By Jeff MacHarg and Camryn Rohr
To practitioners familiar with internal disputes involving closely held companies, the allegations in Lafayette Village Pub, LLC v. Burnham, 2025 NCBC 8, are nothing new. The member running the business (allegedly) made bad, self-interested decisions. The other members complained, and eventually litigation ensued.
Evaluating these disputes should almost always begin with the operating agreement, but for whatever reason, the members here never agreed to one. So, this motion to dismiss ruling is founded on default rules and duties under North Carolina’s LLC Act, N.C. Gen. Stat. § 57D-1-101 et seq. and case law. To the unfamiliar, these rules can seem counterintuitive and maybe even unfair, particularly when one member-manager does what is alleged here. But the other members could have intervened, and they didn’t. Inaction was their undoing. As Judge Davis summed it up,
Ultimately, the present case serves as yet another example of the limits on a court’s willingness to protect members of an LLC from the consequences of their own decision not to insist on the adoption of an operating agreement and their failure to be vigilant in exercising their rights.
This case involves two North Carolina LLCs, each with three members: Kenneth Burnham, John Bronson, and Paul Bronson. Burnham individually owned the largest percentage of each LLC but never owned more than 50% in either company. Neither LLC had an operating agreement, and the Articles of Organization for both made clear they were member-managed, each member had equal voting power, and majority decisions rule. This is all consistent with the default rules established by North Carolina’s LLC Act. (See N.C. Gen. Stat. § 57D-3-20.)
While individually the Bronsons were each a minority member, together, the Bronsons had two votes to Burnham’s one, so they could have could have exercised the majority ownership interest and effectively controlled the companies. Instead, as the Bronsons allege, Burnham ran things by himself and exercised complete control over the companies. The Bronsons allege that Burnham made self-interested decisions to the detriment of the Bronsons; paid his friends and family for doing nothing; and took for himself company property. The Bronsons asserted individual and derivative claims against Burnham for breach of fiduciary duty and constructive fraud (among other claims).
Burnham filed a motion to dismiss the individual claims for breach of fiduciary duty and constructive fraud arguing that he owed his fellow manager-members no such fiduciary duties. After a careful analysis, Judge Davis agreed and dismissed these claims with prejudice.
Judge Davis assessed both types of fiduciary duties: de jure (as a matter of law) and de facto (based on the facts), concluding that neither applied. De jure fiduciary duties are limited to legal relationships such as attorney-client, doctor-patient, and guardian-ward. Judge Davis acknowledged that the list of recognizable de jure relationships are limited. Member-member relationships are different. LLCs are “creatures of contract,” and members are free to arrange their relationships “however they wish.” Members could, and indeed often do, impose fiduciary duties on each other; but they do it by contract (i.e. an operating agreement). With no operating agreement, Judge Davis concluded a member-member relationship, without more, does not create a de jure fiduciary relationship.
Judge Davis next assessed whether there was a de facto fiduciary relationship. There was not. Fiduciary duties between LLC members are limited and arise only when the controlling member has actual control, and the other members can’t do anything about it. Judge Davis certainly took note of Burnham’s exercise of control, unilateral decisions, and alleged malfeasance. But the Bronsons failed to explain what prevented them from intervening. The complaint made no allegations that the Bronsons ever called any meetings or votes. And nothing in the pleadings suggests that Burnham threatened or coerced the Bronsons into inaction. Nor is there any indication that Burnham attempted to hide his alleged misconduct. Yet, the Bronsons allowed these activities to continue for years, when the Articles of Incorporation gave them controlling voting power to stop it.
Judge Davis held that “caution should be exercised” before recognizing a de facto fiduciary duty. The Bronsons, like any LLC member, could have insisted on an operating agreement (imposing fiduciary duties) before they invested. And nothing was alleged that prevented them from calling a meeting and putting any one of Burnham’s decisions to a vote. As Judge Davis put it, “in a nutshell, the Complaint merely alleges that Burnham sought to exercise more power than he actually possessed over the Companies and that the Bronsons inexplicably let him do it.” That’s not enough to establish a fiduciary relationship.
Takeaways:
Operating agreement, operating agreement, operating agreement. Always have an operating agreement.
Know your rights. Although unstated, it sure seems like the Bronsons mistakenly thought Burnham, the largest individual shareholder, had the right to do as he did. But, as Judge Davis made clear, the Bronsons, acting together, actually had the controlling votes all along.
Who really won here? Although Burnham won this battle, he may have lost the war. Sure, Judge Davis granted his motion in part, dismissing the Bronsons individual claims for breach of fiduciary duty and constructive fraud (with prejudice). But Judge Davis’ rationale lights the path for the Bronsons, acting together, to take complete control of the Companies.