Judicial Dissolution of a “Deadlocked” LLC in North Carolina is a Big Ask When There is Evidence of Even Limited Cooperation Among Members
Plaintiff Lee Norris and defendant James Schaafsma are the sole member-managers of a development company – defendant Greymont Development, LLC – and disagree about the propriety of a derivative action initiated by Schaafsma over funds allegedly owed to Greymont. Plaintiff claimed that the conflict left the 50/50 owners “deadlocked in the management and business operations of Greymont” to the degree that judicial dissolution was required. In Norris v. Greymont Dev., LLC, 2022 NCBC 4, the Business Court looked for a stalemate and found the parties at least several chess moves away.
The dispute revolves around whether Greymont is owed $750,000 in development fees by 518 Morehead, LLC, as Schaafsma claims; or whether 518 Morehead has satisfied its obligations to Greymont by paying $60,000, as Norris claims. Id. ¶¶ 6-7. At first blush, the purported “deadlock” might be hard to spot. After all, if Greymont was actually owed $750,000, why would plaintiff mind if his business partner pursued it on the company’s behalf?
The answer is that many inter-related players are engaged on a very messy chess board.
Norris and Schaafsma are two of four member-managers of another entity, 4Line, LLC, that in turn is the member manager of several other LLCs – including 518 Morehead. Id. ¶ 4. Greymont contracted to provide services to 518 Morehead in a development agreement that was, the amended complaint noted, executed by Schaafsma for Greymont and by Norris for 518 Morehead. On a landscape of companies with interlocking management and intertwined business interests, the Business Court had to decide whether the judicial dissolution standards of N.C.G.S. § 57D-6-02(2) were met, such that: “(i) it is not practicable to conduct the LLC’s business in conformance with the operating agreement and [Chapter 57D] or (ii) liquidation of the LLC is necessary to protect the rights and interests of the member.” Id. ¶ 15.
The Court closely examined the facts as pled and concluded that the Greymont members’ dispute over the derivative action was “a discrete disagreement that has not prevented Norris and Schaafsma from effectively managing Greymont’s other daily operations[.]” Id. ¶ 17. In dismissing the claim for dissolution, Judge Bledsoe rejected plaintiff’s contention that the contested derivative suit against 518 Morehead was the “only material business activity” of Greymont. Instead, the Court concluded that the lawsuit did not “comprise all or even substantially all of Greymont’s current operations[.]” Id. ¶¶ 19-20.
The Court noted that Norris and Schaafsma were able to make cooperative decisions about the end stages of two other 4Line projects to which Greymont was providing development services, and that they are in accord “that Greymont should wind down its affairs and are taking steps to do so.” Id. ¶ 21. The Court concluded that this cooperation on other facets of Greymont’s business activities rebutted the notion of a broad-scale, corporate stalemate that Judge Bledsoe set as a dissolution standard in a 2014 case:
“[C]ooperative activity refutes Norris’s claim that the parties’ pleaded disagreement reflects . . . ‘discord [that] pervades every aspect of [the parties’] management’ of Greymont.”
Id. (quoting Battles v. Bywater, LLC, 2014 WL 5512304, * 7 (N.C. Super. Ct. Oct. 31, 2014). Plaintiff’s unsuccessful pitch was that the derivative suit was the only remaining “material” activity of Greystone, and that the partners’ agreed clean-up of remaining projects did not blunt the stalemate occasioned by the derivative suit.
Independent panel review of a derivative suit
The Court also rejected plaintiff’s alternate ask: to enable independent review of the derivative suit to determine if it “is in the best interest of the LLC.” N.C.G.S. § 57D-8-03(f). The statute allows a court to appoint one or more persons to review the continued “maintenance of the derivative proceeding” where such a motion is brought by the LLC. However, the court held the statute afforded no wiggle room to enable the independent review provision unless it is sought by the LLC. Id. ¶ 26. Here, no independent review of the derivative action was possible because it would have required Schaasfsma’s assent to have the LLC seek review of propriety of the action he brought on behalf of the entity. The Court also held that a motion seeking appointment of an independent person to examine the LLC’s best interests must be brought in the court where the derivative action is pending. Id. ¶ 36.
Liquidation of an LLC
The Court also rejected plaintiff’s claim that liquidation of Greymont was “necessary to protect [his] rights and interests.” N.C.G.S. § 57D-6-02(2). Judge Bledsoe determined that plaintiff’s claim was based on his interests in 518 Morehead and other grounds that did not affect his interests in Greymont, itself. That failed the well-settled requirement under North Carolina law that the “rights and interests” protected under the statute must be those arising from the entity sought to be dissolved. Foster v. Foster Farms, 112 N.C. App. 700, 709 (1993).
- Limited evidence of normal functioning within an LLC may well bar dissolution purportedly based on allegations of pervasive discord among members. Discrete controversies – even big ones – may not be enough to meet North Carolina’s exacting standards.
- Drafting operating agreements for LLCs with 50/50 control splits places special burdens on crafting dispute resolution paths to address de facto deadlocks that fall short of the criteria for judicial dissolution.
- See the movie! Searching for Bobby Fischer.
Brad Risinger is a partner in the Raleigh office of Fox Rothschild LLP.