This blog, written by Thomas E. Rutledge, focuses primarily on business entity law in Kentucky. Postings on contract law, contractual and statutory construction, and the entity law of other jurisdictions appear as well. There may as well be some random discussions of classical, medieval and renaissance history.
Thursday, November 13, 2014
North Carolina Court Considers Authority to Hire Legal Counsel on Behalf of LLC and Grounds for Judicial Dissolution
North Carolina Court Considers
Authority to Hire Legal Counsel on Behalf
of LLC and Grounds for Judicial Dissolution
In a recent decision from North
the question of who has authority, when one member brings a suit against the LLC, to hire legal counsel on behalf of that LLC. The court addressed as well the standard for judicial dissolution of an LLC, a decision which has application in Kentucky due to the similarity of the statutory formulae. Battles v. Bywater, LLC, 2014 NCBC 52, 2014 WL 5512304 (October 31, 2014).
Battles and Rogers, each individuals, formed two North
and Roger were each 50% owners in each LLC;
they were also managers of each LLC. Eventually
would break down, it being asserted that Rogers inappropriately
accident.At least Bywater had been represented
by the Hart Law group (“Hart”), and Rogers consulted
with Heart as to how to protect the LLC from, what Battles alleged, was Rogers’ inappropriate
conduct. Battles began moving the bank account of Bywater among various banks at which Rogers did not have signature authority. Invariably the
accounts were frozen when the banks were made aware of the dispute, and they were again moved. Eventually the
account came to rest at a bank at which both Battles and Rogers had signature authority.
Rogers retained Asheville Law group (“Asheville”) to represent him versus Battles as to Bywater. Battles filed
suit seeking, among other claims, the judicial dissolution of each LLC. Rogers then terminated Asheville
as his personal counsel
and retained it on behalf of the two LLCs, Bywater and Agiqua, against Battles. Rogers then sought to effect Battles’
expulsion from Bywater on the grounds that Battles’ movement of the Bywater bank accounts justified
Battles moved to disqualify Asheville as counsel to the LLCs on the grounds that Rogers, as a 50% member and one of two managers of each of the LLCs, did not constitute a “majority” enabled to act. Rogers responded that
a written operating agreement
was expelled, leaving at a single-member LLC. As to Agiqua, Rogers asserted
that the default rules of the LLC act permitted him to act unilaterally, and that absent agreement
of a majority of the managers his action is binding.
After finding the Bywater’s operating agreement was effective even
though never“signed,” the Court bypassed
of Battles’ expulsion by noting that it was some 10 days after Asheville
was hired. Hence, as of that date, Bywater could not have been a single-member LLC. Further, the Court found that Battles’ alleged actions
did not satisfy the “stringent requirements for
Addressing then the specific authority (or the absence thereof) to retain Asheville, retention that would generate a fee of some $85,000, the Court concluded
that this retention was
Specifically, the retention was “other than in the ordinary course of business” and
it created “an actual … conflict of interest between
a member and the company[.]” In that Rogers had retained Asheville without
the “affirmative vote
of members holding a majority of the ownership interests,” he acted outside of his authority.
Turning to Agiqua and looking to the default rules of the North Carolina LLC
Act, and in reliance
upon a number of other decisions, the Court found that Rogers did not have the unilateral authority, on behalf of the LLC, to retain counsel. Is therein noted:
To conclude otherwise
would leave open the possibility of
two equal LLC members each designating
the same LLC in the same legal action.
As such, the motion to disqualify Asheville
on behalf of each
of the LLCs was granted, and all of the pleadings they had submitted were ordered struck.
As to the question of judicial dissolution, the court noted that the North
Carolina LLC act, as most recently amended, provides for dissolution if
“it is not practicable to
conduct the LLCs business in conformance
with the operating agreement.” N.C. Gen. Stat. § 57 D-6-02. Brushing aside the suggestion that
amongst the members did not satisfy the statutory requirement on
the basis that the prior statute referred to deadlock and the current one does not, the Court held that:
It cannot be reasonably argued
of the LLC’soperations is “practicable” where, as in the instant case, the two 50% member-managers are unable to reach agreement
to even the most basic management
The Court as well granted the request for a receiver.
With respect to the grant of judicial dissolution, the statute in North Carolina is
to that in Kentucky although while
North Carolina uses
standard. KRS § 275.290(1).
As for the inability
in a two member LLC where action requires
and the authority to hire legal counsel when suit is brought, this decision is in no manner an outlier. For example, and as cited in this decision, on similar facts the Delaware Chancery
Court has held
there to be no authority to hire counsel. Maitland v. International Registries, LLC, 2008 Del. Ch. Lexis 70 (Del. Ch. June 6,
2008). This problem can be avoided in a well-crafted
to retain counsel on
behalf of the company
if either of the members should