A minority shareholder who said he was forced to resign as an officer and director of the company got past a Motion to Dismiss challenging his claims for breach of fiduciary duty, breach of the duty of good faith and fair dealing, conspiracy, and punitive damages in the Business Court’s opinion last Friday in Oakeson
Directors Of Corporation Facing “Deepening Insolvency” Owed Fiduciary Duties To Creditor
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Directors of corporations verging on insolvency can owe fiduciary duties to creditors under certain circumstances. Whether those duties were owed — and whether the claim for their breach had been released as a part of the corporation’s bankruptcy proceeding — were the main issues yesterday in Phillips and Jordan, Inc. v. Bostic, 2009 NCBC
Judicial Serendipity: North Carolina And Delaware On Fiduciary Duties Of LLC Members And Managers
The fiduciary duties owed by members and managers of limited liability companies are very different under North Carolina and Delaware law. In a bit of judicial serendipity, the North Carolina Court of Appeals and the Delaware Court of Chancery each issued opinions on those issues last week, just a day apart.
The North Carolina case
Threats And Secret Promises: Bank Of America’s Merger With Merrill Lynch
Ken Lewis, Bank of America’s CEO, has testified under oath to threats by former Secretary of the Treasury Hank Paulson to remove the Bank’s Board of Directors and its management if the Bank didn’t close its deal to acquire Merrill Lynch, and secret promises to support the Bank with federal funds if it did close
A Business Court Hat Trick Today In The North Carolina Court Of Appeals
Three decisions from the North Carolina Business Court were affirmed today by the North Carolina Court of Appeals. They involve fiduciary duties of members of LLCs, the right of limited partners to sue directly for injury to a partnership, and the obligation of the personal representative of an estate to give notice to creditors.
Court of Appeals Rulings Today (September 2, 2008)
The North Carolina Court of Appeals ruled today on cases involving the statute of repose applicable to legal malpractice actions, fiduciary duties of trustees, and the waiver of the right to arbitration.
On the fiduciary duty issue, the Court affirmed the decision of the Business Court in Heinitsh v. Wachovia Bank on an obscure point of
Does The Manager Of An LLC Have A Fiduciary Duty To The Members Of The LLC?
The United States District Court for the Middle District of North Carolina dismissed an LLC member’s fiduciary duty claims against a manager based on grounds of standing in Morris v. Hennon & Brown Properties, LLC.
The Defendant LLC was an investor and member of three limited liability companies. It alleged in a counterclaim that
LLC Investor Did Not Owe A Fiduciary Duty To The LLC Or Its Members
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
Sex and Fiduciary Duty
The case of Land v. Land is a minority shareholder dispute among shareholders of a family business.
The Business Court sees these kinds of disputes regularly, and there’s not much novel in the Court’s Order today denying summary judgment in a fight over a masonry business involving two brothers and their father.
The part of the
Aiding And Abetting Breach Of Fiduciary Duty: Alive Or Dead?
Does North Carolina recognize a claim for aiding and abetting breach of fiduciary duty? The North Carolina Court of Appeals shed a little bit of light on the question this week., but it wasn’t very illuminating.
The linchpin for this frequently made claim has been the twenty year old case of Blow v. Shaughnessy, 88 N.C. App. 484, 364 S.E.2d 444 (1988), in which the Court of Appeals recognized the tort. It held simply that "a cause of action on this theory has been recognized by federal courts in securities fraud cases based on violations of section 10(b) of the Securities Exchange Act of 1934."
But six years after Blow was decided, in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), the United States Supreme Court held that there was no liability for aiding and abetting under the securities laws, thus eviscerating the underpinning of the Blow case.
Since then, the North Carolina Business Court has expressed doubt about the continuing vitality of claims for aiding and abetting breach of fiduciary duty. Judge Diaz noted the issue most recently in Regions Bank v. Regional Property Development Corp., 2008 NCBC 8 and in Battleground Veterinary Hospital, P.C. v. McGeough, 2007 NCBC 33; and Judge Tennille wrote on the subject in Sompo Japan Insurance Inc. v. Deloitte & Touche, LLP, 2005 NCBC 2. In none of these cases, however, did the Business Court dismiss the claim on the basis that it is not recognized in North Carolina.
This week, the Court of Appeals decided the case of Hinson v. Jarvis, in which it made a passing reference to Blow which might be interpreted as giving some life to that case. In a footnote, the Court stated:
In addition to the cases discussed in this section, plaintiffs also rely on Blow v. Shaughnessy, 88 N.C. App. 484, 364 S.E.2d 444 (1988). That case, however, involved the imposition of liability on a defendant that encouraged a third party to breach his fiduciary responsibility — a securities law violation — owed to the plaintiff. Id. at 489, 364 S.E.2d at 447. This case, however, does not involve any fiduciary relationship between Mr. Jarvis and plaintiffs. We therefore find Blow distinguishable from the instant case.
Continue Reading Aiding And Abetting Breach Of Fiduciary Duty: Alive Or Dead?