Direct Versus Derivative Distinction Applied in Single-Member LLC

Direct Versus Derivative Distinction Applied in Single-Member LLC

      In a recent decision from the North Carolina Business Court, the direct versus derivative distinction was applied to dismiss claims for breach of fiduciary duty brought by the LLC’s sole member. Timbercreek Land & Timber Co., LLC v. Robbins, 17 CVS 140, 2017 NCBC 64, 2017 WL 3214427 (Sup. Ct. N.C. July 28, 2017).

       Hooper, who had no experience in the timber industry, thought it was a good investment opportunity. In turn, Robbins, who represented that he had extensive experience in the timber industry, needed financing. To that end, Hooper caused Timbercreek Land & Timber Co., LLC to be organized with Hooper as the sole member. It appointed Robbins as the LLCs manager, with authority to oversee all aspects of the LLC’s business operations. Ultimately, the trust placed in Robbins was unjustified. Rather, he engaged in a far-reaching program that included embezzlement, kickbacks, misappropriation of company assets, misappropriation of opportunities, etc. When suit was ultimately brought against him by both the Timbercreek LLC and Hooper individually, Robbins sought to dismiss all of the claims for breach of fiduciary duty, claiming he was not subject to any such duties.

      With respect to the LLC’s claims, the court, applying a provision of the North Carolina LLC Act imposing fiduciary duties upon company officials who are not themselves managers (N.C. Gen. Stat. § 57D-3-21(b)), easily dismissed the allegations that Robbins was not subject to fiduciary obligations.

      The claims for breach of fiduciary duty brought by Hooper himself were, in contrast, dismissed. Applying the direct versus derivative distinction, the court could not within the pleadings find any special duty owed by Robbins to Hooper; rather, Robbins’ obligations were owed to the LLC. This distinction was applied notwithstanding that the Timbercreek LLC was entirely owned by Hooper.