Key Business Court Decisions

The Right of Dissolution: It Can’t Be Contracted Away, But Merely Being The Alter Ego Isn’t Enough

An operating agreement’s attempt to prevent a member of an LLC from seeking her statutory right of dissolution is unenforceable.  Slaughter v. Winner Enterprises of Carolina Beach, LLC, 2019 NCBC 1 (J. McGuire).  But in order to have standing to seek a dissolution, the member must be an actual member of the LLC and not merely a member of the LLC’s alter ego.

In December 2011, Plaintiff and her then-husband, Troy, were minority members in Troy’s family’s business, Winner Enterprises (“Enterprises”), which developed commercial and residential property.  At that time, Troy asked Plaintiff to sign a document which he represented was part of his mother’s estate planning documents, but in reality was the signature page for an amendment to Enterprises’ operating agreement.  The amendment limited certain rights in the LLC to those members who were either direct descendants or spouses of direct descendants of the company’s founders.  While at the time she signed the amendment Plaintiff was married to Troy and a thus a member of the company, Plaintiff was unaware Troy was involved in a multi-year extramarital affair.  Troy separated from Plaintiff six months after she signed the amendment. Troy refused to purchase her interest in Enterprises or enable Enterprises to provide her any further distributions.   Troy then started up a second company with his mother, Winner Construction (“Construction”), and used Enterprises’ assets and property to fund Construction’s business activities.   Plaintiff was not a member of Construction and received no distributions from it.  After a messy divorce, Plaintiff filed suit to dissolve both Enterprises and Construction.  Both companies filed a motion to dismiss, contending Plaintiff lacked standing to seek dissolution of either company.

Enterprise argued that the amendment explicitly precluded Plaintiff from exercising her right under G.S. §57D-6-02(2) to seek dissolution of the company.  In rejecting Enterprises’ argument, the Business Court determined that the amendment was ambiguous about its effect on Plaintiff’s membership in Enterprise and thus it could not be determined as a matter of law at the motion to dismiss stage that the amendment eliminated Plaintiff’s membership rights.  (Opinion, ¶37).  Because Plaintiff was a member in Enterprise, the Business Court held, any language in the amendment that sought to limit or restrict her statutory right to seek dissolution of the company was unenforceable as it was contrary to the plain language of the statute.  (Id., ¶35).  As such, the Business Court denied Enterprises’ motion to dismiss for lack of standing.

In its motion to dismiss, Construction contended that Plaintiff lacked standing because she was not a member of Construction.  Although she conceded as much in her complaint,  Plaintiff nonetheless contended that she had standing to seek Construction’s dissolution because Construction was the mere alter ego of Enterprises, and because she had standing to seek Enterprises dissolution she could also seek Construction’s dissolution.  The Business Court rejected Plaintiff’s argument.  After finding that the doctrine of piercing the corporate veil is not a theory of liability but only becomes relevant when there is an underlying legal claim upon which it may attach, the Business Court refused to permit veil-piercing as a mechanism to confer standing on a non-member of an LLC.                 A business should recognize that any language in its operating agreement that seeks to prevent a member from seeking dissolution of the LLC is likely unenforceable.  However, in order to seek dissolution, the individual must still be a member at the time dissolution is sought.

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