Eighty Five Thousand Reasons Not To Represent An LLC Without The Approval Of A Majority Of The Members (and one Other Thing)
Be sure that an LLC member has the authority to hire you before accepting the representation of the LLC in a suit by or against another LLC member. That authorization generally requires a majority of the interest of the members, at least under the default provisions of the LLC Act, which apply in the absence of an Operating Agreement providing to the contrary.
But what if a 50% owner goes ahead and retains counsel to represent the LLC against her 50% co-owner, who does not consent to the representation? That can only turn out badly, even if there is a written fee agreement signed by the 50% owner.
In Judge Bledsoe's decision last week in Battles v. Bywater, LLC, 2014 NCBC 52, the Court found that one of the 50% owners of two LLCs which were defendants did not have the power to hire counsel for the LLCs, either under the default provisions of the LLC Act or the terms of the Operating Agreement of one of the LLCs.
There is nothing new in holding that one 50% member does not have the power to retain counsel for the LLC in a lawsuit against the other 50% member. The Court of Appeals held seven years ago, in Crouse v. Mineo, 189 N.C. App. 232, 658 S.E.2d 33 (2007) that:
a fifty percent LLC member 'lacked authority to cause [the LLC] to institute [an] . . . action on its own behalf' against the other fifty percent LLC member).
Id. at 239, 658 S.E.2d 37-38.
The Business Court rejected the Plaintiff's argument that he, as a 50% owner of the LLCs, had the authority under the new LLC Act to hire counsel without the consent of his adversarial member.
Judge Bledsoe struck all of the filings made in the case by the lawyers for the LLC, though "without prejudice to Defendants' right to refile these or other legally supportable and permissible documents after retention of new counsel." Op. ¶52.
That's an expensive ruling for the lawyers who had been retained without proper authorization to represent the LLCs. They had represented to the Court that they were owed $85,000 in legal fees by the LLCs that they were disqualified from representing.
Apart from guidance from the Bywater case of the necessary approval of the LLC members for an LLC representation, the case also makes clear that a management deadlock is a valid basis for dissolving an LLC per G.S. §57D-6-02(2).
Deadlock was formerly mentioned specifically in the dissolution statute (in the former G.S. §57C-6-02(2)), but the revised act deleted any reference to "deadlock" as a basis for dissolution in G.S. §57D-6-02.
Judge Bledsoe found that since the statute now allows dissolution where "it is not practicable to conduct the LLC's business," that this embraces deadlock. He supported that conclusion with reference to the similar language of the Delaware LLC Act. The Delaware Court of Chancery held in Fisk Ventures, LLC v. Segal, 2009 Del. Ch. LEXIS 7 (Del. Ch. 2009) that if:
a board deadlock prevents the limited liability company from operating or from furthering its stated business purpose, it is not reasonably practicable for the company to carry on its business.
Op. ¶19 (quoting Fisk Ventures at *12)