Emrich Enters., LLC v. Hornwood, Inc., 2020 NCBC 29.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION WAKE COUNTY 19 CVS 5659
EMRICH ENTERPRISES, LLC, individually and derivatively on behalf of TRIANGLE AUTOMOTIVE COMPONENTS, LLC,
Plaintiff,
v.
HORNWOOD, INC., ORDER AND OPINION ON DEFENDANTS’ PARTIAL Defendant, MOTION TO DISMISS v.
TRIANGLE AUTOMOTIVE COMPONENTS, LLC,
Defendant and Nominal Defendant.
1. THIS MATTER is before the Court on Defendants’ Partial Motion to
Dismiss (the “Motion”) filed on August 21, 2019. (ECF No. 63.)
2. For the reasons set forth herein, the Court DENIES the Motion.
Ellis & Winters LLP by Jonathan D. Sasser, Stephen D. Feldman, 1 and Michelle A. Liguori, for Plaintiff.
Moore & Van Allen, PLLC by Mark A. Nebrig and Kaitlin M. Price for Defendants.
Robinson, Judge.
1 At the time of briefing and oral arguments on the Motion, Mr. Stephen D. Feldman (“Mr.
Feldman”) represented Plaintiff Emrich Enterprises, LLC as legal counsel. After oral arguments on February 27, 2020, Mr. Feldman requested that the Court permit him withdraw as counsel. (ECF No. 80.) The Court granted Mr. Feldman’s request on March 3, 2020, and Mr. Feldman is effectively no longer counsel of record in the above-captioned litigation. (ECF No. 82.) Mr. Jonathan D. Sasser and Ms. Michelle A. Liguori remain counsel of record for Plaintiff Emrich Enterprises, LLC. I. INTRODUCTION
3. This action arises out of a dispute between Plaintiff Emrich Enterprises,
LLC (“Emrich Enterprises”) and Defendant Hornwood, Inc. (“Hornwood”) as member-
managers of a North Carolina limited liability company, Triangle Automotive
Components, LLC (“Triangle,” and with Hornwood collectively referred to herein as
“Defendants”). Emrich Enterprises contends that Hornwood attempted to
unilaterally withdraw from Triangle contrary to the terms of Triangle’s operating
agreement. Emrich Enterprises also contends that after being enjoined from
withdrawing from Triangle by this Court, Hornwood has subsequently mismanaged
Triangle in order to benefit itself.
II. FACTUAL BACKGROUND
4. The Court does not make findings of fact for the purposes of a motion to
dismiss, but only recites or summarizes those factual allegations contained in the
operative pleading, which are accepted as true, that are relevant and necessary to the
Court’s determination of the Motion. 2
A. The Parties
5. Emrich Enterprises is a North Carolina limited liability company with its
principal office in Raleigh. (First Am. Verified Compl. ¶ 14, ECF No. 56 [“Am.
Compl.”].)
2 “Absent a request by one of the parties, the trial court is not required to make findings of
fact when ruling a motion” to dismiss. Cameron-Brown Co. v. Daves, 83 N.C. App. 281, 285, 350 S.E.2d 111, 114 (1986). The appellate courts will presume that the trial court found sufficient facts to support its ruling. Id. 6. Hornwood is a North Carolina corporation with its principal office in
Lilesville. (Am. Compl. ¶ 15.) Chuck Horne is Hornwood’s Chief Executive Officer
(“Horne”). (Am. Compl. ¶ 43.)
7. Triangle is a North Carolina limited liability company with its principal
office in Lilesville. (Am. Compl. ¶ 15.) Triangle is in the business of manufacturing
and selling automotive textile products for passenger and commercial vehicles. (Am.
Compl. ¶ 1.)
8. Emrich Enterprises is the minority member of Triangle, with a membership
interest of approximately forty-seven percent (47%). (Am. Compl. ¶ 14.) Hornwood
is the majority and controlling member of Triangle, with a membership interest of
about fifty-three percent (53%). (Am. Compl. ¶ 16.) Hornwood controls Triangle’s
finances. (Am. Compl. ¶¶ 47, 127.)
B. Triangle’s Operations
9. On February 28, 2006, Emrich, Hornwood, and Bondtex, Inc. (“Bondtex”),
who is not a party to this litigation, entered into an operating agreement (the
“Operating Agreement”) to govern Triangle’s operations. (Am. Compl. ¶ 33; see also
Am. Compl. Ex. 1, ECF No. 56.1 [the “Operating Agreement”].) Emrich Enterprises,
Hornwood, and Bondtex also entered into a joint venture agreement dated April 28,
2006 (the “Joint Venture Agreement”). (Am. Compl. ¶ 38; see also Am. Compl. Ex. 2,
ECF No. 56.2 [the “Joint Venture Agreement”].) At some point after signing the
Operating Agreement and the Joint Venture Agreement, Bondtex withdrew from
Triangle. (See Am. Compl. ¶ 29.) 10. When Triangle was founded in 2006, Hornwood and Emrich Enterprises
agreed to a certain division of labor. (Am. Compl. ¶ 29.) Aside from the division of
Bondtex’s responsibilities after it withdrew from Triangle, Emrich Enterprises and
Hornwood’s responsibilities have remained the same since 2006. (Am. Compl. ¶ 29.)
11. Hornwood manufactures the fabric that Triangle sells and performs certain
non-manufacturing services. (Am. Compl. ¶ 28.) Hornwood also owns the facilities
at which Triangle’s products are manufactured. (Am. Compl. ¶ 30.) Emrich
Enterprises performs functions related to Triangle’s business development, including
sales and marketing services. (Am. Compl. ¶¶ 28, 118.) Emrich Enterprises does not
have manufacturing facilities or the ability to perform Hornwood’s manufacturing
and non-manufacturing responsibilities. (Am. Compl. ¶ 31.)
12. Triangle is a supplier for automobile companies, including Daimler, GM,
and Fiat Chrysler. (Am. Compl. ¶ 23.) In the automotive industry, suppliers are
awarded “programs” to supply component parts for automobiles. (Am. Compl. ¶ 25.)
Under the programs, the manufacturers usually give Triangle their projected needs
on a six-month basis, and Triangle then meets those supply needs during that period
of time. (Am. Compl. ¶ 26.)
13. The approval process for being awarded these programs usually takes six
to nine months and requires approval by the automobile manufacturers’ engineers.
(Am. Compl. ¶ 25.) Any change Triangle makes in its manufacturing process also
requires approval by the automobile manufacturer’s engineers. (Am. Compl. ¶ 25.) C. Triangle’s Lawsuit and its Settlement Proceeds
14. In 2015, Triangle sued one of its former sales agents, who had acquired
Bondtex, for breach of contract and related claims (the “Lawsuit”). (Am. Compl. ¶
42.) In September 2018, the Lawsuit was settled favorably for Triangle. (Am. Compl.
¶ 44.)
15. Emrich Enterprises and Hornwood, comprising 100% of the membership
interests of Triangle, agreed that Triangle would distribute the Lawsuit’s settlement
proceeds with approximately fifty-two percent (52%) being distributed to Hornwood
and approximately forty-eight percent (48%) being distributed to Emrich Enterprises.
(Am. Compl. ¶¶ 14, 16, 45.)
16. In October 2018, Triangle distributed approximately seventy-eight percent
(78%) of Emrich Enterprises’ share of the settlement proceeds to Emrich Enterprises.
(Am. Compl. ¶ 46.) Emrich Enterprises, Hornwood, and Triangle agreed that
Triangle would retain the remainder of Emrich Enterprises’ share of the settlement
proceeds until the end of 2018 to ensure that Triangle could pay its liabilities for that
year. (Am. Compl. ¶ 46.)
17. Emrich Enterprises has made multiple requests for the remainder of its
share of the Lawsuit’s settlement proceeds, but Triangle has refused to make such
payment. (Am. Compl. ¶ 46.) Hornwood controls Triangle’s finances and has caused
Triangle to wrongfully withhold Emrich Enterprises’ share of the settlement
proceeds. (Am. Compl. ¶ 47.) 18. As part of the settlement of the Lawsuit, Hornwood and Emrich Enterprises
consented to Bondtex’s withdrawal from Triangle. (Am. Compl. ¶ 48.) Prior to its
withdrawal, Bondtex provided lamination services for Triangle. (Am. Compl. ¶ 49.)
Triangle hired a contract laminator, C.H. Mueller (“Mueller”), to provide Triangle
with lamination services as a successor to and replacement for Bondtex providing
these services. (Am. Compl. ¶ 51.)
19. Emrich Enterprises and Hornwood agreed that Hornwood would oversee
the transition from Bondtex to Mueller. (Am. Compl. ¶ 51.) However, Hornwood
failed to timely transition the lamination services to Mueller, requiring Triangle to
continue to use Bondtex’s lamination services. (Am. Compl. ¶¶ 52–53.) Bondtex
charges substantially more than Mueller and the continued use of Bondtex’s
lamination services has resulted in reduced Triangle profits by tens of thousands of
dollars per month. (Am. Compl. ¶¶ 54, 57.)
20. Hornwood’s failure to properly oversee the lamination transition is a
byproduct of its intensive work with a competitor of Triangle. (Am. Compl. ¶ 67.)
D. Hornwood’s Alleged Competitive Misconduct
21. Borgstena, similar to Triangle, is a textile company in the business of
manufacturing and selling automotive textile products for suppliers of automobile
manufacturers. (Am. Compl. ¶¶ 6, 68.) Borgstena is a competitor of Triangle. (Am.
Compl. ¶¶ 6, 67.)
22. Beginning in September 2017, Hornwood began working with Borgstena.
(Am. Compl. ¶ 6.) On or before that date, Borgstena contacted Horne to discuss Hornwood making seating and headliner fabric for an automobile manufacturer.
(Am. Compl. ¶ 69.) Horne provided Borgstena with a “company profile” for Hornwood.
(Am. Compl. ¶ 69.)
23. In November 2017, Hornwood and Borgstena entered into a nondisclosure
agreement with the intent of working together on product development. (Am. Compl.
¶ 70.) Hornwood never disclosed this agreement to Emrich Enterprises or suggested
that Triangle should be a party to the agreement. (Am. Compl. ¶ 70.)
24. In February 2018, Horne, and another Hornwood principal, visited
Borgstena’s manufacturing facility in Portugal. (Am. Compl. ¶ 73.) Hornwood never
informed Emrich Enterprises of Hornwood’s plans to send its representatives to
Borgstena’s Portugal facility. (Am. Compl. ¶ 73.)
25. After Horne’s visit to Borgstena’s Portugal facility, Hornwood began
communicating weekly with Borgstena regarding product-development issues. (Am.
Compl. ¶ 74.) Hornwood and Borgstena discussed product development with at least
three automobile manufacturers, one of which is a customer of Triangle. (Am. Compl.
¶¶ 71–72, 75–76.)
26. After the Lawsuit was initiated and while the Lawsuit was pending,
Triangle, at the advice of Hornwood’s leadership, scaled back its efforts to secure new
programs. (Am. Compl. ¶ 78.) Horne represented that automobile manufacturers
would not grant new programs to a supplier that was involved in litigation. (Am.
Compl. ¶ 78.) However, during this time, Hornwood was actively engaging in
product-development efforts with Borgstena. (Am. Compl. ¶¶ 76, 78.) 27. After the Lawsuit was settled in 2018, Hornwood and Emrich Enterprises
discussed efforts to secure new business for Triangle. (Am. Compl. ¶ 79.) Before
Emrich Enterprises became aware of the work Hornwood was doing with Borgstena,
John Emrich (“Mr. Emrich”), of Emrich Enterprises, suggested to Horne that
Triangle contact Borgstena regarding a joint development, sales, and supply
agreement between Triangle and Borgstena. (Am. Compl. ¶¶ 82, 88, 97.) Borgstena’s
CEO declined this offer. (Am. Compl. ¶ 82.) The offer purportedly made by Horne to
Borgstena’s CEO was a “charade” and Hornwood had no intention of pursuing a
partnership with Borgstena as a member of Triangle. (Am. Compl. ¶ 82.)
28. On January 1, 2019, Borgstena Textile North America, LLC was formed
and organized as a North Carolina limited-liability company. (Am. Compl. ¶ 84.)
During January 2019, Hornwood informed Borgstena of an opportunity to purchase
a textile plant in North Carolina. (Am. Compl. ¶ 85.)
29. On March 5, 2019, Hornwood and Borgstena met with the director of the
Anson County Economic Development Partnership. (Am. Compl. ¶ 86.) Borgstena,
through Borgstena Textile North America, LLC, is opening a facility in Anson
County, where Horwood’s facilities are located. (Am. Compl. ¶¶ 86–87.)
30. While discussing product development with Borgstena, Hornwood disclosed
to Borgstena representatives Triangle’s confidential product information. (Am.
Compl. ¶¶ 89–95.) Horne admitted by e-mail to Borgstena’s CEO that Hornwood’s
work with Borgstena violates the provisions of the Operating Agreement. (Am.
Compl. ¶ 96.) 31. Hornwood did not tell Emrich Enterprises about its product-development
efforts with Borgstena until it was disclosed in discovery in this litigation. (Am.
Compl. ¶ 88.)
E. Hornwood’s Proposed Changes to the Operating Agreement
32. On March 4, 2019, Triangle held a members meeting. (Am. Compl. ¶ 97.)
Horne and Wesley Horne (collectively referred to herein as the “Hornes”) attended
for Hornwood and Mr. Emrich and Martha Miller (“Ms. Miller”) attended for Emrich
Enterprises. (Am. Compl. ¶ 97.)
33. Before the March 4 meeting, Emrich Enterprises and Hornwood discussed
adjusting their respective membership interests in Triangle and eliminating Emrich
Enterprises’ sales commissions. (Am. Compl. ¶ 98.)
34. The Hornes also proposed a new governing document for Triangle. (Am.
Compl. ¶ 99.) Emrich Enterprises contends that the proposed document eliminated
the majority of the terms in the Operating Agreement and the Joint Venture
Agreement. (Am. Compl. ¶ 99.) Mr. Emrich and Ms. Miller did not agree to the terms
of the proposed agreement and refused to sign it. (Am. Compl. ¶ 99.)
35. At the March 4 meeting, Hornwood informed Emrich Enterprises that
Hornwood planned to do business with Borgstena. (Am. Compl. ¶ 100.) Hornwood
then acknowledged that the Operating Agreement prohibited it from doing business
with Borgstena; therefore, Hornwood needed to discontinue its affiliation with
Emrich Enterprises in order to work with Borgstena. (Am. Compl. ¶ 100.) 36. Hornwood offered to buy Emrich Enterprises’ membership share in
Triangle, but Hornwood’s offer undervalued Emrich Enterprises’ interest. (Am.
Compl. ¶ 101.) Alternatively, Hornwood offered to sell its membership interest in
Triangle to Emrich Enterprises. (Am. Compl. ¶ 102.) Emrich Enterprises declined
this offer because it lacks the manufacturing capabilities that Hornwood provides and
is not able to operate Triangle without Hornwood. (Am. Compl. ¶¶ 102, 106–10.)
37. At the end of the March 4 meeting, Hornwood provided Emrich Enterprises
a notice of its intent to withdraw from Triangle in sixty (60) days. (Am. Compl. ¶
103.) Notwithstanding Hornwood’s notice, in the weeks after the conclusion of the
March 4 meeting, Emrich Enterprises and Hornwood communicated on multiple
occasions regarding Hornwood’s offer to purchase Emrich Enterprises’ interest in
Triangle. (Am. Compl. ¶ 104.)
F. Hornwood Threatens to Withdraw from Triangle
38. On April 16, 2019, Horne, by letter, again expressed Hornwood’s interest in
purchasing Emrich Enterprises’ share of Triangle. (Am. Compl. ¶ 105.) However,
Horne communicated that if Emrich Enterprises did not agree to sell its share of
Triangle, Hornwood would withdraw from Triangle as of May 2, 2019 and stop
performing its manufacturing duties. (Am. Compl. ¶ 105; see also Am. Compl. Ex. 6,
ECF No. 56.6.)
39. On April 24, 2019, Hornwood sent a letter to Emrich Enterprises,
withdrawing its offer to purchase Emrich Enterprises’ interest in Triangle and
reiterating its intent to withdraw from Triangle. (Am. Compl. ¶ 113.) The next day, on April 25, 2019, Hornwood sent an e-mail to Emrich Enterprises threatening to
inform Triangle’s customers of Hornwood’s withdrawal. (Am. Compl. ¶ 114.)
40. On May 31, 2019, the Court entered the Order on Amended Motion for
Preliminary Injunction, prohibiting Hornwood from withdrawing from Triangle (the
“Preliminary Injunction”). (Order Am. Mot. Prelim. Inj. ¶ 75, ECF No. 40 [“Prelim.
Inj.”].)
41. After the Court entered the Preliminary Injunction, Hornwood initiated
several actions “designed to cripple Triangle.” (Am. Compl. ¶ 117.)
G. Additional Alleged Misconduct by Hornwood
42. In exchange for Emrich Enterprises providing sales and marketing
services, Triangle agreed to pay Emrich Enterprises a monthly commission on
Triangle’s sales. (Am. Compl. ¶¶ 118, 120.) This agreement was made part of the
Joint Venture Agreement. (Am. Compl. ¶ 120; see also Joint Venture Agreement ¶¶
2(c), 3(a).)
43. Beginning in January 2013, Triangle paid Emrich Enterprises a two-
percent commission on a regular basis. (Am. Compl. ¶ 125.) After Emrich
Enterprises initiated this lawsuit, Hornwood caused Triangle to stop paying
commissions to Emrich Enterprises. (Am. Compl. ¶¶ 126–27.)
44. Additionally, on June 10, 2019, Hornwood unilaterally approved an
unprecedented price increase for fabric manufactured and sold by Hornwood to
Triangle, which will cost Triangle more than $200,000 a year. (Am. Compl. ¶¶ 128,
130–32.) 45. The Joint Venture Agreement requires Hornwood to charge Triangle at cost
for the fabric it manufactures for Triangle. (Am. Compl. ¶ 129.) Emrich Enterprises
requested that Hornwood produce documents to support the proposition that the
increased prices represented Hornwood’s actual costs. (Am. Compl. ¶ 133.)
46. Hornwood has not provided credible documentation to justify the price
increases. (Am. Compl. ¶¶ 134, 140.) The documentation provided by Hornwood
suggests that the price increases are a device to achieve Hornwood’s desired
separation from Emrich Enterprises. (Am. Compl. ¶¶ 134–40.)
47. On June 24, 2019, Hornwood informed Emrich Enterprises that Hornwood,
for the first time since Triangle’s inception, would start billing Triangle for
Hornwood’s non-manufacturing services. (Am. Compl. ¶ 143.) Hornwood stated that
it was “no longer willing to handle [Triangle’s] customer service, accounting, and
other non-manufacturing tasks” if Hornwood was not paid for its non-manufacturing
services. (Am. Compl. ¶ 145.)
48. After the Court entered the Preliminary Injunction prohibiting Hornwood
from unilaterally withdrawing from Triangle, Hornwood has attempted to use its
status as controlling member of Triangle to divert Triangle profits to Hornwood, stop
the flow of profits from Triangle to Emrich Enterprises, and otherwise cripple
Triangle. (Am. Compl. ¶¶ 117, 147.)
III. PROCEDURAL BACKGROUND
49. The Court sets forth here only those portions of the procedural history
relevant to its determination of the Motion. 50. Emrich Enterprises initiated this action by filing a Verified Complaint on
April 29, 2019 (the “First Complaint”). (ECF No. 3.) The action was designated as a
mandatory complex business case that same day, (ECF No. 1), and assigned to the
undersigned on April 30, 2019, (ECF No. 2).
51. On May 21, 2019, Emrich Enterprises filed an Amended Motion for
Preliminary Injunction. (ECF No. 27.) The Court entered the Preliminary Injunction
on May 31, 2019. (ECF No. 40.)
52. As of right, Emrich Enterprises filed the First Amended Verified Complaint
on July 22, 2019 (the “FAVC”).
53. Hornwood and Triangle filed the Motion and brief in support thereof on
August 21, 2019. (Defs.’ Mem. Supp. Partial Mot. Dismiss Pl.’s First Am. Verified
Compl., ECF No. 64 [“Br. Supp.”].) Briefing was timely completed, and the Court
held a hearing on the Motion on February 19, 2020. (See ECF No. 78.)
54. The Motion is ripe for resolution.
IV. LEGAL STANDARDS
A. Subject Matter Jurisdiction
55. A court shall dismiss the action when it appears that the court lacks subject
matter jurisdiction. N.C.G.S. § 1A-1, Rule 12(h)(3). The plaintiff bears the burden of
establishing subject matter jurisdiction. Harper v. City of Asheville, 160 N.C. App. 209, 217, 585 S.E.2d 240, 245 (2003). “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. 500, 554, 687 S.E.2d 299, 302 (2009); Tart, 38 N.C. App. at 502, 248 S.E.2d
at 737.
B. Rule 12(b)(6)
56. A motion to dismiss pursuant to Rule 12(b)(6) “tests the legal sufficiency of
the complaint.” Concrete Serv. Corp. v. Inv’rs Grp., Inc., 79 N.C. App. 678, 681, 340
S.E.2d 755, 758 (1986). In ruling on a motion to dismiss pursuant to Rule 12(b)(6),
the Court reviews the allegations in the Complaint in the light most favorable to
Plaintiff. See Christenbury Eye Ctr., P.A. v. Medflow, Inc., 370 N.C. 1, 5, 802 S.E.2d
888, 891 (2017). The Court’s inquiry is “whether, as a matter of law, the allegations
of the complaint . . . are sufficient to state a claim upon which relief may be granted
under some legal theory[.]” Harris v. NCNB Nat’l Bank, 85 N.C. App. 669, 670, 355
S.E.2d 838, 840 (1987). The Court accepts all well-pleaded factual allegations in the
relevant pleading as true. See Krawiec v. Manly, 370 N.C. 602, 606, 811 S.E.2d 542,
546 (2018). The Court is therefore not required “to accept as true allegations that are
merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” Good Hope Hosp., Inc. v. N.C. Dep’t of Health & Human Servs., 174 N.C. App. 266,
274, 620 S.E.2d 873, 880 (2005) (citation omitted).
57. Furthermore, the Court “can reject allegations that are contradicted by the
documents attached, specifically referred to, or incorporated by reference in the
complaint.” Moch v. A.M. Pappas & Assocs., LLC., 251 N.C. App. 198, 206, 794 S.E.2d
898, 903 (2016) (citation omitted). The Court may consider these attached or
incorporated documents without converting the Rule 12(b)(6) motion into a motion
for summary judgment. Id. (citation omitted). Moreover, the Court “may properly
consider documents which are the subject of a plaintiff’s complaint and to which the
complaint specifically refers even though they are presented by the defendant.”
Oberlin Capital, L.P. v. Slavin, 147 N.C. App. 52, 60, 554 S.E.2d 840, 847 (2001)
(citation omitted). Where the Court considers documents that are not specifically
referred to, contained in, or attached to the complaint, the Rule 12(b)(6) motion will
be converted into a Rule 56 motion and subject to its standards of consideration and
review. Fowler v. Williamson, 39 N.C. App. 715, 717, 251 S.E.2d 889, 890−91 (1979). 3
Our Supreme Court has noted that “[i]t is well-established that dismissal pursuant
to Rule 12(b)(6) is proper when ‘(1) the complaint on its face reveals that no law
3 For the purposes of Rule 12(b)(6), the Court is limited to its review of the relevant pleading,
the FAVC, and any documents referred to in that pleading. Moch, 251 N.C. App. at 206 S.E.2d at 903 (citation omitted). While the Court may consider matters outside of the FAVC in determining whether it has subject matter jurisdiction over the parties or the claims, the Court limits its review for the purposes of Rule 12(b)(6), only considering appropriate matters of record. See Estate of Belk v. Boise Cascade Wood Prods., L.L.C., 824 S.E.2d 180, 183 (N.C. Ct. App. 2019) (“[T]he trial court is not required to convert a motion to dismiss into one for summary judgment simply because additional documents are submitted. . . Where it is clear from the record, namely from the order itself, that the additional materials were not supports the plaintiff’s claim; (2) the complaint on its face reveals the absence of facts
sufficient to make a good claim; or (3) the complaint discloses some fact that
necessarily defeats the plaintiff’s claim.’” Corwin v. British Am. Tobacco PLC, 371
N.C. 605, 615, 821 S.E.2d 729, 736−37 (2018) (quoting Wood v. Guilford Cty., 355 N.C.
161, 166, 558 S.E.2d 490, 494 (2002)). This standard of review for Rule 12(b)(6) is the
standard our Supreme Court “uses routinely . . . in assessing the sufficiency of
complaints in the context of complex commercial litigation.” Id. at 615, 821 S.E.2d at
737 n.7 (citations omitted).
V. ANALYSIS
58. The FAVC includes eight claims for relief. (See Am. Compl. ¶¶ 150–235.)
Only the following six claims for relief are the subject of the Motion: (1) breach of
contract, brought derivatively and directly, against Hornwood for violation of section
4.4. of the Operating Agreement (the “First Claim for Relief”); (2) breach of contract,
brought derivatively and directly, against Hornwood for ceasing manufacturing for
Triangle (the “Second Claim for Relief”); (3) breach of fiduciary duty, brought
derivatively and directly, against Hornwood (the “Fourth Claim for Relief”); (4)
breach of contract against Triangle for failure to pay settlement proceeds from the
Lawsuit (the “Fifth Claim for Relief”); (5) breach of contract against Hornwood for
failure to manufacture for Triangle at cost (the “Seventh Claim for Relief”); and (6) a
considered by the trial court, the 12(b)(6) motion is not converted into a Rule 56 motion.” (internal quotation marks, brackets, and citation omitted).) direct breach of fiduciary duty claim against Hornwood (the “Eighth Claim for
Relief”). 4 (See Br. Supp. 1–2.)
59. Hornwood moves to dismiss the derivative claims asserted by Emrich
Enterprises – the First, Second, and Fourth Claims for Relief – for lack of subject
matter jurisdiction for Emrich Enterprises’ failure to meet the pre-suit demand
requirements as provided for in N.C.G.S. § 57D-8-01. (Br. Supp. 8–10.) However, on
September 20, 2019, Emrich Enterprises voluntarily dismissed its Second Claim for
Relief without prejudice. (Resp. Emrich Enterprises, LLC Defs.’ Part. Mot. Dismiss
9, ECF No. 72 [“Resp. Br.”].) Therefore, Defendants’ Motion should be DENIED as
MOOT to the extent it seeks dismissal of Emrich Enterprises’ Second Claim for Relief.
60. Hornwood also moves to dismiss the First and Seventh Claims for Relief
pursuant to Rule 12(b)(1), contending that Emrich Enterprises lacks standing to
assert the respective direct breach of contract claims against Hornwood. (Br. Supp.
15–16.)
61. Hornwood also moves to dismiss Emrich Enterprises’ direct breach of
fiduciary duty claims, the Fourth and Eighth Claims for Relief, pursuant to Rule
12(b)(1) arguing that it does not owe Emrich Enterprises fiduciary duties. (Br. Supp.
11–14.) Hornwood also argues that the Fourth and Eighth Claims for Relief fail
pursuant to Rule 12(b)(6) because Emrich Enterprises fails to allege that Hornwood
breached any fiduciary duty owed or that any such breach caused damages. (Br.
Supp. 16–19.)
4 The Third and Sixth Claims for Relief, as defined by the FAVC, are not subject to the Motion.
(See Am. Compl. ¶¶ 176–86, 207–16; see also Br. Supp. 1–2.) 62. Lastly, Hornwood and Triangle move to dismiss the direct breach of
contract claims asserted against them incorporated in the First and Fifth Claims for
Relief pursuant to Rule 12(b)(6). (Br. Supp. 19–23, 25–27.)
63. The Court addresses each issue in turn.
A. Derivative Claims
64. At the time Emrich Enterprises filed the FAVC, it asserted four derivative
claims against Hornwood on behalf of Triangle. (Am. Compl. ¶¶ 150–197.) Only two
of Emrich Enterprises’ derivative claims are now the subject of Hornwood’s Motion to
Dismiss: (1) breach of section 4.4 of the Operating Agreement (the First Claim for
Relief); and (2) breach of fiduciary duty (the Fourth Claim for Relief). (Defs.’ Reply
Mem. Supp. Part. Mot. Dismiss Pl.’s First Am. Verified Compl. 2–4, ECF No. 74
[“Reply Br.”].)
65. Hornwood contends that Emrich Enterprises did not comply with the pre-
suit demand requirements in N.C.G.S. § 57D-8-01(a)(2) for the derivative claims
encompassed in the First and Fourth Claims for Relief. (Br. Supp. 8.)
66. “The challenge to the adequacy of any pre-suit demand is, inter alia, a
challenge to the Court’s subject matter jurisdiction over the derivative claims.”
Zoutewelle v. Mathis, 2018 NCBC LEXIS 95, at *18 (N.C. Super. Ct. Sept. 13, 2018)
(citation omitted). “Without a proper demand, the plaintiff has no standing to pursue
derivative claims, and the trial court has no subject matter jurisdiction to hear and
decide them.” Al-Hassan v. Salloum, 2020 NCBC LEXIS 22, at *5 (N.C. Super. Ct.
Feb. 20, 2020.) 67. A member of a North Carolina limited liability company may bring a
derivative action only if “the member made written demand on the LLC to take
suitable action, and either (i) the LLC notified the member that the member’s demand
was rejected, (ii) 90 days have expired from the date the demand was made, or (iii)
irreparable injury to the LLC would result by waiting for the expiration of the 90-day
period.” N.C.G.S. § 57D-8-01(a)(2).
68. On April 29, 2019, Emrich Enterprises served Triangle with a demand
letter. (Am. Compl. ¶ 115; see also Am. Compl. Ex. 9, ECF No. 56.9.) However,
Emrich Enterprises did not wait 90 days before filing the First Complaint nor the
FAVC, which were filed on April 29, 2019 and July 22, 2019 respectively. (See ECF
Nos. 3, 56.) Emrich Enterprises also does not allege that Triangle notified Emrich
Enterprises that the demand was rejected. Therefore, Emrich Enterprises did not
comply with the 90-day waiting period requirement in N.C.G.S. § 57D-8-01(a)(2)
when initiating this derivative action.
69. However, N.C.G.S. § 57D-8-01(a)(2) provides that the 90-day waiting period
is “excused by . . . a finding of irreparable injury that would result from imposing such
a waiting period.” Petty v. Morris, 2014 NCBC LEXIS 67, at *13–14 (N.C. Super. Ct.
Dec. 16, 2014). Notably, Defendants did not move the Court to dismiss Emrich
Enterprises’ Third Claim for Relief for Hornwood’s breach of the Operating
Agreement for its threat to unilaterally withdraw from Triangle. (Br. Supp. 8–10.)
70. Emrich Enterprises alleges that Hornwood’s withdrawal from Triangle,
contrary to the provisions of the Operating Agreement, will cause Triangle and Emrich Enterprises to suffer irreparable harm. (Am. Compl. ¶ 184.) Emrich
Enterprises specifically alleges that, if Hornwood were to withdraw and cease its
manufacturing duties owed to Triangle, all of Triangle’s business would come to a
halt, Triangle would not be able to meet its customers’ orders, and it would destroy
Triangle’s customer relationships. (Am. Compl. ¶¶ 5, 106, 184.) Emrich Enterprises
contends that Hornwood’s withdrawal from Triangle would irreparably harm
Triangle’s and Emrich Enterprises’ reputations and ability to obtain business from
future customers or to find future business opportunities in the textile industry. (Am.
Compl. ¶¶ 184–85.)
71. The Court has already concluded “that allowing Hornwood to unilaterally
withdraw in breach of the Operating Agreement, and thereby extinguish its fiduciary
duties, would result in irreparable harm to both Triangle and to Emrich Enterprises.”
(Prelim. Inj. ¶¶ 60– 64.)
72. Defendants appear to argue that Emrich Enterprises must show
irreparable injury on a claim-by-claim basis, and that a showing that irreparable
injury would result from a delay might be sufficient for one derivative claim but
insufficient to waive the 90-day waiting period requirement for other asserted
derivative claims in the same action. (Reply Br. 2–4.)
73. The statute does not require that irreparable injury stem from each claim
for the plaintiff to bring the derivative action. See N.C.G.S. § 57D-8-01. “[N.C.G.S.
§57D-8-01] does permit filing the complaint before the 90-day period expires upon a sufficient showing of irreparable harm.” Winters v. First Union Corp., 2001 NCBC
LEXIS 5, at *6 (N.C. Super. Ct. July 12, 2001).
74. The Court declines on the record before it to judicially impose an additional
requirement on Emrich Enterprises by requiring it to show irreparable injury on a
claim-by-claim basis. See State v. Davis, 364 N.C. 297, 302, 698 S.E.2d 65, 68 (2010)
(“[C]ourts must give [an unambiguous] statute its plain and definite meaning, and
are without power to interpolate, or superimpose, provisions and limitations not
contained therein.”) (alteration in original).
75. The Court concludes that showing irreparable injury for the Third Claim
for Relief is sufficient for the purposes of N.C.G.S. § 57D-8-01 to permit Emrich
Enterprises to initiate its derivate action before the expiration of the 90-day waiting
period. Therefore, the Court may properly exercise subject matter jurisdiction over
all of Emrich Enterprises’ derivative claims in the FAVC and the Motion should be
DENIED to the extent it requests the Court dismiss any of Emrich Enterprises’
derivative claims for lack of subject matter jurisdiction based on a failure to satisfy
N.C.G.S. § 57D-8-01.
B. Standing to Bring Direct Claims
76. Hornwood also challenges this Court’s subject matter jurisdiction over
certain direct claims brought by Emrich Enterprises against Hornwood including the
First, Fourth, Seventh, and Eighth Claims for Relief. (Br. Supp. 10–16.) Generally,
Hornwood argues that Emrich Enterprises does not have standing to bring these
claims. (See Br. Supp. 10–16.) 77. “Standing is a necessary prerequisite to a court’s proper exercise of subject
matter jurisdiction.” Neuse River Found., Inc. v. Smithfield Foods, Inc., 155 N.C.
App. 110, 113, 574 S.E.2d 48, 51 (2002) (citation omitted). The plaintiff has the
burden of proving that it has standing to bring its claims. Id. “In considering whether
a member of an LLC has standing to assert an individual claim, ‘members of an LLC
are treated like corporate shareholders and managers are similar to directors.’” Wirth
v. Sunpath, LLC, 2017 NCBC LEXIS 84, at *10 (N.C. Super. Ct. Sept. 14, 2017)
(quoting Levin v. Jacobson, 2015 NCBC LEXIS 111, at *14 (N.C. Super. Ct. Dec. 7,
2015)).
78. Generally, “shareholders cannot pursue individual causes of action against
third parties for wrongs or injuries to the corporation that result in the diminution or
destruction of the value of their stock.” Barger v. McCoy Hilliard & Parks, 346 N.C.
650, 658, 488 S.E.2d 215, 219 (1997). However, there are two exceptions that may
permit a shareholder to sue for injuries to the corporation: “(1) where there is a special
duty, such as a contractual duty, between the wrongdoer and the shareholder, and
(2) where the shareholder suffered an injury separate and distinct from that suffered
by other shareholders.” Id. “These rules apply equally to LLCs and their members
because the members are, for this purpose, functionally equivalent to corporate
shareholders.” Bennett v. Bennett, 2019 NCBC LEXIS 19, at *13 (N.C. Super. Ct.
Mar. 15, 2019) (internal quotation marks omitted). 79. The Court concludes that Emrich Enterprises has standing to raise its
direct claims, as alleged in the First and Seventh Claims for Relief, for breach of
contract based on contractual obligations owed directly to Emrich Enterprises.
80. Section 4.4 of the Operating Agreement states that “[n]o Member may
engage in or possess an interest in other business ventures of any nature or
description, independently or with others, which are competitive with the activities
of [Triangle], without first offering an interest in such activities to [Triangle] and
each other Member.” (Operating Agreement § 4.4.) Section 4.4 imposes an obligation
on Hornwood to offer an interest in business ventures that are competitive activities
to Emrich Enterprises as a member of Triangle before pursing such competitive
activities. By pursuing a claim for breach of section 4.4. of the Operating Agreement,
Emrich Enterprises attempts to enforce its own contractual rights. See, e.g., Panzino
5Church, Inc., 2020 NCBC LEXIS 17, at *17–18 (N.C. Super. Ct. Feb. 12, 2020).
81. Paragraph 3(a) of the Joint Venture Agreement states that:
Either party shall invoice [Triangle], with the terms of 75 days, the cost it incurs in providing fabric, laminating, cutting and packaging for the completion of the services. Selling expenses shall be paid on a commission basis of the 15th of the month based on the previous month’s invoices. All parties shall mutually agree upon additional expenses. 5
(Joint Venture Agreement ¶ 3(a).) Emrich Enterprises is a party to the Joint Venture
Agreement. (See Compl. ¶ 38; Joint Venture Agreement 1; see also Resp. Br. 17.)
Paragraph 3(a) prevents Hornwood from invoicing Triangle for additional expenses
5 Paragraph 3(a) of the Joint Venture Agreement appears to include hand-written modifications which read as presented in this Order and Opinion. (See Joint Venture Agreement ¶ 3(a).) without the consent of Emrich Enterprises. By pursuing a claim for breach of
paragraph 3(a) of the Joint Venture Agreement, Emrich Enterprises attempts to
enforce its own contractual rights to participate in the management of Triangle. See
759 Ventures, LLC v. GCP Apt. Inv’rs, LLC, 2018 NCBC LEXIS 82, at *9–10 (N.C.
Super. Ct. Aug. 13, 2018) (concluding that excluding a member from the LLC’s
management was a direct cause of action); see also La Mack v. Obeid, 2015 NCBC
LEXIS 24, at *12–14 (N.C. Super. Ct. Mar. 5, 2015) (applying Delaware law, the
Court concluded that the plaintiffs could bring a direct claim when the managers’
contractual rights to vote on matters impacting the LLC were impeded).
82. When a member of an LLC seeks to enforce its own rights under the LLC’s
operating agreement, not the rights of the LLC, in an effort to remedy its own injury,
that member has standing to bring its direct breach of contract claim. Panzino, 2020
NCBC LEXIS 17, at *17–18; 759 Ventures, LLC, 2018 NCBC LEXIS 82, at *8–11.
Accordingly, the Court concludes that Emrich Enterprises has standing to bring the
direct breach of contract claims in the First and Seventh Claims for Relief and
Hornwood’s Motion as to those claims should be DENIED.
83. Hornwood also argues that Emrich Enterprises cannot assert a direct
breach of fiduciary duty claim against Hornwood because, absent provisions in an
operating agreement to the contrary, members of a limited liability company do not
owe a fiduciary to each other and any claim brought by Emrich Enterprises should
be brought as a derivative claim. (Br. Supp. 10–14; Reply Br. 4–7.) Hornwood
contends that it follows that Emrich Enterprises lacks standing to assert its direct breach of fiduciary duty claims encompassed in the Fourth and Eighth Claims for
Relief. (Br. Supp. 10–13.)
84. As it pertains to the Fourth and Eighth Claims for Relief, and even if the
Court applied Barger to the First and Seventh Claims for Relief, the Court concludes
that the allegations by Emrich Enterprises satisfy, at this preliminary stage in the
proceeding, the first Barger exception by sufficiently alleging that Hornwood is the
controlling member of Triangle thus owing fiduciary duties individually and directly
to Emrich Enterprises. See Corwin, 371 N.C. at 612, 821 S.E.2d at 734–35 (providing
that whether the first Barger exception applied depended on whether the plaintiff
sufficiently alleged that the controlling stockholder owed the plaintiff minority
stockholder fiduciary duties).
85. For the aforementioned reasons, the Motion as it pertains to Emrich
Enterprises’ standing to bring the First, Fourth, Seventh, and Eighth Claims for
Relief should be DENIED.
C. Motion to Dismiss Pursuant to Rule 12(b)(6)
86. Hornwood requests that the Court dismiss Emrich Enterprises’ First,
Fourth, Fifth, and Eighth Claims for Relief for Emrich Enterprises’ failure to state a
claim pursuant to Rule 12(b)(6). (Br. Supp. 16–23, 25–27.)
1. Breach of Fiduciary Duty
87. Emrich Enterprises’ Fourth and Eighth Claims for Relief assert breach of
fiduciary duty claims, directly and derivatively on behalf of Triangle, against Hornwood in its capacity as the controlling member-manager of Triangle. (Am.
Compl. ¶¶ 188–97, 228–35.)
88. “The North Carolina Limited Liability Company Act does not create
fiduciary duties among members.” Finkel v. Palm Park, Inc., 2019 NCBC LEXIS 38,
at *23 (N.C. Super. Ct. June 11, 2019) (citation and quotation marks omitted). As a
general rule, “[m]embers of a limited liability company are like shareholders in a
corporation in that members do not owe a fiduciary duty to each other or to the
company.” Kaplan v. O.K. Techs., L.L.C., 196 N.C. App. 469, 473, 675 S.E.2d 133,
137 (2009). “The rights and duties of LLC members are ordinarily governed by the
company’s operating agreement, not by general principles of fiduciary relationships.”
Strategic Mgmt. Decisions v. Sales Performance Int’l, 2017 NCBC LEXIS 69, at *10–
11 (N.C. Super. Ct. Aug. 7, 2017).
89. However, in some circumstances, “a holder of a majority interest who
exercises control over the LLC owes a fiduciary duty to minority interest members.”
Vanguard Pai Lung, LLC v. Moody, 2019 NCBC LEXIS 39, at *17 (N.C. Super. Ct.
June 19, 2019.) “Thus, when the operating agreement confers controlling authority
on the majority member, [the majority member] owes a duty not to use its control to
harm the minority, assuming no other provision disclaims such a duty.” Id. at *21.
90. Emrich Enterprises alleges that Hornwood is the majority and controlling
member of Triangle. (Am. Compl. ¶¶ 2, 16, 189.) Emrich Enterprises argues that
Hornwood “controls nearly every aspect of Triangle’s business.” (Resp. Br. 13.)
Hornwood owns all of the manufacturing equipment used by Triangle and the facilities where Triangle’s products are manufactured. (Am. Compl. ¶¶ 30, 189.)
Hornwood controls Triangle’s day-to-day operations including its finances, customer
service, administration, and its correspondence. (Am. Compl. ¶¶ 47, 189.)
91. Furthermore, section 3.1 of the Operating Agreement states that “all
decisions with respect to the management of the business and affairs of [Triangle]
shall be made by action of a Majority Interest of the Members[.]” (Operating
Agreement § 3.1.) Section 3.1 of the Operating Agreement confers authority on
Hornwood as the majority member.
92. Hornwood has allegedly used that control over Triangle to withhold funds
owed to Emrich Enterprises, unilaterally approve unprecedented and drastic
increases in the price Triangle pays to Hornwood for fabric Hornwood manufactures
for and sells to Triangle, divert Triangle’s profits to Hornwood, and further
mismanage Triangle for Hornwood’s benefit. (Am. Compl. ¶¶ 47, 51–66, 127–28, 147,
231.)
93. Emrich Enterprises has alleged that Hornwood exercises complete control
over Triangle and has used that control to harm Emrich Enterprises. The attached
Operating Agreement confers controlling authority on Hornwood as the majority
member and neither the Operating Agreement nor the Joint Venture Agreement
address or disclaim fiduciary duties. For the purposes of a Rule 12(b)(6) motion, such
allegations are sufficient to allege the existence of a fiduciary duty. 6 See Vanguard
6 As said in Vanguard Pai Lung, LLC, it is important to note that the Court does not hold that
Hornwood owes or owed a fiduciary duty to Emrich Enterprises. Vanguard Pai Lung, LLC, 2019 NCBC LEXIS 39, at *21. While the Court concludes that Emrich Enterprises has sufficiently alleged control for the purposes of a Rule 12(b)(6) motion, a more fully developed Pai Lung, LLC, 2019 NCBC LEXIS 39, at *21 (concluding that for the purposes of
Rule 12, the counterclaim plaintiff alleged sufficient control by the majority member
over the LLC to plead the existence of a fiduciary duty when the counterclaim
plaintiff made allegations that (1) the operating agreement conferred controlling
authority to the majority member; (2) the majority member exercised that control;
and (3) the operating agreement did not address nor disclaim fiduciary duties owed
between members); cf. Finkel, 2019 NCBC LEXIS 38, at *27–29 (holding that, on a
Rule 56 motion, the plaintiff did not establish the majority member exercised
sufficient control over the LLC to find a fiduciary duty owed by the majority member
to the minority member where (1) the operating agreement provided “significant
protections” to the minority member; (2) the operating agreement contemplated
fiduciary duties; and (3) there was undisputed evidence that there was financial
transparency between the majority and minority members).
94. Hornwood alternatively argues that, in the event the Court concludes that
Emrich Enterprises sufficiently alleged a fiduciary duty owed by Hornwood to Emrich
Enterprises, Emrich Enterprises nonetheless failed to allege the requisite elements
of a breach of any fiduciary duty to support its claim. (Br. Supp. 16–19.)
95. To state a claim for breach of fiduciary duty a plaintiff must allege both that
(1) the defendant owes the plaintiff a fiduciary duty through the existence of a
fiduciary relationship, and (2) the defendant breached that duty. Surratt v. Brown,
2015 NCBC LEXIS 75, at *19 (N.C. Super. Ct. July 27, 2015).
record could reveal factors that weigh against the conclusion that a fiduciary relationship existed between Hornwood and Emrich Enterprises. 96. Emrich Enterprises alleges, among other things, that Hornwood violated
the non-compete obligations of the Operating Agreement and usurped a corporate
opportunity of Triangle’s, caused Triangle to withhold payments that Emrich
Enterprises is otherwise entitled to, and generally engaged in willful misconduct in
the management of Triangle that constitutes self-dealing. (Am. Compl. ¶¶ 67–96,
191–95.) The Court concludes that these allegations are sufficient to support Emrich
Enterprises’ claim for breach of fiduciary duty. See Vanguard Pai Lung, LLC, 2019
NCBC LEXIS 39, at *3–7, 21–22 (permitting a breach of fiduciary duty claim to
survive a Rule 12 motion when the controlling member diverted the LLC’s money and
assets to benefit itself and used its controlling authority over the LLC to harm the
minority interest holder); Shaw v. Gee, 2016 NCBC LEXIS 103, at *18–19 (N.C.
Super. Ct. Dec. 21, 2016) (“[A] manager may breach his fiduciary duty when he
diverts a business opportunity that rightfully belongs to the limited liability company
for his professional gain.”); SCA-Blue Ridge, LLC v. WakeMed, 2016 NCBC LEXIS 2,
at *26 (N.C. Super. Ct. Jan. 4, 2016) (concluding that the plaintiff sufficiently stated
a claim for breach of fiduciary duty against the controlling member of the LLC by
alleging violations of non-compete obligations in the LLC’s operating agreement).
97. For the aforementioned reasons, the Motion as it pertains to the Fourth and
Eighth Claims for Relief should be DENIED.
2. Breach of Contract Claims
98. Defendants move to dismiss Emrich Enterprises’ claims for breach of
contract encompassed in the First and Fifth Claims for Relief pursuant to Rule 12(b)(6) for failure to state a claim. To properly plead a breach of contract claim, a
plaintiff need only allege “(1) [the] existence of a valid contract and (2) [a] breach of
the terms of that contract.” Poor v. Hill, 138 N.C. App. 19, 26, 530 S.E.2d 838, 843
(2000). “[S]tating a claim for breach of contract is a relatively low bar.” Vanguard
Pai Lung, LLC, 2019 NCBC LEXIS 39, at *11.
i. Section 4.4 of the Operating Agreement
99. Hornwood, in part, contends that Emrich Enterprises’ derivative and direct
claims in the First Claim for Relief, for breach of section 4.4 of the Operating
Agreement, should be dismissed because section 4.4 is an unenforceable non-compete
provision because it is overbroad as to geographic scope and is unnecessary to protect
a legitimate business interest. 7 (Br. Supp. 19–21.)
100. Section 4.4 of the Operating Agreement states that “[n]o Member may
engage in or possess an interest in other business ventures of any nature or
description, independently or with others, which are competitive with the activities
of [Triangle], without first offering an interest in such activities to [Triangle] and
each other Member.” (Operating Agreement § 4.4.)
101. “An operating agreement is a contract,” and general rules of contract
construction are used to interpret an LLC’s operating agreement. N.C. State Bar v.
Merrell, 243 N.C. App. 356, 370, 777 S.E.2d 103, 114 (2015); Comput. Design &
7 Section 4.4 of the Operating Agreement seems to incorporate both a non-compete provision
and an obligation not to take the corporate opportunities of Triangle without first offering the opportunity to Triangle and its other members. (Operating Agreement § 4.4.) Primarily, the parties argue that North Carolina’s law regarding non-competes govern the enforceability of this section of the Operating Agreement, therefore the Court only addresses this argument. Integration, LLC v. Brown, 2018 NCBC LEXIS 216, at *25 (N.C. Super. Ct. Dec. 10,
2018). “It is the policy of the [LLC Act] to give the maximum effect to the principle of
freedom of contract and the enforceability of operating agreements.” N.C.G.S. § 57D-
10-01.
102. “The reasonableness of a restraining covenant is a matter of law for the
court to decide.” Jewel Box Stores Corp. v. Morrow, 272 N.C. 659, 663, 158 S.E.2d
840, 843 (1968). “According to well-established North Carolina law, non-competition
agreements contained in an employment contract are more closely scrutinized than
those contained in a contract for the sale of a business.” Outdoor Lighting
Perspectives Franchising v. Harders, 228 N.C. App. 613, 620, 747 S.E.2d 256, 262
(2013) (quoting Keith v. Day, 81 N.C. App. 185, 193, 343 S.E.2d 562, 567 (1986))
(internal quotation marks omitted). When a non-compete provision does “not fit
neatly into either the employer-employee category or the business sale category”
courts should engage in a detailed analysis of the reasonableness of the restrictions
rather than rigidly analyze the restrictions under one category or the other. See
Outdoor Lighting Perspectives Franchising, 228 N.C. App. at 621–22, 747 S.E.2d at
262–63.
103. As it pertains to the relationship between a member-manager and an LLC,
the Court concludes “that the facts alleged in this case do not fit squarely under the
analysis applied to restrictive covenants between employer and employee or buyer
and seller, but instead call for a more situation-specific approach.” KNC Techs., LLC
v. Tutton, 2019 NCBC LEXIS 72, at *16–17 (N.C. Super. Ct. Oct. 9, 2019). The Court in Outdoor Lighting addressed the reasonableness of a non-compete agreement
between a franchisor and a franchisee and ultimately concluded that the elements of
the tests utilized in both the employee-employer and business sale context were
relevant in analyzing the reasonableness of the non-compete agreement between a
franchisor and franchisee. Id. at 621–22, 747 S.E.2d at 263.
104. Some factors that can be considered in making the determination as to
whether a non-compete is reasonable include, but are not limited to, (1) the area, or
the scope of the restriction; (2) the area in which the employee actually worked or was
subject to work; (3) the area in which the employer operated; (4) the nature of the
business involved; (5) the nature of the employee’s duty and his knowledge of the
employer’s business operation; and (6) the good will of the business. Outdoor Lighting
Perspectives Franchising, 228 N.C. App. at 622–23, 747 S.E.2d at 263–64 (citing Clyde
Rudd & Assocs., Inc. v. Taylor, 29 N.C. App. 679, 684, 225 S.E.2d 602, 605 (1976)).
105. However, the FAVC and the Operating Agreement attached thereto do not
adequately address these factors. The North Carolina Court of Appeals has
previously held that “a ruling on the enforceability of [a non-compete agreement]
cannot be made at the pleadings stage in cases where evidence is needed to show the
reasonableness of the restrictions contained therein. See Mkt. Am., Inc. v. Lee, 257
N.C. App. 98, 110, 809 S.E.2d 32, 41 (2017) (citing Okuma Am. Corp. v. Bowers, 181
N.C. App. 85, 96, 638 S.E.2d 617, 618 (2007)). Section 4.4 of the Operating Agreement
is not per se unreasonable. See Jewel Box Stores Corp., 272 N.C. at 663–64, 158
S.E.2d at 843–44 (“[T]his Court has upheld covenants not to compete which accompanied the sale of a trade or business and contained limitations of ten, fifteen,
and twenty years, as well as limitations for the life of one of the parties[.]”); Biesse
Am., Inc. v. Dominici, 2019 NCBC LEXIS 50, at *24 (N.C. Super. Ct. Aug. 19, 2019)
(“A worldwide covenant not to compete is not per se invalid.”) (emphasis added).
106. The determination as to whether section 4.4. of the Operating Agreement
is enforceable should be made on a more fully developed record. See Akzo Nobel
Coatings, Inc. v. Rogers, 2011 NCBC LEXIS 42, at *39 (N.C. Super. Ct. Nov. 3, 2011).
107. At the pleading stage, Emrich Enterprises’ allegations that (1) Hornwood
and Emrich Enterprises agreed to the provisions of the Operating Agreement; (2)
Hornwood and Borgstena developed a business relationship to develop automotive
fabrics; (3) Borgstena is a competitor of Triangle; (4) Hornwood and Borgstena’s
efforts are competitive with Triangle’s business activities; and (5) Hornwood did not
offer this business opportunity to Triangle or Emrich Enterprises and actively
concealed such work, are sufficient to state a claim for breach of contract. (Am.
Compl. ¶¶ 152–57.) Accordingly, Hornwood’s Motion should be DENIED subject to
the Court’s ability to more fully consider the reasonableness of the restriction
contained in the Operating Agreement upon a more fully developed record.
ii. Agreement to Distribute Settlement Proceeds
108. Emrich Enterprises asserts the Fifth Claim for Relief on the basis that
Triangle breached the parties’ agreement to distribute the settlement proceeds from
the Lawsuit. (Am. Compl. ¶¶ 199–205.) In large part, Triangle contends that Emrich
Enterprises’ Fifth Claim for Relief must fail because Emrich Enterprises cannot require Triangle to distribute funds where doing so would result in Triangle’s
liabilities exceeding its assets. (Br. Supp. 25–27; Reply Br. 11–13.) In its argument,
Triangle references facts that are not part of the FAVC nor the documents attached
thereto. The Court therefore declines to consider this argument or the extraneous
facts provided on a Rule 12(b)(6) motion nor will the Court convert the Motion into
one for summary judgment pursuant to Rule 56.
109. Based on the allegations made in the FAVC regarding the agreement to
distribute the settlement proceeds and the terms of the attached Operating
Agreement, there is no inherent conflict between the agreements’ respective terms.
Therefore, the Court need not determine whether the express agreement between the
parties regarding the settlement proceeds, the Operating Agreement, or both govern
the dispute at issue at this stage in the proceeding. See Vanguard Pai Lung, LLC,
2019 NCBC LEXIS 39, at *15 (citing Roth v. Penguin Toilets, LLC, 2011 NCBC LEXIS
46, at *12 (N.C. Super. Ct. Nov. 30, 2011)).
110. Emrich Enterprises has sufficiently alleged that Triangle, Emrich
Enterprises, and Hornwood agreed that Triangle would distribute the Lawsuit’s
settlement proceeds in certain amounts and at certain times and Triangle has refused
to pay Emrich Enterprises’ its share of the settlement proceeds as required by the
alleged agreement, which is sufficient for the purposes of Rule 12(b)(6). (Am. Compl.
¶¶ 199–204.) Therefore, Triangle’s Motion should be DENIED. VI. CONCLUSION
111. For the foregoing reasons, the Court hereby DENIES the Motion.
SO ORDERED, this the 8th day of April, 2020.
/s/ Michael L. Robinson Michael L. Robinson Special Superior Court Judge for Complex Business Cases