For the second time in a space of two weeks,  the Business Court granted a motion for a preliminary injunction against  an LLC member/manager as a result of breaches of fiduciary duty.  The first case was GoRhinoGo, LLC v. Lewis,  which I blogged about last week, and the second case, decided last Thursday, was Lake House Academy for Girls LLC v. Jennings, 2011 NCBC 40.

Lake House provides a residential therapeutic program to "troubled" girls aged 10 to 14.  It is one of only two programs in the United States directed at that target age group.  Lake House’s boarding school is in Flat Rock, NC.  The other program is located in Bend, Oregon.  Op. ¶.5.  (Where do the mothers of 10-14 year old girls go for therapy?  My wife was fond of saying that she wanted to check into Charter Hills, a private psychiatric hospital in Greensboro, when our daughters were in that age bracket.  As things turned out, I should have listened and dropped her off there.)

Ms. Jennings was a member manager of the Lake House LLC.  Her breaches of fiduciary duty arose from her activities to set up a competing school in the same area as Lake House, to be called Glen Willow Academy. Judge Gale included in his opinion a laundry list of fiduciary duty violating conduct by Ms. Jennings.  Op. ¶¶39a-j.  This included soliciting Lake House employees to join the competitive entity, disparaging Lake House to the parents of daughters boarding there, leasing the space for Glen Willow’s operations, and deleting documents from a Lake House computer.

Ms. Jennings defended the case on the basis that once she resigned as a manager of the LLC, she had no fiduciary duty to the LLC.  And, as she frequently pointed out in her brief, she had not signed a non-compete.  On that defense, she was part right.  Members do not owe fiduciary duties to each other or to the entity.  Op. ¶34.  But managers do, and much of Ms. Jennings actions took place before she resigned as a manager.  There was also an issue about whether her resignation as a manager was effective, because the Lake House Operating Agreement said that each member was a manager.  Ms. Jennings had sought to retain her status as a member when she resigned. 

The evidence at the preliminary injunction stage was enough to show a likelihood of success that Jennings had subverted Lake House’s operations while she was a manager of the facility.  She was pretty candid and threatening about her plans.  According to a Lake House employee, Jennings said that she was "going to start up another school and that [she and others]  would make sure that no one would ever enroll another student at Lake House Academy and that she would make sure the school shut down and that [its employees] would all lose [their] jobs Op.  ¶14.

She also said “there would not be an educational consultant in the country who would make a referral to [Lake House]; I will make sure of that.” Op. ¶ 13

Irreparable injury was established by the impact of the opening of Glen Willow on a pending sale of Lake House.  Judge Gale said "[i]f Glen Willow Academy were to open its doors and compete with Lake House under these circumstances, such actions would unquestionably cause irreparable injury" to Lake House. Op. ¶46.  Ms. Jennings testified that the opening of the new school would affect the amount the buyer was willing to pay for Lake House.

On balancing the harms to the parties, the Court also ruled that Mrs. Jennings and Glen Willow Academy will suffer materially less damage or injury than Lake House if Jennings were permitted to open Glen Willow and compete with Lake House during the pendency of the litigation.  Judge Gale ordered Lake House to post a $100,000 bond as a condition of the injunction.

It was a big week in the courts last week for  breaches of fiduciary duty.  The Delaware Chancery Court entered judgment for $1.2 billion against corporate directors for their role in an acquisition of another company.  You can read about that case on the Delaware Corporate and Commercial Litigation Blog.