Miller v. Burlington Chem. Co., 2017 NCBC 6.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION GUILFORD COUNTY 13 CVS 9719
JOHN MILLER; JOHN CROSBY; and ) GEORGE CLEMENTS, as Personal ) Representative of the Estate of ) Augustus K. Clements, III, as ) members of Burlington Chemical Co., ) LLC and BCC Properties, LLC, ) ) Plaintiffs, ) ORDER AND OPINION ON ) DEFENDANTS’ MOTIONS TO DISMISS v. ) AND MOTION TO STAY ) BURLINGTON CHEMICAL CO., ) LLC; BCC PROPERTIES, LLC; and ) BRET HOLMES, ) ) Defendants. ) )
1. THIS MATTER is before the Court on Defendants Burlington Chemical
Co., LLC (“Burlington”) and BCC Properties, LLC’s (“BCC Properties”) (collectively,
the “Companies”) Motion to Stay Derivative Proceeding (the “Motion to Stay”), the
Companies’ Motion to Dismiss, and Defendant Bret Holmes’s (“Holmes”) motion to
dismiss (collectively, the “Motions to Dismiss”) filed on September 22, 2014. The
Companies and Holmes are collectively referred to herein as “Defendants.” For the
reasons set forth below, the Court GRANTS IN PART and DENIES IN PART the
Motions to Dismiss and DENIES the Motion to Stay.
Womble Carlyle Sandridge & Rice, LLP, by Brent F. Powell and Philip Mohr, for Plaintiffs John Miller, John Crosby, and George Clements.
Nexsen Pruet, LLC, by David S. Pokela, for Defendants Burlington Chemical Co., LLC and BCC Properties, LLC. Boydoh & Hale, PLLC, by J. Scott Hale, for Defendant Bret Holmes.
Robinson, Judge.
I. PROCEDURAL HISTORY
2. The Court sets forth here only those portions of the procedural history
relevant to its determination of the Motions to Dismiss and the Motion to Stay.
3. Plaintiffs initiated this action by filing their original complaint on October
28, 2013. This case was designated as a mandatory complex business case by order
of the Chief Justice of the Supreme Court of North Carolina dated October 30, 2013
and assigned to the Honorable James L. Gale on the same day. This case was
reassigned to the undersigned by order dated September 9, 2016.
4. On July 21, 2014, Plaintiffs filed an amended complaint (the “Complaint”)
and a Motion for Temporary Restraining Order and Preliminary Injunction (the
“July 2014 Motion”).
5. Defendants filed the Motions to Dismiss, Motion to Stay, and supporting
briefs on September 22, 2014.
6. After numerous motions for extensions of time and supplemental briefing
by Plaintiffs, on August 10, 2015 the Court heard oral argument on the July 2014
Motion. After the hearing, the Court corresponded with the parties to determine
whether the parties could resolve the issue on their own. Plaintiffs’ counsel
requested that the Court reserve ruling on the July 2014 Motion while the parties
negotiated with each other. Ultimately, the parties were unable to resolve the issue
on their own and filed supplemental briefing in April 2016. 7. On July 1, 2016, Plaintiffs filed their Motion for Mandatory Injunction
(the “July 2016 Motion”). On September 27, 2016, the Court entered an Order on
Plaintiffs’ Motions for Mandatory Injunction (the “Mandatory Injunction Order”)
ordering Defendants to produce certain books and records. That same day, the
Court entered a Briefing Schedule Order establishing a briefing schedule for the
Motions to Dismiss and the Motion to Stay following Plaintiffs’ inspection of books
and records as set forth in the Mandatory Injunction Order.
8. The Motions to Dismiss and Motion to Stay have been fully briefed, and
the Court held a hearing on the motions on January 17, 2017. The Motions to
Dismiss and Motion to Stay are ripe for resolution.
II. FACTUAL BACKGROUND
9. The Court does not make findings of fact on the Motions to Dismiss under
Rule 12(b)(6) of the North Carolina Rules of Civil Procedure (“Rule(s)”), but only
recites those allegations of the Complaint that are relevant and necessary to the
Court’s determination of the Motions to Dismiss.
10. In 2007, Plaintiffs, Holmes, and two other individuals formed the
Companies. (First Am. Verified Compl. and Mot. TRO and Permanent Injunctive
Relief ¶ 7 [hereinafter Am. Compl.].) Burlington is a North Carolina limited
liability company (“LLC”) with its principal place of business in Greensboro, North
Carolina. (Am. Compl. ¶ 5.) BCC Properties is a North Carolina LLC with its
former principal place of business in Burlington, North Carolina. (Am. Compl. ¶ 6.)
BCC Properties was dissolved on December 28, 2012. (Am. Compl. ¶ 6.) 11. Plaintiffs and Holmes are members of the Companies. (Am. Compl. ¶¶
1−4.) At the time the Companies were formed, Holmes assured Plaintiffs that he
was not and would not operate a business that competed with the Companies. (Am.
Compl. ¶ 9.) Based on Holmes’s representation, Plaintiffs agreed to appoint Holmes
as the manager of the Companies. (Am. Compl. ¶ 9.)
12. Plaintiff John Miller owns a 25% interest in each of the Companies. (Am.
Compl. ¶ 1.) Plaintiff John Crosby owns a 16.67% interest in each of the
Companies. (Am. Compl. ¶ 2.) Plaintiff George Clements, as the personal
representative of the estate of Augustus K. Clements, III, owns an 8.33% interest in
each of the Companies. (Am. Compl. ¶ 3.) Holmes owns a 25% interest in each of
the Companies. (Am. Compl. ¶ 4.) The remaining interests in each of the
Companies are owned by Charles L. Moore and Bill Moorer. (Am. Compl. Ex. A
[hereinafter Operating Agreement].)
13. The members of the Companies executed two substantially similar
operating agreements to govern the Companies’ operation and management
(collectively, the “Operating Agreements”). (Am. Compl. ¶ 8.) Other than the
company name on the Operating Agreements, the only difference between the
Operating Agreements is the capital contributions and loan amounts each member
was required to make to the Companies (the “Initial Contributions”). (Am. Compl. ¶
8.)
14. Under the terms of the respective Operating Agreements, Holmes was
required to make a capital contribution of $3,000 and a $750,000 loan to BCC Properties, (Operating Agreement §§ 5.1−5.2), and Holmes was required to
contribute by cash and/or loans a total of $112,500 to Burlington. (Am. Compl. ¶
13.)
15. Pursuant to the Operating Agreements, distributions to the members are
based on each member’s “Company Interest.” (Operating Agreement § 7.1(b).)
“Company Interest” is defined in the Operating Agreements as “the ratio of the
Capital Contributions of the Member to the Capital Contributions of all Members.”
(Operating Agreement § 1.16.) “Capital Contributions” are defined as the amount of
money contributed by the member pursuant to his capital contribution and loan
obligations to the company. (Operating Agreement § 1.10.)
16. Plaintiffs have made their required Initial Contributions. (Am. Compl. ¶
11.) Plaintiffs allege that Holmes has represented to Plaintiffs that he made his
required Initial Contributions, but that Holmes has failed to provide adequate
documentation of his Initial Contributions upon request. (Am. Compl. ¶ 14.)
Plaintiffs contend that Holmes has received various distributions based on his
representation that he made the required Initial Contributions under the Operating
Agreements. (Am. Compl. ¶ 23.)
17. On December 9, 2009, the Companies closed on an asset purchase
agreement (the “Asset Purchase Agreement”) with Mount Vernon Chemicals L.L.C.
(“Mount Vernon”). (Am. Compl. ¶ 15.) Pursuant to the Asset Purchase Agreement,
Mount Vernon obtained the real property and certain enumerated assets, patents,
and accounts receivable owned by the Companies. (Am. Compl. ¶ 15.) 18. Under the Asset Purchase Agreement, the estimated purchase price was
$4 million. (Am. Compl. ¶ 16.) An immediate payment of $2.5 million was due at
closing. (Am. Compl. ¶ 16.) Mount Vernon was to pay the remaining $1.5 million
balance over the next four years (the “Four-Year Period”) based on sales of certain
products Mount Vernon obtained under the Asset Purchase Agreement (the
“Products”). (Am. Compl. ¶ 17.) Each month, Mount Vernon was to report its
monthly sales of the Products to Holmes on behalf of the Companies (the “Monthly
Reports”). (Am. Compl. ¶ 17.) Mount Vernon was to then remit a certain
percentage of the sales profits to Holmes (the “Monthly Payments”). (Am. Compl. ¶
17.) The Monthly Payments were to be deducted from the $1.5 million balance
owed to the Companies. (Am. Compl. ¶ 17.) At the end of the Four-Year Period,
Mount Vernon was to pay the Companies the deficit, if any, between the $1.5
million balance less the Monthly Payments that had been made during the Four-
Year Period (the “Shortfall Amount”). (Am. Compl. ¶ 18.) The Shortfall Amount
was due on December 9, 2013 and was required to be paid no later than January 8,
2014. (Am. Compl. ¶ 18.)
19. During the Four-Year Period, Plaintiffs questioned Holmes about the
Monthly Payments. (Am. Compl. ¶ 19.) Holmes assured Plaintiffs that he was
keeping up with the Monthly Reports and keeping track of the Monthly Payments.
(Am. Compl. ¶ 19.) Holmes expressed that Mount Vernon’s sales of the Products
were not as voluminous as expected, but Holmes assured Plaintiffs that any
diminished Monthly Payments would be covered by the Shortfall Amount. (Am. Compl. ¶ 19.) Plaintiffs allege that based on Holmes’s statements, Plaintiffs were
reasonably led to believe that Holmes was fulfilling his obligations as manager of
the Companies. (Am. Compl. ¶ 20.)
20. Throughout 2012, Holmes represented to Plaintiffs that the Companies
were having a successful year and indicated that a sizeable distribution would be
made to the members at the annual meeting in March 2013. (Am. Compl. ¶ 24.) At
the March 2013 meeting, however, Holmes announced that 2012 had not been a
profitable year and no distribution would be made. (Am. Compl. ¶ 25.)
21. Plaintiffs began requesting copies of various documents from Holmes and
the Companies’ accountants to understand the Companies’ unexpected
unprofitability. (Am. Compl. ¶ 26.) As of the filing of the Complaint, Holmes had
not fully provided the requested documentation. (Am. Compl. ¶ 27.)
22. During their investigation, Plaintiffs discovered that Holmes was
operating Gulf States International, LLC (“Gulf States”), a business similar to and a
direct competitor of Burlington. (Am. Compl. ¶¶ 29, 31.) Plaintiffs allege that
Holmes sold some of the Companies’ inventory to Gulf States and/or was storing
some of the Companies’ inventory at Gulf States’s location. (Am. Compl. ¶ 30.)
Plaintiffs allege that “there were undoubtedly numerous business transactions
consummated by Gulf States which otherwise could have been performed by the
Companies.” (Am. Compl. ¶ 31.) Plaintiffs requested documentation of the sale of
the Companies’ inventory to Gulf States and documentation that the Companies’
inventory was being properly accounted for and used only for the Companies’ operations. (Am. Compl. ¶ 30.) As of the filing of the Complaint, Holmes had not
provided the requested documentation. (Am. Compl. ¶ 30.)
23. Also during their investigation, Plaintiffs learned that Holmes failed to
pursue an account receivable in excess of $324,000 for product sold by the
Companies to VersaChem (the “VersaChem Account Receivable”). (Am. Compl. ¶
57.) The VersaChem Account Receivable accrued from 2007 to just prior to
December 2009. (Am. Compl. ¶ 58.) Holmes did not inquire about the VersaChem
Account Receivable until about December 2009, at which time Holmes unilaterally
determined the Companies would not pursue it. (Am. Compl. ¶¶ 58−59.)
24. On March 12, 2014, Plaintiff John Crosby made a written demand on
Holmes to take all necessary steps to collect the VersaChem Account Receivable and
to take appropriate actions to collect the Shortfall Amount (the “Demand Letter”).
(Companies’ Br. Supp. Mot. Dismiss Ex. B [hereinafter Demand Letter].)
25. Plaintiffs bring the following direct claims against Holmes: (1) inspection
of books and records; (2) breach of the Operating Agreements; (3) unjust
enrichment; (4) breach of fiduciary duty; (5) breach of the implied covenant of good
faith and fair dealing; and (6) fraud and negligent misrepresentation. (Am. Compl.
17−22.) Plaintiffs bring the following derivative claims on behalf of the Companies
against Holmes: (1) breach of the Operating Agreements; (2) breach of fiduciary
duty; and (3) breach of the implied covenant of good faith and fair dealing. (Am.
Compl. 24−27.) Plaintiffs also demand an accounting. (Am. Compl. 27.) III. LEGAL STANDARD
A. Rule 12(b)(1)
26. A court shall dismiss the action when it appears that the court lacks
subject matter jurisdiction. N.C. Gen. Stat. § 1A-1, Rule 12(h)(3). A defect in
subject matter jurisdiction may be raised by a party or by the court sua sponte.
Conner Bros. Mach. Co. v. Rogers, 177 N.C. App. 560, 561, 629 S.E.2d 344, 345
(2006). “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.
B. Rule 12(b)(6)
27. 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). 28. 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).
C. Motion to Stay
29. “If the LLC commences an inquiry into the allegations set forth in the
demand or complaint, the court may stay a derivative proceeding.” N.C. Gen. Stat.
§ 57D-8-02. An inquiry into the allegations may be made pursuant to N.C. Gen.
Stat. § 57D-8-03(b) or (f). Under section 57D-8-03(b)(1), an inquiry may be made by
“[a] majority vote or other approval of those persons who have the authority
individually or collectively to cause the LLC to bring an action . . . and are
independent.” N.C. Gen. Stat. § 57D-8-03(b)(1). Under section 57D-8-03(b)(2), an
inquiry may be made by “[a] majority vote of a committee composed of two or more
independent persons appointed by a majority vote or other approval of those
persons described in [§ 57D-8-03(b)(1)].” N.C. Gen. Stat. § 57D-8-03(b)(2). IV. ANALYSIS
A. Direct Claims
30. Holmes moves to dismiss Plaintiffs’ direct claims against him pursuant to
Rule 12(b)(1), contending that Plaintiffs’ direct claims are derivative claims of the
Companies and Plaintiffs lack standing to bring direct claims against Holmes.
Holmes also moves to dismiss Plaintiffs’ direct claims against him pursuant to Rule
12(b)(6).
31. “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). It is a well-settled principle of North
Carolina law that shareholders of a corporation cannot pursue individual causes of
action for wrongs or injuries to the corporation. Barger v. McCoy Hillard & Parks,
346 N.C. 650, 658, 488 S.E.2d 215, 219 (1997); Corwin v. British Am. Tobacco PLC,
No. COA15-1334, 2016 N.C. App. LEXIS 1320, at *37 (N.C. Ct. App. Dec. 20, 2016),
mot. for en banc reh’g filed, (Jan. 4, 2017). There are two exceptions: (1) when there
is a special duty between the wrongdoer and the shareholder; and (2) when the
shareholder suffered an injury separate and distinct from the injury suffered by the
corporation and the other shareholders. Barger, 346 N.C. at 658, 488 S.E.2d at 219;
Corwin, 2016 N.C. App. LEXIS 1320, at *37.
32. For the special duty exception to apply, “the duty must be one that the
alleged wrongdoer owed directly to the shareholder as an individual”—a duty that
was personal to the shareholders and separate and distinct from the duty owed to the corporation. Barger, 346 N.C. at 659, 488 S.E.2d at 220. In Barger, the
Supreme Court of North Carolina set forth an illustrative, non-exclusive list of
situations in which a special duty may be found. Such list included when the
wrongful actions of the party induced plaintiff to become a shareholder, the
wrongdoer violated his fiduciary duty to the shareholder, the wrongdoer performed
individualized services directly for the shareholder, and the wrongdoer undertook to
advise shareholders independently of the corporation. Id.
33. For the special injury exception to apply, the injury must be peculiar or
personal to the shareholder. Id. “[A] plaintiff must show that its particular injury
was ‘separate and distinct from the injury sustained by the other shareholders or
the corporation itself.’” Raymond James Capital Partners, L.P. v. Hayes, 789
S.E.2d 695, 702 (N.C. Ct. App. 2016) (quoting Barger, 346 N.C. at 659, 488 S.E.2d at
219).
1. Inspection of Books and Records
34. To the extent the Motions to Dismiss seek dismissal of Plaintiffs’ claim to
inspect the Companies’ books and records, the Motions to Dismiss are rendered
moot by the Mandatory Injunction Order, which ordered Defendants to produce
specific documents set forth therein. As a result, the Court denies as moot the
Motions to Dismiss with respect to Plaintiffs’ inspection of books and records claim.
2. Breach of the Operating Agreements
35. Plaintiffs contend that Holmes breached the Operating Agreements “[b]y
failing and/or refusing to account for his [Initial Contributions.]” (Am. Compl. ¶ 87.) Plaintiffs argue that they may bring a direct claim for Holmes’s alleged breach
under the special injury exception. (Pls.’ Consolidated Br. Opp. Defs.’ Mots. 8.)
Plaintiffs contend that they suffered a distinct injury because “[i]f Mr. Holmes did
not make the required [Initial Contributions], then Plaintiffs should have had
proportionally higher membership interests and received correspondingly larger
distributions.” (Pls.’ Consolidated Br. Opp. 8.)
36. Plaintiffs have failed to show an injury that is distinct from the injury to
the Companies or the members collectively. The fact that, but for Holmes’s alleged
conduct, all members should have had proportionally higher membership interests
and received correspondingly larger distributions reveals on its face that Plaintiffs
have not suffered a unique, personal injury. See Raymond James Capital Partners,
L.P., 789 S.E.2d at 702 (“Plaintiff’s arguments on appeal are also consistently
couched in terms of injuries sustained by it and ‘the shareholders.’ Thus, by
plaintiff’s own account, it has not suffered a unique, personal injury.”).
37. Further, Plaintiffs’ alleged injury derives from the same injury suffered by
the Companies. Plaintiffs allege that they received reduced distributions. Any
reduction in distributions is directly tied to Holmes’s failure to make the Initial
Contributions to the Companies. See id. (“[P]laintiff is simply positing a distinction
without a difference: plaintiff’s claims for reduced payments are based upon its
ownership of shares, and these claims derive from the same underlying injury
suffered by the corporation itself.”). 38. Therefore, Plaintiffs have failed to allege an injury that is separate and
distinct from the harm suffered by the Companies or the members collectively.
39. Plaintiffs do not argue, and there is no reasonable basis for the Court to
conclude, that Plaintiffs may bring a direct claim for breach of the Operating
Agreements pursuant to the special duty exception. In light of the foregoing,
Plaintiffs’ direct claim for breach of the Operating Agreements must be dismissed
for lack of subject matter jurisdiction.
3. Breach of Implied Covenant of Good faith and Fair Dealing
40. “In every contract there is an implied covenant of good faith and fair
dealing that neither party will do anything which injures the right of the other to
receive the benefits of the agreement.” Governor’s Club Inc. v. Governors Club Ltd.
P’ship, 152 N.C. App. 240, 251, 567 S.E.2d 781, 789 (2002) (quoting Bicycle Transit
Auth. v. Bell, 314 N.C. 219, 228, 333 S.E.2d 299, 305 (1985)). Plaintiffs allege that
Holmes breached the implied covenant of good faith and fair dealing in the
Operating Agreements, and Plaintiffs have suffered individual harm as a result
because “the revenue and income which would have been generated but for
Defendant Holmes’[s] acts would have necessarily flowed to Plaintiffs in the form of
distributions.” (Am. Compl. ¶ 106.)
41. As the Court has concluded that Plaintiffs lack standing to sue for breach
of the Operating Agreements, it follows that Plaintiffs also lack standing to sue for
breach of the Operating Agreements’ implied terms. See Suntrust Bank v.
Bryant/Sutphin Props., LLC, 222 N.C. App. 821, 833, 732 S.E.2d 594, 603 (2012). Regardless, as discussed above, any reduced distributions are not a separate and
distinct injury from that suffered by the Companies or the members collectively.
42. Plaintiffs do not argue, and there is no reasonable basis for the Court to
conclude, that Plaintiffs may bring a direct claim for breach of the implied covenant
of good faith and fair dealing pursuant to the special duty exception. In light of the
foregoing, Plaintiffs’ direct claim for breach of the implied covenant of good faith
and fair dealing must be dismissed for lack of subject matter jurisdiction.
4. Unjust Enrichment
43. Plaintiffs allege that Holmes was unjustly enriched because he did not
make the Initial Contributions and received distributions from the Companies
based on his purported Initial Contributions. (Am. Compl. ¶ 90.) Further,
Plaintiffs allege that Holmes was unjustly enriched because he transferred business
opportunities from the Companies to his competing business, Gulf States, which
resulted in sales, profits, and benefits to Holmes. (Am. Compl. ¶ 91.)
44. Plaintiffs have failed to show an injury that is distinct from the injury to
the Companies or the members collectively. As discussed above, any injury suffered
by Plaintiffs as a result of Holmes’s failure to make the Initial Contributions is not
a separate and distinct injury. Likewise, any injury suffered by Plaintiffs as a
result of Holmes usurping corporate opportunities from the Companies is not a
separate and distinct injury from the injury to the Companies. See Meiselman v.
Meiselman, 309 N.C. 279, 310−11, 307 S.E.2d 551, 569 (1983) (discussing “several
circumstances under which a corporate director or officer will be deemed to have appropriated for him or herself an opportunity rightfully belonging to the
corporation” (emphasis added)).
45. Plaintiffs do not argue, and there is no reasonable basis for the Court to
conclude, that Plaintiffs may bring a direct claim for unjust enrichment pursuant to
the special duty exception. In light of the foregoing, Plaintiffs’ direct claim for
unjust enrichment must be dismissed for lack of subject matter jurisdiction.
5. Fraud/Negligent Misrepresentation
46. Plaintiffs allege that “[i]mmediately prior to entering into the Operating
Agreement[s], Defendant Holmes assured Plaintiffs that he did not operate and
would not operate any business which competed with the Companies.” (Am. Compl.
¶ 109.) Plaintiffs allege that they would not have appointed Holmes as manager of
the Companies if they knew Holmes was or would be operating a competing
business. Plaintiffs contend that, as manager of the Companies, Holmes was able to
redirect corporate opportunities from the Companies to Gulf States. Plaintiffs
argue that, as a result, they suffered a separate and distinct injury because they
would have received distributions from the income generated by the corporate
opportunities had Holmes not redirected such opportunities to Gulf States.
47. Plaintiffs have failed to show an injury that is distinct from the injury to
the Companies or the members collectively. As discussed above, any injury suffered
by Plaintiffs as a result of Holmes usurping corporate opportunities from the
Companies is not a separate and distinct injury from the injury to the Companies. 48. Plaintiffs do not argue, and there is no reasonable basis for the Court to
conclude, that Plaintiffs may bring direct claims for fraud or negligent
misrepresentation pursuant to the special duty exception. In light of the foregoing,
Plaintiffs’ direct claims for fraud or negligent misrepresentation must be dismissed
6. Breach of Fiduciary Duty
49. Plaintiffs allege that Holmes breached his fiduciary duties to Plaintiffs by
failing to provide Plaintiffs with current financial information, failing to provide the
Companies’ books and records to Plaintiffs, failing to insure that all Initial
Contributions were made and accounted for on the Companies’ books and records,
failing to take appropriate action to collect accounts receivable owed to the
Companies, and failing or refusing to provide Plaintiffs with information concerning
the Shortfall Amount. (Am. Compl. ¶ 96.)
50. Plaintiffs have failed to allege an injury that is separate and distinct from
the harm suffered by the Companies or the members collectively. As discussed
above, any reduced distributions Plaintiffs received as a result of Holmes’s failure to
insure that all Initial Contributions were made and accounted for derive from the
injury suffered by the Companies. Similarly, any injury to Plaintiffs that resulted
from Holmes’s failure to take appropriate action to collect accounts receivable owed
to the Companies is not separate and distinct from the injury to the Companies.
The same is true with respect to Holmes’s failure or refusal to provide Plaintiffs
with information concerning the Shortfall Amount. The Shortfall Amount and any outstanding accounts receivable are debts owed to the Companies, not the members
individually.
51. Plaintiffs contend that Holmes owed Plaintiffs a special duty under
Section 13.1 of the Operating Agreements to maintain company books and records
and make them available for inspection. (Pls.’ Consolidated Br. Opp. 8.) Section
13.1 of the Operating Agreements provides that Holmes
shall maintain full and accurate books of the Company, showing all receipts and expenditures, assets and liabilities, profits and losses, and all other records necessary for recording the Company’s business and affairs . . . . Such books and records shall be open for the inspection and examination by any Member . . . at reasonable times at the offices of the Company upon prior written notice.
(Operating Agreement § 13.1(a).)
52. The Court cannot infer from Section 13.1 of the Operating Agreements
that Holmes owed Plaintiffs a special duty distinct from the duty Holmes owed to
the Companies. Although the requirements that Holmes maintain full and accurate
books and that such books be available for inspection by the members arguably
creates a duty that is owed to the members, such requirements equally create a
duty that is owed to the Companies. “A primary purpose of the
shareholder . . . inspection statutes is to permit a shareholder . . . to become
adequately informed about important matters relating to the affairs of the
company, and in particular, to the shareholder’s investment in the corporation and
to the fulfillment of the director’s fiduciary duty to the corporation.” Beam v. Beam
Rest Home, Inc., 2014 NCBC LEXIS 45, at *10 (N.C. Super. Ct. Sept. 25, 2014).
Although the requirement that the Companies’ books and records be open for inspection and examination by the members conferred rights on the members, the
Court cannot conclude, without more, that such a requirement created a special
duty distinct from that owed to the Companies.
53. Even assuming, arguendo, that the Court found the allegations sufficient
to find that Holmes owed Plaintiffs a special duty, Plaintiffs’ direct claim for breach
of fiduciary duty must nonetheless be dismissed for failure to state a claim upon
which relief can be granted.
54. In order to establish a claim for breach of fiduciary duty, plaintiff must
show that: (1) defendant owed plaintiff a fiduciary duty; (2) defendant breached his
fiduciary duty; and (3) the breach of fiduciary duty was a proximate cause of injury
to plaintiff. Farndale Co., LLC v. Gibellini, 176 N.C. App. 60, 68, 628 S.E.2d 15, 20
(2006).
55. Under the North Carolina Limited Liability Company Act (the “LLC 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, Holmes, as the manager of the Companies, does
not owe fiduciary duties to Plaintiffs, who are members of the Companies.
56. Under the LLC 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. Here, Holmes owns a 25% membership
interest in Burlington and a 25% membership interest in BCC Properties.
57. The Court of Appeals of North Carolina recently held “that a minority
shareholder exercising actual control over a corporation may be deemed a
‘controlling shareholder’ with a concomitant fiduciary duty to the other
shareholders.” Corwin, 2016 N.C. App. LEXIS 1320, at *12. Prior to Corwin, North
Carolina courts had 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. E.g., Norman
v. Nash Johnson & Sons’ Farms, Inc., 140 N.C. App. 390, 407, 537 S.E.2d 248, 260
(2000). North Carolina courts had not, however, recognized that possibility in the
context of an LLC. See Raymond James Capital Partners, L.P., 789 S.E.2d at 701
(“[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. Assuming, without deciding, that Corwin extends to minority interest
owners in an LLC, the allegations do not present the unique circumstances present
in Corwin. Holmes’s minority interest did not operate as a veto power over the
other membership interests, and there are no specific factual allegations from which
it can be inferred that Holmes exercised actual domination and control over the
Companies. Therefore, the Court concludes that Holmes is not a controlling
member and does not owe fiduciary duties to Plaintiffs.
59. In short, Plaintiffs have failed to adequately allege that Holmes owed
Plaintiffs a special duty or that Plaintiffs have suffered a separate and distinct
injury. Therefore, Plaintiffs’ direct claim for breach of fiduciary duty must be
dismissed for lack of subject matter jurisdiction. Moreover, Plaintiffs have failed to
sufficiently allege that Holmes owed fiduciary duties to Plaintiffs to state a claim
for breach of fiduciary duty.
B. Derivative Claims
60. Defendants move to dismiss Plaintiffs’ derivative claims pursuant to Rule
12(b)(1), contending that Plaintiffs failed to make an adequate demand on the
Companies. Defendants also move to dismiss Plaintiffs’ derivative claims pursuant
to Rule 12(b)(6). 61. In order to have standing to bring their derivative claims, Plaintiffs must
have made a proper demand. N.C. Gen. Stat. § 57D-8-01; Anderson v. Seascape at
Holden Plantation, LLC, 773 S.E.2d 78, 87 (N.C. Ct. App. 2015). In order for a
member to bring a derivative claim on behalf of the LLC, the LLC Act requires that
[t]he 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. Gen. Stat. § 57D-8-01(a)(2).
62. The Court will first address whether Plaintiffs made a proper demand on
the Companies. A demand is effective if the demand is delivered to the LLC’s
registered agent. Petty v. Morris, 2014 NCBC LEXIS 67, at *18 (N.C. Super. Ct.
Dec. 16, 2014). Delivery is not required to be by registered or certified mail. Id.
63. Here, Plaintiffs’ Demand Letter was directed to Holmes at two addresses:
Burlington Chemical Co., LLC, 251 Welsh Avenue, Union Springs, Alabama 36089;
and Burlington Chemical Co., LLC, 8646 West Market Street, Suite 117,
Greensboro, North Carolina 27409. (Demand Letter.) The subject line of the
Demand Letter is “Burlington Chemical Co., LLC.” (Demand Letter.) Defendants
contend that because the Demand Letter was not directed to BCC Properties,
Plaintiffs have not made an adequate demand on BCC Properties.
64. While the Demand Letter was not explicitly directed to BCC Properties,
Holmes is the registered agent of both Burlington and BCC Properties. Moreover,
according to the records of the North Carolina Secretary of State, BCC Properties’ registered office and registered mailing address are the same as that of
Burlington—8646 West Market Street, Suite 116, Greensboro, North Carolina
27409. The Court notes that the Demand Letter was addressed to “Suite 117”
rather than “Suite 116,” which is the suite number listed on the records of the North
Carolina Secretary of State as the suite address for both Burlington and BCC
Properties. Notwithstanding that discrepancy, Defendants do not contend that the
Demand Letter was not timely received by Holmes.
65. Thus, the Demand Letter was directed to and received by the registered
agent of both Burlington and BCC Properties. Further, the Demand Letter
demanded that Holmes take appropriate actions to collect the Shortfall Amount
pursuant to the Asset Purchase Agreement entered into between Mount Vernon and
Burlington and BCC Properties, and to take all necessary steps to collect the
VersaChem Account Receivable owed to the Companies.
66. The court addressed a similar issue in Petty v. Morris, 2014 NCBC LEXIS
67 (N.C. Super. Ct. Dec. 16, 2014). In Petty, plaintiffs’ demand letter was addressed
to an attorney who represented three individuals who had no authority to take
action on the LLC’s behalf. Id. at *8, 20. Plaintiffs argued that the demand was
properly made on the LLC because even though the letter was only addressed to the
attorney, the letter made a demand on the LLC, and the letter was copied and
mailed to the LLC and received by its registered agent. Id. at *20−21.
67. The court found plaintiffs’ demand letter to be a demand on the LLC. Id.
at *21 (“The Court is asked to follow an indirect path, rather than the clear path that would have existed if the letter had been addressed expressly to [the LLC].
With some reluctance, the Court finds Plaintiffs’ Demand Letter to be a demand on
[the LLC] delivered through its registered agent.”).
68. In light of the foregoing, the Court similarly finds the Demand Letter to
be a demand on both Burlington and BCC Properties delivered through their
registered agent.
69. The Court next addresses whether the Demand Letter properly
demanded that the Companies “take suitable action.” Defendants contend that
“take suitable action” means a member must demand that the LLC bring an action.
The Court disagrees.
70. The purpose of the demand requirement is to “allow[] the corporation the
opportunity to remedy the alleged problem without resort to judicial action, or, if
the problem cannot be remedied without judicial action, to allow the corporation, as
the true beneficial party, the opportunity to bring suit first against the alleged
wrongdoers.” Bridges v. Oates, 167 N.C. App. 459, 467−68, 605 S.E.2d 685, 691
(2004) (quoting Alford v. Shaw, 72 N.C. App. 537, 540, 324 S.E.2d 878, 881 (1985),
modified and aff’d, 320 N.C. 465, 358 S.E.2d 323 (1987)). “The demand must be
made with sufficient clarity and particularity to permit the corporation . . . to assess
its rights and obligations and determine what action is in the best interest of the
company.” Garlock v. Hilliard, 2000 NCBC LEXIS 6, at *9 (N.C. Super. Ct. Aug. 22,
2000). 71. Thus, while a demand on the LLC to bring a lawsuit may constitute a
demand to take suitable action, a demand on the LLC to take other action may also
constitute a demand to take suitable action. See Bridges, 167 N.C. App. at 468−69,
605 S.E.2d at 691 (concluding that plaintiffs’ demand that the officers cease the
actions contrary to the by-laws was a proper demand). Compare Del. Code Ann. tit.
6, § 18-1001 (“A member . . . may bring an action in the Court of Chancery in the
right of a limited liability company to recover a judgment in its favor if managers or
members with authority to do so have refused to bring the action . . . .” (emphasis
added)), with N.C. Gen. Stat. §§ 55-7-42, 57D-8-01(a)(2) (requiring a shareholder or
member to make a demand on the corporation or the LLC to take suitable action
before bringing a derivative action).
72. Although the Court rejects Defendants’ argument that “take suitable
action” means “bring a lawsuit,” the Court must still determine whether the
Demand Letter constituted a proper demand to take suitable action so as to satisfy
the demand requirement. In so doing, “the Court must compare the derivative
claims asserted in a complaint against the specific demands a plaintiff has made
prior to filing suit.” Garlock, 2000 NCBC LEXIS 6, at *9.
73. Here, the Demand Letter demands that Holmes take all necessary steps
to collect the $324,000 VersaChem Account Receivable, and that Holmes take
appropriate actions to collect the Shortfall Amount. The Court notes that the
Demand Letter complains of injuries relating to Holmes’s failure to provide
information to Plaintiffs, failure to provide information regarding the Companies’ transactions with Gulf States, and failure to provide records to the Companies’
accountants. Such complaints and allegations of injury, however, are not demands
to take suitable action. See Wright v. Dee, 87 Va. Cir. 148, 150 (2013) (applying the
Virginia Limited Liability Company Act and concluding that plaintiffs’ demand
“merely contains allegations of wrongdoing, not a demand for suitable action”).
74. The Court next compares each derivative claim asserted to the actions
demanded in the Demand Letter to determine whether Plaintiffs have satisfied the
demand requirement.
1. Breach of the Operating Agreements
75. Plaintiffs allege that Holmes breached the Operating Agreements by
failing and refusing to account for his Initial Contributions to the Companies. The
Demand Letter does not demand that Holmes take any action with respect to the
Initial Contributions or the records accounting for the Initial Contributions.
Therefore, Plaintiffs have failed to demand that Holmes take suitable action in
regards to Plaintiffs’ claim for breach of the Operating Agreements, and such claim
must be dismissed for lack of subject matter jurisdiction.
2. Breach of Implied Covenant of Good Faith and Fair Dealing
76. Plaintiffs allege that Holmes breached the implied covenant of good faith
and fair dealing in the Operating Agreements, and the Companies have suffered
harm as a result because “the Companies would have received revenue and income
which would have been generated but for Defendant Holmes’[s] bad acts.” (Am.
Compl. ¶ 145.) 77. Plaintiffs failed to make a proper demand that Holmes take suitable
action with respect to Plaintiffs’ claim for breach of the Operating Agreements. It
follows, therefore, that Plaintiffs have also failed to make a proper demand that
Holmes take suitable action with respect to Plaintiffs’ claim for breach of the
implied terms of the Operating Agreements. Further, Plaintiffs’ claim for breach of
the implied covenant of good faith and fair dealing appears to be based on Holmes’s
operation of Gulf States. As discussed above, the Demand Letter fails to demand
that Holmes take any action with respect to Gulf States or records of the
Companies’ transactions with Gulf States.
78. Therefore, the Court concludes that Plaintiffs have failed to demand that
Holmes take suitable action in regards to Plaintiffs’ claim for breach of the implied
covenant of good faith and fair dealing, and such claim must be dismissed for lack of
subject matter jurisdiction.
3. Breach of Fiduciary Duty
79. Plaintiffs allege that Holmes breached his fiduciary duties to the
Companies by failing to maintain accurate books and records, failing to discharge
his duties, failing to insure that the Initial Contributions were made and accounted
for, usurping corporate opportunities, failing to appropriately account for profits
and benefits he personally derived from the use of the Companies’ assets, failing to
take appropriate action to collect accounts receivable owed to the Companies, and
failing to maintain and provide records necessary to collect the Shortfall Amount.
(Am. Compl. ¶¶ 135−36.) 80. To the extent Plaintiffs’ breach of fiduciary duty claim is based on
Holmes’s failure to maintain accurate books and records, failure to discharge his
duties, failure to insure that the Initial Contributions were made and accounted for,
usurpation of corporate opportunities, and failure to account for profits and benefits
Holmes personally derived, the Demand Letter is inadequate. The Demand Letter
does not demand that any action be taken with respect to proper accounting of the
Companies’ books and records, Holmes’s duties, the Initial Contributions, Gulf
States, or Holmes’s alleged usurpation of opportunities of the Companies.
Accordingly, Plaintiffs’ breach of fiduciary duty claim must be dismissed to the
extent it is based on these allegations.
81. The Demand Letter does, however, demand that Holmes take all
necessary steps to collect the VersaChem Account Receivable and that Holmes take
appropriate action to collect the Shortfall Amount. Thus, to the extent Plaintiffs’
breach of fiduciary duty claim is based on Holmes’s failure to collect the VersaChem
Account Receivable and the Shortfall Amount, the Demand Letter constitutes a
proper demand to take suitable action.
82. Consistent with the requirements of the LLC Act, Plaintiffs did not bring
their derivative claims until ninety days had expired from the date of the Demand
Letter. Therefore, the Court concludes that Plaintiffs have standing to bring a
derivative claim for breach of fiduciary duty based on Holmes’s failure to collect the
VersaChem Account Receivable and the Shortfall Amount. 83. Although the Court has concluded that Plaintiffs have standing to assert
their derivative claim for breach of fiduciary duty on the limited grounds discussed
above, the Motions to Dismiss also seek dismissal of Plaintiffs’ claims pursuant to
Rule 12(b)(6). The Court concludes, however, that the allegations of the Complaint
are sufficient to state a claim for breach of fiduciary duty on these grounds.
84. The Complaint sufficiently alleges that Holmes, as the manager of the
Companies, owed the Companies fiduciary duties. N.C. Gen. Stat. § 57D-3-21(b);
Kaplan, 196 N.C. App. at 474, 675 S.E.2d at 137. Further, the Complaint alleges
that Holmes breached his fiduciary duties to the Companies by failing to take
appropriate action to collect the VersaChem Account Receivable and the Shortfall
Amount, which caused financial loss to the Companies. (Am. Compl. ¶¶ 61, 100.)
85. Therefore, the Court concludes that the allegations of the Complaint are
sufficient to state a claim for breach of fiduciary duty based on the VersaChem
Account Receivable and the Shortfall Amount.
C. Accounting
86. Based on Holmes’s breach of fiduciary duties, Plaintiffs request that the
Court order Defendants to provide a full and complete accounting of the Companies’
financial records from 2007 to the present. (Am. Compl. ¶ 149.) At the hearing on
the Motions, the Court inquired of Plaintiffs as to what they sought from an
accounting that they could not obtain pursuant to their inspection request. In
response to the Court’s inquiry, counsel for Plaintiffs stated that an accounting
would require gathering and reconciling various information. Defendants argue that Plaintiffs are not entitled to an accounting because Plaintiffs can obtain the
information through discovery.
87. “The remedy of an equitable accounting may be available when a plaintiff
has asserted a valid claim for relief in equity and an accounting is necessary to
compel discovery of information regarding accounts held exclusively by the
defendant.” Mkt. Choice, Inc. v. New Eng. Coffee Co., 5:08-CV-90, 2009 U.S. Dist.
LEXIS 73627, at *35−36 (W.D.N.C. Aug. 18, 2009) (applying North Carolina law).
In Market Choice, Inc., the federal district court dismissed plaintiff’s accounting
claim because plaintiff failed to state a claim for unjust enrichment to support its
accounting demand, and plaintiff had an adequate remedy under the Federal Rules
of Civil Procedure for discovery of information. Id. at *36−37. Similarly, in Toomer
v. Branch Banking and Trust Co., 171 N.C. App. 58, 70, 614 S.E.2d 328, 337 (2005),
the court dismissed plaintiffs’ claim for an accounting, concluding that because the
underlying claims failed, the remedy of an accounting was also unavailable.
88. Here, the Court has concluded that the allegations of the Complaint are
sufficient to state a derivative claim for breach of fiduciary duty against Holmes.
While the Court may ultimately conclude that Plaintiffs are not entitled to an
accounting, the Court cannot conclude, at the motion to dismiss stage, that the
allegations of the Complaint are insufficient to state a claim for an accounting.
Therefore, the Motions to Dismiss as to the accounting claim are denied. D. Motion to Stay
89. The Motion to Stay requests that the Court stay the derivative proceeding
while the Companies commence an inquiry into the allegations of the Complaint.
Pursuant to N.C. Gen. Stat. § 57D-8-02, the Court may stay a derivative proceeding
if the LLC commences an inquiry into the allegations set forth in the complaint.
90. Defendants have failed to come forward with any record evidence that,
either individually or collectively, they have taken any action to begin an inquiry
into Plaintiffs’ allegations.
91. In light of the fact that the Complaint was filed two and one-half years
ago, and the absence of any evidence of affirmative actions by Defendant to begin an
inquiry, the Court, in the exercise of its discretion, denies the Motion to Stay.
V. CONCLUSION
92. Pursuant to the foregoing, the Court hereby DENIES the Motion to Stay.
The Court hereby GRANTS IN PART and DENIES IN PART the Motions to
Dismiss as follows:
A. The Motions to Dismiss as to Plaintiffs’ inspection of books and
records claim are DENIED AS MOOT.
B. The Motions to Dismiss as to Plaintiffs’ direct claims are
GRANTED.
C. The Motions to Dismiss as to Plaintiffs’ derivative claims for breach
of the Operating Agreements and breach of the implied covenant of
good faith and fair dealing are GRANTED. D. The Motions to Dismiss as to Plaintiffs’ derivative claim for breach
of fiduciary duty are GRANTED in part and DENIED in part as
provided herein.
E. The Motions to Dismiss as to Plaintiffs’ demand for an accounting
are DENIED.
SO ORDERED, this the 27th day of January, 2017.
/s/ Michael L. Robinson Michael L. Robinson Special Superior Court Judge for Complex Business Cases