Failure to Deliver Pre-Suit Demand on the Company Prevents Any Derivative Claims

Where a member of an LLC failed to ensure that the LLC timely received his pre-suit demand, the Court necessarily lacked jurisdiction to hear the derivative claims. Robert Barefoot v. Quint Barefoot, et al, 2022 NCBC 5 (J. Bledsoe).  As a result, Plaintiff’s derivative claims would be dismissed, even though the statute of limitations had likely run on all such claims.

 Along with his three brothers, Plaintiff is a minority member of Robert and Sons, LLC (“Company”) which owned certain parcels of land in Greensboro, North Carolina (“Property”).  In 2018, Plaintiff’s brother, Quint, convinced his mother, Iris (who also was the majority owner in the Company) to sell the Property at what Plaintiff would ultimately contend was an “unreasonably low” price.  Although aware of the sale in 2018, Plaintiff waited until just days before the statute of limitations ran in 2021 to commence a proceeding pursuant to Rule 3 of the North Carolina Rules of Civil Procedure, whereby the clerk issued a summons and provided Plaintiff twenty (20) additional days to file his complaint.  Having obtained the summons, Plaintiff then sent a letter making certain demands on the Company but, in doing so, did not serve the Company’s registered agent nor all of its managers.  When no resolution could be reached, Plaintiff filed his complaint before the expiration of the 20-day deadline, asserting individual and derivative claims. Defendants moved to dismiss, contending the Business Court lacked subject matter jurisdiction over the derivative claims because Plaintiff failed to make the requisite pre-suit demand.

The Business Court agreed. Explaining that the purpose behind the 90-day, pre-suit demand is to give the company the chance to either cure the identified problems or permit it to bring suit itself (rather than the claims being brought derivatively) (Opinion, ¶20), the Business Court held the pre-suit demand is a jurisdictional requirement and, absent an excuse for irreparable harm (Id., ¶19), the failure to make the demand is fatal to the derivative claims. (Id., ¶24). Moreover, the LLC must actually receive the demand in order for the pre-suit requirement to be fulfilled, (Id., ¶20); service can either be on the managers/members (who have the requisite authority to reject or fulfill the demand) or the LLC’s registered agent. (Id., ¶27). Merely sending the demand to company members, purported third-party bad actors and only one of the company’s managers (when the Operating Agreement requires majority approval by the managers for any act) is insufficient (Id., ¶29, 31).  The potential running of the statute of limitations did not qualify as potential “irreparable harm” that would excuse waiver of the pre-suit demand, the Business Court held, because Plaintiff had been aware of the purported bad acts as early as 2018, but waited until the day before the running of the statute of limitations in 2021 to bring suit. (Id., ¶34-35).

Based upon this decision, members of an organization who seek to bring claims derivatively on behalf of the business should remember the importance of the 90-day, pre-suit demand.

Additional Legal Points :

Being a sibling is not a sufficient basis to create a fiduciary relationship (Opinion, ¶41).

Being a fiduciary in one matter does not make one a fiduciary for all matters. (Id., ¶42).

Ordinarily, directors owe fiduciary duties to corporations, and not shareholders. (Id., ¶44), and managers ordinarily owe fiduciary duties to the LLC and not to individual members. (¶45).

Any reference in an Operating Agreement that the managers must act in certain ways “for the best interests of the Company and members” is not enough, standing on its own, to impose fiduciary duties on the managers which run to members (Id., ¶47); more specificity in creating fiduciary duties is required. (Id., ¶48).

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