When shareholders breach the company’s operating agreement to the detriment of another shareholder, the statute of limitations on the plaintiff’s breach of contract action does not begin to run until the plaintiff has notice of the breach. Chisum, et al v. Campagna, et al, 2019 NCBH 27 (J. McGuire). As a result, the plaintiff’s breach claim filed more than four (4) years after the defendants unilaterally took control of the company was not barred by the statute of limitations.
Plaintiff was a minority shareholder with the defendants in three separate limited liability companies, Judges Road Industrial Park, LLC (“Judges Road”), Carolina Coast Holdings, LLC (“CCH”) and Parkway Business Park, LLC (“Parkway”). In October 2010, all parties participated in a meeting of CCH members where a capital call was assessed. Plaintiff refused to make an additional capital contribution and, thereafter, Defendants operated CCH as if Plaintiff was no longer a member—in contravention of CCH’s operating agreement. Approximately one year later, Plaintiff received a K-1 for CCH, which showed his interest in the company no longer existed. Notwithstanding such information, Plaintiff took no action with regard to CCH or with the other two companies, Judges Road or Parkway.
In mid-2012, Defendants held member meetings for Judges Road and Parkway. Plaintiff did not attend. At each meeting, capital calls were made and, again, Plaintiff did not make the corresponding contribution. Defendants thereafter operated Judges Road and Parkway as if Plaintiff were no longer a member, selling the companies’ property and taking distributions. Yet, Plaintiff received no distribution from either company, even though his 2012 and 2013 K-1s showed he still maintained a membership interest in each company. It was not until mid-2014 that Plaintiff’s K-1s for each company showed his membership had been eliminated.
Plaintiff filed suit in August 2016, bringing individual and derivative claims. All of Plaintiff’s claims depended on obtaining a declaration that he remained a member of all three companies notwithstanding Defendants’ unilateral actions. Defendants countered that Plaintiff’s actions were barred because their actions—which Plaintiff contended had breached the companies’ operating agreements—had all happened more than three years before Plaintiff filed suit.
The Business Court disagreed, holding that the statute of limitations for any breach of contract claim does not begin to run until Plaintiff “knew or should have known” about Defendants’ breaches. Although the Court ultimately determined that the Plaintiff’s breach claim related to CCH was timed barred based upon his receipt of the CCH K-1 in 2011, the Court held the Parkway and Judges Road claims created factual issues for the jury to decide about when the statute of limitations began to run. The Court acknowledged there was appellate case law to support Defendants’ position, but also found other case law to support its holding. The jury ultimately determined Plaintiff’s claims related to Parkway and Judges Road were timely.
Based upon this decision, a business that discovers it has been wronged by a company that violated a contract should nonetheless pursue its breach of contract claim even if more than three years has elapsed since the breach.
Categories: Key Business Court Decisions