Where at least one derivative claim asserted “irreparable harm” to the LLC if the member waited 90 days after its demand before filing suit, the member did not have to wait 90 days before asserting other derivative claims. Emrich Enterprises, LLC v. Hornwood, Inc., 2020 NCBC 29 (J. Robinson). Instead, the member could include all derivative claims in the same complaint, and the Business Court would have jurisdiction over all of them.
Plaintiff and Defendant Hornwood, Inc. (“Hornwood”) are the sole members of Defendant Triangle Automotive Components, LLC (“Triangle”), a North Carolina LLC which manufactures and sells textile products to several large automobile manufacturers. Hornwood provides the manufacturing component of Triangle’s business operations, is Triangle’s majority member and controls Triangle’s business operations. Plaintiff provides sales and marketing services to Triangle. Pursuant to Triangle’s Operating Agreement, neither member was entitled to engage in business activities that competed with Triangle without first offering the opportunity to Triangle and the other member. Beginning in September 2017, Hornwood allegedly began working with Triangle’s competitor, Borgstena, to develop products to sell to the automotive industry, but never advised or offered the opportunities to Triangle or Plaintiff. At a March 2019 members meeting for Triangle, Hornwood proposed a new governing arrangement for Triangle that essentially gutted Plaintiff’s rights under the Operating Agreement. When Plaintiff refused to sign the new agreement, Hornwood announced that it would work exclusively with Borgstena. When Plaintiff turned down Hornwood’s subsequent offer to buy out Plaintiff’s membership interest in Triangle, Hornwood announced it intended to withdraw from Triangle, stop performing all manufacturing duties and notify Triangle’s customers of its withdrawal. Four days later, Plaintiff served Triangle with a letter demanding it take action against Hornwood for its actions and threatened actions that had and would harm Triangle. The same day it sent its demand letter, Plaintiff filed its verified complaint, asserting both individual and derivative claims. In connection with one of its derivative claims, Plaintiff also filed a motion for TRO and preliminary injunction, contending Hornwood’s withdrawal from Triangle would both breach the Operating Agreement and irreparably harm Triangle. The Business Court granted the TRO and the preliminary injunction. Hornwood subsequently brought a motion to dismiss Plaintiff’s other derivative claims, contending that Plaintiff’s failure to abide by the statutorily-imposed 90-day waiting period (from the date of its demand until it filed suit) meant the court lacked jurisdiction to hear Plaintiff’s other derivative claims.
The Business Court disagreed. While recognizing a member must ordinarily wait 90 days from the date of its pre-suit demand before filing a derivative claim (absent the LLC immediately rejecting the demand), the Business Court nonetheless acknowledged the statute’s exception to the waiting period where “irreparable injury would occur to the LLC” by waiting for the 90 days to expire. (Opinion, ¶67, citing N.C.G.S. §57D-8-01(a)(2)). The Business Court recognized Plaintiff’s claim that was the subject of the TRO and the preliminary injunction satisfied the statute’s exception. Because at least one of Plaintiff’s derivative claims satisfied the exception, the Business Court refused to require Plaintiff to satisfy the statutory exception for each of its other derivative claims or to wait 90 days before asserting its other derivative claims in its complaint. (Opinion, ¶74-75). Instead, the Business Court allowed Plaintiff to assert all of its derivative claims at the same time (i.e., in its original complaint, which was filed on the same day that Plaintiff sent the demand letter). Id.
Based upon this decision, a business should understand that where a member claims the LLC will suffer irreparable harm if certain action is not taken immediately, the business may want to respond appropriately in order to prevent the member from instituting immediate legal action for all claims it might assert on behalf of the business.
Additional legal points from this decision:
- Where a majority member controls the LLC and uses its control to the detriment of the minority member in identifiable ways, the minority member has stated both the existence of a fiduciary duty and a preliminary claim for breach of that duty. (Opinion, ¶¶89-93).
- Where a non-compete agreement does not “fit neatly” into either the employer-employee category or the sale of a business category, the Business Court will analyze the “reasonableness of the restrictions” upon a more developed record, usually after the pleadings stage. (Id., ¶¶102-106).
- One exception to the general rule that a member cannot pursue individual causes of actions against a third party for injuries done to the LLC exists where a member of an LLC seeks to enforce its contractual right to participate in the management of the LLC. (Id., ¶¶81-82).
Categories: Key Business Court Decisions