By John Bloss, Member, Higgins Benjamin PLLC
Glenn Crossing, LLC, one of the defendants in Island Beyond, LLC v. Prime Capital Group, LLC, 2013 NCBC 51 (Oct. 30, 2013),was formed for the purpose of purchasing and owning 30 acres of investment property near Kernersville. One of Glenn Crossing’s two members (which was itself an LLC and will be referred to for simplicity as the “Managing Member”) provided capital to Glenn Crossing. Glenn Crossing’s Operating Agreement delegated responsibility for acquiring the 30 acres to a company owned by the Managing Member’s principal, Raymond Kraweic.
The Complaint filed by Glenn Crossing’s second member (the “Plaintiff”) alleged that Plaintiff assumed, but did not independently verify, that Kraweic had caused Glenn Crossing to purchase the entire 30 acres as contemplated by the parties’ agreement. Unbeknownst to the Plaintiff, however, the Managing Member acquired only 10 acres of the property for Glenn Crossing, while two companies owned by Kraweic acquired the remaining 20 acres. Seven years after Glenn Crossing was formed, Plaintiff learned that NCDOT had condemned a portion of those 20 acres, resulting in a payment of a condemnation award to Kraweic’s companies only, and leaving Glenn Crossing with no income-producing property.
Business Court Judge Gale dismissed the Plaintiff’s claims for breach of fiduciary duty and fraud against the Managing Member and Kraweic. While a managing member of an LLC may “in some instances” owe the other members a fiduciary duty, no such duty arose under these circumstances where the Operating Agreement bestowed on the Managing Member “full and complete authority to manage and control . . . the properties of the Company.” The Plaintiff’s fraud-by-omission claim failed due to a failure of reasonable reliance, since the Plaintiff could have searched the public records to verify that Glenn Crossing had, in fact, purchased the 30 acres for itself.
Plaintiff’s derivative claim (that is, a claim brought by Plaintiff on behalf of Glenn Crossing) against the Managing Member for breach of fiduciary duty survived the motion to dismiss, however. Plaintiff alleged that the Managing Member had acquired the 20 acres and misdirected Glenn Crossing’s opportunities for an improper personal benefit; the Court ruled that these allegations of a breach of fiduciary duty were adequately pleaded. The Court rejected the Managing Member’s argument that the Operating Agreement eliminated any fiduciary obligation from the Managing Member to Glenn Crossing since, under North Carolina statutes governing LLCs, there can be no contractual waiver of a member’s duty to refrain from taking actions that conflict with the interest of the LLC or causing the LLC to enter into transactions in which the managing member derives an improper personal benefit.
If you would like to discuss a dispute arising in the context of a limited liability company or other business entity please contact John Bloss at (336) 273-1600 or firstname.lastname@example.org.
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