Member Has a Constitutional Right to File Non-Frivolous Derivative Action

Where a member filed various derivative actions against a co-member and LLC (nominally), those claims were protected by the First Amendment.  Emrich Enterprises, LLC v. Hornwood, Inc. and Triangle Automotive, LLC (nominal), 2022 NCBC 11 (J. Robinson).  As a result, the LLC’s breach of fiduciary duty claim against the member based solely upon the member’s decision to assert those derivative claims was dismissed.

Plaintiff is a minority member of Triangle Automotive, LLC.  Plaintiff learned that Triangle’s majority member, Hornwood, Inc., had allegedly breached a number of provisions of the Operating Agreement, including diverting potential business away from Triangle and directing it to Hornwood. Plaintiff filed suit against Hornwood, asserting both individual and derivative claims.  Although a nominal defendant, Triangle nonetheless filed a counterclaim against Plaintiff contending that it breached its fiduciary duty to Triangle by filing the derivative claims.  Following discovery, Plaintiff filed a motion for summary judgment against Triangle’s claim, contending Triangle’s breach of fiduciary duty claim should be dismissed.

The Business Court agreed.  After recognizing that a member ordinarily does not owe any fiduciary duties to an LLC merely because of its position as a member (Opinion, ¶72), the Business Court held no exception to this general rule applied in this case. Id.  As a result, Plaintiff had no fiduciary duty to the LLC which it could breach.  Moreover, the Business Court recognized the First Amendment protects a citizen’s right “to petition the Government for redress of grievances.”  (Id., ¶73).  Relying upon precedent from the United States Supreme Court, the Business Court held that a non-frivolous derivative action was necessarily a petition for the redress of grievances which was therefore protected by the First Amendment.  (Id., ¶75).  Because Plaintiff’s right to bring a non-frivolous derivative action was protected by the First Amendment, this was yet another reason the Business Court stated that it would have dismissed Triangle’s breach of fiduciary duty claim.

Additional Legal Points

  • A non-competition provision in an Operating Agreement is enforceable if the restriction neither includes post-termination activity nor is an outright prohibition of all activity; if it merely requires the business opportunity to first be offered to the LLC, the provision is enforceable. (Opinion, ¶83).
  • The Business Judgment Rule (“BJR”) will not protect a manager if the action complained of is a ministerial act, and not a “business act” contemplated by the BJR. (¶¶129-131).
  • The BJR can be overcome for a “business act” if the plaintiff can prove the manager: a) failed to act in good faith; b) failed to act in the honest belief the act was in the best interest of the company; or c) failed to act in an informed basis.  (Id., ¶128).  
  • While evidence that the manager was “inattentive, uniformed, acted in bad faith, or made a decision that is unreasonable,” will overcome application of the BJR, mere failure to correct an otherwise attended-to problem will not defeat the BJR. (Id., ¶136).

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