Sivadhanam v. 7 Hills Learning, LLC

Sivadhanam v. 7 Hills Learning, LLC, 2021 NCBC 53.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
WAKE COUNTY 20 CVS 4791

SRINIVAS SIVADHANAM,
individually and derivatively of 7
HILLS LEARNING, LLC and 7
HILLS LEARNING WAKE FOREST,
LLC,
ORDER AND OPINION ON
Plaintiffs, PLAINTIFF’S MOTION TO DISMISS
AMENDED COUNTERCLAIM
v.

7 HILLS LEARNING, LLC; 7 HILLS
LEARNING WAKE FOREST, LLC;
CHANDRASEKHAR
PUCHAKAYALA; and JITHENDAR
KANCHARLA,

Defendants.

1. THIS MATTER is before the Court on Plaintiff Srinivas Sivadhanam’s

(“Plaintiff”) Motion to Dismiss Amended Counterclaim (the “Motion” or “Motion to

Dismiss”) pursuant to North Carolina Rule of Civil Procedure (“Rule(s)”) 12(b)(6) filed

on 17 February 2021 in the above-captioned case. (ECF No. 15.) For the reasons

stated below, the Motion is DENIED.

Graebe Hannah & Sullivan, PLLC, by Christopher T. Graebe and John
William Graebe, for Plaintiff Srinivas Sivadhanam.

Fiduciary Litigation Group, by Thomas R. Sparks, for Defendants
Chandrasekhar Puchakayala and Jithendar Kancharla.

Earp, Judge.

I. INTRODUCTION

2. The individual parties in this matter are members of three LLCs, two in

North Carolina and one in New Jersey, that were organized to operate childcare
centers under franchise agreements with The Learning Experience (“TLE”). Plaintiff

brings this action individually and on behalf of the North Carolina entities alleging

that his colleagues are engaged in self-dealing and waste of corporate assets.

Defendants counterclaim that Plaintiff’s alleged mismanagement of the New Jersey

franchise constitutes a breach of fiduciary duty owed to them. The pending Motion

pertains to this counterclaim. A central issue is whether there is a controlling

operating agreement, oral, written, or otherwise, that speaks to the parties’ duties to

each other.

II. FACTUAL BACKGROUND

3. The Court does not make findings of fact when ruling on a motion to

dismiss under Rule 12(b)(6). See, e.g., Concrete Serv. Corp. v. Invs. Grp., Inc., 79 N.C.

App. 678, 681 (1986). Rather, the Court tests the claims by stating the relevant

factual allegations in the Amended Answer and Counterclaims (“Amended

Counterclaim”) construed in Defendants’ favor without being bound to any of the

alleged legal conclusions.

4. On 3 October 2012 Defendants Chandrasekhar Puchakayala (“Charlie”)

and Jithendar Kancharla (“Jeetu”; together, “Defendants”) executed a franchise

agreement with TLE in contemplation of their purchase of a TLE franchise in Chapel

Hill, North Carolina. (Am. Answer & Countercls. ¶ 1 [hereinafter “Countercl.”], ECF

No. 3.) Two weeks later, Defendants and Plaintiff signed a document entitled
“Partnership Agreement,” which gave each party a one-third interest in their

enterprise. (Countercl. ¶ 2; see Partnership Agreement, ECF No. 16.1. 1)

5. The Partnership Agreement specifically references the North Carolina

Uniform Partnership Act (the “Uniform Partnership Act”), stating that the parties

“desire to join together in a general partnership under and pursuant to the Uniform

Partnership Act, amended from time to time[.]” (Partnership Agreement, at

Explanatory Statement); see N.C.G.S. § 59-31, et seq. The Partnership Agreement

limits any duties imposed by the Uniform Partnership Act by allowing each partner

to “engage in and possess any interest in other business or ventures of every nature

and description, independently or with other persons, whether or not, directly or

indirectly, in competition with the business or purpose of the Partnership[.]”

(Partnership Agreement, at § 8.2.)

6. The Partnership Agreement has never been terminated. (Countercl.

¶ 5.)

A. The North Carolina Franchises (Chapel Hill and Wake Forest)

7. On 24 October 2012 the parties organized Nominal Defendant 7 Hills

Learning Center, LLC to operate the Chapel Hill TLE franchise (the “Chapel Hill

1 Although Defendants did not attach any of the relevant documents to their Counterclaim,

the Court may review on a motion to dismiss “a document . . . expressly referenced,” included
in the Complaint or Answer, and integral to the claims without converting the motion to one
for summary judgment. Tomlin v. Dylan Mortg. Inc., 2000 NCBC LEXIS 11, at *2 n.1 (N.C.
Super. Ct. June 12, 2000); see Oberlin Cap., L.P. v. Slavin, 147 N.C. App. 52, 60 (2001)
(“[W]hen ruling on a Rule 12(b)(6) motion, a court may properly consider documents which
are the subject of a plaintiff's complaint and to which the complaint specifically refers even
though they are presented by the defendant.”). Thus, the Court cites to those Plaintiff’s
exhibits integral to Defendants’ claim.
LLC”). (Countercl. ¶ 7.) The parties agree that they never executed a separate

document entitled “operating agreement” for the Chapel Hill LLC. (Countercl. ¶ 3;

Compl. ¶ 11, ECF No. 2.)

8. On 25 October 2012 the parties amended their franchise agreement with

TLE to include Plaintiff. (Countercl. ¶ 8.)

9. The parties agreed to be bound to the terms of the TLE franchise

agreement, which contains a provision that each of them, individually, as well as the

entity they thereafter organize, is considered an “Affiliate.” (Countercl. ¶ 9(a).)

10. Notably, the franchise agreement also contains a cross-default provision

giving TLE the right, in the event of default, not just to terminate the franchise

agreement of the defaulting franchise, but also to terminate (or pursue other

available remedies against) any other TLE franchise owned by any of the Affiliates,

even if that other franchise was co-owned by a party who had no ownership interest

in the defaulting franchise. (Countercl. ¶ 9(c); see First. Am. Franchise Agreement,

ECF No. 16.2.)

11. On 8 July 2016 the parties organized Nominal Defendant 7 Hills

Learning Wake Forest, LLC (the “Wake Forest LLC”; together with the Chapel Hill

LLC, the “North Carolina LLCs”), (Countercl. ¶ 12), for the purpose of establishing a

TLE franchise in Wake Forest, North Carolina, (Countercl. ¶ 13). They entered into

a franchise agreement for the Wake Forest LLC on 22 August 2016. That franchise

agreement contains the same cross-default provision as appears in the franchise

agreement for the Chapel Hill LLC. (Countercl. ¶ 14.) And, as with the Chapel Hill
LLC, the parties did not execute a separate document entitled “operating agreement”

for the Wake Forest LLC. (Countercl. ¶ 15; see also Compl. ¶ 11.)

12. On or about 2 September 2016, Defendants and Plaintiff amended their

Partnership Agreement to include a fourth business partner, Rahul Patel (“Patel”),

making each of them 25% interest-holders in the Wake Forest LLC. (Countercl. ¶ 17.)

Patel executed the franchise agreement for the Wake Forest childcare center on 8

September 2016. (Countercl. ¶ 18.)

13. On 28 February 2018, however, Patel left the Wake Forest LLC. The

parties then executed a “Partnership Dissolution Agreement” dissolving the

partnership only as to Patel and returning the parties to a one-third interest each.

(Countercl. ¶ 19.)

B. The New Jersey Franchise

14. At some point in 2016, Plaintiff expressed to Defendants his interest in

acquiring a third TLE franchise, this time in New Jersey, and offered Defendants the

opportunity to join him. Defendants declined the offer. (Countercl. ¶ 21.)

15. Thereafter, on 1 December 2016 Plaintiff organized a New Jersey LLC

under the name 7 Hills Learning, LLC (the “New Jersey LLC”) and served as its sole

member. (Countercl. ¶ 22.) On 15 December 2016 Plaintiff executed a franchise

agreement with TLE containing substantially the same provisions as stated above.

(Countercl. ¶ 23.) Plaintiff also executed a loan to fund the New Jersey LLC from

either TLE or a TLE-owned entity. (Countercl. ¶ 26.)
16. Plaintiff operated the New Jersey LLC alone until June 2017, although

he frequently sought Jeetu’s advice. (Countercl. ¶¶ 28–29.) Unfortunately, the New

Jersey LLC struggled, and “staff morale was low, enrollments dropped precipitously,

revenues decreased substantially, [and] employee retention became problematic,”

among other things. (Countercl. ¶ 30.) Given Plaintiff’s involvement with Jeetu in

the North Carolina franchises, TLE contacted both Plaintiff and Jeetu about its

concerns. (Countercl. ¶¶ 31–32.)

17. By late May or early June 2017, the New Jersey LLC’s financial

condition had deteriorated to the point that Plaintiff had sought assistance from

Charlie, who loaned the New Jersey LLC a total of $75,000. (Countercl. ¶ 33.)

Plaintiff sought help from both Defendants to “keep the New Jersey [LLC] viable and

operating.” (Countercl. ¶ 34.)

18. Meanwhile, TLE informed Defendants that pursuant to the cross-

default provisions in each of the franchise agreements, it would look to the North

Carolina LLCs to cover the resulting damages should the New Jersey LLC default.

(Countercl. ¶ 35.) According to Defendants, they faced a Hobson’s choice: let the New

Jersey LLC default and risk the future of the North Carolina LLCs, or help Plaintiff

keep the New Jersey LLC from defaulting and save the North Carolina LLCs from

application of the cross-default provision. (Countercl. ¶ 36.)

19. Even though they had not wanted to participate in the New Jersey

operation, Defendants chose the latter option, joined in the ownership of the New

Jersey LLC, and assumed the TLE loan, which had a balance of approximately
$165,000 at that time. (Countercl. ¶¶ 38–39.) On 12 June 2017 Jeetu and Charlie

signed a franchise agreement with TLE for the New Jersey LLC. (Countercl. ¶ 42.)

20. Prior to committing to invest in the New Jersey LLC, Defendants

requested the New Jersey LLC’s financial records to conduct their due diligence, but

Plaintiff refused to provide them. (Countercl. ¶ 40.) Defendants allege that “[i]n a

normal franchise acquisition process, such a refusal of financial transparency would

make the potential purchaser terminate the process; however, in this case,

[Defendants] knew that, had they not tried to salvage what they could of the New

Jersey [LLC], they risked default of the North Carolina [LLCs].” (Countercl. ¶ 41.)

Calling their participation a “forced ownership,” (Countercl. ¶ 43), Defendants allege

that they had “no choice but to tolerate their business partner’s abject lack of concern

or appreciation for what they were doing for him.” (Countercl. ¶ 41).

21. After joining as members, Defendants made capital contributions to the

New Jersey LLC to keep the center running. Jeetu contributed a total of $77,000,

and Charlie contributed a total of $89,000. (Countercl. ¶ 43.) Jeetu also took a

personal loan of $100,000 to help fund the New Jersey LLC’s flagging operations.

(Countercl. ¶ 45.)

22. Meanwhile, Plaintiff did not contribute “equally” to the New Jersey

LLC’s finances. (Countercl. ¶ 44.) The same was true of its operations. Although not

his desire to do so, Jeetu “undertook an active role in management.” At the same

time, however, Plaintiff “essentially abandoned the center.” (Countercl. ¶¶ 46–47.)
23. Shortly after joining the operation, Defendants discovered that bills had

gone unpaid for months and learned that the building had fallen into disrepair.

(Countercl. ¶ 48.) Despite their efforts, the downward spiral continued. TLE finally

issued a notice of default on 15 October 2017. (Countercl. ¶ 49.)

24. In early 2018, the parties paid $100,000 of their personal funds as part

of a transaction to extricate themselves from the New Jersey Center and transfer the

business to an unrelated third party. (Countercl. ¶ 50.) The transaction also required

that the Chapel Hill LLC assume repayment of the TLE loan, which still had a

balance of approximately $165,000, and Defendants were required to personally

guarantee all the debt of the New Jersey Center, including this loan. (Countercl.

¶ 51; see also Countercl. ¶ 9(d) (stating that each party “personally guaranteed all

obligations of the Chapel Hill TLE [f]ranchise incurred by any of them during their

operation of it” under the franchise agreements).)

25. Defendants allege that, despite having to take on “substantial and

unanticipated” debt from the New Jersey LLC, they have continued to manage the

North Carolina LLCs successfully. (Countercl. ¶ 53.) However, they contend that

Plaintiff’s actions with respect to the New Jersey LLC render him directly and

personally liable to Defendants for breach of fiduciary duty. (Countercl. ¶ 57.) This

is because, according to Defendants, the Partnership Agreement and franchise

agreements together constitute the operating agreement for both North Carolina
LLCs and impose special “partnership-like” fiduciary duties on the members. 2

(Countercl. ¶ 16.)

III. PROCEDURAL BACKGROUND

26. Plaintiff filed his Complaint on 14 April 2020. (Compl.)

27. Defendants filed their Answer and Counterclaims on 7 July 2020,

(Answer & Countercls., ECF No. 6), and their Amended Counterclaim on 5 January

2021. In their Amended Counterclaim, Defendants assert a single claim for breach

of fiduciary duty individually against Plaintiff. (Countercl. ¶¶ 58–61.)

28. Plaintiff filed his Motion to Dismiss Amended Counterclaim on 17

February 2021. (Mot. Dismiss Am. Countercl., ECF No. 15.) The Motion has been

fully briefed, and the Court heard oral arguments during a Hearing held on 11 August

2021, at which all parties except the nominal defendants were represented by

counsel. 3 The Motion is now ripe for determination.

IV. LEGAL STANDARD

29. “When reviewing a [counterclaim] . . . under Rule 12(b)(6), [the Court]

treat[s] a [claimant’s] factual allegations as true.” State ex rel. Cooper v. Ridgeway

Brands Mfg., LLC, 362 N.C. 431, 442 (2008) (quoting Stein v. Asheville City Bd. of

2 Despite the fact that one of the documents at issue is entitled “Partnership Agreement,”

and contrary to paragraph 16 of the Amended Counterclaim, (Countercl. ¶ 16 (stating the
theory that the parties are partners who owe each other fiduciary duties)), during the 11
August 2021 hearing on this Motion (the “Hearing”), counsel for Defendants stated that
Defendants do not contend that the parties were actually partners at the time of the relevant
events. Rather, Defendants contend that they, along with Plaintiff, were members in both of
the North Carolina LLCs but that the Partnership Agreement governed their relationship.
(Aug. 11, 2021 Hr’g Tr. 47:24–48:6 [hereinafter “Tr.”], ECF No. 41.)

3 Nominal Defendants have been unrepresented at all times since the filing of the Complaint.
Educ., 360 N.C. 321, 325 (2006)). However, “conclusions of law or unwarranted

deductions of fact are not admitted.” Wray v. City of Greensboro, 370 N.C. 41, 46

(2017) (quoting Arnesen v. Rivers Edge Golf Club & Plantation, Inc., 368 N.C. 440,

448 (2015)).

30. “Dismissal of an action under Rule 12(b)(6) is appropriate when the

[counterclaim] ‘fail[s] to state a claim upon which relief can be granted.’ ” Arnesen,

368 N.C. at 448 (quoting N.C. R. Civ. P. 12(b)(6)); see also Wray, 370 N.C. at 46 (“A

complaint should not be dismissed under Rule 12(b)(6) . . . unless it affirmatively

appears that plaintiff is entitled to no relief under any state of facts which could be

presented in support of the claim.” (citation and internal quotation marks omitted)).

31. “[A counterclaim] fails in this manner when: ‘(1) the [counterclaim] on

its face reveals that no law supports the [defendants’] claim; (2) the [counterclaim] on

its face reveals the absence of facts sufficient to make a good claim; or (3) the

[counterclaim] discloses some fact that necessarily defeats the [defendants’] claim.’ ”

Krawiec v. Manly, 370 N.C. 602, 606 (2018) (quoting Wood v. Guilford Cty., 355 N.C.

161, 166 (2002)).

V. ANALYSIS

32. Despite alleging in the alternative that the parties are either “Partners

who . . . owe fiduciary duties to each other” or “Co-Members of limited liability

companies who have expanded their duties to each other by making them fiduciaries

of each other,” and despite referencing fiduciary duties Plaintiff “owes his business

partners,” (Countercl. ¶¶ 16, 59), at the Hearing, Defendants abandoned their
partnership theory. Instead, they embraced their status as members of two LLCs but

argued that the LLCs’ operating agreement, which they contend is composed of a

combination of the pre-existing Partnership Agreement and the franchise

agreements, created fiduciary duties that Plaintiff breached. (Tr. 47:24–48:6.)

33. Plaintiff seeks dismissal of Defendants’ breach of fiduciary duty claim

based on the well-established rule in North Carolina that LLC members do not owe

fiduciary duties to their fellow members, (Br. Supp. Pl.’s Mot. Dismiss Am. Countercl.

9 [hereinafter “Pl.’s Br.”], ECF No. 16), and because, they argue, the Partnership

Agreement and franchise agreements do not impose specific fiduciary duties, (Pl.’s

Br. 10).

34. “For a breach of fiduciary duty to exist, there must first be a fiduciary

relationship between the parties.” Dalton v. Camp, 353 N.C. 647, 651 (2001). “As

explained by our Court of Appeals, the North Carolina Limited Liability Company

Act ‘does not create fiduciary duties among members’ of an LLC.” Slattery v.

Appycity, LLC, 2021 NCBC LEXIS 24, at *24 (N.C. Super. Ct. Mar. 24, 2021) (quoting

Kaplan v. O.K. Techs., LLC, 196 N.C. App. 469, 473 (2009)); see generally N.C.G.S.

§ 57D-1-01, et seq.

35. In addition, it is settled law that LLC members generally cannot

maintain an individual claim against another member for harms suffered by the LLC.

See Green v. Freeman, 367 N.C. 136, 142 (2013) (“The general rule is that

‘[s]hareholders, creditors or guarantors of corporations generally may not bring

individual actions to recover what they consider their share of the damages suffered
by the corporation.’ ” (quoting Barger v. McCoy Hillard & Parks, 346 N.C. 650, 660

(1997)); Bennett v. Bennett, 2019 NCBC LEXIS 19, at *13 (N.C. Super. Ct. Aug. 6,

2019) (“These rules apply equally to LLCs and their members because the members

are, for this purpose, functionally equivalent to corporate shareholders.” (citation and

internal quotation marks omitted)).

36. Under Barger, however, an LLC member may maintain an individual

action against a fellow LLC member for a harm that “directly affects” the member if

he can show “that the wrongdoer owed him a special duty or that the injury suffered

by the [member] is separate and distinct from the injury sustained by the other

[members] or the [LLC] itself.” Barger, 346 N.C. at 659.

37. As members of an LLC, the parties here were free to define their

relationship. See Vanguard Pai Lung, LLC v. Moody, 2019 NCBC LEXIS 39, at *17–

18 (N.C. Super. Ct. June 19, 2019) (“Because ‘an LLC is primarily a creature of

contract,’ the members are generally free to arrange their relationship however they

wish. Among other things, they may depart from statutory default rules, . . . and

impose or eliminate fiduciary duties for members and managers.” (quoting Crouse v.

Mineo, 189 N.C. App. 232, 237 (2008)) (citations omitted)).

38. Typically, the relationship among and between the members and the

LLC is defined in an operating agreement. However, the North Carolina Limited

Liability Company Act does not require an operating agreement, nor does it prescribe

the form that an operating agreement must take. See N.C.G.S. § 57D-1-03(23)

(defining “operating agreement” as “[a]ny agreement concerning the LLC or any
ownership interest in the LLC to which each interest owner is a party or is otherwise

bound as an interest owner” and stating that “the operating agreement may be in any

form, including written, oral, or implied, or any combination thereof”).

39. Defendants plead repeatedly that the Partnership Agreement

constitutes the governing document for their business enterprise, regardless of the

term they used for themselves or the corporate form their business eventually took.

Going a step further, Defendants plead that the franchise agreements, or at least

certain provisions thereof, form part of the governing document, and that by

describing their obligations with respect to the management of the North Carolina

LLCs through these franchise agreements, they have further defined the fiduciary

duties they owed to one another. (See, e.g., Countercl. ¶ 10 (“By October 25, 2012,

[the parties] were business partners, and the terms of their partnership were defined

by said Partnership Agreement and the obligations each owed to the others imposed

by the Franchise Agreement and the amendment thereto.”).)

40. Defendants further plead that the incorporation of fiduciary duties

imposed by the Uniform Partnership Act in the document creates “special duties”

under Barger, permitting their direct action. (Countercl. ¶ 16 (“[The parties are] Co-

Members of limited liability companies who have expanded their duties to each other

by making them fiduciaries of each other[.]”); see also Br. Opp’n Mot. Dismiss Am.

Countercl. 14 [hereinafter “Br. Opp’n”], ECF No. 21 (“[B]y virtue of the reality that

the parties executed the Partnership Agreement, they elected to impose, individually,

fiduciary duties on themselves to each other.”).)
41. The Court determines that, under the standard set by Rule 12(b)(6),

Defendants have alleged facts sufficient to state a claim.

42. In his briefing and at the Hearing, Plaintiff urged the Court to go beyond

the pleadings and to consider as determinative how unlikely it would be for the

parties to intend for a Partnership Agreement and franchise agreements that predate

the formation of the LLCs to constitute the operating agreement for the LLCs. (Reply

Br. Pl.’s Mot. Dismiss Am. Countercl. 7, ECF No. 25 (“[W]hen the Partnership

Agreement and Franchise Agreement (and the amendment adding [Plaintiff]) were

executed, the two [North Carolina] LLCs did not exist.”); Tr. 9:20–10:4 (highlighting

the argument’s “facial absurdity”).) However, nothing in the LLC Act forbids the

formation of an operating agreement prior to organization of the LLC itself, see

N.C.G.S. § 57D-1-03(23), nor has Plaintiff presented any authority supporting that

proposition.

43. The Court observes that the Partnership Agreement expressly

contemplates the formation of an entity to operate as a “[d]ay care center” under TLE,

and that the Partnership Agreement was executed only seven days prior to the

organization of the Chapel Hill LLC. (See Partnership Agreement.) The short period

of time between execution of the Partnership Agreement and the formation of the

first LLC contemplated under the Partnership Agreement suggests that the

Partnership Agreement, at the very least, “concern[ed] the LLC[.]” See N.C.G.S. §

57D-1-03(23).
44. In addition, the parties’ franchise agreements, which also contemplate

the existence of TLE childcare centers and contain the cross-default provisions, were

likewise executed in close proximity to the time the LLCs were organized. The Court

cannot ignore the parties’ pleading stating that they intended for the several

agreements in combination to establish their duties to each other. (See Countercl.

¶¶ 1, 8, 14); see also N.C.G.S. § 57D-1-03(23).

45. Furthermore, in this case, Defendants allege that their relationship

began with the Partnership Agreement and that they continued to abide by its terms

to both add and subtract Patel as a member after the LLCs were organized. (See

Countercl. ¶¶ 17, 19.) The parties’ continued reliance on the Partnership Agreement

and its terms, even after formation of the LLCs, could indicate that the parties still

considered the Partnership Agreement to govern their relationship and explain why

they never refashioned the documents into a more traditional operating agreement.

46. The Court cannot say as a matter of law, then, that the Partnership

Agreement, alone or in combination with the franchise agreements, constitutes or

does not constitute an operating agreement that created fiduciary duties between and

among the parties.

47. Plaintiff urges the Court to take judicial notice of Defendants’ sworn

statements in another forum as proof that no operating agreement existed for the

North Carolina LLCs. (Pl.’s Br. 10–11.) On a motion to dismiss, the Court may

“consider records of which it has taken judicial notice.” BB&T Boli Plan Trust v.

Mass. Mut. Life Ins. Co., 2016 NCBC LEXIS 36, at *27 (N.C. Super. Ct. Apr. 29, 2016)
(citing Wood v. J.P. Stevens & Co., 297 N.C. 636, 641 (1979) (“[I]t is clear that judicial

notice can be used in rulings on . . . motions to dismiss for failure to state a claim[.]”)).

The Court may take judicial notice of adjudicative facts that are not subject to

reasonable dispute because they are either “generally known within the territorial

jurisdiction of the trial court” or “capable of accurate and ready determination by

resort to sources whose accuracy cannot reasonably be questioned.” N.C. R. Evid.

201(a)–(b).

48. Plaintiff has presented Defendants’ sworn statements from a Verified

Complaint filed in New Jersey stating that “[t]he [North Carolina] LLCs were created

without operating agreements and at no time since their creation have operating

agreements been executed or otherwise ratified for these LLCs.” (Verified Compl.

¶ 16, ECF No. 16.10.) Defendants further pleaded that in 2017, they “drafted and

attempted to execute operating agreements for the [North Carolina] LLCs, as well as

the [New Jersey] LLC, but [Plaintiff] refused to sign.” (Verified Compl. ¶ 37.)

49. Defendants respond that their statements in the New Jersey pleading

meant only that no document entitled “operating agreement” exists for either North

Carolina LLC, but that they, instead, operated under the terms of the Partnership

Agreement and the franchise agreements. (Tr. 23:20–24:11.)

50. Even were the Court to take judicial notice of this pleading as Plaintiff

urges, the sworn statements do not foreclose Defendants’ Amended Counterclaim at

this juncture. Rather, the sworn statements establish that Defendants attempted to

procure an executed document entitled “operating agreement” for each of the LLCs,
but that they were not successful. The statements do not speak directly to whether

the parties intended for the Partnership Agreement and franchise agreements to

serve as the LLCs governing documents until another agreement could be executed.

51. While it would be an unusual set of circumstances that would lead a

fact-finder to conclude that the parties intended portions of commercial agreements,

particularly those agreements that involve third parties such as the franchise

agreements at issue here, to serve as the governing documents for a limited liability

company, on this record the Court cannot as a matter of law rule out that possibility.

This is particularly so when each of the documents explicitly references the business

to be formed as the LLC. (See, e.g., Partnership Agreement, at Explanatory

Statement (stating that the parties desired to enter into the business of “purchasing,

acquiring, operating, leasing, owning and selling Day care center from TLE[.]”).)

52. Less unusual would be a scenario in which a closely held LLC starts as

a “partnership” and continues to both refer to itself in those terms and govern itself

by a “partnership agreement” even after organizing as an LLC. Again, under these

unique circumstances, the Court cannot conclude that the facts alleged fail to present

a claim under Rule 12(b)(6).

53. Defendants also point to the cross-default provisions within the

franchise agreements in support of their theory that a higher standard of care was

imposed on the Plaintiff. (Br. Opp’n 14–16.) The Court makes no determination at

this time as to whether the parties ultimately intended the franchise agreements’

terms to speak to their duties with respect to one another as part of an operating
agreement. Instead, the Court determines that this is more properly decided on a

more developed record.

54. As to Plaintiff’s argument that Defendants have failed to specify the

fiduciary duty that was breached and how it was breached, the Court applies a notice

pleading standard. Global Textile All., Inc. v. TDI Worldwide, LLC, 2018 NCBC

LEXIS 159, at *11 (N.C. Super. Ct. Nov. 29, 2018) (“North Carolina is a notice

pleading state.” (citing Feltman v. City of Wilson, 238 N.C. App. 246, 252 (2014))).

“Under notice pleading, a statement of claim is adequate if it gives sufficient notice

of the claim asserted to enable the adverse party to answer and prepare for trial, to

allow for the application of the doctrine of res judicata, and to show the type of case

brought.” Feltman, 238 N.C. App. at 252; (see also Countercl. ¶¶ 58–61 (alleging a

breach of fiduciary duty claim that does not rise to the level of fraud)). Accordingly,

the Court concludes that Defendants have adequately alleged a claim for breach of

fiduciary duty.

55. In sum, based on the allegations in the Amended Counterclaim, the

documents expressly referenced in the Amended Counterclaim and submitted to the

Court, and the facts alleged that are unique to this case, the Court cannot say as a

matter of law that no fiduciary duty exists between the parties. See Wray, 370 N.C.

at 46.

56. The Court therefore DENIES Plaintiff’s Motion to Dismiss. However,

the Court reserves judgment on which fiduciary duty has been implicated, whether

under the Uniform Partnership Act or otherwise; whether a breach of fiduciary duty
has actually occurred; and whether the harms alleged here give rise to a direct claim

under Barger. The Court merely holds at this juncture that Defendants’ Amended

Counterclaim, taken as true for purposes of this Motion, has pleaded facts sufficient

to meet the Rule 12(b)(6) standard and proceed to discovery.

VI. CONCLUSION

57. WHEREFORE, for the reasons set forth above, the Court hereby

DENIES Plaintiff’s Motion to Dismiss.

IT IS SO ORDERED, this the 8th day of September, 2021.

/s/ Julianna Theall Earp
Julianna Theall Earp
Special Superior Court Judge
for Complex Business Cases