Unlike a majority owner of a corporation, the majority owner of an LLC does not owe minority members a fiduciary duty merely because of her majority status. Instead, there must be evidence of control over the LLC by the majority owner. Vanguard Pai Lung, LLC, et al. v. Moody, 2019 NCBC 38 (J. Conrad). As such, when the complaint alleges facts which, if proven, would show the majority owner controls the LLC, then a fiduciary claim has been stated and the majority owner can be liable for the breach of that duty.
Plaintiff Pai Lung Machinery Mill Co., Ltd (“PLMM”) is the majority owner of plaintiff Vanguard Pai Lung, LLC (“Vanguard”), a North Carolina limited liability company which makes sewing machines. Defendant Nova Trading USA, Inc. (“Nova Trading”) is the minority owner of Vanguard. Nova Trading is owned by defendant Moody, who is also the CEO of Vanguard. Per its Operating Agreement, Vanguard is managed by a five member board, four of whom are subject to appointment by PLMM and one member is appointed by Nova Trading. In 2017, PLMM and Vanguard brought claims against Moody and Nova Trading contending, inter alia, that Moody had siphoned funds from Vanguard. Nova Trading and Moody counterclaimed, with Nova Trading asserting a breach of fiduciary duty claim against PLLM. PLMM moved to dismiss, arguing that it did not owe Nova Trading any fiduciary duty.
The Business Court disagreed. The Business Court first recognized that a majority owner in a limited liability company can, in certain circumstances, owe a fiduciary duty to a minority member not to use its control to harm the minority. (Opinion, ¶41). While mere majority ownership of a corporation presumes majority control of the company, the Business Court held that such presumption does not exist in the LLC context because minority members are free to negotiate certain protections as part of the operating agreement of the company. To properly allege the existence of a fiduciary duty, a minority member of an LLC must allege actual acts of control over the board by the majority member. In refusing to dismiss the breach of fiduciary duty claim, the Business Court found that Nova Trading did not merely rely on PLMM’s majority ownership but that it had made factual allegations that, when taken as true, evidenced PLMM’s control over Vanguard and its board of managers.
Based upon this decision, an LLC should be aware that its majority owner who controls the company’s board might owe a duty to its minority owner to take no action which harms the minority owner.
Other additional legal holdings from the case:
- Asserting a breach of contract claim is a relatively low bar, and no evidence need be pled in the complaint showing the terms or the damages arising from any alleged breach. (Opinion, ¶¶20-21).
- While a claim for constructive fraud must be pled with particularity, the level of particularity is not the same as that required to prove actual fraud under N.C.R.C.P. 9(v). (Id., ¶44).
Categories: Key Business Court Decisions