CAMACHO v. McCALLUM

Camacho v. McCallum, 

.


STATE OF NORTH CAROLINA                     IN THE GENERAL COURT OF JUSTICE
                                                SUPERIOR COURT DIVISION
GASTON COUNTY                                          16 CVS 602

SUSAN CAMACHO individually, and         )
in her capacity as Administrator        )
C.T.A. of the Estate of Kerry Lee       )
McCallum, deceased, and on behalf of    )
JOAN FABRICS, LLC,                      )
                                        )
                Plaintiffs,             )
                                        )         ORDER AND OPINION
        v.                              )
                                        )
ELKIN MCCALLUM and JOAN                 )
FABRICS, LLC,                           )
                                        )
                Defendants.             )
                                        )

   1.        THIS MATTER is before the Court on Plaintiff Susan Camacho’s

(“Plaintiff” or “Camacho”) Motion for Appointment of Receiver (the “Motion for a

Receiver”) and Defendants Elkin McCallum and Joan Fabrics, LLC’s (collectively,

“Defendants”) Motion to Dismiss Plaintiff’s Complaint (the “Motion to Dismiss”).

After considering the Motion for a Receiver and the Motion to Dismiss (collectively,

the “Motions”), supporting and opposing briefs, and arguments of counsel at a hearing

on the Motions, for the reasons set forth below the Court hereby GRANTS

Defendants’ Motion to Dismiss and DENIES Plaintiff’s Motion for a Receiver.

        Hickmon & Perrin, P.C., by James Hickmon, and Fitzgerald Litigation,
        by Andrew Fitzgerald, for Plaintiff Susan Camacho.

        Patrick, Harper & Dixon, LLP, by Michael J. Barnett, for Defendants
        Elkin McCallum and Joan Fabrics, LLC.

Robinson, Judge.
                            I.    PROCEDURAL HISTORY

   2.     Plaintiff commenced this action in her individual capacity, in her capacity

as the personal representative of the Estate of Kerry McCallum (“Kerry’s Estate”),

and on behalf of Joan Fabrics, LLC (“Joan”) on February 18, 2016 by filing her

Complaint, Motion to Review Corporate Books and Records, and Motion for

Appointment of Receiver (“Complaint”). In addition to the Motion for a Receiver, the

Complaint brings the following direct claims: (1) an accounting and inspection of

books and records claim (the “Inspection Claim”); (2) a judicial dissolution claim; and

(3) a breach of fiduciary duty claim (collectively, the “Claims”). (Compl. ¶¶ 22, 25,

33.) Plaintiff also asserts the Claims derivatively on behalf of Joan. (Compl. 5.)

   3.     The case was designated as a mandatory complex business case pursuant

to N.C. Gen. Stat. § 7A-45.4(b) by order of the Chief Justice of the North Carolina

Supreme Court dated February 19, 2016, and was assigned to the Honorable Louis

A. Bledsoe, III, by order dated February 24, 2016. The case was later reassigned to

the undersigned by order dated July 5, 2016.

   4.     On March 17, 2016, Defendants filed the Motion to Dismiss. The Motion to

Dismiss seeks dismissal of the Complaint pursuant to Rules 12(b)(1) and 12(b)(6) of

the North Carolina Rules of Civil Procedure (“Rule(s)”).

   5.     After briefing on the Motions was completed, the Court held a hearing on

the Motions on June 1, 2016. At the hearing, the parties agreed to a temporary stay

to allow for limited production of documents and initial mediation. The Court entered

a Scheduling Order on June 10, 2016, staying the case to and including August 1,
2016. In the Scheduling Order, the Court ordered that Defendants produce records

no later than June 15, 2016, that the parties engage in an initial mediation session

no later than August 1, 2016, and that the parties submit a status report to the Court

within ten days of the initial mediation, but no later than August 1, 2016.

   6.    On July 26, 2016, the parties submitted a Status Report to the Court. The

Status Report states that the parties conducted mediation on July 18, 2016, which

resulted in an impasse, and the parties would like the Court to proceed with ruling

on the Motions.

                           II.    FACTUAL BACKGROUND

   7.    Joan is a Delaware limited liability company (“LLC”) with its principal

place of business in Massachusetts. (Compl. ¶ 3.)

   8.    Defendant Elkin McCallum (“Elkin”) is a member of Joan and Joan’s

President and Chief Executive Officer (“CEO”). (Compl. ¶¶ 4−5.) Elkin owns a 50%

interest in Joan. (Compl. ¶ 4.)

   9.    Donna McCallum (“Donna”)—who is not a party to this action—is a member

of Joan, a 25% interest owner, and the wife of Elkin. (Compl. ¶¶ 4, 6.)

   10.   Kerry McCallum (“Kerry”) was the daughter of Elkin and Donna. (Compl.

¶ 4.) Kerry died on October 31, 2014. (Compl. ¶ 2.) Prior to her death, Kerry was a

member of Joan, the Vice President of Joan, and a 25% interest owner. (Compl. ¶¶

2, 9.)

   11.   Kerry’s Estate owns a 25% interest in Joan. (Compl. ¶ 2.) Camacho is the

personal representative of Kerry’s Estate and was legally married to Kerry. (Compl.
¶¶ 1, 9.)     Camacho individually inherited Kerry’s 25% ownership interest, and

Defendants have ignored Plaintiff’s requests to assign the Estate’s ownership interest

to Camacho individually. (Compl. ¶ 2.)

   12.      Plaintiff alleges that there have been questions regarding Joan’s

management for many years. (Compl. ¶ 10.) In 2007, Joan filed for bankruptcy

protection and, around the same time, Elkin was the subject of a complaint filed by

the Securities and Exchange Commission. (Compl. ¶ 10.)

   13.      Plaintiff alleges that Elkin has told Donna that Donna must always vote in

agreement with Elkin, and Donna has never dissented from action taken by Elkin.

(Compl. ¶ 6.) As a result, Plaintiff contends that Donna and Elkin, who together own

75% of Joan, make a majority voting bloc that owes a fiduciary duty to Plaintiff, the

minority member. (Compl. ¶¶ 6, 32−34.)

   14.      Plaintiff, through a series of letters and emails and an estate proceeding,

sought information on Joan pursuant to the Joan Fabrics LLC Operating Agreement

(the “Operating Agreement”) and Delaware law. (Compl. ¶¶ 12−14, Exs. 2−6.) The

Operating Agreement contains a Delaware choice-of-law provision (Compl. Ex. 1 ¶

11(c) [hereinafter Op. Agmt.]) and the following provision providing members with

inspection rights:

         The Members shall keep or cause to be kept complete and accurate books
         and records of the LLC . . . . Such books and records shall be maintained
         and be available, in addition to any documents and information required
         to be furnished to the Members under the [Delaware Limited Liability
         Company] Act, at an office of the LLC for examination and copying by
         any Member, or his duly authorized representative, at his reasonable
         request and at his expense during ordinary business hours.
(Op. Agmt. ¶ 9(a).) Plaintiff alleges that Joan is in financial distress, Plaintiff is

entitled to the information requested, and Defendants have refused to provide such

information. (Compl. ¶¶ 19, 34.)

   15.    Plaintiff has attempted to call a members meeting, but Elkin will not and/or

cannot, due to health issues, have a members meeting.           (Compl. ¶ 17.)    Elkin

scheduled a members meeting on two separate occasions and cancelled both

meetings. (Compl. ¶ 17.)

   16.    Elkin has threatened to make a capital call on Plaintiff, which Plaintiff

alleges is not permitted by the Operating Agreement. (Compl. ¶ 16.)

                               III.   LEGAL STANDARD

   17.    In ruling on a motion to dismiss pursuant to Rule 12(b)(6), the Court

reviews the allegations of the Complaint in the light most favorable to Plaintiff. The

Court’s inquiry is “whether, as a matter of law, the allegations of the complaint,

treated as true, are sufficient to state a claim upon which relief may be granted under

some legal theory.” Harris v. NCNB Nat’l Bank of N.C., 

, 

 (1987). The Court construes the Complaint liberally and accepts all

allegations as true. Laster v. Francis, 

, 

(2009).

   18.    Dismissal of a claim pursuant to Rule 12(b)(6) is proper “(1) when the

complaint on its face reveals that no law supports [the] claim; (2) when the complaint

reveals on its face the absence of fact sufficient to make a good claim; [or] (3) when

some fact disclosed in the complaint necessarily defeats the . . . claim.” Oates v. JAG,
Inc., 

, 

 (1985); see also Jackson v. Bumgardner,

, 

 (1986). Otherwise, “a complaint should not

be dismissed for insufficiency unless it appears to a certainty that plaintiff is entitled

to no relief under any state of facts which could be proved in support of the claim.”

Sutton v. Duke, 

, 

 (1970) (emphasis omitted).

   19.    A court shall dismiss the action when it appears that the court lacks subject

matter jurisdiction. N.C. R. Civ. P. 12(h)(3). “A motion to dismiss for lack of subject

matter jurisdiction is not viewed in the same manner as a motion to dismiss for failure

to state a claim upon which relief can be granted.” Tart v. Walker, 

, 

 (1978). A court may consider matters outside the pleadings

in determining whether subject matter jurisdiction exists. Keith v. Wallerich, 

, 

 (2009); Tart, 

, 

.

                              IV.    MOTION TO DISMISS

   A.     Inspection Claim

   20.    Plaintiff brings her Inspection Claim pursuant to N.C. Gen. Stat. § 57D-3-

04 and 

, in which she demands a full accounting and

seeks to inspect all records of Joan available under those statutes and the Operating

Agreement. (Compl. ¶ 22.)

   21.    The parties agree that because Joan is an LLC organized under the laws of

Delaware and the Operating Agreement contains a Delaware choice-of-law provision,

Delaware law governs the Inspection Claim. (Joint Case Mgmt. Report 2); 

(i) (2015) (“A limited liability company agreement that provides

for the application of Delaware law shall be governed by and construed under the

laws of the State of Delaware in accordance with its terms.”); see also 

 § 18-305(a)

(providing inspection rights to members of a “limited liability company”); id. § 18-

101(6) (defining “limited liability company” as “a limited liability company formed

under the laws of the State of Delaware”).

   22.    To the extent Plaintiff purports to bring her Inspection Claim pursuant to

section 57D-3-04 of the North Carolina Limited Liability Company Act (the “North

Carolina Act”), the Inspection Claim must be dismissed for failure to state a claim

upon which relief can be granted. Delaware law governs the Inspection Claim, and

section 57D-3-04 applies only to members of an LLC formed under the North Carolina

Act. N.C. Gen. Stat. § 57D-1-02(a) (2015) (“[The North Carolina Limited Liability

Company Act] and any other applicable laws of this State govern (i) the internal

affairs of every LLC, including the interpretation, construction, and enforcement of

operating agreements and determining the rights and duties of interest owners . . . .”

(emphasis added)); id. § 57D-1-03(13), (19) (defining “LLC” as an entity formed under

the North Carolina Act and a “foreign LLC” as a limited liability company organized

under the law of another state); id. § 57D-3-04(a) (providing inspection rights to

members of an LLC, as opposed to a foreign LLC). Therefore, section 57D-3-04 does

not provide Plaintiff, a member of a Delaware LLC, with inspection rights.

   23.    Under section 18-305(a) of the Delaware Limited Liability Company Act

(the “Delaware Act”), a member of a Delaware LLC “has the right, subject to such
reasonable standards (including standards governing what information and

documents are to be furnished at what time and location and at whose expense) as

may be set forth in a[n LLC] agreement or otherwise . . . to obtain from the [LLC]”

certain information regarding the LLC. 

(a).

   24.    Section 18-305 is explicit that an action under that section must be brought

in the Court of Chancery and the Court of Chancery has exclusive jurisdiction to

determine whether the member is entitled to the information requested. “Any action

to enforce any right arising under [section 18-305] shall be brought in the Court of

Chancery. . . . The Court of Chancery is hereby vested with exclusive jurisdiction to

determine whether or not the person seeking such information is entitled to the

information sought.” 

 § 18-305(f) (emphasis added); see also Elf Atochem N. Am.,

Inc. v. Jaffari, 

 (Del. 1999) (“In vesting the Court of Chancery with

jurisdiction, the [Delaware Act] accomplished at least three purposes: (1) it assured

that the Court of Chancery has jurisdiction it might not otherwise have . . . ; (2) it

established the Court of Chancery as the default forum in the event the members did

not provide another choice of forum or dispute resolution mechanism; and (3) it tends

to center interpretive litigation in Delaware courts with the expectation of

uniformity.”).

   25.    Here, Plaintiff seeks to inspect Joan’s records pursuant to section 18-305

and the Operating Agreement. Thus, the Inspection Claim is “any action to enforce

any right arising under [section 18-305]” and must therefore be brought in the Court

of Chancery, which has exclusive jurisdiction to determine whether Plaintiff is
entitled to the requested information. 

(f). As a result,

the Inspection Claim must be dismissed for lack of subject matter jurisdiction.

   B.     Judicial Dissolution

   26.    Plaintiff seeks judicial dissolution of Joan pursuant to N.C. Gen. Stat. §

57D-6-02 and 

. (Compl. ¶ 25.) Plaintiff alleges that “it

is not practicable to conduct [Joan’s] business in conformance with the operating

agreement and the Delaware and North Carolina Limited Liability [Company] Acts

and liquidation of [Joan] is necessary to protect the rights and interests of the

member.” (Compl. ¶ 25.)

   27.    The parties agree that because Joan is a Delaware LLC and the Operating

Agreement contains a Delaware choice-of-law provision, Delaware law governs the

judicial dissolution claim. (Joint Case Mgmt. Report 2); 

-

802 (providing for judicial dissolution of a “limited liability company” when “it is not

reasonably practicable to carry on the business in conformity with a limited liability

company agreement”); 

 § 18-101(6) (defining “limited liability company” as “a

limited liability company formed under the laws of the State of Delaware”); id. § 18-

1101(i) (“A limited liability company agreement that provides for the application of

Delaware law shall be governed by and construed under the laws of the State of

Delaware in accordance with its terms.”).

   28.    To the extent Plaintiff purports to bring the judicial dissolution claim

pursuant to N.C. Gen. Stat. § 57D-6-02, the claim must be dismissed for failure to

state a claim upon which relief can be granted. Delaware law governs the judicial
dissolution claim, and section 57D-6-02 applies only to an LLC formed under the

North Carolina Act. N.C. Gen. Stat. § 57D-1-03(13), (19) (defining “LLC” as an entity

formed under the North Carolina Limited Liability Company Act and a “foreign LLC”

as a limited liability company organized under the law of another state); id. § 57D-6-

01 (providing that an LLC, as opposed to a foreign LLC, is dissolved upon a decree of

judicial dissolution under section 57D-6-05); id. § 57D-6-02 (providing the grounds on

which “[t]he superior court may dissolve an LLC[,]” as opposed to a foreign LLC); id.

§ 57D-6-05(a) (providing that the court “may enter a decree dissolving the LLC[,]” as

opposed to a foreign LLC).

   29.   Under section 18-802 of the Delaware Act, “the Court of Chancery may

decree dissolution of a [Delaware] limited liability company whenever it is not

practicable to carry on the business in conformity with a limited liability company

agreement.”   

 (emphasis added).         Unlike other

provisions of the Delaware Act that provide an action may be brought in the Court of

Chancery, thereby implying that those actions may be brought in courts other than

the Court of Chancery, the plain language of section 18-802 permits only the Court

of Chancery to enter a decree dissolving a Delaware LLC. Compare 

 § 18-111 (“Any

action to interpret, apply or enforce the provisions of a limited liability company

agreement . . . may be brought in the Court of Chancery.”), and id. § 18-1001 (stating

that a member of an LLC “may bring [a derivative] action in the Court of Chancery”),

with id. § 18-802 (stating “the Court of Chancery may decree dissolution”). See also

In re Raharney Capital, LLC v. Capital Stack LLC, 

, 217−18 (N.Y.
App. Div. 2016) (holding that New York courts do not have subject matter jurisdiction

to judicially dissolve a Delaware LLC); Intertrust GCN, LP v. Interstate Gen. Media,

LLC, No. 99, 

, at *7 (Phila. Ct. Com. Pl. Feb. 11,

2014) (stating that the language of section 18-802 “grants exclusive subject [matter]

jurisdiction to the Delaware Court of Chancery to hear and determine petitions for

judicial dissolution”); Casella Waste Sys., Inc. v. GR Tech., Inc., No. 409-6-07, 

, at *7−8 (Vt. Super. Ct. Feb. 6, 2009) (“[A] plain reading of

[section 18-802] suggests that the default rules governing dissolution grant subject

matter jurisdiction only to the Delaware Court of Chancery, and not to any other

court.”).

   30.      Moreover, the Delaware statute’s limited grant of authority to the Court of

Chancery to judicially dissolve a Delaware LLC is consistent with the underlying

principles and structure of an LLC. The Delaware Act enables the formation of an

LLC and affords members substantial freedom to contract among themselves

regarding various issues, such as management of the LLC, the rights and duties of

managers and members, admission of new members, and termination of the LLC.

The Delaware Act provides default provisions only where the parties have not

otherwise agreed. 

(b) (“It is the policy of [the Delaware

Act] to give the maximum effect to the principle of freedom of contract and to the

enforceability of [LLC] agreements.”); Elf Atochem N. Am., Inc. v. Jaffari, 

, 290−92 (Del. 1999).
   31.      Judicial dissolution of entities created under, and granted substantial

contractual freedom by, the laws of one state should be accomplished by a decree of a

court of that state. See Classic Coffee Concepts, Inc. v. Anderson, 

, at *45 (N.C. Super. Ct. Dec. 1, 2006) (finding that a North Carolina court lacked

authority to judicially dissolve a Delaware corporation); In re Carlisle Etcetera LLC,

, 605−06 (Del. Ch. 2015) (“[W]hen a sovereign makes available an [LLC]

with attributes that contracting parties cannot grant themselves by agreement, the

[LLC] is not purely contractual. Because the entity has taken advantage of benefits

that the sovereign has provided, the sovereign retains an interest in that [LLC]. That

interest in turn calls for preserving the ability of the sovereign’s courts to oversee

and, if necessary, dissolve the [LLC].”).

   32.      Here, Plaintiff seeks judicial dissolution of Joan, a Delaware LLC. Only the

Delaware Court of Chancery may enter a decree dissolving Joan, and therefore

Plaintiff’s judicial dissolution claim must be dismissed for lack of subject matter

jurisdiction.

   C.       Breach of Fiduciary Duty Claim

   33.      Plaintiff’s breach of fiduciary duty claim is that

         [t]he majority owners have breached their fiduciary duties in numerous
         respects, to be supplemented when plaintiff may view the Joan books
         and records. Plaintiff believes that there has been corporate waste, selfdealing and a lack of adherence to corporate formalities. Specifically to
         date plaintiff pleads that Elkin McCallum and Donna McCallum have
         breached their fiduciary duties by concealing the company’s books and
         records and refusing to have a member’s meeting.

(Compl. ¶¶ 33−34.)
          1.     Standing

   34.    Because Plaintiff purports to bring both a direct claim and a derivative

claim for breach of fiduciary duty, the Court must first determine whether Plaintiff

has standing to assert a direct claim for such alleged breach. North Carolina courts

look to the laws of the state in which the LLC is organized to determine whether a

claim is derivative or direct. Scott v. Lackey, 

, at *14 (N.C.

Super. Ct. Dec. 3, 2012) (“Because BHCM is a limited liability company formed in

Delaware, the Court looks to Delaware law to determine Plaintiff’s standing to bring

his direct claims.”).

   35.    Under Delaware law, to determine whether a claim is direct or derivative,

a court must look to the nature of the wrong and to whom the relief will go. Tooley v.

Donaldson, Lufkin, & Jenrette, Inc., 

 (Del. 2004). A member’s

claimed direct injury must be independent of any alleged injury to the LLC. 

 A

member must demonstrate that the duty breached was owed to the member and that

the member can prevail without showing an injury to the LLC. Id.; Kuroda v. SPJS

Holdings, L.L.C., 

 (Del. Ch. 2009) (“Delaware law is clear that direct

claims are available only where the member has suffered damage that is independent

of any damage suffered by the limited liability company.”).

   36.    Here, Plaintiff’s breach of fiduciary duty claim is based on Elkin failing to

hold a members meeting and refusing to allow Plaintiff to inspect Joan’s books and

records. The nature of the wrong alleged is that Plaintiff was not permitted to inspect

the books and records and Plaintiff has been unable to get company information
because Elkin has failed to have a members meeting, and any relief would go to

Plaintiff. Therefore, Plaintiff has standing to assert a direct claim for breach of

fiduciary duty. Sanders v. Ohmite Holding, LLC, 

 (Del. Ch. 2011)

(deciding a member’s direct claim to inspect company books and records); RED

Capital Inv. L.P. v. RED Parent LLC, 

, at *10−11 (Del. Ch.

Feb. 11, 2016) (same); Somerville S Trust v. USV Partners, LLC, 

, at *1 (Del. Ch. Aug. 2, 2002) (same).

          2.     Governing Law

   37.    The Court must next determine which state’s law governs Plaintiff’s breach

of fiduciary duty claim. In their briefs, the parties argued the breach of fiduciary

duty claim as if North Carolina law applies; however, the parties did not provide a

basis as to why North Carolina law governs the claim, and the Court does not find

the issue to be so straightforward.

   38.    Under North Carolina conflict of law principles, matters affecting the

substantial rights of the parties are determined by lex loci, the law of the situs of the

claim, and remedial or procedural rights are determined by lex fori, the law of the

forum. E.g., Harco Nat’l Ins. Co. v. Grant Thornton LLP, 

, 

, 722−23 (2010). For tort claims, the state where the injury occurred is

considered the situs of the claim. 

 The place of the injury is the state where the

injury or harm was sustained or suffered—the state where the last event necessary

to make the actor liable or the last event required to constitute the tort takes place,

and the substantive law of that state applies. 

, 

.
   39.    Here, the Operating Agreement does not expand, limit, or alter traditional

fiduciary duties. Plaintiff’s breach of fiduciary duty claim is thus properly classified

as a tort claim, rather than a contract claim. Nelson v. Alliance Hospitality Mgmt.,

, at *25 (N.C. Super. Ct. Aug. 20, 2013). As a result, the choice-

of-law provision in the Operating Agreement does not apply, and the law of the situs

of the claim controls. See, e.g., Associated Packaging, Inc. v. Jackson Paper Mfg. Co.,

, at *9−10 (N.C. Super. Ct. Mar. 1, 2012) (“While the LLC

Agreement’s choice of law provision would control enforcement of the LLC Agreement

itself, the provision does not control the [tort] claims in this case.” (citation omitted)).

   40.    Plaintiff’s breach of fiduciary duty claim is based on Elkin failing to hold a

members meeting and refusing to allow Plaintiff to inspect Joan’s books and records.

It is unclear from the Complaint where Elkin’s relevant acts took place. On the one

hand, Plaintiff is a North Carolina resident; the last scheduled members meeting was

to take place in North Carolina; Joan has an office in North Carolina; Elkin has a

residence in North Carolina; and Plaintiff, through counsel, made a final demand

that the information requested be provided to Plaintiff (in North Carolina) by the

close of business on February 17, 2016, or otherwise Plaintiff would bring an action

to receive the information. Plaintiff did not receive the information and brought this

action as a result on February 18, 2016. On the other hand, Elkin is a Massachusetts

resident; Joan is a Delaware LLC with its principal place of business in

Massachusetts; and the first scheduled members meeting was to take place in
Massachusetts. Further, it is unclear where Joan maintains its books and records

and where inspection of such records would occur.

   41.    However, the Court concludes that it need not determine the situs of the

claim because, applying the law of either jurisdiction, Plaintiff’s claim for breach of

fiduciary duty must be dismissed.

                i.     Application of Massachusetts Law

   42.    Under Massachusetts law, the law of the state of organization governs the

liability of an LLC’s members and managers. Mass. Gen. Laws ch. 156C, § 47 (2015).

Here, because Joan is organized in Delaware, Massachusetts law requires that

Delaware law govern Plaintiff’s breach of fiduciary duty claim.

   43.    In order to establish a claim for breach of fiduciary duty under Delaware

law, a plaintiff must show that: (1) a fiduciary duty exists; and (2) the fiduciary

breached that duty. Estate of Eller v. Bartron, 

 (Del. 2011).

   44.    Unless otherwise provided in an LLC agreement, the managers and

controlling members of an LLC owe traditional fiduciary duties of care and loyalty to

the LLC members. Feeley v. NHAOCG, LLC, 

, 660−61 (Del. Ch. 2012);

CMS Inv. Holdings, LLC v. Castle, C.A. No. 9568-VCP, 

, at

*65 (Del. Ch. June 23, 2015); Kelly v. Blum, 

, at *3 (Del. Ch.

Feb. 24, 2010). A manager of an LLC qualifies as a fiduciary to the LLC and its

members because a manager has more than an arms-length, contractual relationship

with the LLC members and is vested with discretionary power to manage the LLC’s

business. CMS Inv. Holdings, LLC, 

, at *65−66.
   45.     Here, although Elkin is not named in the Operating Agreement as the

manager, Elkin is Joan’s President and CEO. Therefore, at the motion to dismiss

stage, Plaintiff has alleged sufficient facts from which it may be found that Elkin has

more than an arms-length, contractual relationship with Joan’s members and thus

owes fiduciary duties to Plaintiff. See 

 at *67−68 (finding that, at the motion to

dismiss stage, allegations that a member was responsible for running certain

operations of the LLC were sufficient allegations from which a fiduciary relationship

may be found).

   46.     Plaintiff states that Elkin breached his fiduciary duties in two respects: (1)

by failing to hold a members meeting; and (2) by refusing to allow Plaintiff to inspect

Joan’s books and records.       Plaintiff further alleges that her allegations will be

supplemented after inspection of the books and records.

   47.     “The fiduciary duty of care requires that [managers] . . . use that amount of

care     which   ordinarily   careful   and   prudent   men   would    use   in   similar

circumstances . . . .” In re Walt Disney Co., 

 (Del. Ch. 2005). The

fiduciary duty of loyalty requires that a manager act in the best interest of the

company, and that a manager put the interests of the company and its interest

owners before his own. 

. Here, Elkin’s failure to hold a members meeting

implicates the duty of care, rather than the duty of loyalty. See 

 (noting that the

duty of loyalty is implicated when a fiduciary stands on both sides of a transaction or

receives a personal benefit).
   48.    The standard for evaluating a breach of the duty of care is gross negligence.

McPadden v. Sidhu, 

 (Del. Ch. 2008); In re Walt Disney Co., 

; Prospect St. Energy, LLC v. Bhargava, 

, at

*21−22 (Del. Super. Ct. Jan. 27, 2016) (applying the gross negligence standard in the

LLC context and finding a claim for gross negligence is the same as a claim for breach

of fiduciary duty). Gross negligence is reckless indifference to the interest owners or

actions that are without the bounds of reason. McPadden, 

; In re

Walt Disney Co., 

; Prospect St. Energy, LLC, 

, at *21−22.

   49.    Here, Plaintiff requested a members meeting in order to obtain information.

(Compl. ¶ 17.) Plaintiff made her first request for a meeting on January 4, 2016.

(Compl. Ex. 2.) In response to that request, Elkin scheduled a meeting for February

1, 2016. Thereafter, Elkin cancelled that meeting and rescheduled it for February

11, 2016. For health reasons, Elkin cancelled the February 11 meeting. As a result,

Plaintiff made her second request on February 11, 2016 for a meeting to be held by

February 17, 2016. (Compl. Ex. 6.) This action was brought on February 18, 2016.

   50.    Neither the Operating Agreement nor the Delaware Act requires members

meetings. See 

(c) (stating that members may take

action without a meeting unless otherwise provided in an LLC agreement). Assuming

arguendo that Delaware law recognizes that failing to hold a members meeting may

constitute a breach of fiduciary duty under some circumstances, the Court concludes

that, under the facts alleged here, failing to hold a members meeting within one and
one-half months of Plaintiff’s request to have a meeting—especially when neither the

Operating Agreement nor the Delaware Act requires such a meeting—is insufficient

to satisfy the requirement of pleading gross negligence.

   51.    Moreover, the Court notes that the Complaint states that Plaintiff sought

a members meeting to obtain more information, and that Defendants breached their

fiduciary duties in numerous ways and the allegations will be supplemented after

Plaintiff inspects the books and records. The breach of fiduciary duty claim based on

the failure to hold a members meeting is heavily dependent on the Inspection Claim.

However, as discussed previously, the Delaware Court of Chancery has exclusive

jurisdiction over the determination as to whether Plaintiff is entitled to the

information sought.

   52.    As to the breach of fiduciary duty claim based on Elkin refusing to allow

Plaintiff to inspect the books and records, because the Delaware Court of Chancery

has exclusive jurisdiction over Plaintiff’s Inspection Claim and the determination of

whether Plaintiff is entitled to the information sought, this Court has no authority to

determine the propriety of Elkin’s refusal to permit Plaintiff to inspect the books and

records. Therefore, this Court has no authority to find that such refusal was a breach

of Elkin’s fiduciary duties to Plaintiff. In asking this Court to find Elkin breached

his fiduciary duties to Plaintiff by failing to allow Plaintiff to inspect Joan’s books and

records, Plaintiff is, in essence, asking this Court to determine whether Plaintiff is

entitled to the information requested, which this Court does not have the authority

to do.
   53.    Therefore, because failing to have a members meeting under these

circumstances does not amount to gross negligence, and because the Delaware Court

of Chancery has exclusive jurisdiction over the Inspection Claim and whether

Plaintiff is entitled to the information requested, Plaintiff’s breach of fiduciary duty

claim based on Elkin failing to hold a members meeting and refusing Plaintiff’s

inspection request must be dismissed.

                ii.    Application of North Carolina Law

   54.    In order to establish a claim for breach of fiduciary duty under North

Carolina law, a plaintiff must show that: (1) the defendant owed the plaintiff a

fiduciary duty; (2) the defendant breached his fiduciary duty; and (3) the breach of

fiduciary duty was a proximate cause of injury to the plaintiff. Farndale Co., LLC v.

Gibellini, 

, 

 (2006).

   55.    Under the North Carolina Act, a manager of an LLC must discharge his

duties in good faith, with the care of an ordinary prudent person, and in the best

interests of the LLC. N.C. Gen. Stat. § 57D-3-21(b).         The manager owes these

fiduciary duties to the LLC, not to individual members. Id.; see also Kaplan v. O.K.

Techs., L.L.C., 

, 

 (2009). Therefore, Elkin,

as the manager of Joan, does not owe fiduciary duties to Plaintiff, a member of Joan.

   56.    Under the North Carolina Act, members of an LLC are like shareholders in

a corporation in that members do not owe fiduciary duties to each other or the LLC,

except a controlling member owes fiduciary duties to minority members. Kaplan, 

, 

. A 50% owner is not a majority interest owner,
and thus a 50% owner does not owe fiduciary duties to the other interest owners. 

(holding that a member who owned a 41.5% interest, and who was the largest

percentage interest owner, was a minority member who did not owe fiduciary duties

to the other members); BOGNC, LLC v. Cornelius NC Self-Storage, LLC, 

 (N.C. Super. Ct. May 1, 2013) (concluding that a 50% owner is not a

majority interest owner and therefore does not owe fiduciary duties to the other

members). Here, Elkin owns 50% of the membership interest in Joan. Elkin is

therefore not a controlling member and does not owe fiduciary duties to Plaintiff.

   57.   Plaintiff contends that Elkin operates as a 75% interest owner because, in

addition to his 50% ownership interest, he controls Donna’s 25% ownership interest.

While North Carolina courts have recognized that individual minority shareholders

of a closely-held corporation who act in concert and collectively own the majority

interest in the corporation may owe fiduciary duties as the controlling shareholders,

North Carolina courts have not recognized that possibility in the context of an LLC.

See Norman v. Nash Johnson & Sons’ Farms, Inc., 

, 

 (2000); Raymond James Capital Partners, L.P. v. Hayes, 

 (N.C. Ct. App. 2016) (“[A]n exception to [the general] rule is that a controlling

shareholder owes a fiduciary duty to minority shareholders. To that end, our courts

have extended special protections to minority shareholders in closely held

corporations.” (emphasis added) (internal quotations omitted) (citation omitted)

(citing Norman, 

, 

)); Fiske v. Kieffer, 

, at *10 (N.C. Super. Ct. Mar. 9, 2016) (stating that the holding in
Norman has not been extended to minority interest owners in an LLC); Wortman v.

Hutaff, 

, at *22 (N.C. Super. Ct. Oct. 29, 2013) (finding that

two members who each owned a 33.33% interest were minority interest owners and

they “did not owe Plaintiffs fiduciary duties simply because together they owned a

majority interest in [the LLC] and could out-vote Plaintiffs”); Blythe v. Bell, 

, at *14 (N.C. Super. Ct. Apr. 8, 2013) (stating that the Norman rule

should not apply in the LLC context).

   58.   The Court concludes that, applying North Carolina law, Plaintiff has failed

to adequately allege that Elkin owed fiduciary duties to Plaintiff, and therefore the

breach of fiduciary duty claim must be dismissed.

   D.    Derivative Claims

   59.   In addition to the direct action, Plaintiff asserts the Claims derivatively on

behalf of Joan. North Carolina courts look to the law of the state in which an LLC is

organized to determine the procedural prerequisites to bringing a derivative claim.

Scott v. Lackey, 

, at *14−15 (N.C. Super. Ct. Dec. 3, 2012).

Furthermore, the North Carolina Act specifically provides that the law of the state in

which a foreign LLC is organized governs derivative proceedings, except for matters

regarding a stay of the proceedings, discontinuance or settlement, and payment of

expenses. N.C. Gen. Stat. § 57D-8-06. Thus, Delaware law governs whether Plaintiff

may bring a derivative action on behalf of Joan.

   60.   Under Delaware law, a member of an LLC may bring a derivative action “if

managers or members with authority to do so have refused to bring the action or if
an effort to cause those managers or members to bring the action is not likely to

succeed.” 

. “[T]he complaint shall set forth with

particularity the effort, if any, of the plaintiff to secure initiation of the action by a

manager or member or the reasons for not making the effort.” 

 § 18-1003. “[T]he

pleading burden imposed on the sponsor of derivative claims is more onerous [than

the pleading burden to survive a motion to dismiss for failure to state a claim]; it

requires pleading ‘with particularity’ to survive; one cannot rest after serving mere

notice of the claim asserted.” Spellman v. Katz, C.A. No. 1838-VCN, 

, at *17−18 (Del. Ch. Feb. 6, 2009). A court will not “guess those facts that

might support a derivative claim.” Id. at *22. The complainant must set forth

supporting factual allegations, and “[a] complaint devoid of factual specificity will fail

to provide the necessary basis for excusing demand.” Id. at *22−23.

   61.    Here, Plaintiff states in her Complaint that “[t]his Complaint including the

exhibits thereto sets forth the efforts to obtain a members meeting, access to the

corporate books and records, and an understanding of the health and competency of

Elkin . . . , as set forth in Del. [Code Ann. tit. 6,] § 18-1003.” (Compl. ¶ 39.) Although

the Complaint sets forth Plaintiff’s efforts to have a members meeting and inspect

Joan’s books and records, the Complaint does not set forth any efforts to cause the

members to bring this action. The efforts contemplated by section 18-1003 are those

efforts to cause the members to bring the lawsuit based on the failure to have a

members meeting and concealment of books and records—not Plaintiff’s efforts to

have a members meeting and to gain access to books and records. Thus, Plaintiff has
not made a demand on Joan’s members to bring this action pursuant to section 18-

1001, and Plaintiff was required to set forth with particularity the reasons why

demand would have been futile. See Spellman, 

.

   62.      In this regard, Plaintiff has only alleged that

         [t]his action is proper at this time because Elkin McCallum and Joan
         have not provided corporate records to a minority owner, have admitted
         that Joan is in financial distress, have admitted that Elkin McCallum
         has some health issues, and have not had a members meeting. It is not
         likely that further efforts to secure these action [sic] would be successful,
         per Del. [Code Ann. tit. 6,] § 18-1001.

(Compl. ¶ 40 (emphasis added).) The applicable standard is whether an effort to

cause Joan’s members to bring this lawsuit based on the failure to have a members

meeting and concealment of books and records would have been futile—not whether

further efforts by Plaintiff to have a members meeting and to gain access to books

and records would have been futile. There are no specific facts that provide the

necessary basis for excusing demand. See Spellman, 

, at

*20−22 (“One does not satisfy Delaware’s demand futility standards with the oft-

employed phrase that one cannot be expected to sue himself. To the contrary, [the

complainant] must show a substantial likelihood of [the other member’s] personal

liability before demand will be excused [for] lack of impartiality. . . . It is a rare case

in which a director or member’s actions are sufficiently egregious that a substantial

likelihood of personal liability exists.” (internal quotations omitted)).

   63.      Plaintiff has not pled with particularity her reasons for not making a

demand, and therefore Plaintiff has failed to comply with the procedural
prerequisites for bringing a derivative action. Therefore, Plaintiff’s derivative claims

must be dismissed.

                           V.     MOTION FOR A RECEIVER

   64.    Plaintiff’s Motion for a Receiver is made pursuant to N.C. Gen. Stat. § 57D-

6-04 and 

. The Motion for a Receiver requests that a

receiver be appointed “to marshal Joan’s assets, protect them, provide an accounting,

prevent waste, and manage Joan” because Joan is in imminent danger of insolvency

and irreparable harm will result to Plaintiff’s profits and rents if a receiver is not

appointed. (Compl. ¶¶ 27−29.)

   65.    Section 57D-6-04 of the North Carolina Act provides North Carolina courts

with authority to appoint a receiver of a North Carolina LLC; it does not provide

North Carolina courts with authority to appoint a receiver of an LLC organized in

another state. N.C. Gen. Stat. §§ 57D-1-03(13), (19), 57D-6-04. Thus, this Court does

not have authority to appoint a receiver of Joan pursuant to section 57D-6-04.

   66.    Section 18-805 of the Delaware Act provides that the Delaware Court of

Chancery may appoint a receiver of an LLC when the certificate of formation of an

LLC formed under the Delaware Act is cancelled by the filing of a certificate of

cancellation. 

(6), 18-805. No certificate of cancellation

has been filed, and, in any event, that statute provides the Court of Chancery with

authority to appoint a receiver of Joan; it does not provide this Court with such

authority. Thus, section 18-805 does not provide a basis for appointing a receiver of

Joan.
   67.    Pursuant to 

(4) and 1-507.1, a North Carolina court

may appoint a receiver over a foreign LLC’s property within North Carolina when the

LLC is in imminent danger of insolvency. 

(4), 1-507.1.

Appointment of a receiver is within the discretion of the trial court. Barnes v.

Kochhar, 

, 

 (2006). Appointment of a

receiver is a rare and drastic remedy, especially for solvent companies, and should be

used cautiously. Lowder v. All Star Mills, Inc., 

, 

 (1981). Appointment of a receiver has been found to be a proper remedy in cases

where there is fraud or gross misconduct in company management, incapacity or

neglect of those operating the company, evidence of diversion of company funds, and

refusal to permit inspection of corporate books combined with other grounds

justifying the appointment of a receiver. Id.

   68.    Assuming that Joan has property within North Carolina over which this

Court could appoint a receiver, the Court does not find that the allegations and proof

before the Court at this time warrant such a drastic remedy. Plaintiff states that

Joan is in imminent danger of insolvency and that Plaintiff has a right to profits and

rents that are in imminent danger of being secreted; however, there is no evidence of

fraud, gross misconduct, or incapacity of Joan’s management. Plaintiff states that

her allegations in support of appointing a receiver will be supplemented once Plaintiff

inspects Joan’s books and records, but the Court has concluded that the Delaware

Court of Chancery has exclusive jurisdiction over the Inspection Claim. In light of

the harshness of the remedy; the lack of evidence before the Court at this time
warranting such a harsh remedy; the Motion for a Receiver’s dependency on the

Inspection Claim; and the Delaware Court of Chancery’s exclusive jurisdiction over

such claim, the Court declines to exercise its discretion to appoint a receiver of Joan.

Therefore, the Motion for a Receiver is denied.

                                    VI.    CONCLUSION

   69.      For the foregoing reasons, the Court, in the exercise of its discretion, hereby

GRANTS Defendants’ Motion to Dismiss and DISMISSES without prejudice

Plaintiff’s claims, and DENIES Plaintiff’s Motion for a Receiver.

         SO ORDERED, this the 25th day of October, 2016.



                                            /s/ Michael L. Robinson
                                           Michael L. Robinson
                                           Special Superior Court Judge
                                             for Complex Business Cases