Thursday, October 6, 2016

Failure to Make Capital Contribution is Breach of Contract, Not a Breach of Fiduciary Duty

Failure to Make Capital Contribution is Breach of Contract, Not a Breach of Fiduciary Duty

Earlier this summer, a court in North Carolina considered whether a member's failure to make a capital contribution as called for by the operating agreement constituted a breach of fiduciary duty.  The court held that there was a breach of contract, but not a breach of fiduciary duty.  Brady v. Van Vlaanderens, 2016 NCBC 56, 2016 WL 4005858 (Sup. Ct. N. Ca. July 21, 2016).

Brady, the plaintiff in this action, was apparently involved in a wide variety of business ventures with various of the individual defendants involving a number of business organizations that likewise are defendants.  After she was terminated from another company, United Tool & Stamping Company of North Carolina, LLC, Brady bought an apparently wide ranging action.  This decision related exclusively to her claims with respect to Enterprise Realty, an LLC in which she was a one third member.

When enterprise was losing money, in accordance with the operating agreement, capital calls were made.  Brady, however, default another obligation to satisfy those capital calls on the basis that:

She has not been given access to adequate documentation to determine the amount of the capital contribution, if any, that she should be required to make to enterprise, and also that she should be excused for making the capital contributions because of her exclusion from, and the mismanagement of, Enterprise and the other company Defendants.

While Enterprise was a member-managed LLC, the members, in writing, delegated to one of them, Townsend, authority to operate the company and the authority determine “in his sole discretion” whether additional capital contributions were necessary.  Ultimately, Brady would fail to satisfy capital contribution obligations of $83,097.00.

With respect to Brady’s claim to inspect company records, in her deposition, she acknowledged that she had been afforded either copies of or the right to inspect all the documents she need it.  On that basis, summary judgment was granted to the company.

With respect to a claim by Brady that Enterprise should be judicially dissolved on the basis that her “reasonable expectations” with respect to the company had been thwarted.  Without determining whether it would be appropriate to extend Meiselman v. Meiselman, 307 S. E.2d 551, 564-67 (N.C. 1983) to LLCs, the court found that while she may have an expectation of employment with one of the companies in the family, she had not shown any particular expectation of employment with Enterprise, the company that had never had employees.  Further, with respect to assertions that she had been frozen out of the management of Enterprise, there was the fact that she had participated in the delegation of almost all management authority to Townsend.  Further, the court found that there had been informal discussions as to management, and that Brady had also participated in the decision to sell the company’s assets, the even at a loss, in order to cut off further exposure.

With respect to the capital contributions, Brady was found to have breached the obligations undertaken in the operating agreement.:

The Operating Agreement requires that the Members make capital contributions in proportion to their respective percentage interests once the Members unanimously agreed to make additional capital contributions to pay for Enterprise’s obligations, expenses, costs, liabilities, or expenditures.  Although Brady has disputed whether the amount of the requested capital contributions is proper, she has not disputed that she agreed to make the capital contributions or that she agreed to the actions that led to Enterprise’s indebtedness.  Further, Brady admits that, in June 2012, she stop making capital contributions that were used to pay down Enterprise’s debt.

Brady argues, in part, that her failures to make capital contributions should be excused because of the facts underlying her claims against the other Defendants. As noted above, the Court concludes that the actions underlying Brady’s claims against the other company Defendants, and particularly the termination of her employment with United Tool, do not translate to claims against Enterprise or defenses to Enterprise’s claims and do not excuse Brady’s failure to make capital contributions as an Enterprise Member.

In turn, the court rejected the notion that the failure to satisfy the capital contribution obligations constituted, by Brady, breach of fiduciary duty.  Starting with the rule that members of an LLC do not owe fiduciary duties to one another, citing in support thereof Kaplan v. O.K. Tech, LLC, 675 S.E.2d 133, 137 (N.C. App. 2009), it was observed as well that the managers of an LLC owe fiduciary duties.  Still, Brady had undertaken the obligation to pay in additional capital in her capacity as a member of the LLC, and not in her capacity as a manager of the LLC.

That is, the obligation, if any, to make capital contributions arises as a result of a member’s status as a member, not as a result of his or her status as a manager.

The Court concludes that Brady’s decision to stop making capital contributions was made in her capacity as a member and that Brady's failure to make such contributions is probably considered as a breach of her contract as a member and not as a breach of the fiduciary duty she owed as a manager.

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