N.C. Business Court Refuses to Allow Member-Managers to Assert Contract Claims Belonging to their LLC.

In its second opinion in Bennett v. Bennett, 2019 NCBC 45 (N.C. Super. Ct. Aug. 6, 2019), the Business Court denied Plaintiff Bert Bennett’s motion to dismiss a breach of contract claim by an LLC, but granted his motion to dismiss the same claim by three of its member-managers for lack of standing – even though the individuals were parties to the contract at issue. See Order and Opinion.

A Takeaway:

  • A member of an LLC who is a party to an Operating Agreement lacks standing to sue for its breach when the legal injury asserted belongs solely to the LLC.

This case involves a dispute between sibling members of Bennett Linville Farm, LLC (“Bennett Farm”), a real estate company created to facilitate estate planning of the parties’ parents. Plaintiff Bert Bennett (along with Terry Bennett, who is no longer a party) alleged that Defendants Graham, Ann, and Jim Bennett gained control of the company to the exclusion of the other sibling members, and nearly all actions they took were unauthorized. A prior post describes the nature of Plaintiffs’ claims. See Don’t Fence Me In (Aug. 12, 2019).

Through counterclaims, Defendants Graham, Ann, and Jim Bennett allege the following: they are the managers of Bennett Farm; a majority of the managers may order capital contributions from the company’s members pursuant to its Operating Agreement; the managers authorized seven capital calls over a two-year period; Plaintiff Bert’s total share of the contribution was about $380,000; and Bert failed to pay it. These individual member-managers (and the LLC under their direction) seek an order directing Bert’s capital payment to Bennett Farm.

The Court questioned whether it had subject matter jurisdiction over the member-managers’ claim. The general rule is that members of an LLC cannot pursue individual causes of action against third parties for wrongs or injuries to the company. Op. ⁋ 4 (citing Energy Investors Fund, L.P. v. Metric Constructors, Inc., 351 N.C. 331, 335 (2000)).

Defendants Graham, Ann, and Jim argued they have standing to enforce the Operating Agreement because they are parties to it.

In response, the Court looked to the terms of the Operating Agreement alleged to be in force. It makes clear that members who fail to make required capital contributions are to be liable “to the Company.” Op. ⁋ 5.

While the Court noted that some operating agreements may be crafted to support actionable individual claims like these, Op. n.3, this Operating Agreement did not do so. It dismissed the member-managers’ individual claims.  The company’s breach of contract claim survived dismissal.