Violating Fiduciary Obligations – Let Me Count the Ways

Violating Fiduciary Obligations – Let Me Count the Ways

     In an Order dated October 13, 2011, the North Carolina Business Court entered a preliminary injunction barring a member-manager of an LLC from further violation of her fiduciary duties.  Lake House Academy for Girls LLC v. Jennings, 2011 NCBC 40 (Order Granting Preliminary Injunction, Oct. 13, 2011).

     Jennings was a member-manager of Lake House Academy for Girls LLC and as well its Executive Director. While in that position she developed and began implementation to open a competing venture, including by hiring away certain of the LLC’s employees.  She also indicated that she was willing to disparage the LLC and its operations to the effect that it would no longer receive referrals. 

     Under the North Carolina LLC Act, a manager has a statutory fiduciary obligation to discharge his or her duties as a manager “in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in the manner the manager reasonably believes to the be in the best interest of the [LLC].” N.C. Gen. Stat. § 57C-3-22(b).  The statute as well provides a statutory duty of care which tracks the rules that exist under the Uniform Partnership Act.  See N.C. Gen. Stat. § 57C-3-22(e).

     Often cases alleging breach of fiduciary duty come down to judgment calls because the propriety of the actor’s conduct vis-à-vis the standard is somewhat unclear.  Perhaps that conduct should be permitted or perhaps it should be sanctioned.  In this instance, the Court found that there was no ambiguity and for that reason issued a preliminary junction.  Reciting the conduct that justified the determination that Jennings had breached her fiduciary duties, the Court noted:

·                    She e-mailed proprietary documents of the LLC to her husband;

·                    She advised LLC employees of her intent to leave and solicited employees to terminate their further employment with the company;

·                    She solicited current employees of the LLC to leave and join her in the new venture;

·                    She contacted a real estate agent and charged him to locate a property from which the new venture could operation;

·                    She caused that real estate agent to submit a letter of intent with respect to the lease of the property from which the new venture would operate;

·                    She directed individuals, including current customers, to a website setting forth disparaging comments about the staff at the existing venture;

·                    She entered into contracts with respect to the operation of the new venture, including a lease for the new facility;

·                    She executed an employment agreement with a former employee of the LLC after having soliciting him to resign; and

·                    After refusing to return a company issued laptop, she deleted nearly every document therefrom before finally returning it pursuant to Court order.

All of these actions were taken while Jennings was still a member-manager of the LLC.

     Here in Kentucky, we have the Steelvest and Aero Drapery decisions, both of which in the corporate context clearly forbid conduct of this nature.  Likewise, this conduct clearly violates the statutory duty of loyalty that exists in our partnership and LLC acts.  That said, it was certainly nice of Mrs. Jennings to provide us with such a useful roadmap as how to clearly violate those duties.