Battles v. Bywater, LLC, 2014 NCBC 51.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION BUNCOMBE COUNTY 14 CVS 1853
CHAD A. BATTLES,
Plaintiff,
v. ORDER AND OPINION BYWATER, LLC, a North Carolina Limited Liability Company, and AGIQUA, LLC, a North Carolina Limited Liability Company,
Defendants.
Ferikes & Bleynat, PLLC, by H. Gregory Johnson and Joseph A. Ferikes, for Plaintiff Chad A. Battles.
Asheville Law Group, by Michael G. Wimer and Jake A. Snider, for Defendants Bywater, LLC and Agiqua, LLC.
Bledsoe, Judge
{1} THIS MATTER is before the Court upon the following motions: (i) Plaintiff
Chad Battles’ (“Plaintiff”) Motion to Disqualify Counsel for Defendants and to
Strike Defendants’ Answer, Defenses and Counterclaims (“Motion to Disqualify”);
(ii) Plaintiff’s Motion to Appoint Receiver; (iii) Plaintiff’s Motion for Preliminary
Injunction; (iv) Defendants Bywater, LLC, a North Carolina Limited Liability
Company (“Bywater”), and Agiqua, LLC, a North Carolina Limited Liability
Company’s (“Agiqua”) (together, “Defendants”) Motion to Dismiss; and (v)
Defendants’ Motion to Re-Open Discovery (collectively, “the Motions”).
{2} The Court, having considered the Motions, affidavits and supporting
briefs, as well as the arguments of counsel at the October 16, 2014 hearing in this matter, FINDS and CONCLUDES, for the limited purpose of resolving the Motions,
as follows:
FINDINGS OF FACT
{3} Plaintiff and James Rogers (“Rogers”) formed Bywater, a North Carolina-
based limited liability company (“LLC”), as equal owners and member-managers in
April 2010. Bywater operates a tavern for music and entertainment near downtown
Asheville, North Carolina.
{4} Plaintiff and Rogers dispute whether their management of Bywater is
governed by a valid and enforceable operating agreement. In 2010, Plaintiff printed
his name and Rogers’ name – with Rogers’ permission – in the signature block of a
written operating agreement between Plaintiff and Rogers (hereinafter, the
“Operating Agreement”), which Plaintiff relied upon to open a bank account for the
Bywater business. Plaintiff contends that the Operating Agreement is invalid and
that it has not governed Plaintiff’s and Rogers’ management of Bywater.
{5} Plaintiff and Rogers are equal owners and member-managers of Agiqua, a
North Carolina-based LLC that owns the real property on which Bywater conducts
its business. Plaintiff and Rogers agree that they have not executed an operating
agreement with respect to Agiqua.
{6} Plaintiff and Rogers operated Bywater successfully and without significant
dispute until Rogers was involved in a car accident in July 2013. According to
Plaintiff, Rogers thereafter began to neglect his responsibilities at Bywater and
gradually withdrew his participation in the management of the business. Plaintiff has submitted affidavits from Bywater employees describing Rogers’ conduct during
this time period as generally dysfunctional and detrimental to the Bywater
business.
{7} Purportedly due to Rogers’ behavior and to preserve Bywater’s assets, and
after consulting Bywater’s then counsel, The Hart Law Group, Plaintiff moved the
Bywater bank account from Mountain 1st Bank and Trust Company (now First
Citizens Bank) to Branch Banking and Trust (“BB&T”) in December 2013. Plaintiff
moved the account without Rogers’ knowledge and advised Rogers that he would be
added to the BB&T account only if he agreed to execute a formal written operating
agreement for Bywater detailing Plaintiff’s and Rogers’ respective management
responsibilities. BB&T froze the Bywater bank account after Rogers appeared at
BB&T seeking access to the account. Plaintiff then moved the Bywater bank
account to Forest Commercial Bank (now Carolina Alliance Bank), again
purportedly to protect the Bywater funds from Rogers and to ensure that Bywater
would have sufficient funds to carry on its business operations.
{8} Rogers retained the Asheville Law Group (“ALG”) in March 2014 to
represent him personally in his dispute with Plaintiff concerning Bywater.
{9} On April 4, 2014, Mike Wimer (“Wimer”) of ALG accompanied Rogers to
Forest Commercial Bank, seeking to add Rogers as a signatory to the Bywater
account. Forest Commercial Bank responded by freezing the Bywater account. {10} Plaintiff and Rogers subsequently agreed to deposit all Bywater funds in a
jointly accessible account with First Citizens Bank; however, approximately $50,000
in Bywater funds remains frozen in the Carolina Alliance Bank account.
{11} Plaintiff filed his complaint in this action on May 2, 2014, alleging, inter
alia, that it was “impossible and impractical” for Plaintiff and Rogers to continue
operating the Bywater and Agiqua businesses. (Compl. ¶ 10.) Citing “numerous
conflicts regarding the management and operation” of both companies, Plaintiff’s
complaint requests (i) judicial dissolution of both Bywater and Agiqua pursuant to
N.C. Gen. Stat. § 57D-6-02; and (ii) the appointment of a receiver pursuant to N.C.
Gen. Stat. § 57D-6-04 to manage Defendants’ business operations pending the
Court’s decision on dissolution (and to wind up the businesses in the event that
Plaintiff’s request for dissolution is granted). (Id. ¶¶ 11-13.)
{12} On May 5, 2014, Rogers terminated ALG as counsel in his personal dispute
against Plaintiff and that same day retained ALG to represent both Bywater and
Agiqua in this lawsuit. Rogers consented on his own behalf and purportedly on
behalf of Defendants to ALG’s representation of Defendants and signed documents
seeking to waive any conflict of interest that may have arisen due to ALG’s prior
representation of Rogers. Plaintiff did not consent to ALG’s representation of
{13} On May 15, 2014, Bywater sought to expel Plaintiff as a member of
Bywater on grounds that Plaintiff’s conduct, including but not limited to Plaintiff’s decision to move the Bywater bank account without Rogers’ knowledge in December
2013, warranted Plaintiff’s expulsion under the Operating Agreement.
{14} On May 16, 2014, Defendants filed an answer to Plaintiff’s complaint,
therein asserting counterclaims and moving to dismiss Plaintiff’s complaint
pursuant to Rule 12(b)(6) of the North Carolina Rules of Civil Procedure.
{15} On July 7, 2014, Plaintiff moved to disqualify ALG as Defendants’ counsel
in this action, contending, inter alia, that Rogers, as a fifty percent member of
Bywater and Agiqua, lacked the authority to hire ALG to represent Defendants in
this matter.
{16} Plaintiff asserts that Rogers has continued to misappropriate Bywater
funds, for example, by transferring at least $25,000 in company funds to ALG
without Plaintiff’s consent. Plaintiff has thus moved the Court for a preliminary
and permanent injunction, seeking to prevent Defendants from making further
payments to ALG in connection with ALG’s representation of Defendants in this
matter.
{17} Following a case management conference, the Court entered an Order
staying all discovery pending resolution of Plaintiff’s Motion to Disqualify.
Defendants have since moved the Court to reopen discovery, requesting the
opportunity to depose Plaintiff for purposes of gathering information to assist them
in their defense against Plaintiff’s Motion to Disqualify. {18} The Court held a hearing on Plaintiff’s Motion to Disqualify, Motion to
Appoint Receiver, and Motion for Preliminary Injunction, and on Defendants’
Motion to Dismiss and Motion to Re-Open Discovery on October 16, 2014.
CONCLUSIONS OF LAW
Plaintiff’s Motion to Disqualify
{19} “‘Decisions regarding whether to disqualify counsel are within the
discretion of the trial judge and, absent an abuse of discretion, a trial judge’s ruling
on a motion to disqualify will not be disturbed on appeal.’” Sisk v. Transylvania
Cmty. Hosp., Inc., 364 N.C. 172, 179, 695 S.E.2d 429, 434 (2010) (quoting Travco
Hotels, Inc. v. Piedmont Natural Gas Co., 332 N.C. 288, 295, 420 S.E.2d 426, 430
(1992)).
{20} Plaintiff moves to disqualify ALG as Defendants’ counsel and to strike all
filings submitted by ALG on Defendants’ behalf on grounds that Rogers, as a fifty
percent (but not majority) member-manager of Defendants, lacked the requisite
authority to unilaterally retain ALG to represent Defendants in this matter. In
support of his position, Plaintiff argues that neither Defendant has an operating
agreement and therefore relies upon the North Carolina Limited Liability Company
Act’s (“the LLC Act”) provisions that “[e]ach manager has equal rights to participate
in the management of the LLC and its business” and that “[m]anagement decisions
approved by a majority of the managers are controlling.” N.C. Gen. Stat. § 57D-3-
20(b) (2014). {21} Defendants counter that Rogers properly retained ALG to represent
Defendants in this matter. Defendants contend that the default provisions of the
LLC Act are inapplicable with respect to Bywater because there exists a valid
operating agreement and because Plaintiff’s expulsion under the Operating
Agreement left Rogers free to hire ALG. Defendants further contend that even if
the LLC Act does apply, its provisions support their position that “a single manager
[like Rogers here] may bind the company, but his actions may be overridden by
majority of managers” and “[w]here [as here] no majority acts to revoke an act
taken by a single manager, the manager’s decision for the LLC stands.” (Defs.’
Resp. Pl.’s Mot. to Disq., pg 9.)
{22} An LLC “is a ‘statutory form of business organization . . . that combines
characteristics of business corporations and partnerships.’” Crouse v. Mineo, 189
N.C. App. 232, 237, 658 S.E.2d 33, 36 (2007) (citations and quotation marks
omitted) (ellipsis in original). “The [LLC] Act contains numerous ‘default’
provisions or rules that will govern an LLC only in the absence of an explicitly
different arrangement in the LLC’s articles of organization or written operating
agreement. Because these default provisions can be changed in virtually any way
the parties wish, an LLC is primarily a creature of contract.” Id. (citation omitted).
{23} Where applicable, the default provisions of the LLC Act provide that “[t]he
management of an LLC and its business is vested in the managers”; that “[a]ll
members by virtue of their status as members are managers of the LLC”; and that
“[e]ach manager has equal rights to participate in the management of the LLC and its business.” N.C. Gen. Stat. § 57D-3-20(a)-(b), (d). Further, although the
“manager[s] may act on behalf of the LLC in the ordinary course of the LLC’s
business” and “may make management decisions without a meeting and without
notice[,]” this authority is subject to the Act’s mandate that “[m]anagement
decisions approved by a majority of the managers are controlling.” N.C. Gen. Stat. §
57D-3-20(b)-(c).
Bywater
{24} Plaintiff acknowledges that a written operating agreement for Bywater
was prepared, but contends that the draft agreement is invalid because neither he
nor Rogers ever signed it. Plaintiff thus asserts that the default provisions of the
LLC Act govern Plaintiff’s and Rogers’ management of Bywater. Plaintiff, however,
admits affixing his name to the Operating Agreement in his own hand1 and
representing its validity in order to open a bank account for the Bywater business.
Having embraced the Agreement at the inception of the LLC’s existence, and having
failed to show that the parties rescinded or did not intend to be bound by the
Agreement thereafter, Plaintiff cannot now unilaterally disavow the Agreement and
claim that it has no legal effect. See, e.g., Redevelopment Com’n of Greenville v.
Hannaford, 29 N.C. App. 1, 4, 222 S.E.2d 752, 754 (1976) (“Where one having the
1 Contrary to Defendants’ apparent suggestion, the LLC Act does not require that an operating
agreement be in writing or signed by both parties to be valid, N.C. Gen. Stat. § 57D-1-03 (2014) (providing that “the operating agreement may be in any form, including written, oral, or implied, or any combination thereof”); see also Durham Consol. Land & Improv. Co. v. Guthrie, 116 N.C. 381, 384, 21 S.E. 952, 953 (1895) (providing that the statute of frauds, where applicable, requires only “that the contract shall be in writing and signed by ‘the party to be charged therewith’”); Yaggy v. B. V. D. Co., 7 N.C. App. 590, 598, 173 S.E.2d 496, 501 (1970) (explaining “that a printed name may constitute a sufficient signing under the statute of frauds, provided that it is recognized by the party sought to be charged”). right to accept or reject a transaction or instrument takes and retains benefits
thereunder, he ratifies it, and cannot avoid its obligation or effect by taking a
position inconsistent with it.”); Adver., Inc. v. Harper, 7 N.C. App. 501, 505, 172
S.E.2d 793, 795 (1970) (holding that lessee was estopped from denying validity of
lease where lessee had paid seven months’ rent and accepted benefits under lease).
Accordingly, based on Plaintiff’s own conduct, the Court concludes that Plaintiff has
waived any argument that the Operating Agreement is invalid or unenforceable,
and the Court therefore finds that the Operating Agreement governs Plaintiff’s and
Rogers’ management of Bywater.
{25} Prior to inquiring into whether the terms of the Operating Agreement
permitted Rogers to hire counsel for Bywater as a fifty percent member-manager,
the Court must first consider Defendants’ contention that Plaintiff’s expulsion from
Bywater has rendered Plaintiff without standing to challenge Rogers’ selection of
ALG as Defendants’ counsel.
{26} As an initial matter, Defendants’ standing challenge is undermined by the
undisputed fact that Rogers retained ALG as counsel for Defendants on May 5,
2014, and Defendants do not claim Rogers expelled Plaintiff until May 15, 2014. As
a result, even under Defendants’ theory of liability, Rogers was not the sole member
of the LLC at the time Rogers sought to hire ALG as counsel for Bywater and thus
did not have authority under the Operating Agreement to hire ALG until after
Plaintiff’s alleged expulsion on May 15. {27} In addition, the Operating Agreement provides that a member may be
expelled from the company by “members holding a majority of the ownership shares
held by members other than the expelled member” where the member is “guilty of
wrongful conduct that adversely and materially affects the business or affairs of the
company”; “ has willfully or persistently committed a material breach of the articles
of organization of the company or this agreement”; or “has otherwise breached a
duty owed to the company or to the other members to the extent that it is not
reasonably practicable to carry on the business or affairs of the company with the
member.” (Op. Ag. ¶ 7.2.) Defendants allege that Plaintiff breached the Operating
Agreement on numerous occasions, including (i) in December 2013, when Plaintiff
moved the Bywater bank account from Mountain 1st Bank and Trust Company to
BB&T, thus denying Rogers access to company funds without Plaintiff’s consent in
contravention of the Operating Agreement; (ii) in February 2014, when Plaintiff
signed and represented the validity of a Bywater company resolution – without
Rogers’ signature to authorize the resolution – in order to open an account at
Forest Commercial Bank; and (iii) from May 2014 through August 2014, when
Plaintiff moved certain Bywater funds to a safe located on the Bywater premises,
again denying Rogers access to Bywater funds without Plaintiff’s consent.
{28} Although the Court agrees with Defendants that Plaintiff’s conduct likely
violated his obligations under the Operating Agreement, upon a review of the
record, the Court does not find that Plaintiff’s conduct met the stringent
requirements for expulsion under the Agreement. In particular, in none of the instances upon which Defendants rely did Plaintiff convert Bywater funds to his
own personal use; rather, as Plaintiff has maintained, the only evidence is that
Plaintiff sought merely to safeguard the Bywater funds to ensure the continued
operation of the Bywater business and did not use the removed funds for purposes
unrelated to Bywater. While the Court does not condone Plaintiff’s use of an extra-
contractual self-help remedy on these facts, the Court cannot conclude that
Plaintiff’s conduct in the circumstances here “adversely or materially affected the
business affairs of the company,” constituted a “willful or persistent material
breach” of the Agreement, or otherwise constituted a “breach of duty owed to the
company” justifying Plaintiff’s expulsion from Bywater.2 Accordingly, the Court
concludes that Defendants have failed to demonstrate that Plaintiff was properly
expelled from his role as a member-manager of Bywater; therefore, the Court finds
that Plaintiff and Rogers have been at all relevant times and remain fifty percent
member-managers of Bywater.3
{29} Turning then to Rogers’ authority to retain ALG as counsel for Bywater
under the terms of the Operating Agreement, the Agreement specifically provides
that “[e]xcept as otherwise provided in this agreement, all decisions requiring action
2 Defendants’ sole allegation that Plaintiff converted Bywater funds to his personal use – that
Plaintiff and his wife “likely misused” Bywater funds to make personal purchases – appears wholly unsupported by the record evidence. 3 Defendants also contend that Plaintiff is equitably estopped from contesting Rogers’ decision to hire
ALG because Plaintiff engaged in similar conduct when he sought to engage The Hart Law Group to represent Defendants as counsel in this matter. Defendants’ argument lacks merit, however, because The Hart Law Group had historically served as Defendants’ counsel, with the mutual consent of Plaintiff and Rogers, and because, unlike Rogers in hiring ALG to pursue claims on behalf of Defendants against Plaintiff, Plaintiff did not seek to retain The Hart Law Group to assert claims on Defendants’ behalf against Rogers in his individual capacity. of the members or relating to the business or affairs of the company will be decided
by the affirmative vote or consent of members holding a majority of the ownership
interests.” (Op. Ag. ¶ 5.2.) The Operating Agreement further describes certain
actions that “no member has authority to do . . . without the prior written consent of
all other members[,]” including “incur[ring] indebtedness by the company other
than in the ordinary course of business” and “authoriz[ing] a transaction involving
an actual or potential conflict of interest between a member and the company[.]”
(Id. ¶ 5.3.)
{30} Here, Rogers made the unilateral decision to retain ALG to represent
Bywater in this matter for the purpose of defending against Plaintiff’s claims and
asserting counterclaims against Plaintiff. This decision has caused Bywater to
incur debt “other than in the ordinary course of business” – indeed, it was
represented at the October 16, 2014 hearing that Bywater has incurred legal fees
owed to ALG of approximately $85,000 to date in this matter – and, additionally,
has created “an actual . . . conflict of interest between a member [i.e., Plaintiff] and
the company[.]” Accordingly, because Rogers took these actions without Plaintiff’s
affirmative vote or consent (i.e., without the “affirmative vote of members holding a
majority of the ownership interests”), the Court concludes that Rogers’ retention of
ALG was in contravention of his authority under the Operating Agreement. Agiqua
{31} Plaintiff and Rogers agree that they have not entered into a written
operating agreement with respect to Agiqua. The default provisions of the LLC Act,
therefore, govern Plaintiff’s and Rogers’ management of Agiqua.
{32} Under the LLC Act, majority approval is required to take extraordinary
action on behalf of the LLC of the sort Rogers has sought to authorize here. See,
e.g., Crouse, 189 N.C. App. at 239, 658 S.E.2d at 37-38 (applying LLC Act in
absence of operating agreement and holding that fifty percent LLC member “lacked
authority to cause [the LLC] to institute the . . . action on its own behalf” against
the other fifty percent LLC member); see also Maitland v. Int’l Registries, LLC,
2008 Del. Ch. LEXIS 70, at *4-5 (Del. Ch. June 6, 2008) (holding that fifty percent
LLC member was unauthorized to unilaterally retain counsel on behalf of the LLC
and thus disqualifying counsel and striking the LLC’s answer where the operating
agreement “require[d] action by majority”); Caplash v. Rochester Oral &
Maxillofacial Surgery Assoc., LLC, 20 Misc. 3d 1104(A), 867 N.Y.S.2d 15, 2008 N.Y.
Misc. LEXIS 3519, 2008 NY Slip Op 51216(U) (2008) (following Maitland and
holding that fifty percent LLC member “had no authority to hire counsel for [the
LLC] for any purpose, and certainly not for the purpose of appearing in the action in
a militant capacity on one side of a 50-50 split”). To conclude otherwise would leave
open the possibility of two equal LLC members each designating competing counsel
to represent the same LLC in the same legal action. See Maitland, 2008 Del. Ch. LEXIS 70, at *3 (“If Guida’s interpretation were correct, Maitland would have an
equal right to appoint counsel and file an answer on behalf of [the LLC].”).
{33} Accordingly, for the reasons articulated above, the Court concludes that
Rogers lacked the proper authority to retain ALG as counsel for Agiqua under the
circumstances.
{34} Based on the foregoing, the Court hereby GRANTS Plaintiff’s Motion to
Disqualify and STRIKES all filings submitted by ALG on Defendants’ behalf,
including but not limited to Defendants’ Answer and Counterclaims, Motion to
Dismiss, and Motion to Re-Open Discovery, without prejudice to Defendants’ right
to refile these or other legally supportable and permissible documents after the
retention of new counsel.
Plaintiff’s Motion to Appoint Receiver
{35} The evidence of record demonstrates that Plaintiff and Rogers are
deadlocked with respect to their management of Defendants in that they are unable
to agree on even the most basic decisions concerning Defendants’ day-to-day
operations. In light of this deadlock, Plaintiff requests that the Court appoint a
receiver to manage Defendants’ business operations pending the Court’s decision on
dissolution. Defendants, however, oppose the appointment of a receiver for either
Defendant. Defendants contend that appointing a receiver is a drastic remedy that
is unnecessary in this case because both Bywater and Agiqua operate successful
businesses. Defendants further contend that Plaintiff’s request for a receiver
should be denied because “[a]ppointing a receiver requires a precedent determination that judicial dissolution may be a remedy[,]” and that, in light of the
recent revisions to the LLC Act, Plaintiff’s asserted basis for dissolution –
management deadlock – is no longer valid. (Defs.’ Br. Mot. to Dismiss, pg. 6.)
{36} The LLC Act specifically authorizes a trial court to appoint a receiver “to
manage the business of the LLC pending the court’s decision on dissolution and if
dissolution is decreed by the court to wind up the LLC.” N.C. Gen. Stat. § 57D-6-
04(a) (2014). N.C. Gen. Stat. § 1-502 also contemplates the appointment of a
receiver prior to judgment, providing that a receiver may be appointed where the
moving party “establishes an apparent right to property which is the subject of the
action and in the possession of an adverse party, and the property or its rents and
profits are in danger of being lost, or materially injured or impaired[.]” Barnes v.
Kochhar, 178 N.C. App. 489, 499, 633 S.E.2d 474, 480-81 (2006) (quoting N.C. Gen.
Stat. § 1-502). Additionally, our “Supreme Court [has] indicated that a court of
equity has the ‘inherent power to appoint a receiver, notwithstanding specific
statutory authorization.’” Williams v. Liggett, 113 N.C. App. 812, 816, 440 S.E.2d
331, 333 (1994) (quoting Lowder v. All Star Mills, Inc., 301 N.C. 561 576, 273 S.E.2d
247, 256 (1981)); see also Barnes, 178 N.C. App. at 499, 633 S.E.2d at 480 (“A
receiver may be appointed by a trial court both pursuant to statute and the trial
court’s inherent authority.”). The “appointment of a receiver is within the discretion
of the trial court.” Barnes, 178 N.C. App. at 500, 633 S.E.2d at 481 (citing Murphy
v. Murphy, 261 N.C. 95, 101, 134 S.E.2d 148, 153 (1964)). {37} Here, the Court concludes that the appointment of a receiver is
appropriate in light of the persisting management deadlock between Plaintiff and
Rogers and the accusations of corporate mismanagement and malfeasance each has
made against the other. See, e.g. Assoc. Behavioral Servs. v. Smith, 2011 NCBC 22
(N.C. Super. Ct. July 8, 2011) (appointing a receiver where two fifty percent
shareholders were “hopelessly deadlocked” in the management of their company).
While it is true that Defendants’ businesses have, thus far, withstood the “falling
out” of their two owners, it also true that the discord between Plaintiff and Rogers
pervades every aspect of their management of Defendants, thus posing a constant
and imminent threat of irreparable damage to Defendants’ business operations.
The Court notes, moreover, that the limited duration of the requested receivership –
only through resolution of Plaintiff’s request for dissolution – reduces any perceived
detrimental impact of this remedy on Defendants’ businesses.
{38} Turning now to Defendants’ contention that Plaintiff’s request for a
receiver is improper because recent amendments to the LLC Act have removed
management deadlock as a valid basis for dissolution, the Court recognizes that
Plaintiff is “not entitled to have [the] ancillary relief [of a receiver] unless [Plaintiff
is] entitled to the main relief demanded in [Plaintiff’s] complaint.” Maloney v.
Alliance Dev. Group, LLC, 2006 NCBC 11, at *38 (N.C. Super. Ct. Sept. 18, 2006)
(quoting Witz, Biedler & Co. v. Gray, 116 N.C. 48, 55, 20 S.E. 1019, 1020 (1895)). In
other words, the Court’s appointment of a receiver here is contingent upon first
reaching a determination that Plaintiff will likely succeed on the merits of his claim for judicial dissolution. Id. (citing, inter alia, N.C. Gen. Stat. § 1-502 for the
proposition that “North Carolina courts will neither appoint a receiver nor issue a
preliminary injunction unless the movant can show a likelihood of success on the
merits of his claims”). Accordingly, the Court must consider whether management
deadlock remains a valid basis for judicial dissolution under the LLC Act.
{39} Prior to January 1, 2014, a trial court in North Carolina was authorized
under the LLC Act to dissolve an LLC under the following circumstances:
(1) the managers, directors, or any other persons in control of the limited liability company are deadlocked in the management of the affairs of the limited liability company, the members are unable to break the deadlock, and irreparable injury to the limited liability company is threatened or being suffered, or the business and affairs of the limited liability company can no longer be conducted to the advantage of the members generally, because of the deadlock; (2) liquidation is reasonably necessary for the protection of the rights or interests of the complaining member; (3) the assets of the limited liability company are being misapplied or wasted; or (4) the articles of organization or a written operating agreement entitles the complaining member to dissolution of the limited liability company.
Mitchell, Brewer, Richardson, Adams, Burge & Boughman, PLLC v. Brewer, 209
N.C. App. 369, 390, 705 S.E.2d 757,772 (2011) (quoting N.C. Gen. Stat. § 57C-6-
02(2) (2007)) (emphasis added).
{40} The enactment of N.C. Gen. Stat. § 57D-6-02, effective January 1, 2014,
reformulated the permissible “[g]rounds for judicial dissolution” under the LLC Act
The superior court may dissolve an LLC in a proceeding brought by either of the following:
.... (2) A member if it is established that (i) it is not practicable to conduct the LLC’s business in conformance with the operating agreement and this Chapter or (ii) liquidation of the LLC is necessary to protect the rights and interests of the member.
N.C. Gen. Stat. § 57D-6-02 (2014).4 Defendants contend that the absence of
any reference to “deadlock” in N.C. Gen. Stat. § 57D-6-02 reflects a conscious
decision by the North Carolina General Assembly to remove deadlock as a
proper basis for dissolution.
{41} The Court notes initially that the plain language of the LLC Act’s
newly adopted grounds for dissolving an LLC where “it is not practicable” to
continue the LLC’s operations would appear to embrace, not remove,
management deadlock as a valid grounds for dissolution. “Statutory
interpretation begins with the plain meaning of the words of the statute[,]”
Woods v. Moses Cone Health Sys., 198 N.C. App. 120, 126, 678 S.E.2d 787,
791 (2009), and it cannot be reasonably argued that continuation of the LLC’s
operations is “practicable” where, as in the instant case, the two fifty percent
member-managers are unable to reach agreement with respect to even the
most basic management decisions.
{42} Further, the “not practicable” standard is nearly identical to the
standard for judicial dissolution under Delaware’s LLC Act, which provides
that the Delaware “‘Court of Chancery may decree dissolution of a limited
liability company whenever it is not reasonably practicable to carry on the
4 N.C. Gen. Stat. § 57D-6-02(1) pertains to dissolution by the North Carolina Attorney General under
circumstances not relevant to the instant proceedings. business in conformity with a limited liability company agreement.’” In re
Mobilactive Media, LLC, 2013 Del. Ch. LEXIS 26 (Del. Ch. Jan. 25, 2013)
(quoting 6 Del. C. § 18-802) (emphasis added).
{43} In Fisk Ventures, LLC v. Segal, 2009 Del. Ch. LEXIS 7 (Del. Ch.
Jan. 13, 2009), the Delaware Court of Chancery held that there was “more
than ample reason” to dissolve an LLC under Delaware’s “reasonably
practicable” standard where the “undisputed evidence . . . demonstrate[d] the
futility of [the LLC’s] deadlocked board, the LLC Agreement’s fail[ed] to
prescribe a solution to a potentially deadlocked board, and [the LLC was in]
dire financial straits.” Id. at *12. In so holding, the Court of Chancery
observed that where “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.” Id.; see,
e.g., Haley v. Talcott, 864 A.2d 86, 88-89 (Del. Ch. 2004) (ordering dissolution
even though the 50/50-owned LLC was “technically functioning” despite
deadlock); see also Kirksey v. Grohmann, 2008 SD 76, 754 N.W.2d 825, 830
(S.D. 2008) (ordering dissolution even though the 50/50-owned business could
continue despite deadlock). The Fisk Ventures court also noted that
dissolution may be appropriate even where the LLC is “financially stable”
and that dissolution under the “reasonably practicable” standard does not
require a “show[ing] that the purpose of the limited liability company has been ‘completely frustrated.’” Fisk Ventures, LLC, 2009 Del. Ch. LEXIS 7, at
*11-12.
{44} This Court construes the undeniable similarity between our LLC
Act’s “not practicable” standard and Delaware’s “reasonably practicable”
standard – which, as discussed above, permits dissolution in instances of
management deadlock – as evidence that our Legislature did not intend
through its enactment of N.C. Gen. Stat. § 57D-6-02 to remove management
deadlock as a valid basis for judicial dissolution. Accordingly, the Court
concludes that management deadlock of the sort presented here remains a
valid basis for seeking judicial dissolution under the LLC Act. See
Ehrenhaus v. Baker, 216 N.C. App. 59, 85, 717 S.E.2d 9, 27 (2011) (relying on
Delaware law as persuasive in the absence of relevant controlling authority).
{45} In light of the foregoing, the Court concludes that the management
deadlock present in the instant case, when coupled with the allegations of both
Plaintiff and Rogers that the other has engaged in misconduct and misappropriated
Bywater funds, serves as sufficient grounds to justify the appointment of a receiver
for Defendants.
{46} Accordingly, the Court GRANTS Plaintiff’s Motion to Appoint a Receiver
as more specifically provided in this Order and Opinion.
Plaintiff’s Motion for Preliminary Injunction
{47} “In order to obtain a preliminary injunction, the movant must demonstrate
(1) that it will likely succeed on the merits of its case; and (2) that it will likely sustain irreparable harm absent the injunction.” Northern Star Mgmt. of Am., LLC
v. Sedlacek, __ N.C. App. __, __, 762 S.E.2d 357, 360-361 (2014) (citing Ridge Cmty.
Investors, Inc. v. Berry, 293 N.C. 688, 701, 239 S.E.2d 566, 574 (1977)).
{48} The Court concludes that Plaintiff’s claimed injury will be adequately
redressed through the Court’s appointment of a receiver. Thus, Plaintiff is unable
to demonstrate a likelihood of irreparable harm absent the issuance of an
injunction.
{49} Plaintiff’s Motion for Preliminary Injunction is, therefore, DENIED.
{50} NOW THEREFORE, based upon the foregoing FINDINGS and
CONCLUSIONS, it is ORDERED that:
{51} Plaintiff’s Motion to Disqualify is GRANTED.
{52} All filings submitted by ALG on behalf of Defendants in this matter,
including but not limited to Defendants’ Answer and Counterclaims, Motion to
Dismiss, and Motion to Re-Open Discovery, are hereby STRICKEN without
prejudice to Defendants’ right to refile these or other legally supportable and
permissible documents after the retention of new counsel.
{53} Plaintiff’s Motion for Appointment of Receiver is GRANTED as herein
provided:
a. The parties shall confer and attempt to reach agreement concerning a
joint proposed order appointing receiver (“Joint Proposed Order”). The
Joint Proposed Order shall nominate no more than three (3) persons or
entities who are willing to serve as a receiver in this matter and shall specifically set forth in detail the qualifications of each proposed
receiver, the rates charged and anticipated costs and expenses
associated with each proposed receiver, the allocation of the receiver’s
costs between the parties, and all instructions, powers and duties the
parties request the Court issue to the receiver, including without
limitation, all instructions concerning the scope of the receiver’s work,
the authority of the receiver in performing the receiver’s work, the
timing and timeframe for the receiver’s appointment and work, and all
other instructions the parties believe are appropriate. The power and
duties of the appointed receiver shall include, inter alia, (i) retaining
counsel to defend Defendants against Plaintiff’s claims in this action;
and (ii) pursuing any claims on Defendants’ behalf against Plaintiff,
Rogers, and/or third parties as necessary to further Defendants’ best
interests. The Joint Proposed Order shall be submitted within twenty-
one (21) days of the entry of this Order and Opinion.
b. In the event the parties are unable to agree upon a Joint Proposed
Order, each party shall submit an individual proposed order
appointing a receiver (“Individual Proposed Order”), accompanied by a
supporting brief, within twenty-one (21) days of the entry of this Order
and Opinion. Each Individual Proposed Order shall contain the
information described in connection with the Joint Proposed Order in
the immediately preceding paragraph. c. The parties shall serve responsive briefs in opposition to the Individual
Proposed Orders, if any, within seven (7) days of service of the
supporting brief described in the immediately preceding paragraph.
d. The Court will convene a Case Management Conference after a
receiver has been appointed to discuss scheduling and related matters.
{54} Plaintiff’s Motion for Preliminary Injunction is DENIED.
SO ORDERED, this the 31st day of October, 2014.