Camacho v. McCallum, 2016 NCBC 79.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION GASTON COUNTY 16 CVS 602
SUSAN CAMACHO individually, and ) in her capacity as Administrator ) C.T.A. of the Estate of Kerry Lee ) McCallum, deceased, and on behalf of ) JOAN FABRICS, LLC, ) ) Plaintiffs, ) ) ORDER AND OPINION v. ) ) ELKIN MCCALLUM and JOAN ) FABRICS, LLC, ) ) Defendants. ) )
1. THIS MATTER is before the Court on Plaintiff Susan Camacho’s
(“Plaintiff” or “Camacho”) Motion for Appointment of Receiver (the “Motion for a
Receiver”) and Defendants Elkin McCallum and Joan Fabrics, LLC’s (collectively,
“Defendants”) Motion to Dismiss Plaintiff’s Complaint (the “Motion to Dismiss”).
After considering the Motion for a Receiver and the Motion to Dismiss (collectively,
the “Motions”), supporting and opposing briefs, and arguments of counsel at a hearing
on the Motions, for the reasons set forth below the Court hereby GRANTS
Defendants’ Motion to Dismiss and DENIES Plaintiff’s Motion for a Receiver.
Hickmon & Perrin, P.C., by James Hickmon, and Fitzgerald Litigation, by Andrew Fitzgerald, for Plaintiff Susan Camacho.
Patrick, Harper & Dixon, LLP, by Michael J. Barnett, for Defendants Elkin McCallum and Joan Fabrics, LLC.
Robinson, Judge. I. PROCEDURAL HISTORY
2. Plaintiff commenced this action in her individual capacity, in her capacity
as the personal representative of the Estate of Kerry McCallum (“Kerry’s Estate”),
and on behalf of Joan Fabrics, LLC (“Joan”) on February 18, 2016 by filing her
Complaint, Motion to Review Corporate Books and Records, and Motion for
Appointment of Receiver (“Complaint”). In addition to the Motion for a Receiver, the
Complaint brings the following direct claims: (1) an accounting and inspection of
books and records claim (the “Inspection Claim”); (2) a judicial dissolution claim; and
(3) a breach of fiduciary duty claim (collectively, the “Claims”). (Compl. ¶¶ 22, 25,
33.) Plaintiff also asserts the Claims derivatively on behalf of Joan. (Compl. 5.)
3. The case was designated as a mandatory complex business case pursuant
to N.C. Gen. Stat. § 7A-45.4(b) by order of the Chief Justice of the North Carolina
Supreme Court dated February 19, 2016, and was assigned to the Honorable Louis
A. Bledsoe, III, by order dated February 24, 2016. The case was later reassigned to
the undersigned by order dated July 5, 2016.
4. On March 17, 2016, Defendants filed the Motion to Dismiss. The Motion to
Dismiss seeks dismissal of the Complaint pursuant to Rules 12(b)(1) and 12(b)(6) of
the North Carolina Rules of Civil Procedure (“Rule(s)”).
5. After briefing on the Motions was completed, the Court held a hearing on
the Motions on June 1, 2016. At the hearing, the parties agreed to a temporary stay
to allow for limited production of documents and initial mediation. The Court entered
a Scheduling Order on June 10, 2016, staying the case to and including August 1, 2016. In the Scheduling Order, the Court ordered that Defendants produce records
no later than June 15, 2016, that the parties engage in an initial mediation session
no later than August 1, 2016, and that the parties submit a status report to the Court
within ten days of the initial mediation, but no later than August 1, 2016.
6. On July 26, 2016, the parties submitted a Status Report to the Court. The
Status Report states that the parties conducted mediation on July 18, 2016, which
resulted in an impasse, and the parties would like the Court to proceed with ruling
on the Motions.
II. FACTUAL BACKGROUND
7. Joan is a Delaware limited liability company (“LLC”) with its principal
place of business in Massachusetts. (Compl. ¶ 3.)
8. Defendant Elkin McCallum (“Elkin”) is a member of Joan and Joan’s
President and Chief Executive Officer (“CEO”). (Compl. ¶¶ 4−5.) Elkin owns a 50%
interest in Joan. (Compl. ¶ 4.)
9. Donna McCallum (“Donna”)—who is not a party to this action—is a member
of Joan, a 25% interest owner, and the wife of Elkin. (Compl. ¶¶ 4, 6.)
10. Kerry McCallum (“Kerry”) was the daughter of Elkin and Donna. (Compl.
¶ 4.) Kerry died on October 31, 2014. (Compl. ¶ 2.) Prior to her death, Kerry was a
member of Joan, the Vice President of Joan, and a 25% interest owner. (Compl. ¶¶
2, 9.)
11. Kerry’s Estate owns a 25% interest in Joan. (Compl. ¶ 2.) Camacho is the
personal representative of Kerry’s Estate and was legally married to Kerry. (Compl. ¶¶ 1, 9.) Camacho individually inherited Kerry’s 25% ownership interest, and
Defendants have ignored Plaintiff’s requests to assign the Estate’s ownership interest
to Camacho individually. (Compl. ¶ 2.)
12. Plaintiff alleges that there have been questions regarding Joan’s
management for many years. (Compl. ¶ 10.) In 2007, Joan filed for bankruptcy
protection and, around the same time, Elkin was the subject of a complaint filed by
the Securities and Exchange Commission. (Compl. ¶ 10.)
13. Plaintiff alleges that Elkin has told Donna that Donna must always vote in
agreement with Elkin, and Donna has never dissented from action taken by Elkin.
(Compl. ¶ 6.) As a result, Plaintiff contends that Donna and Elkin, who together own
75% of Joan, make a majority voting bloc that owes a fiduciary duty to Plaintiff, the
minority member. (Compl. ¶¶ 6, 32−34.)
14. Plaintiff, through a series of letters and emails and an estate proceeding,
sought information on Joan pursuant to the Joan Fabrics LLC Operating Agreement
(the “Operating Agreement”) and Delaware law. (Compl. ¶¶ 12−14, Exs. 2−6.) The
Operating Agreement contains a Delaware choice-of-law provision (Compl. Ex. 1 ¶
11(c) [hereinafter Op. Agmt.]) and the following provision providing members with
inspection rights:
The Members shall keep or cause to be kept complete and accurate books and records of the LLC . . . . Such books and records shall be maintained and be available, in addition to any documents and information required to be furnished to the Members under the [Delaware Limited Liability Company] Act, at an office of the LLC for examination and copying by any Member, or his duly authorized representative, at his reasonable request and at his expense during ordinary business hours. (Op. Agmt. ¶ 9(a).) Plaintiff alleges that Joan is in financial distress, Plaintiff is
entitled to the information requested, and Defendants have refused to provide such
information. (Compl. ¶¶ 19, 34.)
15. Plaintiff has attempted to call a members meeting, but Elkin will not and/or
cannot, due to health issues, have a members meeting. (Compl. ¶ 17.) Elkin
scheduled a members meeting on two separate occasions and cancelled both
meetings. (Compl. ¶ 17.)
16. Elkin has threatened to make a capital call on Plaintiff, which Plaintiff
alleges is not permitted by the Operating Agreement. (Compl. ¶ 16.)
III. LEGAL STANDARD
17. In ruling on a motion to dismiss pursuant to Rule 12(b)(6), the Court
reviews the allegations of the Complaint in the light most favorable to Plaintiff. The
Court’s inquiry is “whether, as a matter of law, the allegations of the complaint,
treated as true, are sufficient to state a claim upon which relief may be granted under
some legal theory.” Harris v. NCNB Nat’l Bank of N.C., 85 N.C. App. 669, 670, 355
S.E.2d 838, 840 (1987). The Court construes the Complaint liberally and accepts all
allegations as true. Laster v. Francis, 199 N.C. App. 572, 577, 681 S.E.2d 858, 862
(2009).
18. Dismissal of a claim pursuant to Rule 12(b)(6) is proper “(1) when the
complaint on its face reveals that no law supports [the] claim; (2) when the complaint
reveals on its face the absence of fact sufficient to make a good claim; [or] (3) when
some fact disclosed in the complaint necessarily defeats the . . . claim.” Oates v. JAG, Inc., 314 N.C. 276, 278, 333 S.E.2d 222, 224 (1985); see also Jackson v. Bumgardner,
318 N.C. 172, 175, 347 S.E.2d 743, 745 (1986). Otherwise, “a complaint should not
be dismissed for insufficiency unless it appears to a certainty that plaintiff is entitled
to no relief under any state of facts which could be proved in support of the claim.”
Sutton v. Duke, 277 N.C. 94, 103, 176 S.E.2d 161, 166 (1970) (emphasis omitted).
19. A court shall dismiss the action when it appears that the court lacks subject
matter jurisdiction. N.C. R. Civ. P. 12(h)(3). “A motion to dismiss for lack of subject
matter jurisdiction is not viewed in the same manner as a motion to dismiss for failure
to state a claim upon which relief can be granted.” Tart v. Walker, 38 N.C. App. 500,
502, 248 S.E.2d 736, 737 (1978). A court may consider matters outside the pleadings
in determining whether subject matter jurisdiction exists. Keith v. Wallerich, 201
N.C. App. 550, 554, 687 S.E.2d 299, 302 (2009); Tart, 38 N.C. App. at 502, 248 S.E.2d
at 737.
IV. MOTION TO DISMISS
A. Inspection Claim
20. Plaintiff brings her Inspection Claim pursuant to N.C. Gen. Stat. § 57D-3-
04 and Del. Code Ann. tit. 6, § 18-305, in which she demands a full accounting and
seeks to inspect all records of Joan available under those statutes and the Operating
Agreement. (Compl. ¶ 22.)
21. The parties agree that because Joan is an LLC organized under the laws of
Delaware and the Operating Agreement contains a Delaware choice-of-law provision,
Delaware law governs the Inspection Claim. (Joint Case Mgmt. Report 2); Del. Code Ann. tit. 6, § 18-1101(i) (2015) (“A limited liability company agreement that provides
for the application of Delaware law shall be governed by and construed under the
laws of the State of Delaware in accordance with its terms.”); see also id. § 18-305(a)
(providing inspection rights to members of a “limited liability company”); id. § 18-
101(6) (defining “limited liability company” as “a limited liability company formed
under the laws of the State of Delaware”).
22. To the extent Plaintiff purports to bring her Inspection Claim pursuant to
section 57D-3-04 of the North Carolina Limited Liability Company Act (the “North
Carolina Act”), the Inspection Claim must be dismissed for failure to state a claim
upon which relief can be granted. Delaware law governs the Inspection Claim, and
section 57D-3-04 applies only to members of an LLC formed under the North Carolina
Act. N.C. Gen. Stat. § 57D-1-02(a) (2015) (“[The North Carolina Limited Liability
Company Act] and any other applicable laws of this State govern (i) the internal
affairs of every LLC, including the interpretation, construction, and enforcement of
operating agreements and determining the rights and duties of interest owners . . . .”
(emphasis added)); id. § 57D-1-03(13), (19) (defining “LLC” as an entity formed under
the North Carolina Act and a “foreign LLC” as a limited liability company organized
under the law of another state); id. § 57D-3-04(a) (providing inspection rights to
members of an LLC, as opposed to a foreign LLC). Therefore, section 57D-3-04 does
not provide Plaintiff, a member of a Delaware LLC, with inspection rights.
23. Under section 18-305(a) of the Delaware Limited Liability Company Act
(the “Delaware Act”), a member of a Delaware LLC “has the right, subject to such reasonable standards (including standards governing what information and
documents are to be furnished at what time and location and at whose expense) as
may be set forth in a[n LLC] agreement or otherwise . . . to obtain from the [LLC]”
certain information regarding the LLC. Del. Code Ann. tit. 6, § 18-305(a).
24. Section 18-305 is explicit that an action under that section must be brought
in the Court of Chancery and the Court of Chancery has exclusive jurisdiction to
determine whether the member is entitled to the information requested. “Any action
to enforce any right arising under [section 18-305] shall be brought in the Court of
Chancery. . . . The Court of Chancery is hereby vested with exclusive jurisdiction to
determine whether or not the person seeking such information is entitled to the
information sought.” Id. § 18-305(f) (emphasis added); see also Elf Atochem N. Am.,
Inc. v. Jaffari, 727 A.2d 286, 292 (Del. 1999) (“In vesting the Court of Chancery with
jurisdiction, the [Delaware Act] accomplished at least three purposes: (1) it assured
that the Court of Chancery has jurisdiction it might not otherwise have . . . ; (2) it
established the Court of Chancery as the default forum in the event the members did
not provide another choice of forum or dispute resolution mechanism; and (3) it tends
to center interpretive litigation in Delaware courts with the expectation of
uniformity.”).
25. Here, Plaintiff seeks to inspect Joan’s records pursuant to section 18-305
and the Operating Agreement. Thus, the Inspection Claim is “any action to enforce
any right arising under [section 18-305]” and must therefore be brought in the Court
of Chancery, which has exclusive jurisdiction to determine whether Plaintiff is entitled to the requested information. Del. Code Ann. tit. 6, § 18-305(f). As a result,
the Inspection Claim must be dismissed for lack of subject matter jurisdiction.
B. Judicial Dissolution
26. Plaintiff seeks judicial dissolution of Joan pursuant to N.C. Gen. Stat. §
57D-6-02 and Del. Code Ann. tit. 6, § 18-802. (Compl. ¶ 25.) Plaintiff alleges that “it
is not practicable to conduct [Joan’s] business in conformance with the operating
agreement and the Delaware and North Carolina Limited Liability [Company] Acts
and liquidation of [Joan] is necessary to protect the rights and interests of the
member.” (Compl. ¶ 25.)
27. The parties agree that because Joan is a Delaware LLC and the Operating
Agreement contains a Delaware choice-of-law provision, Delaware law governs the
judicial dissolution claim. (Joint Case Mgmt. Report 2); Del. Code Ann. tit. 6, § 18-
802 (providing for judicial dissolution of a “limited liability company” when “it is not
reasonably practicable to carry on the business in conformity with a limited liability
company agreement”); id. § 18-101(6) (defining “limited liability company” as “a
limited liability company formed under the laws of the State of Delaware”); id. § 18-
1101(i) (“A limited liability company agreement that provides for the application of
Delaware law shall be governed by and construed under the laws of the State of
Delaware in accordance with its terms.”).
28. To the extent Plaintiff purports to bring the judicial dissolution claim
pursuant to N.C. Gen. Stat. § 57D-6-02, the claim must be dismissed for failure to
state a claim upon which relief can be granted. Delaware law governs the judicial dissolution claim, and section 57D-6-02 applies only to an LLC formed under the
North Carolina Act. N.C. Gen. Stat. § 57D-1-03(13), (19) (defining “LLC” as an entity
formed under the North Carolina Limited Liability Company Act and a “foreign LLC”
as a limited liability company organized under the law of another state); id. § 57D-6-
01 (providing that an LLC, as opposed to a foreign LLC, is dissolved upon a decree of
judicial dissolution under section 57D-6-05); id. § 57D-6-02 (providing the grounds on
which “[t]he superior court may dissolve an LLC[,]” as opposed to a foreign LLC); id.
§ 57D-6-05(a) (providing that the court “may enter a decree dissolving the LLC[,]” as
opposed to a foreign LLC).
29. Under section 18-802 of the Delaware Act, “the Court of Chancery may
decree dissolution of a [Delaware] limited liability company whenever it is not
practicable to carry on the business in conformity with a limited liability company
agreement.” Del. Code Ann. tit. 6, § 18-802 (emphasis added). Unlike other
provisions of the Delaware Act that provide an action may be brought in the Court of
Chancery, thereby implying that those actions may be brought in courts other than
the Court of Chancery, the plain language of section 18-802 permits only the Court
of Chancery to enter a decree dissolving a Delaware LLC. Compare id. § 18-111 (“Any
action to interpret, apply or enforce the provisions of a limited liability company
agreement . . . may be brought in the Court of Chancery.”), and id. § 18-1001 (stating
that a member of an LLC “may bring [a derivative] action in the Court of Chancery”),
with id. § 18-802 (stating “the Court of Chancery may decree dissolution”). See also
In re Raharney Capital, LLC v. Capital Stack LLC, 25 N.Y.S.3d 217, 217−18 (N.Y. App. Div. 2016) (holding that New York courts do not have subject matter jurisdiction
to judicially dissolve a Delaware LLC); Intertrust GCN, LP v. Interstate Gen. Media,
LLC, No. 99, 2014 Phila. Ct. Com. Pl. LEXIS 434, at *7 (Phila. Ct. Com. Pl. Feb. 11,
2014) (stating that the language of section 18-802 “grants exclusive subject [matter]
jurisdiction to the Delaware Court of Chancery to hear and determine petitions for
judicial dissolution”); Casella Waste Sys., Inc. v. GR Tech., Inc., No. 409-6-07, 2009
Vt. Super. LEXIS 14, at *7−8 (Vt. Super. Ct. Feb. 6, 2009) (“[A] plain reading of
[section 18-802] suggests that the default rules governing dissolution grant subject
matter jurisdiction only to the Delaware Court of Chancery, and not to any other
court.”).
30. Moreover, the Delaware statute’s limited grant of authority to the Court of
Chancery to judicially dissolve a Delaware LLC is consistent with the underlying
principles and structure of an LLC. The Delaware Act enables the formation of an
LLC and affords members substantial freedom to contract among themselves
regarding various issues, such as management of the LLC, the rights and duties of
managers and members, admission of new members, and termination of the LLC.
The Delaware Act provides default provisions only where the parties have not
otherwise agreed. Del. Code Ann. tit. 6, § 18-1101(b) (“It is the policy of [the Delaware
Act] to give the maximum effect to the principle of freedom of contract and to the
enforceability of [LLC] agreements.”); Elf Atochem N. Am., Inc. v. Jaffari, 727 A.2d
286, 290−92 (Del. 1999). 31. Judicial dissolution of entities created under, and granted substantial
contractual freedom by, the laws of one state should be accomplished by a decree of a
court of that state. See Classic Coffee Concepts, Inc. v. Anderson, 2006 NCBC LEXIS
24, at *45 (N.C. Super. Ct. Dec. 1, 2006) (finding that a North Carolina court lacked
authority to judicially dissolve a Delaware corporation); In re Carlisle Etcetera LLC,
114 A.3d 592, 605−06 (Del. Ch. 2015) (“[W]hen a sovereign makes available an [LLC]
with attributes that contracting parties cannot grant themselves by agreement, the
[LLC] is not purely contractual. Because the entity has taken advantage of benefits
that the sovereign has provided, the sovereign retains an interest in that [LLC]. That
interest in turn calls for preserving the ability of the sovereign’s courts to oversee
and, if necessary, dissolve the [LLC].”).
32. Here, Plaintiff seeks judicial dissolution of Joan, a Delaware LLC. Only the
Delaware Court of Chancery may enter a decree dissolving Joan, and therefore
Plaintiff’s judicial dissolution claim must be dismissed for lack of subject matter
jurisdiction.
C. Breach of Fiduciary Duty Claim
33. Plaintiff’s breach of fiduciary duty claim is that
[t]he majority owners have breached their fiduciary duties in numerous respects, to be supplemented when plaintiff may view the Joan books and records. Plaintiff believes that there has been corporate waste, self- dealing and a lack of adherence to corporate formalities. Specifically to date plaintiff pleads that Elkin McCallum and Donna McCallum have breached their fiduciary duties by concealing the company’s books and records and refusing to have a member’s meeting.
(Compl. ¶¶ 33−34.) 1. Standing
34. Because Plaintiff purports to bring both a direct claim and a derivative
claim for breach of fiduciary duty, the Court must first determine whether Plaintiff
has standing to assert a direct claim for such alleged breach. North Carolina courts
look to the laws of the state in which the LLC is organized to determine whether a
claim is derivative or direct. Scott v. Lackey, 2012 NCBC LEXIS 60, at *14 (N.C.
Super. Ct. Dec. 3, 2012) (“Because BHCM is a limited liability company formed in
Delaware, the Court looks to Delaware law to determine Plaintiff’s standing to bring
his direct claims.”).
35. Under Delaware law, to determine whether a claim is direct or derivative,
a court must look to the nature of the wrong and to whom the relief will go. Tooley v.
Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031, 1039 (Del. 2004). A member’s
claimed direct injury must be independent of any alleged injury to the LLC. Id. A
member must demonstrate that the duty breached was owed to the member and that
the member can prevail without showing an injury to the LLC. Id.; Kuroda v. SPJS
Holdings, L.L.C., 971 A.2d 872, 887 (Del. Ch. 2009) (“Delaware law is clear that direct
claims are available only where the member has suffered damage that is independent
of any damage suffered by the limited liability company.”).
36. Here, Plaintiff’s breach of fiduciary duty claim is based on Elkin failing to
hold a members meeting and refusing to allow Plaintiff to inspect Joan’s books and
records. The nature of the wrong alleged is that Plaintiff was not permitted to inspect
the books and records and Plaintiff has been unable to get company information because Elkin has failed to have a members meeting, and any relief would go to
Plaintiff. Therefore, Plaintiff has standing to assert a direct claim for breach of
fiduciary duty. Sanders v. Ohmite Holding, LLC, 17 A.3d 1186, 1188 (Del. Ch. 2011)
(deciding a member’s direct claim to inspect company books and records); RED
Capital Inv. L.P. v. RED Parent LLC, 2016 Del. Ch. LEXIS 25, at *10−11 (Del. Ch.
Feb. 11, 2016) (same); Somerville S Trust v. USV Partners, LLC, 2002 Del. Ch. LEXIS
103, at *1 (Del. Ch. Aug. 2, 2002) (same).
2. Governing Law
37. The Court must next determine which state’s law governs Plaintiff’s breach
of fiduciary duty claim. In their briefs, the parties argued the breach of fiduciary
duty claim as if North Carolina law applies; however, the parties did not provide a
basis as to why North Carolina law governs the claim, and the Court does not find
the issue to be so straightforward.
38. Under North Carolina conflict of law principles, matters affecting the
substantial rights of the parties are determined by lex loci, the law of the situs of the
claim, and remedial or procedural rights are determined by lex fori, the law of the
forum. E.g., Harco Nat’l Ins. Co. v. Grant Thornton LLP, 206 N.C. App. 687, 692, 698
S.E.2d 719, 722−23 (2010). For tort claims, the state where the injury occurred is
considered the situs of the claim. Id. The place of the injury is the state where the
injury or harm was sustained or suffered—the state where the last event necessary
to make the actor liable or the last event required to constitute the tort takes place,
and the substantive law of that state applies. Id. at 695, 698 S.E.2d at 724. 39. Here, the Operating Agreement does not expand, limit, or alter traditional
fiduciary duties. Plaintiff’s breach of fiduciary duty claim is thus properly classified
as a tort claim, rather than a contract claim. Nelson v. Alliance Hospitality Mgmt.,
2013 NCBC LEXIS 39, at *25 (N.C. Super. Ct. Aug. 20, 2013). As a result, the choice-
of-law provision in the Operating Agreement does not apply, and the law of the situs
of the claim controls. See, e.g., Associated Packaging, Inc. v. Jackson Paper Mfg. Co.,
2012 NCBC LEXIS 13, at *9−10 (N.C. Super. Ct. Mar. 1, 2012) (“While the LLC
Agreement’s choice of law provision would control enforcement of the LLC Agreement
itself, the provision does not control the [tort] claims in this case.” (citation omitted)).
40. Plaintiff’s breach of fiduciary duty claim is based on Elkin failing to hold a
members meeting and refusing to allow Plaintiff to inspect Joan’s books and records.
It is unclear from the Complaint where Elkin’s relevant acts took place. On the one
hand, Plaintiff is a North Carolina resident; the last scheduled members meeting was
to take place in North Carolina; Joan has an office in North Carolina; Elkin has a
residence in North Carolina; and Plaintiff, through counsel, made a final demand
that the information requested be provided to Plaintiff (in North Carolina) by the
close of business on February 17, 2016, or otherwise Plaintiff would bring an action
to receive the information. Plaintiff did not receive the information and brought this
action as a result on February 18, 2016. On the other hand, Elkin is a Massachusetts
resident; Joan is a Delaware LLC with its principal place of business in
Massachusetts; and the first scheduled members meeting was to take place in Massachusetts. Further, it is unclear where Joan maintains its books and records
and where inspection of such records would occur.
41. However, the Court concludes that it need not determine the situs of the
claim because, applying the law of either jurisdiction, Plaintiff’s claim for breach of
fiduciary duty must be dismissed.
i. Application of Massachusetts Law
42. Under Massachusetts law, the law of the state of organization governs the
liability of an LLC’s members and managers. Mass. Gen. Laws ch. 156C, § 47 (2015).
Here, because Joan is organized in Delaware, Massachusetts law requires that
Delaware law govern Plaintiff’s breach of fiduciary duty claim.
43. In order to establish a claim for breach of fiduciary duty under Delaware
law, a plaintiff must show that: (1) a fiduciary duty exists; and (2) the fiduciary
breached that duty. Estate of Eller v. Bartron, 31 A.3d 895, 897 (Del. 2011).
44. Unless otherwise provided in an LLC agreement, the managers and
controlling members of an LLC owe traditional fiduciary duties of care and loyalty to
the LLC members. Feeley v. NHAOCG, LLC, 62 A.3d 649, 660−61 (Del. Ch. 2012);
CMS Inv. Holdings, LLC v. Castle, C.A. No. 9568-VCP, 2015 Del. Ch. LEXIS 169, at
*65 (Del. Ch. June 23, 2015); Kelly v. Blum, 2010 Del. Ch. LEXIS 31, at *3 (Del. Ch.
Feb. 24, 2010). A manager of an LLC qualifies as a fiduciary to the LLC and its
members because a manager has more than an arms-length, contractual relationship
with the LLC members and is vested with discretionary power to manage the LLC’s
business. CMS Inv. Holdings, LLC, 2015 Del. Ch. LEXIS 169, at *65−66. 45. Here, although Elkin is not named in the Operating Agreement as the
manager, Elkin is Joan’s President and CEO. Therefore, at the motion to dismiss
stage, Plaintiff has alleged sufficient facts from which it may be found that Elkin has
more than an arms-length, contractual relationship with Joan’s members and thus
owes fiduciary duties to Plaintiff. See id. at *67−68 (finding that, at the motion to
dismiss stage, allegations that a member was responsible for running certain
operations of the LLC were sufficient allegations from which a fiduciary relationship
may be found).
46. Plaintiff states that Elkin breached his fiduciary duties in two respects: (1)
by failing to hold a members meeting; and (2) by refusing to allow Plaintiff to inspect
Joan’s books and records. Plaintiff further alleges that her allegations will be
supplemented after inspection of the books and records.
47. “The fiduciary duty of care requires that [managers] . . . use that amount of
care which ordinarily careful and prudent men would use in similar
circumstances . . . .” In re Walt Disney Co., 907 A.2d 693, 749 (Del. Ch. 2005). The
fiduciary duty of loyalty requires that a manager act in the best interest of the
company, and that a manager put the interests of the company and its interest
owners before his own. Id. at 751. Here, Elkin’s failure to hold a members meeting
implicates the duty of care, rather than the duty of loyalty. See id. (noting that the
duty of loyalty is implicated when a fiduciary stands on both sides of a transaction or
receives a personal benefit). 48. The standard for evaluating a breach of the duty of care is gross negligence.
McPadden v. Sidhu, 964 A.2d 1262, 1274 (Del. Ch. 2008); In re Walt Disney Co., 907
A.2d at 749; Prospect St. Energy, LLC v. Bhargava, 2016 Del. Super. LEXIS 57, at
*21−22 (Del. Super. Ct. Jan. 27, 2016) (applying the gross negligence standard in the
LLC context and finding a claim for gross negligence is the same as a claim for breach
of fiduciary duty). Gross negligence is reckless indifference to the interest owners or
actions that are without the bounds of reason. McPadden, 964 A.2d at 1274; In re
Walt Disney Co., 907 A.2d at 750; Prospect St. Energy, LLC, 2016 Del. Super. LEXIS
57, at *21−22.
49. Here, Plaintiff requested a members meeting in order to obtain information.
(Compl. ¶ 17.) Plaintiff made her first request for a meeting on January 4, 2016.
(Compl. Ex. 2.) In response to that request, Elkin scheduled a meeting for February
1, 2016. Thereafter, Elkin cancelled that meeting and rescheduled it for February
11, 2016. For health reasons, Elkin cancelled the February 11 meeting. As a result,
Plaintiff made her second request on February 11, 2016 for a meeting to be held by
February 17, 2016. (Compl. Ex. 6.) This action was brought on February 18, 2016.
50. Neither the Operating Agreement nor the Delaware Act requires members
meetings. See Del. Code Ann. tit. 6, § 18-302(c) (stating that members may take
action without a meeting unless otherwise provided in an LLC agreement). Assuming
arguendo that Delaware law recognizes that failing to hold a members meeting may
constitute a breach of fiduciary duty under some circumstances, the Court concludes
that, under the facts alleged here, failing to hold a members meeting within one and one-half months of Plaintiff’s request to have a meeting—especially when neither the
Operating Agreement nor the Delaware Act requires such a meeting—is insufficient
to satisfy the requirement of pleading gross negligence.
51. Moreover, the Court notes that the Complaint states that Plaintiff sought
a members meeting to obtain more information, and that Defendants breached their
fiduciary duties in numerous ways and the allegations will be supplemented after
Plaintiff inspects the books and records. The breach of fiduciary duty claim based on
the failure to hold a members meeting is heavily dependent on the Inspection Claim.
However, as discussed previously, the Delaware Court of Chancery has exclusive
jurisdiction over the determination as to whether Plaintiff is entitled to the
information sought.
52. As to the breach of fiduciary duty claim based on Elkin refusing to allow
Plaintiff to inspect the books and records, because the Delaware Court of Chancery
has exclusive jurisdiction over Plaintiff’s Inspection Claim and the determination of
whether Plaintiff is entitled to the information sought, this Court has no authority to
determine the propriety of Elkin’s refusal to permit Plaintiff to inspect the books and
records. Therefore, this Court has no authority to find that such refusal was a breach
of Elkin’s fiduciary duties to Plaintiff. In asking this Court to find Elkin breached
his fiduciary duties to Plaintiff by failing to allow Plaintiff to inspect Joan’s books and
records, Plaintiff is, in essence, asking this Court to determine whether Plaintiff is
entitled to the information requested, which this Court does not have the authority
to do. 53. Therefore, because failing to have a members meeting under these
circumstances does not amount to gross negligence, and because the Delaware Court
of Chancery has exclusive jurisdiction over the Inspection Claim and whether
Plaintiff is entitled to the information requested, Plaintiff’s breach of fiduciary duty
claim based on Elkin failing to hold a members meeting and refusing Plaintiff’s
inspection request must be dismissed.
ii. Application of North Carolina Law
54. In order to establish a claim for breach of fiduciary duty under North
Carolina law, a plaintiff must show that: (1) the defendant owed the plaintiff a
fiduciary duty; (2) the defendant breached his fiduciary duty; and (3) the breach of
fiduciary duty was a proximate cause of injury to the plaintiff. Farndale Co., LLC v.
Gibellini, 176 N.C. App. 60, 68, 628 S.E.2d 15, 20 (2006).
55. Under the North Carolina Act, a manager of an LLC must discharge his
duties in good faith, with the care of an ordinary prudent person, and in the best
interests of the LLC. N.C. Gen. Stat. § 57D-3-21(b). The manager owes these
fiduciary duties to the LLC, not to individual members. Id.; see also Kaplan v. O.K.
Techs., L.L.C., 196 N.C. App. 469, 474, 675 S.E.2d 133, 137 (2009). Therefore, Elkin,
as the manager of Joan, does not owe fiduciary duties to Plaintiff, a member of Joan.
56. Under the North Carolina Act, members of an LLC are like shareholders in
a corporation in that members do not owe fiduciary duties to each other or the LLC,
except a controlling member owes fiduciary duties to minority members. Kaplan, 196
N.C. App. at 473, 675 S.E.2d at 137. A 50% owner is not a majority interest owner, and thus a 50% owner does not owe fiduciary duties to the other interest owners. Id.
(holding that a member who owned a 41.5% interest, and who was the largest
percentage interest owner, was a minority member who did not owe fiduciary duties
to the other members); BOGNC, LLC v. Cornelius NC Self-Storage, LLC, 2013 NCBC
26, at *44 (N.C. Super. Ct. May 1, 2013) (concluding that a 50% owner is not a
majority interest owner and therefore does not owe fiduciary duties to the other
members). Here, Elkin owns 50% of the membership interest in Joan. Elkin is
therefore not a controlling member and does not owe fiduciary duties to Plaintiff.
57. Plaintiff contends that Elkin operates as a 75% interest owner because, in
addition to his 50% ownership interest, he controls Donna’s 25% ownership interest.
While North Carolina courts have recognized that individual minority shareholders
of a closely-held corporation who act in concert and collectively own the majority
interest in the corporation may owe fiduciary duties as the controlling shareholders,
North Carolina courts have not recognized that possibility in the context of an LLC.
See Norman v. Nash Johnson & Sons’ Farms, Inc., 140 N.C. App. 390, 407, 537 S.E.2d
248, 260 (2000); Raymond James Capital Partners, L.P. v. Hayes, 789 S.E.2d 695,
701 (N.C. Ct. App. 2016) (“[A]n exception to [the general] rule is that a controlling
shareholder owes a fiduciary duty to minority shareholders. To that end, our courts
have extended special protections to minority shareholders in closely held
corporations.” (emphasis added) (internal quotations omitted) (citation omitted)
(citing Norman, 140 N.C. App. at 407, 537 S.E.2d at 260)); Fiske v. Kieffer, 2016
NCBC LEXIS 22, at *10 (N.C. Super. Ct. Mar. 9, 2016) (stating that the holding in Norman has not been extended to minority interest owners in an LLC); Wortman v.
Hutaff, 2013 NCBC LEXIS 47, at *22 (N.C. Super. Ct. Oct. 29, 2013) (finding that
two members who each owned a 33.33% interest were minority interest owners and
they “did not owe Plaintiffs fiduciary duties simply because together they owned a
majority interest in [the LLC] and could out-vote Plaintiffs”); Blythe v. Bell, 2013
NCBC LEXIS 17, at *14 (N.C. Super. Ct. Apr. 8, 2013) (stating that the Norman rule
should not apply in the LLC context).
58. The Court concludes that, applying North Carolina law, Plaintiff has failed
to adequately allege that Elkin owed fiduciary duties to Plaintiff, and therefore the
breach of fiduciary duty claim must be dismissed.
D. Derivative Claims
59. In addition to the direct action, Plaintiff asserts the Claims derivatively on
behalf of Joan. North Carolina courts look to the law of the state in which an LLC is
organized to determine the procedural prerequisites to bringing a derivative claim.
Scott v. Lackey, 2012 NCBC LEXIS 60, at *14−15 (N.C. Super. Ct. Dec. 3, 2012).
Furthermore, the North Carolina Act specifically provides that the law of the state in
which a foreign LLC is organized governs derivative proceedings, except for matters
regarding a stay of the proceedings, discontinuance or settlement, and payment of
expenses. N.C. Gen. Stat. § 57D-8-06. Thus, Delaware law governs whether Plaintiff
may bring a derivative action on behalf of Joan.
60. Under Delaware law, a member of an LLC may bring a derivative action “if
managers or members with authority to do so have refused to bring the action or if an effort to cause those managers or members to bring the action is not likely to
succeed.” Del. Code Ann. tit. 6, § 18-1001. “[T]he complaint shall set forth with
particularity the effort, if any, of the plaintiff to secure initiation of the action by a
manager or member or the reasons for not making the effort.” Id. § 18-1003. “[T]he
pleading burden imposed on the sponsor of derivative claims is more onerous [than
the pleading burden to survive a motion to dismiss for failure to state a claim]; it
requires pleading ‘with particularity’ to survive; one cannot rest after serving mere
notice of the claim asserted.” Spellman v. Katz, C.A. No. 1838-VCN, 2009 Del. Ch.
LEXIS 18, at *17−18 (Del. Ch. Feb. 6, 2009). A court will not “guess those facts that
might support a derivative claim.” Id. at *22. The complainant must set forth
supporting factual allegations, and “[a] complaint devoid of factual specificity will fail
to provide the necessary basis for excusing demand.” Id. at *22−23.
61. Here, Plaintiff states in her Complaint that “[t]his Complaint including the
exhibits thereto sets forth the efforts to obtain a members meeting, access to the
corporate books and records, and an understanding of the health and competency of
Elkin . . . , as set forth in Del. [Code Ann. tit. 6,] § 18-1003.” (Compl. ¶ 39.) Although
the Complaint sets forth Plaintiff’s efforts to have a members meeting and inspect
Joan’s books and records, the Complaint does not set forth any efforts to cause the
members to bring this action. The efforts contemplated by section 18-1003 are those
efforts to cause the members to bring the lawsuit based on the failure to have a
members meeting and concealment of books and records—not Plaintiff’s efforts to
have a members meeting and to gain access to books and records. Thus, Plaintiff has not made a demand on Joan’s members to bring this action pursuant to section 18-
1001, and Plaintiff was required to set forth with particularity the reasons why
demand would have been futile. See Spellman, 2009 Del. Ch. LEXIS 18, at *18.
62. In this regard, Plaintiff has only alleged that
[t]his action is proper at this time because Elkin McCallum and Joan have not provided corporate records to a minority owner, have admitted that Joan is in financial distress, have admitted that Elkin McCallum has some health issues, and have not had a members meeting. It is not likely that further efforts to secure these action [sic] would be successful, per Del. [Code Ann. tit. 6,] § 18-1001.
(Compl. ¶ 40 (emphasis added).) The applicable standard is whether an effort to
cause Joan’s members to bring this lawsuit based on the failure to have a members
meeting and concealment of books and records would have been futile—not whether
further efforts by Plaintiff to have a members meeting and to gain access to books
and records would have been futile. There are no specific facts that provide the
necessary basis for excusing demand. See Spellman, 2009 Del. Ch. LEXIS 18, at
*20−22 (“One does not satisfy Delaware’s demand futility standards with the oft-
employed phrase that one cannot be expected to sue himself. To the contrary, [the
complainant] must show a substantial likelihood of [the other member’s] personal
liability before demand will be excused [for] lack of impartiality. . . . It is a rare case
in which a director or member’s actions are sufficiently egregious that a substantial
likelihood of personal liability exists.” (internal quotations omitted)).
63. Plaintiff has not pled with particularity her reasons for not making a
demand, and therefore Plaintiff has failed to comply with the procedural prerequisites for bringing a derivative action. Therefore, Plaintiff’s derivative claims
must be dismissed.
V. MOTION FOR A RECEIVER
64. Plaintiff’s Motion for a Receiver is made pursuant to N.C. Gen. Stat. § 57D-
6-04 and Del. Code Ann. tit. 6, § 18-805. The Motion for a Receiver requests that a
receiver be appointed “to marshal Joan’s assets, protect them, provide an accounting,
prevent waste, and manage Joan” because Joan is in imminent danger of insolvency
and irreparable harm will result to Plaintiff’s profits and rents if a receiver is not
appointed. (Compl. ¶¶ 27−29.)
65. Section 57D-6-04 of the North Carolina Act provides North Carolina courts
with authority to appoint a receiver of a North Carolina LLC; it does not provide
North Carolina courts with authority to appoint a receiver of an LLC organized in
another state. N.C. Gen. Stat. §§ 57D-1-03(13), (19), 57D-6-04. Thus, this Court does
not have authority to appoint a receiver of Joan pursuant to section 57D-6-04.
66. Section 18-805 of the Delaware Act provides that the Delaware Court of
Chancery may appoint a receiver of an LLC when the certificate of formation of an
LLC formed under the Delaware Act is cancelled by the filing of a certificate of
cancellation. Del. Code Ann. tit. 6, §§ 18-101(6), 18-805. No certificate of cancellation
has been filed, and, in any event, that statute provides the Court of Chancery with
authority to appoint a receiver of Joan; it does not provide this Court with such
authority. Thus, section 18-805 does not provide a basis for appointing a receiver of
Joan. 67. Pursuant to N.C. Gen. Stat. §§ 1-502(4) and 1-507.1, a North Carolina court
may appoint a receiver over a foreign LLC’s property within North Carolina when the
LLC is in imminent danger of insolvency. N.C. Gen. Stat. §§ 1-502(4), 1-507.1.
Appointment of a receiver is within the discretion of the trial court. Barnes v.
Kochhar, 178 N.C. App. 489, 500, 633 S.E.2d 474, 481 (2006). Appointment of a
receiver is a rare and drastic remedy, especially for solvent companies, and should be
used cautiously. Lowder v. All Star Mills, Inc., 301 N.C. 561, 577, 273 S.E.2d 247,
256 (1981). Appointment of a receiver has been found to be a proper remedy in cases
where there is fraud or gross misconduct in company management, incapacity or
neglect of those operating the company, evidence of diversion of company funds, and
refusal to permit inspection of corporate books combined with other grounds
justifying the appointment of a receiver. Id.
68. Assuming that Joan has property within North Carolina over which this
Court could appoint a receiver, the Court does not find that the allegations and proof
before the Court at this time warrant such a drastic remedy. Plaintiff states that
Joan is in imminent danger of insolvency and that Plaintiff has a right to profits and
rents that are in imminent danger of being secreted; however, there is no evidence of
fraud, gross misconduct, or incapacity of Joan’s management. Plaintiff states that
her allegations in support of appointing a receiver will be supplemented once Plaintiff
inspects Joan’s books and records, but the Court has concluded that the Delaware
Court of Chancery has exclusive jurisdiction over the Inspection Claim. In light of
the harshness of the remedy; the lack of evidence before the Court at this time warranting such a harsh remedy; the Motion for a Receiver’s dependency on the
Inspection Claim; and the Delaware Court of Chancery’s exclusive jurisdiction over
such claim, the Court declines to exercise its discretion to appoint a receiver of Joan.
Therefore, the Motion for a Receiver is denied.
VI. CONCLUSION
69. For the foregoing reasons, the Court, in the exercise of its discretion, hereby
GRANTS Defendants’ Motion to Dismiss and DISMISSES without prejudice
Plaintiff’s claims, and DENIES Plaintiff’s Motion for a Receiver.
SO ORDERED, this the 25th day of October, 2016.
/s/ Michael L. Robinson Michael L. Robinson Special Superior Court Judge for Complex Business Cases