Appeal by Defendants Laurent Olivier, Jeffrey Bowman, and
Aquatic Evolution International, Inc. from order entered 7 July
2008 by Judge Ben F. Tennille in Special Superior Court for Complex
Business Cases. Heard in the Court of Appeals 12 March 2009.
Smith Moore Leatherwood LLP, by Alan W. Duncan and Manning A.
Connors, for Plaintiff-Appellee.
Hunter, Higgins, Miles, Elam & Benjamin, PLLC, by James W.
Miles, Jr., for Defendants-Appellants Laurent Olivier, Jeffrey
Bowman, and Aquatic Evolution International, Inc.
STEPHENS, Judge.
Laurent Olivier (“Olivier”), Jeffrey Bowman (“Bowman”), and
Aquatic Evolution International, Inc. (“AEI”) (collectively
“Appellants”) appeal from an order granting summary judgment in
favor of Leonard J. Kaplan (“Kaplan”).
I. Facts and Procedural History
In 2002, Defendants Olivier and Bowman formed AEI for the
purpose of developing, manufacturing, and selling aquariumcomponents. Olivier, Bowman, and Kaplan formed O.K. Technologies,
L.L.C. (“O.K.”) in September 2003. At this time, AEI assigned all
of its intellectual property to O.K. Under O.K.'s operating
agreement, Kaplan held 51% of the ownership interest, while Olivier
held 43%, and Bowman held 6%. The operating agreement stipulated
that management decisions would be made by the “Majority in
Interest[,]” meaning the members whose interests in O.K.
constituted a majority. In July 2004, David Meschan (“Meschan”)
joined O.K. As a result of Meschan's admission as a member, Kaplan
held 41.5% of the ownership interest in O.K., Olivier held 37.5%
interest, Meschan held 15% interest, and Bowman held 6% interest.
Under O.K.'s operating agreement, Kaplan was obligated to
provide $200,000 in equity capital to O.K. Kaplan completed his
$200,000 equity contribution in May 2004. The operating agreement
also obligated Kaplan to provide $500,000 in loans to O.K. Kaplan
ultimately provided $1,864,749 in loans to O.K. between May 2004
and 31 July 2006. Although Kaplan did not seek approval of the
other members prior to making these loans, O.K. and its members
accepted Kaplan's loans and used them to discharge O.K.'s costs and
obligations. In May 2005, Kaplan requested a promissory note for
the amounts he had loaned to O.K. On 28 June 2006, Kaplan
requested repayment of the loans.
On 31 July 2006, Kaplan, Olivier, Bowman, and Meschan voted to
dissolve O.K. During the 31 July 2006 meeting, the members could
not agree on a mechanism for repaying the loans made by Kaplan.
Also during this meeting, Meschan moved to designate Olivier andhimself as O.K.'s representatives for the purpose of initiating
future contact with any potential buyers or licensees and
negotiating any sale of assets or licensing of any technologies
owned by or assigned to O.K. Meschan, Olivier, and Bowman voted
their combined membership interest of 58.5% in favor of Meschan's
motion and Kaplan voted his 41.5% interest against the motion.
On 21 September 2006, Kaplan filed a complaint against O.K.,
Olivier, Meschan, Bowman, and AEI alleging a breach of fiduciary
duty and seeking a declaratory judgment that O.K. had failed to
repay loans from Kaplan. This matter was designated as a complex
business case in an order filed 26 September 2006, and Special
Superior Court Judge Ben F. Tennille (“the trial court”) was
assigned to preside over the case. On 4 October 2006, the trial
court appointed William P. Miller as Receiver for O.K. and directed
him to wind up the affairs of O.K.
Appellants filed an answer, crossclaims, and counterclaims on
18 January 2007 alleging,
inter alia, breaches of fiduciary duty
and fraud by Kaplan. Olivier and Bowman filed a motion to amend
counterclaim and crossclaim on 5 December 2007 to assert derivative
claims on behalf of O.K. against Kaplan. Kaplan filed a motion for
summary judgment on 17 December 2007, seeking judgment as a matter
of law on all claims and counterclaims. In a written order filed
7 July 2008, the trial court granted Kaplan's motion for summary
judgment to enforce the operating agreement and Kaplan's motion for
summary judgment on all counterclaims asserted by Appellants.
Appellants appeal from this order.
II. Existence of Fiduciary Relationship
Appellants assign as error the trial court's granting of
Kaplan's motion for summary judgment and argue that material issues
of fact exist as to whether Kaplan violated his fiduciary duties.
(See footnote 1)
We hold the trial court did not err.
“A trial court's ruling on a motion for summary judgment is
reviewable
de novo to determine whether there is any genuine issue
of material fact and whether either party is entitled to judgment
as a matter of law.”
Showalter v. North Carolina Dept. of Crime
Control and Public Safety, 183 N.C. App. 132, 134, 643 S.E.2d 649,
651 (2007). “We review the record in the light most favorable to
the non-moving party.”
Bradley v. Hidden Valley Transp., Inc., 148
N.C. App. 163, 165, 557 S.E.2d 610, 612 (2001),
aff'd, 355 N.C.
485, 562 S.E.2d 422 (2002) (citation omitted).
“For a breach of fiduciary duty to exist, there must first be
a fiduciary relationship between the parties.”
Dalton v. Camp, 353
N.C. 647, 651, 548 S.E.2d 704, 707 (2001) (citations omitted). A
fiduciary relationship has been defined by our Supreme Court as
one in which “there has been a special
confidence reposed in one who in equity and
good conscience is bound to act in good faith
and with due regard to the interests of the
one reposing confidence . . . , [and] it
extends to any possible case in which a
fiduciary relationship exists in fact, and in
which there is confidence reposed on one side,
and
resulting domination and influence on the
other.”
Id. at 651, 548 S.E.2d at 707-08 (quoting
Abbitt v. Gregory, 201N.C. 577, 598, 160 S.E. 896, 906 (1931) (internal quotation marks
and citation omitted)). The trial court held that no fiduciary
relationship existed between Kaplan and Appellants. Kaplan's
relationship with Olivier and Bowman differs from Kaplan's
relationship to AEI, and thus, we address these relationships
separately.
A. Kaplan's Relationship with Olivier and Bowman
Initially, we address Kaplan's relationship with Olivier and
Bowman. Olivier and Bowman argue Kaplan's fiduciary duties to them
arose from the following: (1) Kaplan's role as a member-manager of
O.K.; (2) Kaplan's minority interest in O.K. coupled with his
control over the company's finances and operations; and (3)
Kaplan's role as a member in a closely-held limited liability
company (“LLC”). We address each of these relationships in turn.
i. Kaplan as a Member and Manager
First, we consider Kaplan's relationship with Olivier and
Bowman based on his position as a member and a manager of O.K.
Kaplan, Olivier, and Bowman were members of O.K. O.K.'s operating
agreement states O.K. shall be managed by its members. Thus, as
members, Kaplan, Olivier, and Bowman were also managers of O.K.
Kaplan's status as a member of O.K. did not create a fiduciary
relationship between Kaplan and Olivier and Bowman. The North
Carolina Limited Liability Company Act, N.C. Gen. Stat. § 57C-1-01
et seq., does not create fiduciary duties among members. Members
of a limited liability company are like shareholders in a
corporation in that members do not owe a fiduciary duty to eachother or to the company. See Freese v. Smith, 110 N.C. App. 28,
37, 428 S.E.2d 841, 847 (1993) (holding “[a]s a general rule,
shareholders do not owe a fiduciary duty to each other or to the
corporation”) (citing Russell M. Robinson, II, Robinson on North
Carolina Corporation Law § 11.4 (4th ed. 1990)). An exception to
this rule is that a controlling shareholder owes a fiduciary duty
to minority shareholders. Id.; see Gaines v. Long Mfg. Co., 234
N.C. 340, 344, 67 S.E.2d 350, 353 (1951) (holding majority
shareholders of a corporation owe a fiduciary duty to minority
shareholders). Kaplan's interest in O.K. was reduced to 41.5% when
Meschan became a member of O.K., and therefore Kaplan was a
minority shareholder with no fiduciary duty to the other members.
Nor did Kaplan's relationship with Olivier and Bowman as a
manager of O.K. create a fiduciary duty. Pursuant to the North
Carolina Limited Liability Act, a manager of a limited liability
company “shall discharge his duties as manager in good faith, with
the care an ordinary prudent person in a like position would
exercise under similar circumstances, and in the manner the manager
reasonably believes to be in the best interests of the limited
liability company.” N.C. Gen. Stat. § 57C-3-22(b) (2007). These
duties are owed by the manager to the company, rather than to other
managers, however. See id. Managers of limited liability
companies are similar to directors of a corporation in that
“[u]nder North Carolina law, directors of a corporation generally
owe a fiduciary duty to the corporation, and where it is alleged
that directors have breached this duty, the action is properlymaintained by the corporation rather than any individual creditor
or stockholder.” Governors Club, Inc. v. Governors Club Ltd.
P'ship, 152 N.C. App. 240, 248, 567 S.E.2d 781, 786-87 (2002)
(citing Underwood v. Stafford, 270 N.C. 700, 703, 155 S.E.2d 211,
213 (1967)), aff'd, 357 N.C. 46, 577 S.E.2d 620 (2003); see also
Keener Lumber Co. v. Perry, 149 N.C. App. 19, 26, 560 S.E.2d 817,
822, disc. review denied, 356 N.C. 164, 568 S.E.2d 196 (2002).
Thus, like directors, managers of a limited liability company also
owe a fiduciary duty to the company, and not to individual members.
Accordingly, Kaplan did not owe any fiduciary duty to Olivier and
Bowman based on their relationship as managers of O.K.
ii. Kaplan as O.K.'s Sole Investor
Second, we consider Kaplan's relationship with Olivier and
Bowman based on his status as O.K.'s sole investor. Olivier and
Bowman argue that Kaplan made O.K. completely dependent upon
Kaplan's financing and that this resulted in such domination and
control as to create a fiduciary relationship. Although our courts
have broadly defined fiduciary relationships, no such relationship
arises absent the existence of dominion and control by one party
over another.
See Dalton v. Camp, 353 N.C. 647, 651, 548 S.E.2d
704, 707-08 (2001). The trial court found that “[l]ike an investor
in a corporation, Kaplan's position as the holder of the purse
strings did not create a fiduciary duty.” We agree.
In
Dalton, our Supreme Court considered whether the
relationship between an employee and employer involved the
requisite level of dominion and influence to find that a fiduciaryrelationship existed where the employee was a production manager
for the employer's publishing business.
Id. at 651, 548 S.E.2d at
708. The Court found that the employer had reposed a certain level
of confidence in the employee, and as a confidant of his employer,
the employee was bound to act in good faith and with due regard for
the employer's interests.
Id. at 651-52, 548 S.E.2d at 708.
However, the Court found these circumstances to be true of
virtually all employer-employee relationships and, without more,
they were inadequate to establish the employee's obligations as
fiduciary in nature.
Id. at 652, 548 S.E.2d at 708. In
holding
that no evidence suggested the employee's position in the workplace
resulted in dominion and influence over the employer, the
Dalton
Court noted:
[The employee] was hired as an at-will
employee to manage the production of a
publication. His duties were those delegated
to him by his employer, such as overseeing the
business's day-to-day operations by ordering
parts and supplies, operating within budgetary
constraints, and meeting production deadlines.
In sum, his responsibilities were not unlike
those of employees in other businesses and can
hardly be construed as uniquely positioning
him to exercise dominion over [the employer].
Thus, absent a finding that the employer in
the instant case was somehow subjugated to the
improper influences or domination of his
employee _ an unlikely scenario as a general
proposition and one not evidenced by these
facts in particular _ we cannot conclude that
a fiduciary relationship existed between the
two.
Id.
In
Tin Originals, Inc. v. Colonial Tin Works, Inc., 98 N.C.
App. 663, 391 S.E.2d 831 (1990), this Court considered whether adistributor's dependence on a manufacturer resulted in the
existence of a fiduciary relationship. The plaintiffs were
distributors of decorative tin items, and the defendants were
manufacturers of these items.
Id. at 664, 391 S.E.2d at 832.
These decorative tin items constituted 80% of the plaintiff's
sales.
Id. at 665, 391 S.E.2d at 833. The plaintiff argued that
its dependence on the defendants required plaintiff to place the
special kind of “trust and confidence in defendants” that
establishes a fiduciary relationship.
Id. at 665, 391 S.E.2d at
832-33.
This Court held that “the evidence [was] insufficient to
submit to the jury the issue of whether a fiduciary relationship
existed between the parties.”
Id. at 666, 391 S.E.2d at 833.
In
Broussard v. Meineke Discount Muffler Shops, Inc., 155 F.3d
331, 348 (4th Cir.
1998), the Fourth Circuit noted that “[o]nly
when one party figuratively holds all the cards _ all the financial
power or technical information, for example _ have North Carolina
courts found that the special circumstance of a fiduciary
relationship has arisen.”
Id. (citing
Lazenby v. Godwin, 40 N.C.
App. 487, 253 S.E.2d 489 (1979)) (internal quotation marks
omitted). In
Lazenby, our Court considered whether such “special
circumstances” existed to establish a fiduciary duty between the
parties with regard to the sale of the plaintiffs' minority
interests in a closely-held family corporation to the defendant.
Lazenby, 40 N.C. App. 487, 253 S.E.2d 489.
The defendant in
Lazenby was the president, manager, and majority shareholder of the
corporation.
Id. at 488, 253 S.E.2d at 489. “Although theplaintiffs were technically codirectors of the corporation, they
did not take part in the management of the corporation. They placed
their trust in the business skills and judgment of the defendant
because the plaintiffs had less experience than defendant in
corporate affairs.”
Id. at 494, 253 S.E.2d at 493. This Court
concluded there was sufficient evidence that the plaintiffs did not
have equal access to information regarding a purchase of the
corporation's assets, and that the defendant, therefore, owed a
special duty to the plaintiffs in negotiating the sale of their
minority interests.
Id. at 495, 253 S.E.2d at 493.
In the present case, Olivier and Bowman argue that Kaplan
“made himself the sole source of funding” for O.K., which resulted
in the level of domination contemplated by our Courts in defining
a fiduciary relationship. Our Courts have previously held that no
fiduciary relationship exists between managers of an organization
and its creditors. “Ordinarily, '[t]he duties and liabilities of
directors . . . run directly to the corporation and indirectly to
its shareholders; they do not run to third parties, such as
creditors.'”
Oberlin Capital, L.P. v. Slavin, 147 N.C. App. 52,
57, 554 S.E.2d 840, 845 (2001) (quoting Russell M. Robinson, II,
Robinson on North Carolina Corporation Law § 14.08 (6th ed. 2000)).
Thus, without more, we cannot find that Kaplan's status as O.K.'s
sole investor creates a fiduciary relationship between Kaplan and
Olivier and Bowman.
Unlike in
Lazenby, Kaplan's relationship to Olivier and Bowman
was not the kind where one party figuratively held all the cards.
See Lazenby, 40 N.C. App. 487, 253 S.E.2d 489;
Broussard, 155 F.3d
331, 348. First, Olivier and Bowman were not inexperienced
businessmen. Olivier completed a two-year business course at a
school in New Caledonia; he worked for the government of New
Caledonia as the equivalent of an “environmental engineer” for
approximately seven years; and he spent three years operating his
own business, catching and exporting exotic tropical fish and
selling and marketing aquariums. Bowman started AEI with Olivier,
had experience servicing aquariums, and was the individual who
approached Kaplan about forming O.K. in the first place.
Olivier and Bowman argue that Kaplan manipulated O.K. to
ensure that he was the only source of funds for the company and
then used this position to direct the company's resources to
further his own agenda. However, under the terms of the operating
agreement agreed to and signed by all the parties, Kaplan was the
only member required to provide equity capital and loans to O.K.
Although Kaplan provided loans in excess of his obligations under
the operating agreement, Olivier and Bowman accepted these loans
and used them to discharge the company's costs and obligations,
including payment of their salaries and reimbursement of their
expenses.
Furthermore, Kaplan was a minority shareholder of O.K., and
the alliance formed by Olivier, Bowman and Meschan represented the
majority. O.K.'s operating agreement provided that the vote of the
majority controlled management decisions. Olivier, Bowman, and
Meschan exhibited their ability to control management decisions inthe vote on 31 July 2006 regarding a repayment plan for Kaplan's
loans to O.K. Olivier, Bowman, and Meschan outvoted Kaplan to pass
a motion designating Olivier and Meschan as representatives for
communicating and negotiating with potential buyers and licensees
in winding up the company. Clearly, Kaplan's position as “the
holder of the purse strings” was insufficient to override the will
of the majority.
Finally, Olivier expressly discussed the inability of one
member to make unilateral decisions for O.K. in an email to the
other partners on 15 August 2006. In this email Olivier stated,
“[J]ust . . . remember every[]body, no member has to give any order
to other member, about what they have to do, only a majority vote
can impose that[.]” Olivier also specifically commented on
Kaplan's inability to control the actions of the other members
based on his financial contributions to O.K. Olivier wrote:
For Leonard [Kaplan], I'm sorry to tell you,
you don't own any asset of [O.K.]
Technologies, the company owns them. This is
not your money anymore, and you cannot tell me
or other members what they have to do, or take
initiative in the company other than try to
help us to sell the asset.
Thus, Olivier himself disputed Kaplan's ability to control the
other members. Accordingly, Olivier and Bowman's contention that
Kaplan exercised dominion and control over the other members so as
to create a fiduciary relationship is wholly unconvincing. This
argument is rejected.
iii. Kaplan as a Member in a Closely-held LLC
Lastly, we consider Kaplan's relationship with Olivier andBowman by virtue of Kaplan's status as a member in a closely-held
LLC. Although we primarily addressed this issue above, Olivier and
Bowman also argue that Kaplan owed them a fiduciary duty based on
the sole fact that O.K. was a closely-held LLC. Olivier and Bowman
argue that the relationship between members of a closely-held LLC
is like the fiduciary relationship between partners in a
partnership.
See Compton v. Kirby, 157 N.C. App. 1, 15, 577 S.E.2d
905, 914 (2003);
Casey v. Grantham, 239 N.C. 121, 124-25, 79 S.E.2d
735, 738 (1954) (“It is elementary that the relationship of
partners is fiduciary”). Olivier and Bowman, however, ignore the
fact that by their operating agreement, the parties expressly
limited the duties the member-managers owed.
N.C. Gen. Stat. § 57C-3-32 (2008) provides:
(a) Subject to subsection (b) of this section,
the articles of organization or a written
operating agreement may:
(1) Eliminate or limit the personal liability
of a manager, director, or executive for
monetary damages for breach of any duty
provided for in G.S. 57C-3-22 . . . .
. . . .
(b) No provision permitted under subsection
(a) of this section shall limit, eliminate, or
indemnify against the liability of a manager,
director, or executive for (i) acts or
omissions that the manager, director, or
executive knew at the time of the acts or
omissions were clearly in conflict with the
interests of the limited liability company,
(ii) any transaction from which the manager,
director, or executive derived an improper
personal benefit, or (iii) acts or omissions
occurring prior to the date the provision
became effective[.]
Consistent with N.C. Gen. Stat § 57C-3-32, the members of O.K.contractually agreed to limit their duties and corresponding
liability as managers. Section 5.3 of O.K.'s operating agreement
provides:
Notwithstanding any other provision to the
contrary contained in this Agreement, no
Member shall be liable, responsible, or
accountable in damages or otherwise to the LLC
or to any other Member or assignee of a Member
for any loss, damage, cost, liability, or
expense incurred by reason of or caused by any
act or omission performed or omitted by such
Member, whether alleged to be based upon or
arising from errors in judgment, negligence,
gross negligence, or breach of duty (including
alleged breach of any duty of care or duty of
loyalty or other fiduciary duty), except for
(i) acts or omissions the Member knew at the
time of the acts or omissions were clearly in
conflict with the interests of the LLC, (ii)
any transaction from which the Member derived
an improper personal benefit, or (iii) a
willful breach of this Agreement. Without
limiting the foregoing, no Member shall in any
event be liable for (A) the failure to take
any action not specifically required to be
taken by the Member under the terms of this
Agreement, (B) any action or omission taken or
suffered by any other Member, or (C) any
mistake, misconduct, negligence, dishonesty or
bad faith on the part of any employee or other
agent of the LLC appointed by such Member in
good faith.
This section of the operating agreement clearly limits the
members' liability to the three exceptions listed above. Olivier
and Bowman argue Kaplan's actions subjected him to liability under
sections 5.3(i) and (ii) of the operating agreement. Assuming
arguendo that Kaplan breached his duties under the operating
agreement, his liability would extend only to the company, and not
to Olivier and Bowman. As O.K. is not a named appellant in this
matter, we will not address Kaplan's potential liability to O.K. Accordingly, no genuine issues of material fact exist as to the
issue of Kaplan's fiduciary obligations to Olivier and Bowman by
virtue of their relationship as members in a closely-held LLC.
B. Kaplan's Relationship with AEI
Appellants have not specifically argued how Kaplan's tenuous
relationship with AEI resulted in the existence of a fiduciary duty
from Kaplan to AEI. The trial court found that:
Kaplan had only a tenuous relationship with
AEI. Olivier and Bowman are the sole
shareholders of AEI. AEI was not a subsidiary
of O.K. nor did O.K. market, manufacture or
sell AEI's components. Kaplan did not provide
any money to AEI after O.K. was formed.
Kaplan had no dominance or control over AEI.
Appellants have not presented any facts that indicate the
relationship between Kaplan and AEI was “one in which there has
been a special confidence reposed in one who in equity and good
conscience is bound to act in good faith and with due regard to the
interests of the one reposing confidence[.]”
Dalton v. Camp, 353
N.C. 647, 651, 548 S.E.2d 704, 707 (2001) (internal quotation marks
and citation omitted). “[I]t is fundamental that a fiduciary
relationship must exist between the parties in order for a breach
of fiduciary duty to occur.”
Branch v. High Rock Realty, Inc. 151
N.C. App. 244, 251, 565 S.E.2d 248, 253 (2002),
disc. review
denied, 356 N.C. 667, 576 S.E.2d 330 (2003). No fiduciary
relationship existed between Kaplan and AEI, and therefore, no
fiduciary duty was owed.
AFFIRMED.
Judges JACKSON and STROUD concur.
Footnote: 1