It’s not often that the rote listing of involved attorneys at the outset of a Business Court opinion gives much of a clue of what issues lie ahead. A curious exception is when the same party is listed as represented by counsel on both sides of the case. In Turner v. Hunt Hill Apartments, LLC, 2020 NCBC 12 (N. C. Super. Ct. Feb. 11, 2020), it set the stage for review of ethical conflicts and reticent litigants. See Order and Opinion.
Hunt Hill, the defendant, hired Sweetwater Construction, LLC to build apartments in Asheville. The complex was built, Hunt Hill allegedly didn’t pay for the work, and Sweetwater’s president, John Turner, launched a derivative action on the entity’s behalf when it declined to do so. Id. ¶¶ 3, 13. But, as Judge Conrad observed, “it’s never that easy. Id. ¶ 4.
The North Carolina derivative action brought by Turner is part of a larger dispute that the Business Court termed a “fight for control of Sweetwater.” In a parallel South Carolina action Turner seeks a declaration that he is Sweetwater’s sole member, or at least one with a significant share. The South Carolina defendants contend Turner has no interest in the LLC at all, and one of them sought to intervene in the North Carolina action to make the same point: Turner had no authority to file the action against Hunt Hill. Id. Naturally, the North Carolina defendant – Hunt Hill – took the same position on Turner’s standing to bring the action. Id. ¶¶ 4-5.
So, the Court had to decide whether Turner had the authority to act for Sweetwater when the LLC elected otherwise. Plus, it had to figure out whether Turner’s counsel in the North Carolina action could purport to work on behalf of Sweetwater in North Carolina but also work on Turner’s behalf in South Carolina to get himself declared the sole member of Sweetwater over its objections.
Essentially, Hunt Hill’s position boiled down to this: Turner’s counsel was derivatively for Sweetwater in North Carolina; it was adverse to Sweetwater in South Carolina trying to get control of the entity for Turner; and in an effort to salvage the North Carolina litigation, an amended complaint proposed that the firm would purportedly work directly for Sweetwater. Id. ¶ 7.
- South Carolina law requires a derivative action be brought by a member who was around for the underlying events, and when the suit is filed.
- Because of a lawyer’s “equal duty” to each of its clients, the Business Court was cool to the argument that a concurrent conflict could be cured by finding new counsel for one of the clients.
Standing for Derivative Actions in South Carolina
Turner’s ability to sue on Sweetwater’s behalf was a straightforward application of South Carolina corporate law, the Court found. Among the requirements, Turner had to be a member of Sweetwater “when the action is commenced” as well as a member “at the time of the transaction” which underlies the proposed derivative action (or have its interest devolved from a member who was). See S.C. Code Ann. § 33-44-1102. The Court found that the complaint didn’t allege Turner was a member of Sweetwater, but instead that he was its president with an undefined “ownership interest.” 2020 NCBC 12, ¶¶ 12-13. It declined subject matter jurisdiction, and noted that even if Turner had an ownership interest of some sort in Sweetwater that wouldn’t confer authority to sue under South Carolina law. Id. ¶ 14.
A similar result would have prevailed under North Carolina law because a member advancing a derivative action must have been a member at the time of the underlying events, or have at least some portion of its member interest devolved from a member who was. See N.C. Gen. Stat. § 57D-8-01.
A Hornbook Instance of Concurrent Conflict
Under North Carolina professional conduct rules,
“a lawyer shall not represent a client if the representation involves a concurrent conflict of interest.”
N.C. Rev. R. Prof’l Conduct 1.7(a). While the Court was clear to point out that the conflicted firm (Sellers, Ayers, Dortch & Lyons, P.A.) showed no bad faith or impure motives, and made no attempt to conceal the conflict, it easily concluded that “[t]he conflict here is clear.” 2020 NCBC 12, ¶¶ 19, 23. The Court found an actual, concurrent conflict, endorsing Hunt Hill’s argument that Sellers, Ayers “is explicitly seeking to represent as a client an LLC that it is actively suing on behalf of another client.” Id. ¶¶ 19-20. The Court granted a motion to disqualify the Sellers, Ayers firm as counsel for Turner and Sweetwater, and struck all filings made on their behalf not dismissed by its separate ruling on subject matter jurisdiction. Id. ¶ 24.
Brad Risinger is a partner in the Raleigh office of Fox Rothschild LLP.