Merrell v. Smith

Merrell v. Smith, 

.


STATE OF NORTH CAROLINA                    IN THE GENERAL COURT OF JUSTICE
                                               SUPERIOR COURT DIVISION
MECKLENBURG COUNTY
                                                 19 CVS 21650 [MASTER FILE]
                                                           Related Cases:
CARL E. MERRELL; LYLE RANSON;                             19 CVS 22027
JEANETTE RANSON; CRAIG S.                                 19 CVS 23665
MILLER; WANDA EDWARDS                              Also filed in 21 CVS 15205
MILLER; and ROBERT J. NASTASE,

                     Plaintiffs,
                                                  ORDER AND OPINION ON
v.                                               PLAINTIFFS’ MOTIONS FOR
                                                   SUMMARY JUDGMENT
JAMES M. SMITH; JENNIFER
SMITH; and CAROLINA BEER &
BEVERAGE GROUP, LLC f/k/a
CAROLINA BEER & BEVERAGE,
LLC,

                     Defendants.



     1.   THIS MATTER is before the Court on Plaintiffs’ Motions for Summary

Judgment, pursuant to Rule 56 of the North Carolina Rules of Civil Procedure (the

“Rule(s)”), seeking entry of judgment in Plaintiffs’ favor as to liability on their claims

for breach of fiduciary duty against Defendant James Michael Smith (“Mike Smith”),

filed in each of four factually related cases. The Plaintiffs’ Motions for Summary

Judgment and the corresponding four cases are: Cochrane, et al. v. Smith, et al., (19

CVS 23665) (“Cochrane”), (Cochrane, ECF No. 154), Merrell, et al. v. Smith, et al., (19

CVS 21650) (“Merrell”), (Merrell, ECF No. 144), Strack, et al. v. Smith, et al., (19 CVS

22027) (“Strack”), (Strack, ECF No. 201), and Short, et al. v. Smith, et al., (21 CVS
15205) (“Short”), (Short, ECF No. 47) (together, the “Motions”). 1 Because the Motions

raise the same legal issues and arguments, the Court considers the Motions together.

    2.      For the reasons set forth herein, the Court DENIES the Motions.

         Hemmings & Stevens, PLLC, by Aaron C. Hemmings, for Plaintiffs.

         Bell, Davis & Pitt P.A., by Edward B. Davis, and Parker Poe Adams &
         Bernstein LLP, by Michael G. Adams, Morgan H. Rogers, Nicholas H.
         Lee, and Alexandra Davidson, for Defendants Jennifer Smith and James
         Michael Smith.

         Alexander Ricks, PLLC, by Alice C. Richey, Benjamin Leighton, and
         Mary K. Mandeville, and Morgan, Lewis & Bockius, LLP, by Thomas
         Peter R. Pound and John A. Vassallo, for Defendants MSI Financial
         Services, Inc. and Metropolitan Life Insurance, Co.

         F. Lane Williamson, Administrator, for Defendant Estate of Richard C.
         Siskey.

Robinson, Judge.




1 The Merrell, Strack, Cochrane, and Short matters involve the same core allegation that the
Plaintiffs invested in Carolina Beer & Beverage Group, LLC (“CBB”) based on the financial
advice of the late Richard Siskey. The Plaintiffs allege that Mike Smith, Jennifer Smith, and
Richard Siskey engaged in a fraudulent insider trading scheme, which induced Plaintiffs to
transfer their respective ownership interests in CBB to Siskey prior to CBB being sold,
thereby causing Plaintiffs to miss out on the substantial profits resulting from the sale.

On 1 April 2020, the Court adopted a consolidated case caption with the Merrell action
designated as the “Master File” for the four actions. (Strack, ECF No. 49.) The order did not
formally consolidate the Merrell, Strack, Cochrane, and Short matters pursuant to Rule 42.
(See Strack, ECF No. 49.) However, the parties agreed in their Case Management Plan,
(Merrell, ECF No. 25), to coordination of certain discovery matters and motions practice
amongst the cases.

The sole plaintiff in Short voluntarily dismissed his claims against all defendants in that case
without prejudice, leaving the Merrell, Strack, and Cochrane matters as the three remaining.
On 31 December 2020, the Court sua sponte amended the 1 April 2020 order removing the
Short action from the case caption. (See, e.g., Strack, ECF No. 126.) The plaintiff in the Short
action later re-filed, but the case caption was not thereafter amended.
                                 I.    INTRODUCTION

   3.     This case arises out of an alleged fraudulent scheme carried out by Richard

C. Siskey (“Siskey”), Mike Smith, and Mike Smith’s wife, Jennifer Smith (“Jennifer

Smith,” together with Mike Smith, the “Smiths”). The Court previously recited in

detail the factual allegations surrounding this purported scheme in its 22 December

2020 Order and Opinion on Defendant Carolina Beverage Group, LLC’s motion to

dismiss in Strack, Merrell, and Cochrane. 2 See, e.g., Merrell v. Smith, 

, at *2–14 (N.C. Super. Ct. Dec. 22, 2020).

   4.     Plaintiffs are former members of Carolina Beverage Group, LLC f/k/a

Carolina Beer and Beverage (“CBB”), a North Carolina limited liability company.

This Opinion concerns only Plaintiffs’ claims for breach of fiduciary duty against Mike

Smith. The main issue raised by the Motions is whether Mike Smith owed Plaintiffs,

minority members in CBB, a fiduciary duty due to his majority ownership in CBB.

                           II.    FACTUAL BACKGROUND

   5.     The Court does not make findings of fact when ruling on motions for

summary judgment. “[T]o provide context for its ruling, the Court may state either

those facts that it believes are not in material dispute or those facts on which a

material dispute forecloses summary adjudication.”          Ehmann v. Medflow, Inc.,

, at *6 (N.C. Super. Ct. Sept. 26, 2017); see also Hyde Ins.

Agency, Inc. v. Dixie Leasing Corp., 

 (1975) (encouraging the



2 Plaintiffs voluntarily dismissed their claims against Defendant Carolina Beverage Group,

LLC with prejudice on 22 December 2021. (Cochrane, ECF No. 147; Merrell, ECF No. 137;
Strack, ECF No. 192; Short, ECF No. 18.)
trial court to articulate a summary of the relevant evidence of record to provide

context for the claims and the motion(s)).

    A.    The Parties

    6.    The plaintiffs in the Merrell matter are Carl E. Merrell, Lyle Ranson,

Jeanette Ranson, Craig S. Miller, Wanda E. Miller, and Robert J. Nastase (together,

the “Merrell Plaintiffs”). 3 (Second Am. Compl. ¶¶ 6, 8, 10–11, Merrell, ECF No. 24.) 4

    7.    The plaintiffs in the Strack matter are Jeffrey A. Strack, Penny N. Strack,

James C. Wilson, Pamela Boileau, Dallas Pendry, Jr., Mallory Johnson, Rita Dilling,

Carolyn Crozier, the Estate of Thomas J. Crozier, Jr., 5 and Kent Kalina (together,

the “Strack Plaintiffs”). (Second Am. Compl. ¶¶ 8–17, Strack, ECF No. 33.)




3 Plaintiff Robert J. Nastase died on 13 March 2022. (Merrell, ECF No. 167.) On 21
September 2022, Robert Todd Nastase was duly appointed the executor of Robert J. Nastase’s
estate in South Carolina. (Merrell, ECF No. 173, Ex. A.) Robert Todd Nastase, however, has
not been substituted for the deceased in this matter, as he has not demonstrated that he
qualifies as the personal representative for the Estate of Robert J. Nastase. (Merrell, ECF
No. 179, at 2.)

4Given the lengthy record in these matters, the Court cites to the Official Record with both
the ECF Nos. and the Record Exhibit numbers, where feasible, as follows, (ECF Nos. [ ] – [ ],
R. Ex. [ ]). Documents submitted by the parties are always cited with the case name, (Case
Name, ECF No. [ ], R. Ex. [ ]). To the extent a document has been filed in more than one of
these matters, or multiple documents substantiate the same fact or issue, the Court cites
only to one filing in order to keep this Order and Opinion and the citations herein from being
unduly lengthy.

5 Plaintiff Thomas J. Crozier, Jr. died on 13 September 2021.  (Strack, ECF No. 243, ¶ 1.) On
8 December 2021, Carolyn B. Crozier was duly appointed the executor of the decedent’s
estate. (Strack, ECF No. 243, ¶ 1.) Pursuant to a motion filed 28 March 2022, (Strack, ECF
No. 241), the Court ordered that Carolyn B. Crozier, as the Executor of the Estate of Thomas
J. Crozier, Jr., be substituted for Thomas J. Crozier, Jr. as Plaintiff, (Strack, ECF No. 243,
¶ 3).
   8.     The plaintiffs in the Cochrane matter are Jeff Cochrane and Gary

Cochrane, as administrators of the Estate of Ralph N. Cochrane. (Am. Compl. ¶¶ 1,

8, Cochrane, ECF No. 7.)

   9.     The plaintiff in the Short matter is Charles Short (“Short”). (Am. Compl.

¶ 8, Short, ECF No. 11.)

   10.    The Court refers to the Merrell, Strack, Cochrane, and Short plaintiffs

herein as “Plaintiffs” when referencing them jointly.

   11.    Defendant Mike Smith is the co-founder and former CEO of CBB. (Second

Am. Compl. ¶ 18, Strack, ECF No. 33.)

   12.    Defendant Jennifer Smith was an employee of CBB and is married to Mike

Smith. 6 (Second Am. Compl. ¶ 19, Strack, ECF No. 33.)

   B.     Relevant Events Leading up to the Plaintiffs’ CBB Unit Sales in
          2007 and 2008

   13.    CBB filed its Articles of Organization with the North Carolina Secretary of

State on 24 September 1997. (Articles of Organization, Merrell, ECF 138.36, R. Ex.

9.) CBB was organized by Mike Smith and John Stritch, CBB’s co-founder and

President, as a manager-managed LLC. (Merrell, ECF 138.36, R. Ex. 9.)

   14.    Section 4.1 of the CBB 2000 Operating Agreement provided that Mike

Smith and John T. Stritch would be the managers of CBB. (Am. Restated Operating

Agreement of CBB 5, Merrell, ECF 138.57, R. Ex. 70 [“2000 Operating Agreement”].)

Section 4.2 provided that the managers “shall manage and control the business and

affairs of the Company to the best of their ability and shall use their best efforts to


6 Jennifer Smith is not a party to these Motions.
carry out the purposes of the Company as set forth herein.”        (2000 Operating

Agreement 5.) Section 9.9 required the “unanimous consent of all of the Members” to

amend the Operating Agreement. (2000 Operating Agreement 23.)

   15.   The undisputed evidence shows that in 2000, Mike Smith asked Siskey to

help him raise start-up capital for CBB. (Dep. James Michael Smith 94:12–95:3,

96:17–100:17, Merrell, ECF No. 138.2, R. Ex. Smith-1 [“M. Smith Dep.”].) Further,

the undisputed evidence shows that Mike Smith and Siskey agreed that Siskey would

circulate a private placement memorandum to raise equity investments in CBB in

order to identify and introduce potential investors to Mike Smith and John Stritch.

(See M. Smith Dep. 94:20–95:1, 107:3–112:10; CBB Private Placement Memo 20,

Merrell, ECF No. 138.56, R. Ex. 67 [“CBB PPM”].)

   16.   The CBB Private Placement Memorandum (“PPM”) provided that CBB had

the right to issue up to 100 units and that one CBB unit was equal to a one percent

(1%) membership interest in the company. (CBB PPM 21.) Through the PPM, CBB

offered to sell a minimum of 15 units and a maximum of 27.5 units to investors, or

between 15% and 27.5% of the company. (CBB PPM, App. VI, 2.)

   17.   Plaintiffs are former members of CBB who purchased their units in the

company between 23 January 2001 and 22 September 2003. (Merrell, ECF No.

138.32, R. Ex. Smith-31.) In 2001, the purchase price for one unit of CBB was

$100,000 and a half (.5) unit was $50,000. (Merrell, ECF No. 138.32, R. Ex. Smith-

31.) The price to purchase units changed in subsequent years. (See, e.g., Merrell,

ECF No. 138.32, R. Ex. Smith-31) (chart containing information regarding Plaintiffs’
unit purchases, distributions, and unit sales, showing, for example, that Kent Kalina

purchased a half (.5) unit in 2003 for $54,500).

   18.    Siskey became a member of CBB on 15 September 2000. (Merrell, ECF No.

156.26, R. Ex. 15.) Siskey originally purchased five units of CBB, (M. Smith. Dep.

97:11–97:19; Merrell, ECF No. 156.26, R. Ex. 15), but thereafter sold his units over

time. On 16 December 2003, Siskey sold the last of the units he then owned (.25

units) to Plaintiff Roy Lynam. (Strack, ECF No. 191.267, R. Ex. 823.)

   19.    On 11 December 2006, Mike Smith emailed Siskey stating that he was

“being approached by an investment group seeking to purchase [CBB].” He further

advised Siskey: “I’ll keep you posted . . . I’m certainly not in a rush as the best is yet

to come for [CBB]. Word on the street is we have the Cap Can deal. This franchise

is worth about 6-7 million net profit annually.” 7 (Merrell, ECF No. 138.39, R. Ex. 24

[“2006 Email”].)

   20.    Three months after providing Siskey with this information, on 12 March

2007, Mike Smith and John Stritch sent a letter to members informing them of the

upcoming annual meeting to be held on 29 March 2007. 8 (Merrell, ECF No. 138.61,

R. Ex. 94 [“Mar. 2007 Letter”].)       The letter contained updates regarding CBB’s



7 The CapCan line was part of an agreement between CBB and Rexam for CBB to install and

put into production a new bottling line. (See M. Smith Aff. ¶ 109, Merrell, ECF No. 139, R.
Ex. 1.) The contract with Rexam was signed by Mike Smith on 28 March 2007. (M. Smith
Aff. ¶ 33(o), Merrell, ECF No. 139, R. Ex. 1.)

8 The undisputed evidence shows that an email was sent on 2 March 2007 by Jennifer Smith

to the “Partner[s]” of CBB informing them of the 29 March 2007 “annual business meeting.”
(Strack, ECF No. 191.77, R. Ex. 93.) The email stated that a “formal letter and invitation to
the meeting from CEO, [Mike] Smith and President, John Stritch will be coming to you via
mail.” (Strack, ECF No. 191.77, R. Ex. 93.)
financial performance and noted a sales increase of 400% from $5.6 million in 2005

to $24 million in 2007 due to a new can line which was being utilized to 100%

capacity. 9 (Mar. 2007 Letter 1–2; Aff. Mike 

(k), Merrell, ECF No. 139, R.

Ex. 1 [“M. Smith Aff.”] (describing the 2005 company sales).) The letter further

informed members that an additional bottling line would be installed in November

2007, which would lead to a separate revenue stream for the company. (Mar. 2007

Letter 2.)

    21.      On 1 October 2007, Mike Smith and John Stritch sent a letter to members

(the “October 1 Letter”) providing a report on CBB’s mid-year performance, an update

on building expansions, and an evaluation of next steps for the business. (Merrell,

ECF No. 138.64, R. Ex. 104 [“Oct. 1 Letter”].) In relevant part, the letter informed

members that net income for the first half of 2007 was $5 million as compared to just

over $2 million for the same period in 2006. (Oct. 1 Letter 1.) The letter estimated

that net income for 2007 would exceed $7 million but that “further distribution of

earnings is speculative at best[.]” (Oct. 1 Letter 1.) The letter also informed members



9 In 2001, CBB owned breweries in Boone, North Carolina and in Mooresville, North
Carolina, and performed, among other things, packaging and production of bottled products.
(Merrell, ECF No. 138.165, R. Ex. 607.) By early 2002, CBB had purchased brand equity in
other beer lines to expand its existing portfolio of beers. (Merrell, ECF No. 138.166, R. Ex.
608.) It had expanded its effort to attract contract packaging work, such as can and bottling
lines, which would offer increased revenues, and ultimately, CBB contracted with Mark
Anthony Brands, which owned Mikes Hard Lemonade, Mission Hill Winery, and Beringer
Winery. (Merrell, ECF No. 138.166, R. Ex. 608.) Under that agreement, Mark Anthony
Brands sent 95% of all liquid, flavoring, and packaging to CBB to produce and package the
final product. (Merrell, ECF No. 138.166, R. Ex. 608.) By late 2002, these packaging projects
were the prime revenue generating vehicle for CBB. (Merrell, ECF No. 138.168, R. Ex. 610.)
The same remained true in later years, and by 2006, the canning and bottling lines were
showing the greatest growth with the addition of can production lines as the company’s plan
for future growth. (Merrell, ECF No. 138.128, R. Ex. 292.)
that CBB was expanding its plant at a cost of $4.2 million and investing in new

equipment at a price of $6.5 million, $4 million of which was financed by the

packaging supplier. (Oct. 1 Letter 2.) Finally, the letter stated that CBB would

“begin due diligence regarding a potential sale of the company” within the “next

twelve months” but that “[a]ny potential sale of the company at this point is truly

speculative.” (Oct. 1 Letter 3.)

   22.    In or around October 2007, Mike Smith made CBB’s corporate counsel,

Wishart, Norris, Henninger & Pittman P.A. (“Wishart Norris”), aware that Siskey

had knowledge of the possible sale of the company and was in the process of

purchasing membership interests in CBB from investors who lacked this information.

   23.    On 3 October 2007, Wishart Norris hand-delivered a letter to Siskey (the

“October 3 Letter”) warning him that it is unlawful “to omit . . . a material fact in

connection with the purchase or sale of any security. . . .” (Merrell, ECF No. 138.38,

R. Ex. 23 [“Oct. 3 Letter”].) The letter warned Siskey that if he had knowledge

regarding CBB and “its future plans, including plans to sell[,]” then he must share

that knowledge with the members of CBB whose units Siskey intended to buy. (Oct.

3 Letter 1.) Further, the letter stated that Mike Smith would withhold his consent

from transfers of any interests in CBB until “all members of the company” were made

aware of management’s plans. (Oct. 3 Letter 2.) The letter stated that the firm and

Mike Smith “believe this action is prudent given the possible liability that may be

incurred . . . if any more sales of interests occur without all parties having knowledge

of all the relevant information.” (Oct. 3 Letter 2.)
   24.      Following the October 1 and 3 Letters, CBB did not authorize any

agreements to sell units in CBB until 15 October 2007. (See Strack, ECF Nos.

191.131, R. Ex. 266, 191.247, R. Ex. 696; Merrell, ECF No. 138.55, R. Ex. 66.)

   25.      Plaintiffs thereafter sold their CBB units to Siskey between 15 October

2007 and 27 March 2008. (See, e.g., Strack, ECF Nos. 191.131, R. Ex. 266, 191.247,

R. Ex. 696, 191.224, R. Ex. 531; Merrell, ECF No. 138.55, R. Ex. 66.)

   C.       The Amendment to the CBB Operating Agreement and the Effect
            on Plaintiffs’ Unit Sales

   26.      All Plaintiffs sold their units to Siskey using the “Consent” method,

pursuant to Sections 7.1(c)(i) and 7.1(e) of the 2003 CBB Operating Agreement. 10

(2000 Op. Agreement 16–18.) Under this method, a member could transfer units to

an individual, so long as the member obtained the “prior written consent of Members

holding at least sixty five percent (65%) of the Percentage Interests held by all

Members.” (2000 Op. Agreement § 7.1(c)(i); see also Cochrane, ECF No. 166.29, R.

Ex. 542.)

   27.      Members selling their interests pursuant to the Consent method were

required to sign Assignment and Purchase Agreements (“APA(s)”), which

demonstrated their assent to the transaction and named who was purchasing the

units, while the members giving approval for such transfers signed Consent to




10 The 2000 Operating Agreement was amended in 2003.    (See Merrell, ECF No. 139.3, R. Ex.
Mike-2.) The only change relevant to the Motions was to change the unit sale permission
requirement from unanimous written member approval to only 65% written member
approval. (See Merrell, ECF No. 139.3, R. Ex. Mike-2.) Therefore, the Court cites herein to
the 2000 Operating Agreement or 2007 Operating Agreement, unless otherwise referencing
the changed language from the 2003 amendment.
Transfer of Membership Interest documents (“Consent Agreement(s)”). (See, e.g.,

Strack, ECF No. 191.229, R. Ex. 600.) Members using the Consent method to sell

their units were required to have both documents executed to transfer their interest

to the purchaser.

   28.    On 26 October 2007, CBB amended its Operating Agreement (“2007

Operating Agreement”). (Am. Restated Operating Agreement of CBB, Merrell, ECF

No. 138.71, R. Ex. 116 [“2007 Am. Op. Agreement”].) A letter sent by CBB on 27

October 2007 informed CBB’s members of changes to the Operating Agreement.

(Merrell, ECF No. 138.70, R. Ex. 115 [“Oct. 27 Letter”].) Three categories were

modified: (1) provisions relating to tax compliance; (2) provisions to allow for tax

distributions to an owner of record during the tax year; and (3) a provision to allow

majority rather than unanimous member approval to amend the Operating

Agreement. (Oct. 27 Letter.)

   29.    The amendments did not change the methods of sale of CBB units. (See

generally 2007 Am. Op. Agreement.) However, rather than the prior 65% written

approval requirement to use the Consent method, the amendments permitted the

method’s use if only 51% of the “voting ownership interests” approved. (2007 Am. Op.

Agreement 14, § 7.1(c)(i).)

   30.    Mike Smith and John Stritch signed their approval to the amendments on

26 October 2007. (2007 Am. Op. Agreement 30.) Unanimous member approval was

not obtained until 14 December 2007. (Written Consent 2, Merrell, ECF No. 138.97,

R. Ex. 243; All Written Consents, Merrell, ECF No. 138.104, R. Ex. 256.)
   31.      Eleven plaintiffs sold their CBB units to Siskey prior to the effective date

of the amendments: James Wilson, Carl Merrell, Pamela Boileau, Jeffrey and Penny

Strack, Kent Kalina, Carolyn Crozier, the Estate of Thomas J. Crozier, Jr., Jeff

Cochrane and Gary Cochrane, as administrators of the Estate of Ralph N. Cochrane,

and Roy Lynam. (Strack, ECF No. 191.131; Merrell, ECF No. 138.107; Strack, ECF

Nos. 191.247, 191.67, 191.203–204, 191.185, 191.187; Cochrane, ECF No. 148.124;

Strack, ECF No. 191.269.)

   32.      The remaining nine plaintiffs sold their units to Siskey after the

amendments became effective: Mallory Johnson, Robert Nastase, Rita Dilling, Lyle

and Jeanette Ranson, Craig and Wanda Miller, Charles Short, and Dallas Pendry,

Jr. (Strack, ECF No. 191.75; Merrell, ECF No. 138.184; Strack, ECF No. 191.229;

Merrell, ECF Nos. 138.109, 138.110, 138.58; Short, ECF No. 36.85; Strack, ECF No.

191.224.)

   D.       Relevant Events that Followed the Sales

   33.      On 27 May 2010, CBB entered into an Agreement and Plan of Merger with

SunTx affiliates Southern Belle Holdings, LLC and Southern Belle Merger Sub, LLC,

which, after closing on 6 August 2010, resulted in a substantial restructuring of CBB,

with CBB effectively merging with SunTx affiliate Southern Belle Merger Sub, LLC,

and produced significant payments to CBB members.           (M. Smith Aff. ¶¶ 129–30,

133.)

   34.      At the time of the merger with SunTx, Siskey owned approximately 15.75

units of CBB, and he received approximately $22,158,642.18 in distributions from
CBB between 2009 and 2013. (See Second Am. Compl. ¶ 132, Strack, ECF No. 33.)

Siskey purchased 12.50 of his 15.75 units for approximately $3,180,000.00. (Merrell,

ECF No. 138.32, R. Ex. Smith-31.)

                        III.   PROCEDURAL BACKGROUND

   35.     The Court sets forth here only those portions of the procedural history

relevant to its determination of the Motions.

   36.     The Merrell, Strack, and Cochrane matters were each initiated in late 2019.

Merrell was filed on 8 November 2019, (Merrell, ECF No. 2), Strack on 14 November

2019, (Strack, ECF No. 3), and Cochrane on 12 December 2019, (Cochrane, ECF No.

3). The plaintiffs in each of these actions filed amended complaints on 28 January

2020, (Merrell, ECF Nos. 18, 19; Strack, ECF Nos. 27, 28; Cochrane, ECF No. 7), and

those in Merrell and Strack filed Second Amended Complaints in those actions on 10

March 2020, (Merrell, ECF Nos. 23, 24; Strack, ECF Nos. 32, 33).

   37.     The Short action was initiated on 20 September 2021, (Short, ECF No. 3),

and subsequently amended as of right on 20 October 2021, (Short, ECF No. 11).

   38.     The Smiths filed answers to the Second Amended Complaints in Merrell,

(Merrell, ECF No. 39), and Strack, (Strack, ECF No. 54), and to the Amended

Complaint in Cochrane, (Cochrane, ECF No. 38), on 23 April 2020. On 17 November

2021, the Smiths filed their answer to the Amended Complaint in Short. (Short, ECF

No. 12.)
   39.   Following full briefing, the Court held a hearing on the Motions and related

motions on 25 and 26 August 2022 (the “Hearing”), at which all parties to the Motions

were present and represented by counsel.

   40.   On 2 September 2022, Plaintiffs’ counsel filed Plaintiffs’ verifications to the

allegations of the operative complaints. (See, e.g., Strack, ECF Nos. 260, 260.1–.10.)

Defendants’ counsel subsequently filed a joint objection to the verifications and

moved to strike. (See, e.g., Strack, ECF No. 263.) After full briefing, the Court

overruled the objection and denied the motion to strike. (Strack, ECF No. 268;

Merrell, ECF No. 177; Cochrane, ECF No. 185; Short, ECF No. 74.) However, the

Court also ruled that it would not consider the operative complaint of each Plaintiff

as an affidavit for purposes of the pending summary judgment motions because the

verifications were untimely. (Strack, ECF No. 268; Merrell, ECF No. 177; Cochrane,

ECF No. 185; Short, ECF No. 74.)

   41.   The Motions are ripe for resolution.

                             IV.    LEGAL STANDARD

   42.   Summary judgment is appropriate “if the pleadings, depositions, answers

to interrogatories, and admissions on file, together with the affidavits, if any, show

that there is no genuine issue as to any material fact and that any party is entitled

to a judgment as a matter of law.” N.C.G.S. § 1A-1, Rule 56(c). “A ‘genuine issue’ is

one that can be maintained by substantial evidence.” Dobson v. Harris, 

 (2000).
   43.      The moving party bears the burden of showing that there is no genuine

issue of material fact, and that the movant is entitled to judgment as a matter of law.

Hensley v. Nat’l Freight Transp., Inc., 

 (2008). The movant

may make the required showing by proving that “an essential element of the opposing

party’s claim does not exist, cannot be proven at trial, or would be barred by an

affirmative defense, or by showing through discovery that the opposing party cannot

produce evidence to support an essential element of her claim.” Dobson, 

 (citations omitted).

   44.      “Once the party seeking summary judgment makes the required showing,

the burden shifts to the nonmoving party to produce a forecast of evidence

demonstrating specific facts, as opposed to allegations, showing that he can at least

establish a prima facie case at trial.” Gaunt v. Pittaway, 

, 784–85

(2000).

   45.      The Court must view the evidence in the light most favorable to the

nonmovant. Dobson, 

. However, the nonmovant

         may not rest upon the mere allegations or denials of their pleading, but
         their response, by affidavits or as otherwise provided in this rule, must
         set forth specific facts showing that there is a genuine issue for trial. If
         [the nonmovant] does not so respond, summary judgment, if
         appropriate, shall be entered against [the nonmovant].

N.C.G.S. § 1A-1, Rule 56(e).

                                      V.     ANALYSIS

   46.      Plaintiffs argue that summary judgment is proper against Mike Smith on

their claims for breach of fiduciary duty because he owed Plaintiffs a “legal fiduciary
duty” which the undisputed evidence establishes that he breached as a matter of

law. 11 (See Pls.’ Mem. Supp. Summ. J. 10, Merrell, ECF No. 145 [“Br. Supp. Mot.”].)

     47.   “To establish a claim for breach of fiduciary duty, a plaintiff must show that:

(1) the defendant owed the plaintiff a fiduciary duty; (2) the defendant breached that

fiduciary duty; and (3) the breach of fiduciary duty was a proximate cause of injury

to the plaintiff.” Sykes v. Health Network Sols., Inc., 

 (2019).

     48.   “The North Carolina Limited Liability Company Act does not create

fiduciary duties among members. As a general rule, members of a limited liability

company are like shareholders in a corporation in that members do not owe a

fiduciary duty to each other or to the company.” Emrich Enters. v. Hornwood, Inc.,

, at **42 (N.C. Super. Ct. Feb. 15, 2022) (internal marks and

citations omitted). “The rights and duties of LLC members are ordinarily governed

by the company’s operating agreement, not by general principles of fiduciary

relationships.” 

 (quoting Strategic Mgmt. Decisions v. Sales Performance Int’l,

, at *10–11 (N.C. Super. Ct. Aug. 7, 2017)).

     49.   However, in some circumstances, “a holder of a majority interest who

exercises control over the LLC owes a fiduciary duty to minority interest members.”

Vanguard Pai Lung, LLC v. Moody, 

, at *17 (N.C. Super. Ct.

June 19, 2019). “Thus, when the operating agreement confers controlling authority




11Plaintiffs’ Memorandum in Support of the Motion for Summary Judgment in the four
actions is nearly identical, and thus, as stated herein at footnote 4, the Court cites only to
one.
on the majority member, [the majority member] owes a duty not to use its control to

harm the minority, assuming no other provision disclaims such a duty.” Id. at *21.

   50.    This Court in Vanguard specified several factors which may reflect a

majority manager’s exercise of sufficient control over the LLC to create a fiduciary

duty owed to the minority: (1) control over the LLC’s board of directors; (2) the ability

to dissolve the LLC; (3) the ability to put the LLC into bankruptcy; and (4) the ability

to amend the LLC’s operating agreement without approval from other members. Id.

at *19–21. The exercise of control through these means weighs in favor of finding a

fiduciary duty from majority member to the LLC’s minority members. Id. at *21.

   51.    At the same time, however, “only when one party figuratively holds all the

cards -- all the financial power or technical information, for example -- have North

Carolina courts found that the special circumstance of a fiduciary relationship has

arisen.” Kaplan v. O.K. Techs., LLC, 

 (2009). “The scope of

this exception [to the general proposition that LLC members do not owe a fiduciary

duty to each other], borrowed from precedents governing corporations, remains

unsettled and ‘this Court has cautioned against a broad application because of the

fundamental differences between LLCs and corporations.’ ” Bennett v. Bennett, 

, at *19 (N.C. Super. Ct. Mar. 15, 2019) (quoting Strategic Mgmt.

Decisions, 

, at *11). Courts have routinely refused to extend

precedents borrowed from corporations to LLCs because minority members have a

much greater ability to negotiate for protections in the operating agreement than do

shareholders in the corporate context. See Bennett, 

, at *20;
Fiske v. Kieffer, 

, at *10 (N.C. Super. Ct. Mar. 9, 2016); Island

Beyond, LLC, 

, at *15–16 (dismissing a claim for breach of

fiduciary duty against the LLC’s manager, even though the operating agreement

provided the manager “complete authority to ‘sell, exchange, transfer or convey any,

all or substantially all of the assets of the company,’ without member approval”).

   52.    Plaintiffs argue that, as the majority member of CBB, Mike Smith owed

them a fiduciary duty. (Br. Supp. Mot. 9.) They argue that Mike Smith breached

that duty when he provided Siskey with inside information unavailable to Plaintiffs—

in particular the information contained in the December 2006 email from Mike Smith

to Siskey. (Br. Supp. Mot. 9.) Plaintiffs further argue that they “relied on information

omitting material facts which proximately caused a loss of liquidation funds” to

Siskey. (Br. Supp. Mot. 9.) Plaintiffs thus contend that, had they known about the

real value of their ownership stake in CBB and the interest of third parties in buying

the company, they would not have sold their units when they did. (Br. Supp. Mot.

10.)

   53.    Mike Smith contends in opposition that he did not owe Plaintiffs a fiduciary

duty. (Mike Smith Br. Opp. Mot. 23, Merrell, ECF No. 157 [“Opp. Br.”].) He argues

that, even with 52% ownership, he did not control CBB or dominate minority

members’ interests or rights, and that Plaintiffs do not argue otherwise—rather they

rely solely on Mike Smith’s status as majority member. (Opp. Br. 25.)

   54.    The Court agrees with Mike Smith that he did not owe Plaintiffs a fiduciary

duty as a matter of law solely on the basis that he was a majority member, given that
it is well settled that the rights and duties of LLC members are governed by the LLC’s

operating agreement. See Emrich Enters., 

, at **42. To the

contrary, to prevail, Plaintiffs must also establish that Mike Smith actually had, and

exercised, control over CBB in order to prove that he owed them a fiduciary duty. See

Vanguard, 

, at *17, *21.

   A.     Plaintiffs who sold to Siskey under the 2003 Operating Agreement

   55.    Prior to the 2007 amendment to the CBB Operating Agreement, Mike

Smith was unable to unilaterally exercise control over CBB members under any of

the four Vanguard factors. He did not have exclusive managerial control over the

LLC’s board of directors, he did not have the exclusive ability to dissolve the company,

(see 2000 Operating Agreement 11, § 6.1), and he did not have the ability to

unilaterally amend the Operating Agreement, as unanimous approval of the

members was required, (see 2000 Operating Agreement § 9.9).             The Operating

Agreement did not address a manager’s ability to declare bankruptcy.

   56.    While Mike Smith was the majority member of CBB when the first group

of Plaintiffs sold their units pursuant to the 2003 amendments to the 2000 Operating

Agreement, he did not hold all of the financial power or technical information of CBB

such that a fiduciary relationship arose between Mike Smith and the minority

members as a matter of law. In fact, the Operating Agreement precluded the LLC’s

managers from taking certain actions without the approval of either 100% or 75% of

the members.     It also provided minority members with the right to access the

company’s “financial books, records and documents during normal business hours”
and make copies of “any of them” upon reasonable notice to the LLC. (2000 Op.

Agreement 7, § 4.4, 9–10, § 5.2.) The Operating Agreement also permitted members

to request “information regarding the status of the business and the financial

condition of the Company” and, among other things, “such other information

regarding the affairs of the Company as is just and reasonable.” (2000 Op. Agreement

10, § 5.2.)

   57.        Further, Mike Smith did not have the exclusive ability to permit Plaintiffs

to sell their ownership interest in CBB—65% member approval on unit sales was

required under the 2003 amendments to the 2000 Operating Agreement, and Mike

Smith could only provide 52% member approval if acting alone. (See, e.g., Short, ECF

No. 36.54, R. Ex. 244) (identifying numerous Consent Agreements signed by Mike

Smith and three others prior to the 2007 amendments).

   58.        Accordingly, the Court concludes that plaintiffs James Wilson, Carl

Merrell, Pamela Boileau, Jeffrey and Penny Strack, Kent Kalina, Carolyn Crozier,

individually and as the executor of the Estate of Thomas J. Crozier, Jr., Jeff Cochrane

and Gary Cochrane, as administrators of the Estate of Ralph N. Cochrane, and Roy

Lynam have failed to establish that Mike Smith exercised sufficient control of the

LLC to owe them a fiduciary duty as a matter of law. Summary judgment on these

plaintiffs’ claims for breach of fiduciary duty must therefore be DENIED.

   B.         Plaintiffs who sold to Siskey under the 2007 Operating Agreement

   59.        After the 2007 Operating Agreement became effective on 18 December

2007, Mike Smith, who held a 52% interest in CBB, was permitted to act unilaterally
with respect to the sale of the remaining Plaintiffs’ units and did in fact act

unilaterally in consenting to the sale of their CBB units. (See, e.g., Short, ECF No.

36.54, R. Ex. 244.) Mike Smith was also able to unilaterally amend the Operating

Agreement.    (See 2007 Am. Op. Agreement 21, § 9.9.)         While these powers are

indicative of some control, they establish only one of the four Vanguard factors, which,

alone, is insufficient to establish that Mike Smith effectively controlled CBB and thus

owed CBB’s minority members a fiduciary duty as a matter of law.

   60.    Additionally, Section 4.7 of the 2007 Operating Agreement provides that

“any Member or Manager may engage independently or with others in other business

ventures of every nature and description even if competitive with the business of the

Company.” (2007 Am. Op. Agreement 8.) The 2007 Operating Agreement does not

otherwise provide for any fiduciary or fiduciary-like duties and, in fact, is reasonably

interpreted to renounce such duties. See Bennett, 

, at *16–17

(providing that where provisions in an operating agreement “disclaim fiduciary or

fiduciary-like duties on the part of members or managers[,]” it is evidence supporting

a conclusion that no fiduciary duties were owed). After the amendment, the plain

language of the 2007 Operating Agreement still provided minority members with the

ability to investigate and request documents as described above.             This, too,

undermines Plaintiffs’ contention that Mike Smith owed them a fiduciary duty as a

matter of law.

   61.    Finally, given that the scope of this “control” exception is “unsettled” and

North Carolina courts have cautioned against its broad application, the Court is not
prepared to conclude that Mike Smith owed Plaintiffs a fiduciary duty as a matter of

law given the disputed facts, discussed above, concerning the degree to which he

exercised control over CBB.

   62.     Therefore, the Court concludes that plaintiffs Mallory Johnson, Robert

Nastase, Rita Dilling, Lyle and Jeanette Ranson, Craig and Wanda Miller, Charles

Short, and Dallas Pendry, Jr. have failed to establish that they are entitled to

judgment as a matter of law against Defendant James Michael Smith as to liability

on their breach of fiduciary duty claim.

   63.     Given that Plaintiffs have not met their burden on the Motions as to the

first required element of the breach of fiduciary duty claim, the Motions are DENIED,

and the Court need not and does not address alternative arguments made in support

of the Motions.

                               VI.         CONCLUSION

   64.     THEREFORE, for the foregoing reasons, the Court hereby DENIES the

Motions.



         SO ORDERED, this the 13th day of December, 2022.




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