North Carolina Business Litigation Lawyer & Attorney : Mack Sperling : Brooks Pierce Law Firm : Greensboro, Raleigh, Winston-Salem, Charlotte

The Business Court dismissed on a Motion for Judgment on the Pleadings an unfair and deceptive practices claim stemming from a dispute between members of a limited liability company.

CDC, a minority member of the LLCs, argued that the member owning a 70% interest, Grimmer, had removed CDC as a manager and had made unnecessary capital calls in order to force CDC out of the LLC.  CDC also alleged that it had been defamed by Grimmer, that Grimmer had taken steps to cause banks to freeze the accounts of the LLCs, favored his son on a contract with the LLCs, and caused an improper $100,000 payment to be made by the LLCs.  CDC claimed these facts made out a claim under Chapter 75. 

The Business Court held that the conduct involving removal and capital calls were "primarily matters of internal corporate governance that do not relate to the day-to-day business activities of the LLCs.  Accordingly, these matters are not sufficiently 'in or affecting commerce' to sustain an UDTPA claim."  Op. at 16.

A defamation claim met with dismissal because Judge Diaz found it had not been described with sufficient particularity, and the other claims were dismissed because they belonged to the LLCs, not to the members.

Claims seeking judicial dissolution of the LLCs survived.  Judge Diaz found that Plaintiffs' allegations of waste and mismanagement were insufficient because they "fail to allege any specific action or conduct on the part of Grimmer that constitutes waste or demonstrates the misapplication of the LLC's assets."  Op. at 11. He ruled, however, that allegations Grimmer was refusing to pay CDC for services provided, badmouthing CDC to vendors and banks, making capital calls, and refusing to provide information regarding the operation of the LLCs might make out a claim for dissolution.  The Court held:

Applying an indulgent standard to Defendants' pleading, these allegations relating to the deteriorating relationship between Grimmer and CDC are sufficient to allow Defendants to pursue their claim that liquidation is reasonably necessary to protect Defendants' rights and interests in the LLCs.

Op. at 12.

The Court also held that CDC's claim for breach of a construction contract could proceed even though CDC was not licensed as a general contractor.  CDC's contract called for some work that required a general contractor's license, and some that didn't.  Judge Diaz held that:

Although the Court's research has not disclosed any binding precedent on point, there is persuasive authority suggesting that the denial of contract remedies to unlicensed general contractors or construction managers should properly be restricted to circumstances where the contractor seeks compensation for work falling within the statutory definition of general contracting or construction management.

Op. at 13.  The contract extended to matters for which a license wasn't necessary, like selling lots in the development, hiring sales managers, developing budgets and implementing marketing plans.

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Brief in Support of Motion for Judgment on the Pleadings

Brief in Opposition to Motion for Judgment on the Pleadings

Reply Brief in Support of Motion for Judgment on the Pleadings

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Reid Pointe, LLC v. Stevens, 2008 NCBC 15 (N.C. Super. Ct. August 18, 2008).

The Business Court today threw out, on a Motion for Judgment on the Pleadings, an unfair and deceptive practices claim stemming from a dispute between members of a limited liability company. The Reid Pointe, LLC v. Stevens case also addresses a question of first impression involving an unlicensed general contractor.  There was a judicial dissolution issue as well.

CDC, a minority member of the LLCs, argued that the member owning a 70% interest, Grimmer, had removed CDC as a manager and had made unnecessary capital calls in order to force CDC out of the LLC.  CDC also alleged that it had been defamed by Grimmer, that Grimmer had taken steps to cause banks to freeze the accounts of the LLCs, favored his son on a contract with the LLCs, and caused an improper $100,000 payment to be made by the LLCs.  CDC claimed these facts made out a claim under Chapter 75. 

Judge Diaz granted the Motion on the unfair and deceptive practices claim, holding that the actions involving removal and capital calls were "primarily matters of internal corporate governance that do not relate to the day-to-day business activities of the LLCs.  Accordingly, these matters are not sufficiently 'in or affecting commerce' to sustain an UDTPA claim."  Op. at 16. (There have been a series of cases from the Business Court reaching similar conclusions in cases involving disputes between members of LLCs or between corporate shareholders.  Those cases are Kaplan, Walters & Zimmerman, Schlieper, and Slickedit.)

The defamation claim met with dismissal because Judge Diaz found it had not been described with sufficient particularity, and the other claims were dismissed because they belonged to the LLCs, not to the members.

Plaintiff's claims seeking judicial dissolution of the LLCs survived, but barely. Judge Diaz found that Plaintiffs' allegations of waste and mismanagement were insufficient because they "fail to allege any specific action or conduct on the part of Grimmer that constitutes waste or demonstrates the misapplication of the LLC's assets."  Op. at 11.He ruled, however, that allegations Grimmer was refusing to pay CDC for services provided, badmouthing CDC to vendors and banks, making capital calls, and refusing to provide information regarding the operation of the LLCs might make out a claim for dissolution.  The Court held:

Applying an indulgent standard to Defendants' pleading, these allegations relating to the deteriorating relationship between Grimmer and CDC are sufficient to allow Defendants to pursue their claim that liquidation is reasonably necessary to protect Defendants' rights and interests in the LLCs.

Op. at 12.

Last but not least, one of CDC's claim was for breach of a construction contract.  CDC, however, wasn't licensed as a general contractor in North Carolina, and our law is pretty clear that an unlicensed general contractor can't recover for its work.  The twist here was that CDC's contract called for some work that required a general contractor's license, and some that didn't.

Grimmer argued that CDC was barred from recovering anything at all on the contract, but Judge Diaz held that:

Although the Court's research has not disclosed any binding precedent on point, there is persuasive authority suggesting that the denial of contract remedies to unlicensed general contractors or construction managers should properly be restricted to circumstances where the contractor seeks compensation for work falling within the statutory definition of general contracting or construction management.

Op. at 13.  Given the "indulgent standard" of inquiry required on a Motion for Judgment on the Pleadings, the Court denied the Motion because the contract extended to matters for which a license wasn't necessary, like selling lots in the development, hiring sales managers, developing budgets and implementing marketing plans.

Brief in Support of Motion for Judgment on the Pleadings

Brief in Opposition to Motion for Judgment on the Pleadings

Reply Brief in Support of Motion for Judgment on the Pleadings

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The Court allowed a motion to bifurcate in this shareholder dispute.  Shortly before trial, the Court agreed to try first Plaintiffs' claims for reasonable expectations, mismanagement, and breach of fiduciary duty; and after determination of those issues to try, if necessary, the issues of valuation and dissolution.  The Order allowing bifurcation was entered with the consent of the parties.

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Motion to Bifurcate

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A party making claims out of the dissolution of a law firm PLLC was not entitled to proceed on its unfair and deceptive practices.  Judge Tennille held that the claims between the lawyers involved an "internal dispute," and that such disputes did not "affect commerce" as required by the statute. 

There was also an issue of standing.  The Court referenced the Court of Appeals' decision in Crouse v. Mineo, 2008 N.C. App. LEXIS 546, 658 S.E.2d 33 (N.C. Ct. App. 2008).  That Court of Appeals held there that a manager of an LLC does not have the authority to bring suit on behalf of the LLC because such an action is not within the powers of a manager, which are limited to things necessary to "carry[] on in the usual way the business of the limited liability company."  Bringing a lawsuit against the LLC, the Court of Appeals held, was not within the course of usual business.  

The Business Court also summarized when the moving party on a Motion to Dismiss can rely on documents outside of the pleadings:

the Court may not consider “extraneous matter” outside the complaint, or else the Rule 12(b)(6) motion will be converted into a Rule 56 motion for summary judgment. See, e.g., Fowler v. Williamson, 39 N.C. App. 715, 717, 251 S.E.2d 889, 891 (1979). However, the Court may consider documents the moving party attaches to a 12(b)(6) motion which are the subject of the challenged pleading and specifically referred to in that pleading, even though they are presented to the Court by the moving party. See Oberlin Capital, L.P. v. Slavin, 147 N.C. App. 52, 60, 554 S.E.2d 840, 847 (2001) (considering a contract on a 12(b)(6) motion even though the contract was presented by the movant). The Court is not required to accept as true “any conclusions of law or unwarranted deductions of fact.” Id. at 56, 554 S.E.2d at 844. Thus the Court can reject allegations that are contradicted by the supplementary documents presented to it. See E. Shore Mkts., Inc. v. J.D. Assocs. Ltd. P’ship, 213 F.3d 175, 180 (4th Cir. 2000) (stating that the court “need not accept as true unwarranted inferences, unreasonable conclusions, or arguments”).

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Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

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The Court denied the entry of a preliminary injunction in a case involving the dissolution of a law firm.  The injunction would have prevented the defendants from distributing to themselves the proceeds from contingent fees cases in which the plaintiffs claimed an interest. 

The Court held that "[t]he Plaintiffs have not made a convincing showing that they either are likely to sustain irreparable loss unless the injunction is issued, or that such relief is necessary for the protection of their rights during the course of litigation.  Plaintiffs' contentions in this regard are implausible.  Their claim for an accounting will not be affected by the issuance or denial of the injunction sought; and their claims for money damages are adequately provided for at law, and are weak grounds for the issuance of an injunction."

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Brief In Support Of Motion For Preliminary Injunction

Brief In Opposition To Motion For Preliminary Injunction

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In what County should a lawsuit seeking the final distribution of the assets of a limited liability company which has already been dissolved be filed? The answer is in the county where the LLC's principal office is or was located. The Court therefore transferred venue in this case from Mecklenburg County to Forsyth County, finding that the change of venue was mandatory pursuant to N.C.G.S. §57C-6-02.1, which deals with "a proceeding to dissolve a limited liability company."

The Court held, in the alternative, that the change of venue was appropriate for the convenience of the witnesses and the ends of justice.

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Defendant, who was a director, shareholder and former employee of the corporate plaintiff, moved to disqualify the corporate plaintiff's counsel. He argued that he reasonably believed that the law firm had represented him with regard to the agreements at issue and a guaranty agreement. He also argued that disqualification was appropriate because the corporation's lawyers had "responsibilities" to him as a shareholder and director of the company.

The Court denied the motion. It found that although the law firm had represented defendant with regard to the guaranty agreement, the former representation was not substantially related to the claims before the Court so as to warrant disqualification under Rule 1.9 of the Rules of Professional Conduct. The Court also found that the law firm had not obtained any information in the course of that representation that would advance its defense of the corporation in the case before it.

Considering multiple factors, it determined that defendant could not have reasonably believed that the law firm was representing him in his individual capacity. On the argument regarding "responsibilities," the Court held that a corporation can be represented by its regular corporate counsel when the corporation is adverse to one of its constituents.

The Court dismissed the defendant's counterclaim that the Stockholders Agreement requiring him to tender his shares back to the corporation was unconscionable, finding that the claim failed under either North Carolina or Delaware law.

Before reaching this issue, the Court expressed doubt about whether the choice of law provision specifying North Carolina law in the Agreement was enforceable, given that the corporation was a Delaware corporation and in consideration of the internal affairs doctrine.

The Court expressly refused to apply North Carolina law to plaintiff's claim for dissolution, "because a claim for judicial dissolution goes to the very core of a corporation's internal affairs [so] it is properly governed by the law of the state of incorporation." If North Carolina law had been applicable, however, the Court held that dissolution would not be appropriate.

Defendant's claim that he had reasonable expectations of continued employment was belied by the terms of his employment agreement, which provided for termination at any time after twelve months, without cause.

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The plaintiffs in this case sought the dissolution of a closely held corporation pursuant to N.C.G.S. §55-14-30(2)(ii) on the ground that the business of the corporation was being conducted to the unfair advantage of the majority shareholder. The Court found that dissolution was appropriate because the reasonable expectations of the majority shareholders were not being met.

Since the dissolution statute gives the corporation the opportunity to avoid dissolution by paying the oppressed shareholders the "fair value" of their shares, the Court moved on to a discussion of that concept. As it had in the Royals case, the Court considered market value, equitable considerations, practical considerations and changes in condition of the company from the market valuation date. It determined that it would be inappropriate to apply discounts for lack of control and lack of marketability. The Court also ruled that the purchase price could be paid over a period of 36 months.

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Plaintiffs had established their right to involuntary dissolution of the closely held corporation in which they were shareholders because their reasonable expectations had not been met, and the business of the corporation was being conducted to the unfair advantage of the minority.

The corporation was entitled to avoid dissolution by paying the oppressed shareholder the "fair value" of his shares. Fair market value is not the same as "fair value," but is a determinant in that consideration.

Discounts for lack of control and lack of marketability do not apply when minority shareholders are compelled to sell their shares.

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