Absent language in the company’s Operating Agreement that establishes fiduciary duties, a majority owner of an LLC owes a minority owner a fiduciary duty only when the majority controls the LLC. Finkle, et al. v. Palm Park, Inc., 2019 N.C.B.C 37 (J. McGuire). As a result, when the minority owner negotiates protections within the Operating Agreement that prevent the majority’s control, the majority owners has no fiduciary obligation to the minority.
Defendant Oak Crest Property Management, Inc. (“Oak Crest”) is the 62% owner in The Oaks At Northgate, a North Carolina limited liability company (“TONG”). Horizon Funding, LLC (“Horizon”) owned the remaining interest in TONG and is managed by Plaintiff Finkle. TONG, in turn, was the sole shareholder of Palm Park, Inc. (“Palm Park”), an entity that owned a commercial building known as the “Lawrence Building.” The owners of Oak Crest formed a new company, Kildaire Office Suites (“KOS”), and had Palm Park rent the only section of the Lawrence Building dedicated to office suites to KOS. KOS then subleased out the various office suites to other tenants. In 2017, a dispute arose between the parties, and Finkle and Horizon filed a lawsuit. Horizon brought a claim for breach of fiduciary duty against Oak Crest, contending that as the majority owner of TONG, Oak Crest owed Horizon a fiduciary duty which it subsequently breached. Oak Crest sought summary judgment on Horizon’s breach of fiduciary duty claim, contending that the facts failed to show that Oak Crest owed a fiduciary duty to Horizon.
The Business Court agreed. Recognizing that a majority owner in an LLC might owe a fiduciary duty to a minority owner if the majority controlled the LLC, the Business Court focused on the level of control Oak Crest possessed under the plain language of TONG’s Operating Agreement. The Business Court found that TONG’s Operating Agreement contained significant protections for Horizon that prevented Oak Crest from exercising too much control over the LLC (e.g., requiring a 75% vote in favor of taking such significant corporate actions as amending the Operating Agreement, dissolving TONG, or distributing cash to members). Because Oak Crest only owned a 62% interest in TONG, the Business Court found that Horizon could block those significant corporate actions and, with this protection, Oak Crest did not have the requisite control over the LLC necessary to create a fiduciary duty.
Based upon this decision, an LLC should decide at its creation whether it wants to include any protections for minority owners that would preclude the creation of a fiduciary relationship between the majority and any minority owners. In addition to explicitly disavowing any such fiduciary duty within the Operating Agreement itself, these additional protections for minority owners could prevent a court from later recognizing an unintended fiduciary relationship.
Additional legal holdings from the case:
- A party will be bound by the admissions it makes within its pleadings, including any admission of whether an opposing party is a member of the LLC at the time of filing. (Opinion, ¶¶ 25, 26).
- While the North Carolina Limited Liability Company Act does not create fiduciary duties among members of the LLC (Opinion, ¶40), fiduciary duties can be created within the terms of the contract. (Opinion, ¶52).
- The exception recognized in Barger v. McCoy, Hillar & Parks, 346 N.C. 650 659, 48 S.E.2d 215, 219 (1997) has no application in the context of a purely individual claim, but does apply where a special duty (such as a contractual duty) exists between the wrongdoer and the shareholder. (Opinion, ¶52).
- The procedure for valuing a limited liability company as set forth in G.S. §57D-6-03(d) is only appropriate after a court decides to dissolve the LLC. (Opinion, ¶61).
Categories: Key Business Court Decisions