authorizations to R&R.
Petitioners admit that they neither specifically asked for nor
received the consent of Brown-Forman to continue to distribute
its products.See footnote 2
In July 1994, Royal and Reitman entered into an agreement
which created R&R as a limited liability company pursuant to the
Act. They executed an Operating Agreement which contained a non-competition clause:
2.7 Other Business Interests of the Members.
No Member, nor any of their present or future
Affiliates, directly or indirectly, by itself
or in any other form or combination with any
other person or entity, shall, during the
term of the Company engage in the wholesale
distribution or sale, in, to or from New
Jersey, of alcoholic or non-alcoholic
beverages or conduct a warehousing business
in New Jersey for alcoholic or non-alcoholic
beverages. Except as set forth in this
Section 2.7, the Members and their Affiliates
may engage in or possess interests in other
business ventures of every kind and nature
and neither the Company nor any other Member
shall have any rights by virtue of this
Agreement in any such other business ventures
of a Member or the income or profits derived
therefrom by that Member.
The Operating Agreement contained an exception to the
Section 2.7 non-competition clause in the event that a supplier
did not consent to Royal's and Reitman's transfer of their
wholesaler authorizations to R&R:
4.6 Distribution and Warehouse Contracts.
All Distribution and Warehouse Contracts
between Royal, Reitman or R&W and
manufacturers or distributors of alcoholic or
non-alcoholic beverages shall, to the extent
possible, be transferred and assigned to the
Company as the contracting party in the place
of Royal, Reitman or R&W. To the extent any
such Distribution or Warehouse Contract
cannot be transferred or the other party
thereto refuses to consent to such transfer,
if such consent is necessary, such contract
shall remain in the name of Royal, Reitman or
R&W. In such event, Royal, Reitman or R&W
shall purchase beverages from or perform
warehousing services for the other party to
such contract and sell the same directly to
and perform such warehousing services on
behalf of the Company at cost so that the
Company would be in the same economic
position with respect to such contract as it
would have been in had such contract been
transferred pursuant to this section 4.6.
Each Member shall take such action as is
necessary or reasonable in order to effect
the intent of this Section 4.6.See footnote 3
The term "Distribution Contract" is defined in the Operating
Agreement as "all contracts, oral or written, to which Reitman,
R&W, Royal or the Company is a party, or any other form of
authorization pursuant to which any of them is authorized to
distribute or sell alcoholic or non-alcoholic beverages."See footnote 4
Soon after R&R's creation, it attempted to purchase
alcoholic beverages from Brown-Forman. However, Brown-Forman
refused to fill those orders. On July 20, 1994, petitioners
filed a Verified Petition against Brown-Forman seeking protection
under N.J.S.A. 33:1-93.6 and N.J.A.C. 13:2-18.1.
Petitioners simultaneously sought ad interim relief
mandating Brown-Forman to supply them with certain alcoholic
beverages during the pendency of the proceeding. On the same
day, the Director granted interim relief to Reitman and Royal,
but denied same to R&R. The ruling was confirmed in an order
dated July 22, 1994.
Specifically, petitioners argued in their Verified Petition
that: (1) N.J.S.A. 33:1-93.6 should be liberally construed to
protect their interests; (2) their agreements creating R&R
conveyed their privileges under the statute; (3) the formation of
the limited liability company should be treated like a corporate
merger and therefore Reitman's and Royal's authorizations were
legally transferred to R&R through the limited liability
company's formation.
In its answer, Brown-Forman claimed that R&R was not
protected under the statute because it never authorized R&R to
sell its brands, and further that Reitman and Royal lost their
protections under the statute because they gave up their ability
to act as independent wholesalers by forming the limited
liability company in the manner that they did.
After full discovery, Brown-Forman successfully moved for
summary judgment, and petitioners' verified petition was
dismissed. In reaching this decision, the Director concluded
that as a matter of law R&R was not an authorized wholesaler
under N.J.S.A. 33:1-93.6, and thus was not entitled to statutory
protection. The Director reasoned that petitioners'
interpretation of the pertinent statute could lead to other
authorized wholesalers entering into numerous joint ventures to
distribute products with or through unauthorized wholesalers.
Additionally, the Director concluded that petitioners'
interpretation would undermine the goal of the statute to balance
the protections afforded wholesalers with the competitive
interests of suppliers, stating:
[N.J.S.A. 33:1-93.6] is designed to balance
interests. If the interpretation urged by
Petitioners is correct, then authorized
wholesalers would be able to auction off
their "authorized status" to the highest
bidders among non-authorized wholesalers.
This interpretation of the statute would
lead to chaos, effectively destroying a
manufacturer's ability to create a stable
distribution network. One of the purposes of
the Alcoholic Beverage Law is to promote
stability in the marketing of alcoholic
beverages, which in turn fosters moderation
and responsibility in the use of alcoholic
beverages.
He was also concerned that such trade instability would "create a
real danger of `price wars' and other destabilizing practices."
The Director also addressed petitioners' claim that the
formation of a limited liability company should be treated like a
corporate merger, by which all personal property, tangible and
intangible, becomes vested in the new corporation, and all
constituent companies cease to exist. See N.J.S.A. 14A:10-6(d),
(e). He distinguished New Jersey's Corporations Law from the
Limited Liability Company Act, which leaves the issue of whether
the separate parties to the company may continue to exist largely
to the Operating Agreement, and which provides that the newly-formed company is an entity separate from its members.
He further concluded that Royal and Reitman could not retain
their individual authorizations to distribute respondent's
products because, according to R&R's operating and other
agreements, they remained as separate entities only to "front"
for R&R:
The system set up by Royal and Reitman
requires them in the first instance to
transfer their distribution contracts to R&R.
If they are unable to do so, they must
purchase [the] product themselves and sell it
directly to R&R "at cost" so that R&R
achieves the same economic position if [sic]
would have been in had the contract been
transferred. In short, they have agreed to
front for R&R.
Brown-Forman correctly characterizes
this as a "sham arrangement." Once Reitman
and Royal executed agreements obligating them
to front for R&R, they forfeited their
protection under the statute.
In addition, the Director dismissed petitioners' estoppel
claim, finding that they did not show that they relied upon
Brown-Forman's conduct to their detriment. He concluded that
petitioners predicated their decision to form a limited liability
company not on franchise concerns but rather on the extent of the
tax benefits.
Petitioners appeal from the Director's decision. We
reverse.
Generally, on appeal from an administrative decision, we will not upset the ultimate determination of an agency unless it was arbitrary, capricious or unreasonable, or violated legislative policies expressed or implied in the act governing the agency. Campbell v. Dep't of Civil Serv., 39 N.J. 556, 562 (1963). When an error in a factfinding of an administrative agency is alleged, the court gives "due regard" to the ability of the factfinder to judge credibility and, where an agency's expertise is a factor, to that expertise. Close v. Kordulak Bros., 44 N.J. 589, 599 (1965).
When asked to review an agency's interpretation of a statute or strictly legal decision, we respect the agency's expertise. Mayflower Sec. Co., Inc. v. Bureau of Sec., 64 N.J. 85, 93 (1973). Ultimately, though, interpretation of statutes is a judicial, not an administrative, function, and the court is not bound by the agency's interpretation. Ibid.
The Director's interpretation of N.J.S.A. 33:1-93.6, a law he was charged with safeguarding, is obviously entitled to deference based upon his expertise. However, he concluded as a matter of law that petitioners were not entitled to protection
under the statute. This court is not bound by the Director's
conclusions of law. Moreover, although his ultimate findings
affected petitioners' rights under N.J.S.A. 33:1-93.6, the
Director's conclusions were also based on his interpretation of
the Limited Liability Company Act, a statute of relatively recent
origin which the Director is not charged in safeguarding. As a
result, this court is not bound by the Director's finding that a
limited liability company formed by two authorized wholesalers is
not entitled to protection under N.J.S.A. 33:1-93.6 because the
company itself is not an authorized wholesaler.
The Limited Liability Company Act was enacted in 1994. Section 42:2B-8(b) of the Act provides that:
A limited liability company shall possess and may exercise all the powers and privileges granted by this act or by any other law or by its operating agreement, together with any powers incidental thereto, so far as such powers and privileges are necessary or convenient to the conduct, promotion or attainment of the business, purposes or activities of the limited liability company.
Under the Act, a "member" of a limited liability company acquires a "limited liability company interest," which is defined as "a member's share of the profits and losses of a limited liability company and a member's right to receive distributions of the limited liability company's assets." N.J.S.A. 42:2B-21; see also N.J.S.A. 42:2B-2 (defining "limited liability company interest"). The Act "is to be liberally construed to give the maximum
effect to the principal of freedom of contract and to the
enforceability of operating agreements." N.J.S.A. 42:2B-66; see
also Peter D. Hutcheon, The New Jersey Limited Liability Company
Statute: Background and Concepts, 18 Seton Hall Legis. J. 111,
129 (1993) ("[Section] 8(b) does invest private parties with
quasi law-making power, by expressly endorsing the concept of
private ordering as a source of common law."). Further, Section
42:2B-67 provides that "[i]n any case not provided for in this
act, the rules of law and equity, including the law merchant,
shall govern."
In enacting the Act, the Legislature obviously sought to
encourage capital investment within the State by encouraging the
formation of limited liability companies. Although parties
forming a limited liability company under the LLC are given
somewhat wide latitude in structuring their organizations through
operating agreements, they may not circumvent the mandates of
other statutes, such as N.J.S.A. 33:1-93.6. See N.J.S.A. 42:2B-67. This court must therefore consider New Jersey's interest in
promoting the formation of limited liability companies together
with the remedial purposes behind the N.J.S.A. 33:1-93.6.
New Jersey's anti-discrimination statute, N.J.S.A. 33:1-93.6, and its corresponding administrative regulation, N.J.A.C.
13:2-18, have been construed as designed for "the protection of
the public through the promotion of temperance and elimination of
the racketeer and bootlegger." Canada Dry Ginger Ale, Inc. v. F
& A Distrib. Co.,
28 N.J. 444, 455 (1958). "[T]he statute seeks
to achieve as far as necessary the independence of wholesalers
from distillers[,] . . . and . . . to prevent the distiller from
arbitrarily closing the source of supply to a wholesaler." Ibid.
The statute and the Director's authority to enforce it shall be
liberally construed. Ibid.
The effect of the law is to prevent alcohol suppliers from
arbitrarily terminating their relationships with wholesalers.
Further, according to the Attorney General, the law is to secure
equitable competition among wholesalers. Originally, it applied
to all wholesalers. In l966, the Act limited its scope to "duly
licensed wholesalers of alcoholic beverages who are authorized"
by the manufacturers or suppliers. N.J.S.A. 33:1-93.6 (emphasis
added). While the statute offers expansive protection to
"authorized" wholesalers, see American B.D. Co. v. The House of
Seagrams, Inc.,
107 N.J. Super. 265, 267 (App. Div. 1969), it
does not define the exact method or criteria upon which a
licensed wholesaler becomes an "authorized" wholesaler.
The crux of the Director's decision seems predicated on the
fact that although both Royal and Reitman are separately
authorized wholesalers, their newly-formed limited liability
corporation is technically not an authorized wholesaler. Yet, as
petitioners argue, had Royal and Reitman effectuated a corporate
merger the new corporate entity would have preserved their
authorized wholesaler status. N.J.S.A. 14A:10-6.See footnote 5
Because both N.J.S.A. 33:1-93.6 and the Limited Liability
Company Act are to be liberally construed, affording petitioners
protection under N.J.S.A. 33:1-93.6 would not defeat the purpose
of that statute but would advance New Jersey's goal in promoting
the formation of limited liability companies as expressed in the
Limited Liability Company Act. The essential relationship
between Brown-Forman and R&R has not changed by combining the
individual corporate entities under the umbrella of a limited
liability company.
In Joseph H. Reinfeld, Inc. v. Schieffelin & Co.,
94 N.J. 400 (1983), the Court held that where only the supplier's state
of incorporation changes, it cannot avoid the anti-discrimination
statute. Id. at 409. In Reinfeld, the supplier terminated all
of its wholesalers and went out of business; the "new" supplier
authorized only one wholesaler to distribute its products. Id.
at 408. However, the "old" and "new" supplier "had the same
directors, officers and salespeople. Only the state of
incorporation changed." Id. at 409. The Court held that were it
to allow the supplier "to avoid the anti-discrimination statute
through such corporate legerdemain, [it] would plainly frustrate
the statute's purpose." Ibid. See also Royal Liquor v. Brown-Forman,
4 N.J.A.R. 248 (1982) (holding that a supplier that
undergoes a corporate reorganization may not terminate the
authorizations of wholesalers previously authorized to distribute
its brands).
R&R was formed by two authorized wholesalers who transferred
their authorizations via their operating, transfer and assignment
agreements to R&R. Petitioners maintain that both Royal and
Reitman are in complete control of their respective sales forces.
Further, petitioners state that the same officers that were in
control of Brown-Forman's account with each petitioner prior to
the joint venture would be in control of the joint venture. As a
result, the relationships between Royal and Brown-Forman and
Reitman and Brown-Forman arguably did not change. Actually, the
business conducted between them may have been simply made more
efficient by the formation of R&R. Interests of equity thus may
dictate that R&R be afforded protection under N.J.S.A. 33:1-93.6.
See N.J.S.A. 42:2B-67.
In response to petitioners' arguments, Brown-Forman, citing
Reinfeld and Royal Liquor argues: "Just as the protections
granted wholesalers by the statute cannot be artificially
constrained by a supplier's corporate transactions, so too
wholesalers may not employ corporate gimmickry in order to
artificially expand the group of wholesalers authorized to sell a
supplier's products." Although that argument has facial appeal,
its persuasiveness pales when two authorized wholesalers combine
under a newly-formed corporate structure.
More important, this is not a case where an authorized
wholesaler and an unauthorized wholesaler seek protection under
N.J.S.A. 33:1-93.6 for a newly-formed corporate entity. The
Director's concerns seem more applicable to those instances where
an authorized wholesaler seeks to combine its business with the
business of an unauthorized wholesaler, thereby circumventing the
limitations imposed by the anti-discrimination statute as amended
in 1966. In such a case, a decision by a supplier to refuse to
sell to the newly-formed entity may indeed be legitimate and not
discriminatory. Moreover, approval of a wholesaler is the
prerogative of the supplier who has the right to select its own
distribution network.
However, as noted, where the new entity is composed of
previously approved wholesalers, the supplier's control of its
distribution system is not dissipated. It is quite apparent that
the Director elevated form over substance in this particular
case. As such, his decision was arbitrary and unreasonable. See
Campbell, supra, 39 N.J. at 562. Although "[a] limited liability
company formed under the act shall be a separate legal entity,"
N.J.S.A. 42:2B-11(b), nonetheless, we cannot overlook the fact
that the new separate legal entity is composed of two entities
which previously were authorized wholesalers and entitled to the
benefits of the anti-discrimination provisions and policies
embodied in N.J.S.A. 33:1-93.6.
We recognize that at its inception, R&R was comprised of
Royal, Reitman, and R & W Warehouse and Transportation Co., a
business clearly not engaged in wholesaling of alcoholic
beverages, but engaged in transportation. The State in its
amicus curiae brief, in fact, argues that "R&R is not solely made
up of authorized wholesalers and thus [is] not entitled to the
statuary protection." We find that argument unpersuasive, as
R&W's participation in the limited liability company as a
deliverer does not expand the class of authorized wholesalers
protected by N.J.S.A. 33:1-93.6. Whether an authorized
wholesaler utilizes its own employees or an outside company to
deliver its products seems irrelevant absent evidence that the
use of a delivery service in some manner interferes with the
intended function of the distribution system.See footnote 6
Because we have concluded that the Director erred in
reaching his decision, it is not necessary to consider
petitioners' other contentions that Royal and Reitman could
continue to operate independently within the framework of R&R's
Operating Agreement, section 4.6, or that Brown-Forman should be
estopped from refusing to recognize R&R as an authorized
wholesaler. Our decision renders each of those arguments moot.
The decision of the Director denying the protections of the
anti-discrimination statute, N.J.S.A. 33:1-93, to petitioners is
reversed.
Footnote: 1 Another company, R & W Warehouse and Transportation Co.
(R&W), became a part of the limited liability company as of the
date of its formation. R&W was engaged solely in providing
transportation in the distribution of the products purchased from
Brown-Forman and was not itself a licensed liquor wholesaler.
R&W was an integral part of the limited liability company as of
the date of petitioners' petition and as of the date of the
administrative decision which prefaces this appeal. At oral
argument, however, we were advised that R&W is no longer part of
R&R Marketing.
Footnote: 2 The record seems clear that Brown-Forman was made aware
of petitioners' intention to form R&R, and that Brown-Forman
never expressly disapproved of petitioners' plan, nonetheless,
the record is clear that Brown-Forman never expressly sanctioned
the formation of R&R.
Footnote: 3 Petitioners' intent is clarified in an inter-company
communication written by Reitman's counsel:
The simplest alternative would be to follow
the method of operation described in Section
4.6, described above. Royal and Reitman
would each purchase products from the
appropriate suppliers and then resell those
products to R&R. R&R would then sell the
products to its customers through its Reitman
division, its Royal division, or any other
divisions it may have.
Footnote: 4 Both Royal and Reitman executed Transfer, Assignment and
Assumption Agreements through which they transferred to R&R all
of their primary interests in their operating assets,
particularly their respective authorizations to sell alcoholic
and non-alcoholic beverages. (Assets excepted from these
agreements are not pertinent to this appeal.) Footnote: 5 Under N.J.S.A. 14A:10-6(b), upon the completion of a corporate merger, "[t]he separate existence of all parties to the plan of merger or consolidation . . . shall cease." The
surviving corporation thus succeeds to "all the rights, privileges, powers, immunities, purposes and franchises, both public and private" of the merging corporations. N.J.S.A. 14A:10-6(c). Footnote: 6 As noted supra, note 1, we were advised at oral argument that R&W is no longer a part of R&R.