The Business Judgment Rule Applies To Actions By Managers Of North Carolina Limited Liability Companies

It might seem self-evident that the Business Judgment Rule applies to decisions made by the managers of a limited liability company, but if you were looking for a North Carolina case to cite on that point before last week, you wouldn't have found one.

But now, we have Mooring Capital Fund, LLC v. Comstock North Carolina, LLCa November 13, 2009 decision from the North Carolina Business Court. The case addresses not only the business judgment rule, but also two other significant aspects of litigation involving LLCs.

The Business Judgment Rule And LLC Managers

Mooring Capital, a minority member of Comstock North Carolina, LLC, filed a lawsuit seeking an accounting and making derivative claims for a diversion of funds by the majority member and manager of the LLC, CHCI. CHCI contended that it was entitled to dismissal because it had limited liability as a member-manager.

Judge Jolly agreed that "member-managers generally are shielded from liability when acting as LLC managers," Op. ¶29, and further held that "the managers of an LLC may also be entitled to the protections of the 'business judgment rule.'" Op. ¶30. The Court based the business judgment rule portion of its ruling on G.S. §57C-3-22(b), which states that an LLC manager is bound to act "in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in the manner the manager reasonably believes to be in the best interests of the limited liability company."

The Court nevertheless denied the manager's motion to dismiss, holding that "while the business judgment rule limits the liability of member-managers when acting on behalf of an LLC, this liability is not limited when managers act outside the scope of managing the LLC." Op. ¶33. Dismissal of Plaintiff's claims wasn't warranted because the Complaint made allegations that the manager had taken "actions clearly in conflict with the interests of the LLC" and had "entered into transactions from which" the manager had "derived an improper personal benefit." Op. ¶36. Those included unauthorized distributions from the LLC to the manager and entities with which the manager it was affiliated.

Derivative Actions On Behalf Of LLCs, And Stays Pending Investigation

There are at least two other LLC-related litigation points worth noting in Mooring Capital. One involves the standing of an LLC member to make a derivative claim, the other involves the right of the LLC to a stay of the action while it investigates the charges.

On the first point, although the LLC Act doesn't specify that a demand be made before a member can file a derivative action, the statute does require that the complaint "allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the managers, directors, or other applicable authority and the reasons for the plaintiff's failure to obtain the action, or for not making the effort." N.C. Gen. Stat. §57C-8-01(b).

The Defendant claimed the Plaintiff hadn't made sufficient effort to have the LLC take action. The Court disagreed, referencing Plaintiff's contentions that "its minority status alone show[ed]" that it lacked the authority to cause the LLC to bring suit," and furthermore that it had made "repeated requests for financial information" to which the LLC had not responded.

On the point of the LLC's right to a stay pending its investigation, the LLC had retained PriceWaterhouseCoopers to investigate some of the matters raised by Plaintiff. The LLC said that it therefore was entitled to a stay per G.S. §57C-8-01(b). The Court denied the stay, however, noting that it had concerns about the scope of the accounting firm's investigation. The engagement letter between the LLC and PWC said that the accounting firm would perform a review of the LLC's financial statements, but did not speak to an investigation of other allegations made by the Plaintiff in its Complaint.

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Brief in Support of Motion to Stay

Brief in Opposition to Motion to Stay

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