Another Preliminary Injunction For Breach Of Fiduciary Duty

Another Preliminary Injunction For Breach Of Fiduciary Duty

For the second time in a space of two weeks, the North Carolina Business Court granted a motion for a preliminary injunction against an LLC member/manager as a result of breaches of fiduciary duty. The first case was GoRhinoGo, LLC v. Lewis, which I blogged about last week, and the second case, decided last Thursday, was Lake House Academy for Girls LLC v. Jennings, 2011 NCBC 40.

Lake House provides a residential therapeutic program to "troubled" girls aged 10 to 14. It is one of only two programs in the United States directed at that target age group. Lake House's boarding school is in Flat Rock, NC. The other program is located in Bend, Oregon. Op. ¶.5. (Where do the mothers of 10-14 year old girls go for therapy? My wife was fond of saying that she wanted to check into Charter Hills, a private psychiatric hospital in Greensboro, when our daughters were in that age bracket. As things turned out, I should have listened and dropped her off there.)

Ms. Jennings was a member manager of the Lake House LLC. Her breaches of fiduciary duty arose from her activities to set up a competing school in the same area as Lake House, to be called Glen Willow Academy. Judge Gale included in his opinion a laundry list of fiduciary duty violating conduct by Ms. Jennings. Op. ¶¶39a-j. This included soliciting Lake House employees to join the competitive entity, disparaging Lake House to the parents of daughters boarding there, leasing the space for Glen Willow's operations, and deleting documents from a Lake House computer.

Ms. Jennings defended the case on the basis that once she resigned as a manager of the LLC, she had no fiduciary duty to the LLC. And, as she frequently pointed out in her brief, she had not signed a non-compete. On that defense, she was part right. Members do not owe fiduciary duties to each other or to the entity. Op. ¶34. But managers do, and much of Ms. Jennings actions took place before she resigned as a manager. There was also an issue about whether her resignation as a manager was effective, because the Lake House Operating Agreement said that each member was a manager. Ms. Jennings had sought to retain her status as a member when she resigned. 

Read this article in its entirety on North Carolina Business Litigation Report, a blog for lawyers focusing on issues of North Carolina business law and the day-to-day practice of business litigation in North Carolina courts.

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