Vanguard Pai Lung, LLC v. Moody, 2019 NCBC 38.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION MECKLENBURG COUNTY 18 CVS 13891
VANGUARD PAI LUNG, LLC; and PAI LUNG MACHINERY MILL CO. LTD.,
Plaintiffs,
v.
WILLIAM MOODY; NOREEN MOODY; MARY KATE MOODY; MICHAEL MOODY; NOVA TRADING USA, INC.; and NOVA ORDER AND OPINION WINGATE HOLDINGS, LLC, ON PLAINTIFFS’ MOTION TO DISMISS COUNTERCLAIMS Defendants.
WILLIAM MOODY; NOVA TRADING USA, INC.; and NOVA WINGATE HOLDINGS, LLC,
Counterclaim Plaintiffs,
VANGUARD PAI LUNG, LLC; and PAI LUNG MACHINERY MILL CO. LTD.,
Counterclaim Defendants.
1. This case arises out of disputes between the members and managers of
Vanguard Pai Lung, LLC (“Vanguard”), a North Carolina limited liability company.
Vanguard and its majority member, Pai Lung Machinery Mill Co. (“Pai Lung”),
brought this suit against six defendants: William Moody, Vanguard’s former
President and Chief Executive Officer; Nova Trading USA, Inc. (“Nova Trading”),
Vanguard’s minority member and a company wholly owned by Moody; Nova Wingate
Holdings, LLC, another company owned by Moody; and three of Moody’s family members. In short, Plaintiffs allege that Moody has been siphoning cash and assets
from Vanguard to benefit himself and his family for the better part of a decade.
2. Defendants deny any wrongdoing and claim to be the real victims. Moody,
Nova Trading, and Nova Wingate Holdings have asserted counterclaims premised on
allegations that Pai Lung used its majority position to control Vanguard, force Moody
out of the business, and frustrate the minority rights of Nova Trading. In addition to
asserting sundry counterclaims for breach of contract and breach of fiduciary duty,
Moody and Nova Trading ask the Court to dissolve Vanguard.
3. Vanguard and Pai Lung have moved to dismiss many but not all of the
counterclaims under Rule 12(b)(6) of the North Carolina Rules of Civil Procedure.
For the following reasons, the Court DENIES the motion.
Womble Bond Dickinson (US) LLP, by Matthew F. Tilley, Russ Ferguson, and Patrick G. Spaugh, and Perkins Coie LLP, by John P. Schnurer, Sean T. Prosser, John D. Esterhay, and Yun (Louise) Lu, for Plaintiffs/Counterclaim Defendants Vanguard Pai Lung, LLC and Pai Lung Machinery Mill Co. LTD.
Johnston, Allison & Hord, P.A., by Patrick E. Kelly, Michael J. Hoefling, and David V. Brennan, for Defendants/Counterclaim Plaintiffs William Moody, Nova Trading USA, Inc., and Nova Wingate Holdings, LLC.
Burns, Gray & Gray, by John T. Burns, for Defendants Noreen Moody, Mary Kate Moody, and Michael Moody.
Conrad, Judge. I. BACKGROUND
4. The Court does not make findings of fact on a Rule 12(b)(6) motion to
dismiss. The following factual summary is drawn from relevant allegations in the
amended answer and counterclaims and its exhibits. (ECF No. 59 [“Countercl.”].) 5. Vanguard, a maker and seller of high-speed circular knitting machines, is
the latest incarnation of a business once owned by Singer Co. and, more recently, by
Monarch Knitting Machinery Corp. (See Countercl. ¶¶ 10–12, 22.) Formed in 2009,
Vanguard had three initial members: Pai Lung (with a 51% interest), Nova Trading
(with a 25% interest), and Leo Yates (with a 24% interest). (Countercl. ¶ 33.) Based
in Taiwan, Pai Lung is one of the world’s largest manufacturers of circular and flat
weft knitting machines. (Countercl. ¶ 15.) Nova Trading, a North Carolina company,
also manufactures knitting machines and is wholly owned by Moody. (Countercl.
¶¶ 2, 13.) Yates is one of Moody’s longtime business partners and industry associates.
(Countercl. ¶ 10.)
6. An Operating Agreement governs Vanguard’s operations and the rights and
obligations of its members. The company is managed by a board of managers, which
must consist of at least three but no more than five managers. (Pls.’/Counter-Defs.’
Mem. in Supp. Partial Mot. Dismiss Am. Countercl. Ex. A § 3.1(a), (c), ECF No. 63.1
[“Op. Agrmt.”].) At least initially, Pai Lung had authority to appoint three of the five
managers, and Nova Trading and Yates had authority to appoint one each. (Op.
Agrmt. § 4.3(b)(i)–(iii).) Once elected, the managers may make “all decisions with
respect to the management of the business and affairs” of Vanguard by a majority
vote, except for some actions that require a supermajority vote of the members. (Op.
Agrmt. § 3.1(a); see also Op. Agrmt. §§ 3.4, 4.4.) Members, on the other hand, are not
permitted to “take part in the management or control of the business” in their
capacity as members. (Op. Agrmt. § 4.2.) 7. To fill its allotted three board positions, Pai Lung appointed its president
and chairman, James Wang, along with Wang’s father and uncle. (Countercl. ¶¶ 17,
34, 35.) The other two board slots went to Moody (appointed by Nova Trading) and
Yates (self-appointed). (See Countercl. ¶ 34.) The company’s initial officers, as
named in the Operating Agreement, included Moody as President and Chief
Executive Officer and Yates as Secretary and Chief Operating Officer. (Op. Agrmt.
§ 3.2(a).) According to Moody, he also had a separate oral employment agreement in
his role as an officer. (Countercl. ¶ 30.)
8. In 2011, Yates resigned, and Wang’s father died. These events opened two
vacancies on the board of managers. (Countercl. ¶¶ 37, 40.) Yates’s position has
never been filled, but Pai Lung filled its open seat with one of its agents. (Countercl.
¶¶ 41, 42.) When Yates resigned, he also sold his membership interest to Vanguard,
leaving Pai Lung and Nova Trading as the two remaining members, with 67.1053%
and 32.8947% interests, respectively. (Countercl. ¶ 38.)
9. That was the status quo until 2017 when Moody and Wang locked horns
over company management. (Countercl. ¶¶ 45, 51.) To start, Pai Lung insisted on
hiring Penny Peng, a Pai Lung employee and agent, as Vanguard’s financial
manager. (Countercl. ¶¶ 47, 48.) Moody thought the move was a fiasco. He objected
to Peng’s qualifications and her cumbrous practice of consulting Wang, halfway
around the globe, before making a decision. (Countercl. ¶¶ 49, 50.) The situation
only worsened when Wang began ignoring communications from Moody and others. (See Countercl. ¶ 51.) Then, in November 2017, the board of managers—chaired by
Wang—voted to remove Moody as President. (Countercl. ¶¶ 36, 52.)
10. At the same time, Peng began withholding commission payments from Nova
Trading. (Countercl. ¶ 62.) These payments were part of an alleged agreement
(“Commission Agreement”) made among Pai Lung, Nova Trading, and Vanguard in
January 2017. (Countercl. ¶¶ 55–58, 60–61.) In a nutshell, Vanguard would pay
increased prices for parts and machines that it purchased from Pai Lung, and Nova
Trading would in turn receive a commission of five percent on parts and ten percent
on machines. (Countercl. ¶ 56.) In effect, the Commission Agreement served to offset
the decrease in distributions to Nova Trading that would result from the increased
prices being paid by Vanguard to Pai Lung. (Countercl. ¶ 60.)
11. Moody also claims that Vanguard refused to pay him a profit-sharing bonus
for 2017. (Countercl. ¶ 71.) According to Moody, he agreed at the beginning of 2017
to assume additional responsibilities in exchange for a fifteen percent profit-sharing
bonus, to be paid annually to Moody or Nova Trading (“Profit-Sharing Agreement”).
(Countercl. ¶¶ 68, 69.) That payment was never made. (Countercl. ¶ 69.)
12. In mid-2018, a majority of the board of managers terminated Moody’s
employment as Chief Executive Officer. (Countercl. ¶ 52.) Two months later,
Vanguard and Pai Lung filed this suit. They allege that Moody, as officer and
manager of Vanguard, orchestrated a massive fraud on the company for the past ten
years, siphoning money and assets for the benefit of himself and his family. 13. Moody and Nova Trading1 respond that they are the victims of a scheme by
Wang and Pai Lung to take complete control of Vanguard. (See Countercl. ¶ 53.)
Today, Moody remains a Vanguard manager, and Nova Trading remains a member,
but they allege that they have been effectively sidelined by Pai Lung and the Pai
Lung-controlled board of managers. (See Countercl. ¶¶ 52–54.) In their amended
answer and counterclaims, Moody and Nova Trading assert twelve counterclaims for,
among other things, breaches of the Operating Agreement, the Commission
Agreement, the Profit-Sharing Agreement, and Moody’s oral employment agreement.
They further assert that Pai Lung, as majority member, owed a fiduciary duty to
Nova Trading, as minority member, and breached that duty. And they seek judicial
dissolution of Vanguard.
14. In this motion, Pai Lung and Vanguard seek to dismiss eight of the twelve
counterclaims. (Partial Mot. Dismiss Am. Countercl., ECF No. 62.) The motion has
been fully briefed, and the Court held a hearing on April 17, 2019. (ECF No. 66.) The
motion is ripe for decision.
II. ANALYSIS
15. A motion to dismiss under Rule 12(b)(6) “tests the legal sufficiency of the”
disputed pleading, here the amended counterclaims. Concrete Serv. Corp. v. Inv’rs
Grp., Inc., 79 N.C. App. 678, 681, 340 S.E.2d 755, 758 (1986). The motion should be
granted only when: (1) the pleading “on its face reveals that no law supports” the
1The merits of this motion do not implicate the third counterclaimant, Nova Wingate Holdings, or any of the remaining defendants. asserted claim; (2) the pleading “on its face reveals the absence of facts sufficient to
make a good claim;” or (3) the pleading “discloses some fact that necessarily defeats”
the claim. Corwin v. British Am. Tobacco PLC, 371 N.C. 605, 615, 821 S.E.2d 729,
736–37 (2018) (citation and quotation marks omitted).
16. In deciding a Rule 12(b)(6) motion, the Court must treat the well-pleaded
allegations of the counterclaims as true and view the facts and permissible inferences
“in the light most favorable to” the non-moving party. Ford v. Peaches Entm’t Corp.,
83 N.C. App. 155, 156, 349 S.E.2d 82, 83 (1986). “[T]he court is not required to accept
as true any conclusions of law or unwarranted deductions of fact.” Oberlin Capital,
L.P. v. Slavin, 147 N.C. App. 52, 56, 554 S.E.2d 840, 844 (2001). The Court may
consider documents that are the subject of the counterclaims and to which the
counterclaims specifically refer without converting a Rule 12(b)(6) motion into a
motion for summary judgment. Weaver v. St. Joseph of the Pines, Inc., 187 N.C. App.
198, 204, 652 S.E.2d 701, 707 (2007) (quoting Oberlin Capital, 147 N.C. App. at 60,
554 S.E.2d at 847).
A. Contract Claims
17. Four disputed counterclaims relate to contracts that were allegedly
breached around the time that Vanguard’s board terminated Moody from his official
positions. As alleged, Vanguard withheld commissions from Nova Trading under the
Commission Agreement, refused to pay any bonus under the Profit-Sharing
Agreement, and failed to pay Moody for accrued vacation time as required by his oral
employment agreement. (Countercl. ¶¶ 126, 132, 143.) Moody and Nova Trading also allege that Vanguard breached the implied covenant of good faith and fair
dealing in each contract. (Countercl. ¶¶ 147, 148.) These four counterclaims are
asserted against only Vanguard.
18. A theme of Vanguard’s brief in support is that the allegations lack detail
and are not supported by corroborating evidence. Vanguard describes the alleged
contracts as “vaguely-articulated.” (Pls.’/Counter-Defs.’ Mem. in Supp. Partial Mot.
Dismiss Am. Countercl. 7, ECF No. 63 [“Mem. in Supp.”].) It contends that the
allegations omit, among other things, who engaged in contract negotiations, when the
negotiations happened, where the contracts were finalized, and why Vanguard would
supposedly have been motivated to enter into them. (See, e.g., Mem. in Supp. 8, 10,
11; see also Pls.’/Counter-Defs.’ Reply in Supp. Partial Mot. Dismiss Am. Countercl.
4, 5, ECF No. 67 [“Reply Br.”].) It also questions the veracity of several allegations—
for example, that certain e-mails were sent or that commission payments were made
for part of 2017—because Moody and Nova Trading haven’t supplied evidence to back
them up. (See Mem. in Supp. 8; Reply Br. 3, 5 n.2.)
19. Two initial observations are necessary. First, claims for breach of contract
are “not subject to heightened pleading standards.” AYM Techs., LLC v. Rogers, 2018
NCBC LEXIS 14, at *52 (N.C. Super. Ct. Feb. 9, 2018). Rather, they must meet the
usual, liberal standard of Rule 8, which requires only a “short and plain statement of
the claim” sufficient to put the court and parties on notice of the events giving rise to
the claim. N.C. R. Civ. P. 8(a)(1). It is enough to plead the “(1) existence of a valid
contract and (2) breach of the terms of that contract.” Poor v. Hill, 138 N.C. App. 19, 26, 530 S.E.2d 838, 843 (2000). When these elements are alleged, “it is error to
dismiss a breach of contract claim under Rule 12(b)(6),” and our appellate courts
routinely reverse trial court orders that require anything more. Woolard v.
Davenport, 166 N.C. App. 129, 134, 601 S.E.2d 319, 322 (2004); see also, e.g.,
Barbarino v. Cappucine, Inc., 2012 N.C. App. LEXIS 305, at *7 (N.C. Ct. App. Mar.
6, 2012) (unpublished) (reversing dismissal of claim for breach of contract); Sanders
v. State Pers. Comm’n, 197 N.C. App. 314, 322, 677 S.E.2d 182, 188 (2009) (same);
Schlieper v. Johnson, 195 N.C. App. 257, 266, 672 S.E.2d 548, 554 (2009) (same).
20. Second, to dismiss a claim under Rule 12(b)(6) for lack of evidentiary support
would be error. “Perhaps the most fundamental concept of motions practice under
Rule 12 is that evidence outside the pleadings . . . cannot be considered in
determining whether the complaint states a claim on which relief can be granted.”
Jackson/Hill Aviation, Inc. v. Town of Ocean Isle Beach, 251 N.C. App. 771, 775, 796
S.E.2d 120, 123 (2017). “Neither party has any evidentiary burden at this stage,” and
the counterclaims’ “factual allegations must be taken as true.” Neier v. State, 151
N.C. App. 228, 233, 565 S.E.2d 229, 232 (2002).
21. Taken together, all of this means that stating a claim for breach of contract
is a relatively low bar. As discussed below, the allegations of the amended
counterclaims, though succinct, meet the minimal requirements of Rule 8 and binding
appellate precedent. 1. Commission and Profit-Sharing Agreements
22. The parties dispute whether the Commission and Profit-Sharing
Agreements must be in writing. Vanguard contends that they must because both are
effectively amendments to the Operating Agreement. (See Mem. in Supp. 9 n.5; Reply
Br. 2–4; Op. Agrmt. § 11.5.) Even if Vanguard were right about that (which the Court
need not decide now), it would not be a reason to dismiss the counterclaims. Moody
and Nova Trading expressly allege that both agreements were “contemporaneously
memorialized.” (Countercl. ¶ 73.) This is sufficient to allege a writing, assuming one
was required, and must be accepted as true. See, e.g., Priest v. Coch, 2013 NCBC
LEXIS 6, at *18 (N.C. Super. Ct. Jan. 25, 2013) (taking allegation of written contract
as true and denying motion to dismiss).
23. Vanguard also argues that Moody and Nova Trading failed to allege
essential contract terms, particularly consideration. Not so. The Commission
Agreement is a three-party contract related to Vanguard’s purchase of machines and
parts from Pai Lung, apparently for resale in North and Central America. (See
Countercl. ¶¶ 55, 56; Op. Agrmt. § 4.9.) Each party received some benefit: Pai Lung
received increased prices for its products; Nova Trading received a percentage
commission for those sales; and Vanguard received the products sold by Pai Lung.
(Countercl. ¶¶ 56, 57.) Perhaps this was a bad deal, as Vanguard suggests,
“multiplying the disadvantage” to it by requiring it to pay increased prices and fees
to both its members. (Mem. in Supp. 9.) But “the parties to a contract,” not the Court,
“are the judges of the adequacy of the consideration.” Hejl v. Hood, Hargett & Assocs., Inc., 196 N.C. App. 299, 305, 674 S.E.2d 425, 429 (2009). Taken as true, the
allegations plead the existence of consideration, which our courts define “as some
benefit or advantage to the promisor or some loss or detriment to the promisee.”
Deans v. Layton, 89 N.C. App. 358, 368, 366 S.E.2d 560, 567 (1988).
24. Likewise, in the Profit-Sharing Agreement, Vanguard agreed to pay a bonus
in return for Moody’s assumption of additional responsibilities. (See Countercl. ¶ 68.)
This allegation adequately pleads consideration and provides all the notice that Rule
8 requires. Moody and Nova Trading did not need to go further and “identify what
these additional responsibilities were, or how employment responsibilities could even
be added to someone who was already CEO and President,” as Vanguard contends.
(Reply Br. 6.)
25. As an additional argument, Vanguard asserts for the first time in its reply
brief that the parties to the Profit-Sharing Agreement are not stated clearly enough.
(See Reply Br. 5.) It is doubtful whether this argument is timely, but in any event,
the Court disagrees. As alleged, the profit-sharing bonus was due to “Nova Trading
and/or Moody.” (Countercl. ¶¶ 68, 69.) Taking this allegation in a light most
favorable to Moody and Nova Trading, Moody took on additional duties in return for
a bonus that he directed to be paid to himself or to his wholly owned company. That
leaves some ambiguity, but not one that is insoluble or so unclear that Vanguard
lacks notice of the events giving rise to the claim.
26. The Court has considered Vanguard’s other arguments as to the level of
detail given by the allegations about these two agreements and finds them all unpersuasive. “There is no rule which requires a plaintiff to set forth in his complaint
the full contents of the contract which is the subject matter of his action or to
incorporate the same in the complaint by reference to a copy thereof attached as an
exhibit.” RGK, Inc. v. U.S. Fid. & Guar. Co., 292 N.C. 668, 675, 235 S.E.2d 234, 238
(1977) (citation and quotation marks omitted). The allegations give Vanguard
“sufficient notice of the events or transactions which produced the claim.” Sutton v.
Duke, 277 N.C. 94, 104, 176 S.E.2d 161, 167 (1970).
27. Accordingly, the Court denies the motion to dismiss the counterclaims for
breach of the Commission Agreement and the Profit-Sharing Agreement.
2. Moody’s Employment Agreement
28. The third disputed contract is Moody’s oral employment agreement. He
alleges that Vanguard breached the employment agreement when it failed to pay him
for accrued but unused vacation time. (Countercl. ¶¶ 140, 143.)
29. Vanguard argues that there is no allegation that Moody’s “oral employment
agreement expressly included a vacation policy, whether from an employee handbook
or elsewhere, that became a binding contract.” (Mem. in Supp. 12.) But there is. The
amended counterclaims allege that “Vanguard maintains a standard vacation policy
that applies to all Vanguard employees” and that this vacation policy “was
incorporated into the employment agreement between Moody and Vanguard, which
is a valid and enforceable contract.” (Countercl. ¶¶ 136, 141.)
30. Next, Vanguard argues that “Moody was placed into the role of CEO and
President through the Operating Agreement” and that, as a result, the terms of the Operating Agreement supersede any alleged oral employment agreement. (See Mem.
in Supp. 12; Reply Br. 7; Op. Agrmt. § 3.2(a)–(c).) It is entirely possible, however,
that the Operating Agreement named the initial officers and that those officers also
had separate employment agreements. There is no inherent conflict between the two.
See, e.g., Roth v. Penguin Toilets, LLC, 2011 NCBC LEXIS 46, at *12 (N.C. Super. Ct.
Nov. 30, 2011) (“The Court’s determination that the Employment Agreement contains
the terms of Plaintiff’s employment relationship with Defendant is not to say that a
particular relationship can only be controlled by one document.”); see also Urquhart
v. Trenkelbach, 2017 NCBC LEXIS 12, at *3–4 (N.C. Super. Ct. Feb. 8, 2017) (noting
that LLC members executed individual employment agreements in addition to the
operating agreement); Chemcraft Holdings Corp. v. Shayban, 2006 NCBC LEXIS 15,
at *3–5 (N.C. Super. Ct. Oct. 5, 2006) (same).
31. Taking all allegations as true, as the Court must, Moody and Nova Trading
have sufficiently alleged the existence of an employment agreement containing a
vacation policy and a breach of that agreement. The Court denies the motion to
dismiss the counterclaim for breach of the employment agreement.
3. Implied Covenant of Good Faith and Fair Dealing
32. Moody and Nova Trading also adequately state a claim for breach of the
implied covenant of good faith and fair dealing as to these three contracts. “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.” Heron Bay Acquisition, LLC v. United Metal Finishing, Inc., 245 N.C. App. 378, 385, 781 S.E.2d 889, 894 (2016) (citation and quotation marks omitted).
Here, Moody and Nova Trading allege the existence of three valid contracts and that
Vanguard breached the contracts as part of a scheme to push them out of the
business. (See, e.g., Countercl. ¶¶ 45, 51–54, 65, 71, 133, 144, 148, 149.) These
allegations are sufficient to state a claim for breach of the implied covenant. See, e.g.,
Sparrow Sys. v. Private Diagnostic Clinic, PLLC, 2014 NCBC LEXIS 70, at *47–48
(N.C. Super. Ct. Dec. 24, 2014); Stec v. Fuzion Inv. Capital, LLC, 2012 NCBC LEXIS
24, at *18–19 (N.C. Super. Ct. Apr. 30, 2012). The Court denies the motion to dismiss
as to this counterclaim.
B. Fiduciary Claims
33. Nova Trading asserts claims for breach of fiduciary duty and constructive
fraud against Pai Lung. Though these two causes of action are distinct, “an essential
element of each claim is the existence of a fiduciary relationship.” Azure Dolphin,
LLC v. Barton, 2017 NCBC LEXIS 90, at *23 (N.C. Super. Ct. Oct. 2, 2017). To state
a claim for breach of fiduciary duty, Nova Trading must plead the existence of a
fiduciary duty, a breach of that duty, and injury proximately caused by the breach.
See Green v. Freeman, 367 N.C. 136, 141, 749 S.E.2d 262, 268 (2013). Constructive
fraud requires Nova Trading to plead, in addition, that Pai Lung sought to benefit
itself through the breach. See White v. Consol. Planning, Inc., 166 N.C. App. 283,
294, 603 S.E.2d 147, 155–56 (2004).
34. The basis for these claims is that Pai Lung, the majority member of
Vanguard, breached a fiduciary duty that it owed to Nova Trading, the minority member. (See Countercl. ¶¶ 162, 172.) Pai Lung argues that there is no fiduciary
relationship between Vanguard’s members and also that Nova Trading failed to meet
the heightened pleading standard for constructive fraud. (See Mem. in Supp. 14, 17.)2
35. As a general rule, members of an LLC do not owe a fiduciary duty to one
another, but in some circumstances, “a holder of a majority interest who exercises
control over the LLC owes a fiduciary duty to minority interest members.” Fiske v.
Kieffer, 2016 NCBC LEXIS 22, at *9 (N.C. Super. Ct. Mar. 9, 2016); see also Kaplan
v. O.K. Techs., L.L.C., 196 N.C. App. 469, 473, 675 S.E.2d 133, 137 (2009). A majority
interest does not necessarily equate to control. It all depends on what the LLC’s
members agree to in the operating agreement. Because “an LLC is primarily a
creature of contract,” the members are generally free to arrange their relationship
however they wish. Crouse v. Mineo, 189 N.C. App. 232, 237, 658 S.E.2d 33, 36 (2008)
(quoting Russell M. Robinson, II, Robinson on North Carolina Corporate Law § 34.01,
at 34-2 to 34-3 (rev. 7th ed. 2006)). Among other things, they may depart from
statutory default rules, require supermajority votes for some or all company matters,
and impose or eliminate fiduciary duties for members and managers. See, e.g.,
Claudio v. Sellers, 2019 N.C. App. LEXIS 288, at *4–5 (N.C. Ct. App. Mar. 26, 2019)
(supermajority requirement); Plasman v. Decca Furniture (USA), Inc., 2016 NCBC
LEXIS 80, at *36 (N.C. Super. Ct. Oct. 21, 2016) (elimination of fiduciary duties);
2 Pai Lung’s opening brief includes the additional, conclusory assertion that, “even if Pai Lung
owed [a fiduciary] duty, Nova Trading has not alleged sufficient facts demonstrating that Pai Lung breached that duty.” (Mem. in Supp. 14.) This argument is unexplained and undeveloped, and the Court rejects it without further discussion. Island Beyond, LLC v. Prime Capital Grp., LLC, 2013 NCBC LEXIS 48, at *15 (N.C.
Super. Ct. Oct. 30, 2013) (statutory default rules).
36. This is one of the principal differences between LLC members and corporate
shareholders. It has long been the rule that majority shareholders, by virtue of their
majority status, hold control over the corporation and therefore owe a duty to protect
the interests of minority shareholders, who “can act and contract in relation to the
corporate property only through the former.” Gaines v. Long Mfg. Co., 234 N.C. 340,
344, 67 S.E.2d 350, 353 (1951) (citation and quotation marks omitted). Minority
members of an LLC have a much stronger position because, through “the freedom of
contract,” they are able “to obtain minority protections not available to shareholders
of [a] closely-held corporation.” Blythe v. Bell, 2013 NCBC LEXIS 17, at *14 (N.C.
Super. Ct. Apr. 8, 2013).
37. Nova Trading obtained a number of such protections as part of Vanguard’s
Operating Agreement. By way of example, members may not take part in the
company’s management in their capacity as members. (Op. Agrmt. § 4.2.) Nova
Trading is guaranteed the right to elect one manager to the board of managers. (Op.
Agrmt. § 4.3(b)(i).) And a supermajority vote of the members is needed to amend the
Operating Agreement, sell the business, remove a member, or take similarly vital
actions. (Op. Agrmt. § 4.4.) The question is whether, as a matter of law, these
protections blocked Pai Lung from exercising control over the LLC.
38. The answer is no, at least at this early Rule 12 stage. Nova Trading alleges
that Pai Lung is Vanguard’s majority member with an interest edging just over 67%. (Countercl. ¶ 38.) It further alleges that Pai Lung dominates the board of managers,
which has broad authority to act on behalf of the company. (See Op. Agrmt.
§ 3.1(a)(i)–(x).) The Operating Agreement gives Pai Lung the right to appoint three
of the five possible managers, thus ensuring a majority. (Op. Agrmt. § 4.3(b)(ii).) And
Pai Lung has filled those seats with its agents, all of whom are “acting for or on its
behalf.” (Countercl. ¶¶ 43, 44.)
39. This type of managerial control is one of the clearest attributes of a
controlling member of an LLC, just as control over a board of directors is an attribute
of a controlling corporate shareholder. See, e.g., Plasman, 2016 NCBC LEXIS 80, at
*17–18, 25 (concluding that plaintiff sufficiently alleged existence of fiduciary duty
by 55% majority member with “ultimate decision-making authority”); Kelly v. Blum,
2010 Del. Ch. LEXIS 31, at *54 (Del. Ch. Feb. 24, 2010) (citing control over board of
managers as factor favoring existence of fiduciary duties for majority member under
Delaware law); see also Corwin, 371 N.C. at 616–17, 821 S.E.2d at 737–38 (noting
that, under Delaware law, a controlling stockholder is one who exercises actual
control over the board). By contrast, this Court has cited the absence of managerial
control as a reason supporting dismissal of a claim for breach of fiduciary duty
brought by one LLC member against another. See Strategic Mgmt. Decisions v. Sales
Performance Int’l, 2017 NCBC LEXIS 69, at *13 (N.C. Super. Ct. Aug. 7, 2017)
(granting motion to dismiss in part because 60% majority member had power to
designate only one of two managers). 40. Pai Lung insists that no fiduciary duty arises simply because it exercised its
rights, including the right to appoint a majority of the board, pursuant to the
Operating Agreement. (See Reply Br. 8–9.) But the cases it cites for that proposition
are inapposite. This Court has refused to impose a fiduciary duty on minority
members that exercise their voting rights by joining together to outvote a third
member. See Fiske, 2016 NCBC LEXIS 22, at *9–10; HCW Ret. & Fin. Servs., LLC
v. HCW Emp. Benefit Servs., LLC, 2015 NCBC LEXIS 73, at *46–47 (N.C. Super. Ct.
July 14, 2015); Wortman v. Hutaff, 2013 NCBC LEXIS 47, at *22–23 (N.C. Super. Ct.
Oct. 29, 2013); BOGNC, LLC v. Cornelius NC Self-Storage, LLC, 2013 NCBC LEXIS
22, at *19 (N.C. Super. Ct. May 1, 2013).
41. These decisions underscore the obvious difference between backing a
majority coalition and exercising majority control as of right. In the latter situation,
it is the imbalance of power inherent in the relationship between majority and
minority member that gives rise to a fiduciary duty. Thus, when the operating
agreement confers controlling authority on the majority member, it owes a duty not
to use its control to harm the minority, assuming no other provision disclaims such a
duty. Here, Nova Trading has alleged that Pai Lung is not only the majority member
but also that it exercises control through the board of managers, and the Operating
Agreement does not address, much less disclaim, the duties that Pai Lung might owe
other members. This is sufficient to survive a Rule 12 motion. See Dunn Holdings I,
Inc. v. Confluent Health LLC, 2018 NCBC LEXIS 89, at *19 (N.C. Super. Ct. Aug. 24, 2018) (holding that plaintiff sufficiently alleged that 80% majority member was a
controlling member).
42. To be clear, in permitting the claim to move forward, the Court does not hold
that Pai Lung owed a fiduciary duty to Nova Trading. Pai Lung’s control is
considerable but not complete. Neither Pai Lung nor the board could dissolve the
company, declare bankruptcy, or amend the Operating Agreement without Nova
Trading’s cooperation. (See Op. Agrmt. §§ 3.4, 4.4, 8.1, 8.3, 10.1.) These are serious
limitations on Pai Lung’s authority and meaningful protections for Nova Trading’s
minority interest, which could weigh against the existence of a fiduciary relationship
in the context of a more developed evidentiary record.
43. At this stage, the facts stated in the amended counterclaims, along with the
provisions of the Operating Agreement, suffice to allege the existence of a fiduciary
relationship. The Court therefore denies the motion to dismiss as to the claim for
breach of fiduciary duty.
44. Pai Lung also argues that the claim for constructive fraud should be
dismissed because Nova Trading has not pleaded it with sufficient particularity. Our
appellate courts have made clear that a claim of constructive fraud need not comply
with the particularity requirements of Rule 9 as claims of actual fraud must. See
Terry v. Terry, 302 N.C. 77, 85, 273 S.E.2d 674, 678–79 (1981). Rather, the amended
counterclaims must allege “facts and circumstances ‘(1) which created the relation of
trust and confidence, and (2) which led up to and surrounded the consummation of
the transaction in which [the non-moving party] is alleged to have taken advantage of his position of trust to the hurt of’” the movant. Id. at 85, 273 S.E.2d at 679 (quoting
Rhodes v. Jones, 232 N.C. 547, 549, 61 S.E.2d 725, 726 (1950)) (alterations omitted).
45. Nova Trading has satisfied this standard. It has alleged a fiduciary duty
based on Pai Lung’s status as a controlling majority member of Vanguard. It has
further alleged that Pai Lung schemed to gain exclusive control over Vanguard. (See
Countercl. ¶¶ 45–53, 65, 71, 115, 167–69, 171–75.) The amended counterclaim goes
beyond mere “cursory allegations” and demonstrates the “facts and circumstances”
giving rise to the claim. Hunter v. Guardian Life Ins. Co. of Am., 162 N.C. App. 477,
482, 593 S.E.2d 595, 599 (2004); see also Global Textile All., Inc. v. TDI Worldwide,
LLC, 2018 NCBC LEXIS 159, at *23 (N.C. Super. Ct. Nov. 29, 2018).
46. The Court denies the motion to dismiss the claim for constructive fraud.
C. Judicial Dissolution
47. Nova Trading asserts two claims for judicial dissolution of Vanguard. By
statute, a member of an LLC may seek judicial dissolution when “it is not practicable
to conduct the LLC’s business in conformance with the operating agreement” or when
“liquidation of the LLC is necessary to protect the rights and interests of the
member.” N.C. Gen. Stat. § 57D-6-02(2). Nova Trading invokes the statutory remedy
on both grounds. It also asserts, separately, that dissolution is appropriate based on
the rule set forth in Meiselman v. Meiselman, which permits minority shareholders
in closely held corporations to seek liquidation when their reasonable expectations
have been frustrated. See 309 N.C. 279, 307 S.E.2d 551 (1983). 48. Vanguard and Pai Lung argue that the claims fail because Nova Trading
has not alleged that it is impracticable to operate the business or that liquidation is
necessary to protect Nova Trading’s interests. They contend that the various
management disagreements set out in the amended counterclaims show only that
Nova Trading is “unhappy with the terms of the Operating Agreement.” (Mem. in
Supp. 18.)
49. The Court concludes that Nova Trading has adequately stated a claim under
section 57D-6-02(2). As discussed, Nova Trading has alleged that Pai Lung breached
its fiduciary duty as part of a scheme to take exclusive control of Vanguard. If true,
these improprieties could support a claim that dissolution is necessary to protect
Nova Trading’s interests. See, e.g., Dunn Holdings I, 2018 NCBC LEXIS 89, at *31–
32. Accordingly, the Court denies the motion to dismiss the claim for judicial
dissolution under section 57D-6-02(2).
50. Likewise, the Court denies the motion to dismiss the Meiselman claim.
“[O]ur courts have not yet decided whether and to what extent the principles of
Meiselman apply to actions” to dissolve an LLC. Bennett v. Bennett, 2019 NCBC
LEXIS 19, at *35 (N.C. Super. Ct. Mar. 15, 2019); see also Pure Body Studios
Charlotte, LLC v. Crnalic, 2017 NCBC LEXIS 98, at *13 (N.C. Super. Ct. Oct. 18,
2017); Brady v. Van Vlaanderen, 2017 NCBC LEXIS 61, at *31–32 (N.C. Super. Ct.
July 19, 2017). Such questions should be addressed on a more fully developed record.
Particularly given that the section 57D-6-02(2) claim is moving forward, it would be
premature to dismiss the Meiselman claim. 51. Finally, it bears noting that it is not clear whether an LLC member may
bring a freestanding Meiselman claim, as Nova Trading has here. There is a
reasonable argument that the legislature intended section 57D-6-02(2) to be the
exclusive avenue for LLC members to seek judicial dissolution, though the
application of section 57D-6-02(2) may be informed by Meiselman principles. Neither
side addressed this issue, however, so the Court leaves it for another day.
III. CONCLUSION
52. For all these reasons, the Court DENIES Vanguard and Pai Lung’s partial
motion to dismiss.
SO ORDERED, this the 19th day of June, 2019.
/s/ Adam M. Conrad Adam M. Conrad Special Superior Court Judge for Complex Business Cases