Derivative Claim Boots Are Made For Walking, Business Court Says, But Only When An LLC Leaves Them On The Rack.

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“Before you judge a man, walk a mile in his shoes. After that who cares? He’s a mile away and you’ve got his shoes!

-Billy Connolly, Scottish comedian, shoe sage.

The N.C. Business Court might not be your first stop for tips on picking quality footwear, but in the spiritual homestead of Air Jordans, solid shoe advice lurks where you least expect it. So it was in Epic Chophouse, LLC v. Morasso, 2019 NCBC 54, 2019 WL 4166626 (N.C. Super. Ct. Sept. 3, 2019), where Judge Conrad laced up his judicial kicks to note there’s no harm in a member strolling in her LLC’s shoes if they’re just gathering dust in the closet.  See Order and Opinion.

Takeaways:

  • The Business Court will scrutinize individual claims by LLC members to ensure they do not actually accrue to the entity.
  • Derivative claims where an LLC member walks in the entity’s shoes likely only survive in the Business Court when the company cannot, or will not, wear them itself.

Epic Chophouse, LLC (“Epic”), which operates a restaurant, and two of its members sued a third member, Defendant Morasso, for booting his job as Epic’s general manager to favor other food enterprises he owned or managed. The complaint alleged that Morasso used Epic as leverage to help Defendants Webb Custom Kitchen, LLC and Chillfire Grill, LLC secure volume discounts on food supplies and better terms with financial vendors. Id. at ¶¶ 1, 6. Epic’s frustrations with Morasso’s alleged inattention to his job mushroomed to the point that it ultimately hired another person to do his job and ejected him as an LLC member. Id. at ¶¶ 7-8.

The Court found sufficient evidence for somebody to have potential claims arising from Morasso’s alleged conduct, but could not shake a solid suspicion that Epic, and two of its members – individually and derivatively – were all trying to walk a good mile in the same pair of sneakers. “In short,” the Court observed, “this is a direct action by the company, an individual member action, and a derivative action all in one. Something is amiss.” Id. at ¶ 16.

Epic could pursue claims in its own stead; and aggrieved, remaining LLC members could pursue claims “peculiar to them,” even if Epic “also has a cause of action arising from the same wrong.” (citing Barger v. McCoy Hillard & Parks, 346 N.C. 650, 659, 488 S.E.2d 215, 219 (1997)). 2019 NCBC 54, at ¶¶ 12, 15. Yet, the Court found, the plaintiff members added a poorly matching belt and suspenders to the sartorial story by, essentially, raising the same claims as the company in their individual capacities, “[a]nd for good measure,” purporting to raise them again in a derivative action on behalf of Epic. Id. at ¶ 16.

This duplication of claims, the Court found, ran afoul of two well-settled concepts that help delineate who can bring what, on behalf of whom. An individual member cannot typically allege claims in her own name that accrue to the company unless equity dictates she must do so because the entity won’t. And, such “derivative actions are typically appropriate only when a corporation is unwilling or unable to litigate its claims for itself.” (citing Anderson v. Seascape at Holden Plantation, LLC, 241 N.C. App. 191, 204, 773 S.E.2d 78, 87 (2015)). 2019 NCBC 54, at ¶¶ 13, 17.

The plaintiff members’ claims were not helped by their election to file no brief in opposition to a Rule 12(c) motion. However, Judge Conrad’s treatment of the motion as “uncontested” under Business Court rules hurt much less than the conclusion that “[t]here is no question that the asserted [derivative] claims are claims accruing to Epic,” and that Epic was “willingly litigating all asserted claims for itself.” Id. at ¶¶ 17-18. The bulk of the plaintiffs’ individual capacity claims suffered the same fate, and were dismissed as the “types of harms [that] are plainly injuries to the company shared by all members proportionately.” Id. at ¶ 19.

The Court’s end-game message to LLCs, LLC members, and their counsel when seeking to match plaintiffs and claims?

“In simple terms, the member is allowed to step into the shoes of the LLC but only if the LLC isn’t already wearing them.

Id. at ¶ 17, n.3.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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