Advising an out-of-state defendant whether it is subject to personal jurisdiction is often a judgment call. There is no bright line test when minimum contacts are involved.
The 2-1 decision today by the North Carolina Court of Appeals in Rossetto USA, Inc. v. Greensky Financial, LLC, in which two Georgia LLCs challenged personal jurisdiction, illustrates that pretty
Today, the Business Court entered an Order granting summary judgment against members of a limited liability company who contended that an investor who was the principal source of funding to the LLC had a fiduciary duty to the LLC and its members.
The case, Kaplan v. O.K. Technologies, arose following the dissolution of a company formed to commercialize a process for filtering hog waste. Kaplan, a minority member of the LLC, was its only source of funds and controlled the LLC’s checkbook. Over time, he lent the LLC nearly $2 million, which the company used to pay salaries and legal expenses, among other things.
When the company’s prospects faded, Kaplan stopped funding the company and asked for repayment of his loans. The other members responded by voting to dissolve the LLC, which was placed in receivership. Kaplan sued to collect his substantial debt.
The other members of the LLC claimed that because Kaplan had "complete control over all expenditures," and because he knew that the LLC was completely reliant on his contributions, he had an "enhanced fiduciary duty" to the LLC and the other members.
Judge Tennille held:
Being an investor in a company does not create a fiduciary relationship. . . . Kaplan, as a minority shareholder, had no fiduciary duty to the other shareholders even though he was the sole financial contributor to O.K. Like an investor in a corporation, Kaplan’s position as the holder of the purse strings did not create a fiduciary duty. At all pertinent times, Kaplan was a minority shareholder without dominance or control over either O.K. or any of the other shareholders and therefore without a fiduciary duty.
Op. at 5-6. Judge Tennille stated that, in any event, it was "unclear what Defendants believe Kaplan’s fiduciary duty required him to do." (Op. at 9). The Court held that Kaplan was not required to provide "limitless funding" and he was entitled to seek to collect the debt owed to him.
The LLC members also contended that Kaplan had not followed the procedures set forth in the LLC’s Operating Agreement in making his loans. The Court ruled, however, that these claims were barred by ratification and estoppel. It held "Defendants are estopped from objecting to the loans by their continued acceptance of reimbursement and salary made possible by the loans, as well as their inaction when O.K. creditors were paid with the loaned money." (Op. at 8).
Two other claims made by the Defendants, for negligent misrepresentation and unfair and deceptive practices, are worth mentioning.Continue Reading LLC Investor Did Not Owe A Fiduciary Duty To The LLC Or Its Members
Although this isn’t in the mainstream of the business litigation decisions that I write about on this blog, I’m writing today about a contract case that’s important to the jurisprudence of North Carolina. It’s the judicial determination made last week about the quality of Duke University football.
The case is University of Louisville v. Duke University, pending in Franklin County, Kentucky. Louisville filed its Complaint against Duke when Duke backed out of a contract to play four games against the Cardinals. Duke had lost the first game in 2002 by a score of 40-3, and decided for some reason that it didn’t want to play the remaining three games in the series, due to be played in 2007-2009.
Louisville didn’t appreciate losing a record-padding opponent of the quality of Duke. It sued, based on a provision in the Athletic Competition Agreement which called for a $150,000 payment for each game not played. Duke’s defense was a provision in the contract which stated that it had to pay only if Louisville was unable to find a replacement opponent of "similar stature" to Duke. The Agreement didn’t define the term.
Louisville, in discovery, asked Duke what NCAA football teams were of "similar stature." Duke’s response was that every single team in former Division I-A and a lot of teams in former Division I-AA were. The only teams that weren’t, to Duke, were junior varsity teams. Here is Duke’s response from Interrogatory No. 1:
Duke states that any and all college varsity teams in the Football Bowl Subdivision (formerly Division I-A) are teams of a ‘similar stature’ to Duke. . . . Additionally, Duke states that any and all college varsity football teams in the Football Championship Subdivision (formerly Division I-AA) that would be considered as good or better than Duke in football. . . are teams of a ‘similar stature’ to Duke. . . . [J]unior varsity programs of any of the aforementioned teams would not be teams of a ‘similar stature’ to Duke’s varsity college football team.
Louisville’s definition of "similar stature" was narrower, but maybe not narrow enough. It said the term should be defined as "any school that is a member of a Bowl Championship Series conference whose champion automatically qualifies for a BCS bowl game," plus Notre Dame. Louisville had been unable to find such a substitute opponent.
Duke moved for judgment on the pleadings, and won. Its argued at the hearing that the standard for "similar stature" was very low because the quality of Duke football was as low as it gets. As Judge Phillip J. Shepherd of the Franklin Circuit Court described the argument in his June 19th Opinion:
The term ‘team of similar stature’ simply means any team that competes at the same level of athletic performance as the Duke football team. At oral argument, Duke . . . persuasively asserted that this is a threshold that could not be any lower. Duke’s argument on this point cannot be reasonably disputed by Louisville. Duke won only one football game, and lost eleven, during the 2007 football season.
The Court, sua sponte, struck Plaintiff’s Motion for Expedited Discovery because Plaintiff had not included a Rule 18.6 certification regarding its counsel’s efforts to confer with opposing counsel.
There was no tortious interference contract claim against a defendant who sold product to plaintiff’s competitor. This was a legitimate exercise of the defendant’s rights.
There was no claim for negligence, or negligent misrepresentation, against the defendant because the plaintiff’s claims were for breach of warranty and covered by the UCC, and also because of the
Defendant claimed that the Plaintiff, who was the majority shareholder of a family corporation, couldn’t have had an expectation of a fiduciary duty from him because the Defendant had had an affair with Plaintiff’s wife. The Court disagreed, and said that the existence of a fiduciary duty under these circumstances was a question of fact.
An Arbitration Award was entitled to collateral estoppel effect, even though the Defendants had not been parties to the arbitration.
The Court compared the claims made in the Arbitration to the claims made in the Amended Complaint, and found them to be identical. It further determined that the Plaintiff had "a full and fair opporutnity to litigate
The actions and impressions of a non-lawyer sent by counsel to conduct an interview were subject to work product privilege.
Judge Tennille held that the interviewer (Ms. Lister):
declined to answer questions which called for her mental impressions and litigation strategy based upon attorney-client privilege and work product. Ms. Lister conducted the interview at the direction and
The Business Court denied the Defendant’s request to amend its Answer to add a statute of limitations defense and a defense of ERISA preemption. Judge Tennille found that the Defendant had unduly delayed by raising the statute of limitations defense fourteen months after the filing of its Answer, and that the Plaintiff would be prejudiced if it
The Court granted a Motion for Protective Order over the objection of the North Carolina Department of Revenue in tax refund litigation. The opinion is very short, but the Briefs have good general discussion on protective order issues.
Defendant’s Brief in Opposition to Motion for Protective Order