Business Court Probes Gray Areas Between “Control” and “Opportunity”
Mary Hartsell is a nurse practitioner who joined Mindpath Care Centers, North Carolina, PLLC in April 2001 as a member, minority interest holder, and employee. Mindpath provides mental and behavioral care in North Carolina, advertising itself with 15 locations across the state. In Hartsell v. MindPath Care Ctrs., N.C., 2022 NCBC 66, plaintiff alleged MindPath was not meeting its obligation to pay her 50% of the monthly gross on her clinical work.
Not content with explanations for these pay discrepancies, Hartsell resigned from Mindpath in November 2017 and requested that her ownership interest be redeemed. But she alleged her exit was frustrated by accusations that she improperly withdrew from the entity, and then by claims that “Mindpath had adopted a policy not to redeem the interests of withdrawing partners.” Id. ¶¶ 14-16.
As plaintiffs alleges it, it turns out she didn’t join all of the right entities.
Hartsell alleges that she knew portions of the receipts for her work were used to pay overhead and expenses but didn’t know such payments were going to an entity, defendant MISO, LLC, owned and controlled by other Mindpath officials and members. The complaint alleged Mindpath’s president, Stanley Monroe, was a managing member of MISO; and that his sister, Yvonne Monroe, was a member in both Mindpath and MISO. Plaintiff also claimed that Stanley and Yvonne’s brother, Steven, participated in their control of MISO. Id. ¶¶ 6, 9, 10.
When Hartsell sought to investigate these “insider transactions” she alleged Stanley Monroe “concealed information from [her] from which she could ascertain the circumstances.” Further, she claimed that a demand for corporate records under N.C.G.S. § 57D-3-04 so that she could determine the value of her interest in MindPath was met only with a monetary figure that lacked supporting records, and a return allegation that she improperly solicited MindPath’s patients. ¶¶ 10, 12, 18.
The vitality of plaintiff’s claims for fiduciary duty and constructive fraud centered on whether there was a way around the well-settled rule that LLC members “do not owe a fiduciary duty to each other[.]” Kaplan v. O.K. Techs., L.L.C., 196 N.C. App. 469, 473 (2009). Judge Earp observed that “LLCs are creatures of contract, and the members may choose to impose fiduciary duties on one another by agreement[,]” but the record reflected no such agreement. Hartsell, ¶ 34. With no basis for a de jure fiduciary duty, plaintiff was left to meet the demanding test of a de facto duty “when one party figurately holds all the cards – all the financial power or technical information, for example.” Id. ¶ 36 (quoting Lockerman v. S. River Elec. Mbrshp. Corp., 250 N.C. App. 631. 636 (2016).
Hartsell argued the Lockerman standard was met because Stanley Monroe’s officer status in Mindpath and ownership interest in MISO, and Yvonne’s dual ownership roles, allowed them to orchestrate “a series of insider transactions between the two companies.” Id. ¶ 38. Without ruling on the alleged scheme itself, the Business Court found that the complaint insufficiently alleged that Stanley Monroe alone, or in cohort with his sister, “exercised sufficient dominion or control over Mindpath to owe fiduciary duties” to Hartsell. Id. ¶ 41.
It was significant to the Court that while Stanley Monroe “may have wielded power as an officer of Mindpath,” an allegation that he held “all the cards” had to be weighed against the reality that plaintiff Hartsell, as a member herself, had “cards to play” under the operating agreement. Id. Moreover, the Court held that the unique way in which the Monroe family operated and owned the entities barred a claim under the doctrine that “the holder of a majority interest who exercises control over the LLC owes a fiduciary duty to the minority interest members.” Id. ¶¶ 41-42. Judge Earp noted that whatever control Stanley Monroe exerted as an officer, or together with his sister, neither was premised on owning a majority interest in Mindpath – the only entity in which Hartsell had an interest.
- Establishing a de facto fiduciary duty in North Carolina is a tall order, and the Business Court’s several references to the lack of pleading detail underscores the need for detailed allegations.
- The Court also reminded that such pleading insufficiency cannot be overcome with an attorney’s interpretative aid. “It is established law that the Court must consider the Amended Complaint as plead and not as argued by counsel.” ¶ 39.
Brad Risinger is a partner in the Raleigh office of Fox Rothschild LLP.