N.C. Business Court allows one judicial dissolution claim to survive, but dismisses another premised on veil-piercing.
In the Business Court’s first opinion of 2019, Slaughter v. Winner Enterprises of Carolina Beach, LLC, 2019 NCBC 1 (N.C. Super. Ct. Jan. 7, 2019), Judge McGuire considered Defendants’ standing arguments under Rule 12(b)(1), and merits arguments under Rule 12(b)(6), where a wife sought judicial dissolution of two Defendant Companies. Plaintiff’s membership rights in one Defendant company degraded (and maybe evaporated) on the event of her divorce. The Court granted one motion to dismiss a dissolution claim against a company in which the Plaintiff had no interest, but allowed Plaintiff’s dissolution claim against the other company to survive despite that she made inconsistent arguments regarding her membership rights in prior divorce proceedings. The membership interest at issue was valued at $624,303.00. Order and Opinion.
When Ms. Slaughter (the Plaintiff) married Mr. Slaughter (the Defendant), Mr. Slaughter and his extended family already owned a real estate company—Defendant Winner Enterprises of Carolina Beach, LLC. Ms. Slaughter became a member of Winner Enterprises when her grandmother-in-law transferred a number of shares to her.
Years later, Mr. Slaughter presented Ms. Slaughter with a signature page for an amendment to the Operating Agreement. She signed it.
The amendment made a number of changes to the Operating Agreement with the potential to alter Ms. Slaughter’s status in the company:
- It defined “Person” to mean an individual who is a direct descendant of Mr. Slaughter’s grandparents (or a spouse of such descendant). 2019 NCBC 1 ⁋⁋ 5, 36.
- It modified the definition of “Member” to mean each “Person” designated as a Member on the schedule attached, provided that only those Members who are direct descendants of Mr. Slaughter’s grandparents (or the spouses of such descendants) could take certain actions. Id. ⁋ 4.
- It sought to eliminate the rights of Members who are not direct descendants of Mr. Slaughter’s grandparents (or the spouses of such descendants) to act to dissolve the company. Id. ⁋ 36.
- It restricted the sale of membership interests in the company to direct descendants of Mr. Slaughter’s grandparents (or the spouses of such descendants). Id. ⁋ 6.
Ms. Slaughter qualified as a “Person” and a “Member” under the agreement as long as she was married to Mr. Slaughter. When unmarried, she no longer qualified as a “Person,” and she may not qualify as a “Member.” Ms. Slaughter alleged that her ex-husband was having an extra-marital affair at the time he presented the amendment and was already planning to leave the marriage. Id. ⁋ 4.
In the couple’s Divorce Order, the district court found that Ms. Slaughter could not realize the value of her membership interest because Mr. Slaughter would not purchase it, and because no other qualified member could purchase it. Therefore, the judge ordered a 60/40 split of the marital and divisible property in Ms. Slaughter’s favor, and she ordered Mr. Slaughter to pay his ex-wife nearly $500,000. Id. ⁋⁋ 11-12. Mr. Slaughter declared bankruptcy and did not make the payment. Id. ⁋ 13.
Nearly a year after the divorce, Mr. Slaughter and his mother formed Defendant Winner Construction Group, LLC. Id. ⁋ 15. They were the sole members. Mr. Slaughter was the sole manager. Id. ⁋ 15. Ms. Slaughter alleges her ex-husband used Winner Enterprises’ assets to fund the new company. Id.
Citing N.C. Gen. Stat. § 57D-6-02(2)(ii), Ms. Slaughter argues that dissolution and liquidation of Winner Enterprises is justified because her reasonable expectations were thwarted. Id. ⁋ 23. Although she is not a member of Winner Construction Group, she seeks dissolution of it through her claim that it is an alter ego of Winner Enterprises. Id. ⁋ 46.
Winner Enterprises made two primary arguments to dismiss the claims against it. First, it argued that the plain reading of the amended Operating Agreement shows Ms. Slaughter’s membership evaporated on her divorce. Id. ⁋⁋ 14, 29, 38, 40.
The Court did not agree. Judge McGuire believed the intent of the amendment was to keep control of the company with the extended Slaughter family, not to divest current members of their interests. Id. ⁋ 37. At best, the issue was ambiguous, and judgement at the pleadings stage was improper.
Second, Winner Enterprises argued that judicial estoppel should bar Ms. Slaughter’s claim. Judicial estoppel is an equitable principle. It prevents a party from asserting a position inconsistent with an earlier one made during litigation. Id. ⁋⁋ 38. It applies when a party’s current position is clearly inconsistent with a previous one, when the party convinced a prior court to accept the inconsistent position, and when the party would receive an unfair advantage in the current litigation. Id. ⁋⁋ 38-39 (citing Whitacre P’ship v. Biosignia, Inc., 358 N.C. 1, 29 (2004)). During her divorce proceeding, Ms. Slaughter argued that the amendment prevented her from exercising her right to sell her membership interest, and here, she argued that she is a member of Winner Enterprises. Winner Enterprises argues that Ms. Slaughter received an unequal distribution of marital property as a result of her prior inconsistence position.
The Court did not agree. Judge McGuire determined that while “the record could support the contention” that Ms. Slaughter took a factually inconsistent position in her divorce action by asserting that she had lost her membership rights, she did not succeed in persuading the courts to accept that position. Id. ⁋ 42 (citing Whitacre, 358 N.C. at 29). In addition, the record showed no unfair advantage. Mr. Slaughter argued to the Court of Appeals when contesting the marital distribution, that his ex-wife’s membership interest allowed her to seek dissolution of Winner Enterprises. Id. ⁋⁋ 14, 42. So, his position was inconsistent. And, as a capper, Mr. Slaughter never made a payment toward the amount he was ordered to pay Ms. Slaughter.
Perhaps unwritten in the opinion is the idea that a litigant must have clean hands to seek the Court’s equitable remedies.
Finally, Judge McGuire was unconvinced about the enforceability of a provision that abolishes a member’s right to judicial dissolution. Id. ⁋ 35. The law governing North Carolina LLCs states: “The operating agreement may not … [s]upplant, vary, disclaim, or nullify” the judicial dissolution provision.” N.C. Gen. Stat. 57D-2-30(b)(1)(c).
Ms. Slaughter has standing to seek judicial dissolution of Winner Enterprises.
Ms. Slaughter asserted that she had standing to seek dissolution of Winner Construction because it was an instrumentality of Winner Enterprises. Id. ⁋ 46.
The Court found no case law supporting that position. But, it did not hold that no such claim could exist. Id. ⁋ 49. It dismissed the claim because there were no predicate claims here to which liability can attach. Id. ⁋ 50.