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
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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