Vanguard Pai Lung, LLC v. Moody

Vanguard Pai Lung, LLC v. Moody, 2019 NCBC 38.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
MECKLENBURG COUNTY 18 CVS 13891

VANGUARD PAI LUNG, LLC; and
PAI LUNG MACHINERY MILL CO.
LTD.,

Plaintiffs,

v.

WILLIAM MOODY; NOREEN
MOODY; MARY KATE MOODY;
MICHAEL MOODY; NOVA
TRADING USA, INC.; and NOVA ORDER AND OPINION
WINGATE HOLDINGS, LLC, ON PLAINTIFFS’ MOTION
TO DISMISS COUNTERCLAIMS
Defendants.

WILLIAM MOODY; NOVA
TRADING USA, INC.; and NOVA
WINGATE HOLDINGS, LLC,

Counterclaim Plaintiffs,

v.

VANGUARD PAI LUNG, LLC; and
PAI LUNG MACHINERY MILL CO.
LTD.,

Counterclaim Defendants.

1. This case arises out of disputes between the members and managers of

Vanguard Pai Lung, LLC (“Vanguard”), a North Carolina limited liability company.

Vanguard and its majority member, Pai Lung Machinery Mill Co. (“Pai Lung”),

brought this suit against six defendants: William Moody, Vanguard’s former

President and Chief Executive Officer; Nova Trading USA, Inc. (“Nova Trading”),

Vanguard’s minority member and a company wholly owned by Moody; Nova Wingate

Holdings, LLC, another company owned by Moody; and three of Moody’s family
members. In short, Plaintiffs allege that Moody has been siphoning cash and assets

from Vanguard to benefit himself and his family for the better part of a decade.

2. Defendants deny any wrongdoing and claim to be the real victims. Moody,

Nova Trading, and Nova Wingate Holdings have asserted counterclaims premised on

allegations that Pai Lung used its majority position to control Vanguard, force Moody

out of the business, and frustrate the minority rights of Nova Trading. In addition to

asserting sundry counterclaims for breach of contract and breach of fiduciary duty,

Moody and Nova Trading ask the Court to dissolve Vanguard.

3. Vanguard and Pai Lung have moved to dismiss many but not all of the

counterclaims under Rule 12(b)(6) of the North Carolina Rules of Civil Procedure.

For the following reasons, the Court DENIES the motion.

Womble Bond Dickinson (US) LLP, by Matthew F. Tilley, Russ Ferguson,
and Patrick G. Spaugh, and Perkins Coie LLP, by John P. Schnurer,
Sean T. Prosser, John D. Esterhay, and Yun (Louise) Lu, for
Plaintiffs/Counterclaim Defendants Vanguard Pai Lung, LLC and Pai
Lung Machinery Mill Co. LTD.

Johnston, Allison & Hord, P.A., by Patrick E. Kelly, Michael J. Hoefling,
and David V. Brennan, for Defendants/Counterclaim Plaintiffs William
Moody, Nova Trading USA, Inc., and Nova Wingate Holdings, LLC.

Burns, Gray & Gray, by John T. Burns, for Defendants Noreen Moody,
Mary Kate Moody, and Michael Moody.

Conrad, Judge.
I.
BACKGROUND

4. The Court does not make findings of fact on a Rule 12(b)(6) motion to

dismiss. The following factual summary is drawn from relevant allegations in the

amended answer and counterclaims and its exhibits. (ECF No. 59 [“Countercl.”].)
5. Vanguard, a maker and seller of high-speed circular knitting machines, is

the latest incarnation of a business once owned by Singer Co. and, more recently, by

Monarch Knitting Machinery Corp. (See Countercl. ¶¶ 10–12, 22.) Formed in 2009,

Vanguard had three initial members: Pai Lung (with a 51% interest), Nova Trading

(with a 25% interest), and Leo Yates (with a 24% interest). (Countercl. ¶ 33.) Based

in Taiwan, Pai Lung is one of the world’s largest manufacturers of circular and flat

weft knitting machines. (Countercl. ¶ 15.) Nova Trading, a North Carolina company,

also manufactures knitting machines and is wholly owned by Moody. (Countercl.

¶¶ 2, 13.) Yates is one of Moody’s longtime business partners and industry associates.

(Countercl. ¶ 10.)

6. An Operating Agreement governs Vanguard’s operations and the rights and

obligations of its members. The company is managed by a board of managers, which

must consist of at least three but no more than five managers. (Pls.’/Counter-Defs.’

Mem. in Supp. Partial Mot. Dismiss Am. Countercl. Ex. A § 3.1(a), (c), ECF No. 63.1

[“Op. Agrmt.”].) At least initially, Pai Lung had authority to appoint three of the five

managers, and Nova Trading and Yates had authority to appoint one each. (Op.

Agrmt. § 4.3(b)(i)–(iii).) Once elected, the managers may make “all decisions with

respect to the management of the business and affairs” of Vanguard by a majority

vote, except for some actions that require a supermajority vote of the members. (Op.

Agrmt. § 3.1(a); see also Op. Agrmt. §§ 3.4, 4.4.) Members, on the other hand, are not

permitted to “take part in the management or control of the business” in their

capacity as members. (Op. Agrmt. § 4.2.)
7. To fill its allotted three board positions, Pai Lung appointed its president

and chairman, James Wang, along with Wang’s father and uncle. (Countercl. ¶¶ 17,

34, 35.) The other two board slots went to Moody (appointed by Nova Trading) and

Yates (self-appointed). (See Countercl. ¶ 34.) The company’s initial officers, as

named in the Operating Agreement, included Moody as President and Chief

Executive Officer and Yates as Secretary and Chief Operating Officer. (Op. Agrmt.

§ 3.2(a).) According to Moody, he also had a separate oral employment agreement in

his role as an officer. (Countercl. ¶ 30.)

8. In 2011, Yates resigned, and Wang’s father died. These events opened two

vacancies on the board of managers. (Countercl. ¶¶ 37, 40.) Yates’s position has

never been filled, but Pai Lung filled its open seat with one of its agents. (Countercl.

¶¶ 41, 42.) When Yates resigned, he also sold his membership interest to Vanguard,

leaving Pai Lung and Nova Trading as the two remaining members, with 67.1053%

and 32.8947% interests, respectively. (Countercl. ¶ 38.)

9. That was the status quo until 2017 when Moody and Wang locked horns

over company management. (Countercl. ¶¶ 45, 51.) To start, Pai Lung insisted on

hiring Penny Peng, a Pai Lung employee and agent, as Vanguard’s financial

manager. (Countercl. ¶¶ 47, 48.) Moody thought the move was a fiasco. He objected

to Peng’s qualifications and her cumbrous practice of consulting Wang, halfway

around the globe, before making a decision. (Countercl. ¶¶ 49, 50.) The situation

only worsened when Wang began ignoring communications from Moody and others.
(See Countercl. ¶ 51.) Then, in November 2017, the board of managers—chaired by

Wang—voted to remove Moody as President. (Countercl. ¶¶ 36, 52.)

10. At the same time, Peng began withholding commission payments from Nova

Trading. (Countercl. ¶ 62.) These payments were part of an alleged agreement

(“Commission Agreement”) made among Pai Lung, Nova Trading, and Vanguard in

January 2017. (Countercl. ¶¶ 55–58, 60–61.) In a nutshell, Vanguard would pay

increased prices for parts and machines that it purchased from Pai Lung, and Nova

Trading would in turn receive a commission of five percent on parts and ten percent

on machines. (Countercl. ¶ 56.) In effect, the Commission Agreement served to offset

the decrease in distributions to Nova Trading that would result from the increased

prices being paid by Vanguard to Pai Lung. (Countercl. ¶ 60.)

11. Moody also claims that Vanguard refused to pay him a profit-sharing bonus

for 2017. (Countercl. ¶ 71.) According to Moody, he agreed at the beginning of 2017

to assume additional responsibilities in exchange for a fifteen percent profit-sharing

bonus, to be paid annually to Moody or Nova Trading (“Profit-Sharing Agreement”).

(Countercl. ¶¶ 68, 69.) That payment was never made. (Countercl. ¶ 69.)

12. In mid-2018, a majority of the board of managers terminated Moody’s

employment as Chief Executive Officer. (Countercl. ¶ 52.) Two months later,

Vanguard and Pai Lung filed this suit. They allege that Moody, as officer and

manager of Vanguard, orchestrated a massive fraud on the company for the past ten

years, siphoning money and assets for the benefit of himself and his family.
13. Moody and Nova Trading1 respond that they are the victims of a scheme by

Wang and Pai Lung to take complete control of Vanguard. (See Countercl. ¶ 53.)

Today, Moody remains a Vanguard manager, and Nova Trading remains a member,

but they allege that they have been effectively sidelined by Pai Lung and the Pai

Lung-controlled board of managers. (See Countercl. ¶¶ 52–54.) In their amended

answer and counterclaims, Moody and Nova Trading assert twelve counterclaims for,

among other things, breaches of the Operating Agreement, the Commission

Agreement, the Profit-Sharing Agreement, and Moody’s oral employment agreement.

They further assert that Pai Lung, as majority member, owed a fiduciary duty to

Nova Trading, as minority member, and breached that duty. And they seek judicial

dissolution of Vanguard.

14. In this motion, Pai Lung and Vanguard seek to dismiss eight of the twelve

counterclaims. (Partial Mot. Dismiss Am. Countercl., ECF No. 62.) The motion has

been fully briefed, and the Court held a hearing on April 17, 2019. (ECF No. 66.) The

motion is ripe for decision.

II.
ANALYSIS

15. A motion to dismiss under Rule 12(b)(6) “tests the legal sufficiency of the”

disputed pleading, here the amended counterclaims. Concrete Serv. Corp. v. Inv’rs

Grp., Inc., 79 N.C. App. 678, 681, 340 S.E.2d 755, 758 (1986). The motion should be

granted only when: (1) the pleading “on its face reveals that no law supports” the

1The merits of this motion do not implicate the third counterclaimant, Nova Wingate
Holdings, or any of the remaining defendants.
asserted claim; (2) the pleading “on its face reveals the absence of facts sufficient to

make a good claim;” or (3) the pleading “discloses some fact that necessarily defeats”

the claim. Corwin v. British Am. Tobacco PLC, 371 N.C. 605, 615, 821 S.E.2d 729,

736–37 (2018) (citation and quotation marks omitted).

16. In deciding a Rule 12(b)(6) motion, the Court must treat the well-pleaded

allegations of the counterclaims as true and view the facts and permissible inferences

“in the light most favorable to” the non-moving party. Ford v. Peaches Entm’t Corp.,

83 N.C. App. 155, 156, 349 S.E.2d 82, 83 (1986). “[T]he court is not required to accept

as true any conclusions of law or unwarranted deductions of fact.” Oberlin Capital,

L.P. v. Slavin, 147 N.C. App. 52, 56, 554 S.E.2d 840, 844 (2001). The Court may

consider documents that are the subject of the counterclaims and to which the

counterclaims specifically refer without converting a Rule 12(b)(6) motion into a

motion for summary judgment. Weaver v. St. Joseph of the Pines, Inc., 187 N.C. App.

198, 204, 652 S.E.2d 701, 707 (2007) (quoting Oberlin Capital, 147 N.C. App. at 60,

554 S.E.2d at 847).

A. Contract Claims

17. Four disputed counterclaims relate to contracts that were allegedly

breached around the time that Vanguard’s board terminated Moody from his official

positions. As alleged, Vanguard withheld commissions from Nova Trading under the

Commission Agreement, refused to pay any bonus under the Profit-Sharing

Agreement, and failed to pay Moody for accrued vacation time as required by his oral

employment agreement. (Countercl. ¶¶ 126, 132, 143.) Moody and Nova Trading
also allege that Vanguard breached the implied covenant of good faith and fair

dealing in each contract. (Countercl. ¶¶ 147, 148.) These four counterclaims are

asserted against only Vanguard.

18. A theme of Vanguard’s brief in support is that the allegations lack detail

and are not supported by corroborating evidence. Vanguard describes the alleged

contracts as “vaguely-articulated.” (Pls.’/Counter-Defs.’ Mem. in Supp. Partial Mot.

Dismiss Am. Countercl. 7, ECF No. 63 [“Mem. in Supp.”].) It contends that the

allegations omit, among other things, who engaged in contract negotiations, when the

negotiations happened, where the contracts were finalized, and why Vanguard would

supposedly have been motivated to enter into them. (See, e.g., Mem. in Supp. 8, 10,

11; see also Pls.’/Counter-Defs.’ Reply in Supp. Partial Mot. Dismiss Am. Countercl.

4, 5, ECF No. 67 [“Reply Br.”].) It also questions the veracity of several allegations—

for example, that certain e-mails were sent or that commission payments were made

for part of 2017—because Moody and Nova Trading haven’t supplied evidence to back

them up. (See Mem. in Supp. 8; Reply Br. 3, 5 n.2.)

19. Two initial observations are necessary. First, claims for breach of contract

are “not subject to heightened pleading standards.” AYM Techs., LLC v. Rogers, 2018

NCBC LEXIS 14, at *52 (N.C. Super. Ct. Feb. 9, 2018). Rather, they must meet the

usual, liberal standard of Rule 8, which requires only a “short and plain statement of

the claim” sufficient to put the court and parties on notice of the events giving rise to

the claim. N.C. R. Civ. P. 8(a)(1). It is enough to plead the “(1) existence of a valid

contract and (2) breach of the terms of that contract.” Poor v. Hill, 138 N.C. App. 19,
26, 530 S.E.2d 838, 843 (2000). When these elements are alleged, “it is error to

dismiss a breach of contract claim under Rule 12(b)(6),” and our appellate courts

routinely reverse trial court orders that require anything more. Woolard v.

Davenport, 166 N.C. App. 129, 134, 601 S.E.2d 319, 322 (2004); see also, e.g.,

Barbarino v. Cappucine, Inc., 2012 N.C. App. LEXIS 305, at *7 (N.C. Ct. App. Mar.

6, 2012) (unpublished) (reversing dismissal of claim for breach of contract); Sanders

v. State Pers. Comm’n, 197 N.C. App. 314, 322, 677 S.E.2d 182, 188 (2009) (same);

Schlieper v. Johnson, 195 N.C. App. 257, 266, 672 S.E.2d 548, 554 (2009) (same).

20. Second, to dismiss a claim under Rule 12(b)(6) for lack of evidentiary support

would be error. “Perhaps the most fundamental concept of motions practice under

Rule 12 is that evidence outside the pleadings . . . cannot be considered in

determining whether the complaint states a claim on which relief can be granted.”

Jackson/Hill Aviation, Inc. v. Town of Ocean Isle Beach, 251 N.C. App. 771, 775, 796

S.E.2d 120, 123 (2017). “Neither party has any evidentiary burden at this stage,” and

the counterclaims’ “factual allegations must be taken as true.” Neier v. State, 151

N.C. App. 228, 233, 565 S.E.2d 229, 232 (2002).

21. Taken together, all of this means that stating a claim for breach of contract

is a relatively low bar. As discussed below, the allegations of the amended

counterclaims, though succinct, meet the minimal requirements of Rule 8 and binding

appellate precedent.
1. Commission and Profit-Sharing Agreements

22. The parties dispute whether the Commission and Profit-Sharing

Agreements must be in writing. Vanguard contends that they must because both are

effectively amendments to the Operating Agreement. (See Mem. in Supp. 9 n.5; Reply

Br. 2–4; Op. Agrmt. § 11.5.) Even if Vanguard were right about that (which the Court

need not decide now), it would not be a reason to dismiss the counterclaims. Moody

and Nova Trading expressly allege that both agreements were “contemporaneously

memorialized.” (Countercl. ¶ 73.) This is sufficient to allege a writing, assuming one

was required, and must be accepted as true. See, e.g., Priest v. Coch, 2013 NCBC

LEXIS 6, at *18 (N.C. Super. Ct. Jan. 25, 2013) (taking allegation of written contract

as true and denying motion to dismiss).

23. Vanguard also argues that Moody and Nova Trading failed to allege

essential contract terms, particularly consideration. Not so. The Commission

Agreement is a three-party contract related to Vanguard’s purchase of machines and

parts from Pai Lung, apparently for resale in North and Central America. (See

Countercl. ¶¶ 55, 56; Op. Agrmt. § 4.9.) Each party received some benefit: Pai Lung

received increased prices for its products; Nova Trading received a percentage

commission for those sales; and Vanguard received the products sold by Pai Lung.

(Countercl. ¶¶ 56, 57.) Perhaps this was a bad deal, as Vanguard suggests,

“multiplying the disadvantage” to it by requiring it to pay increased prices and fees

to both its members. (Mem. in Supp. 9.) But “the parties to a contract,” not the Court,

“are the judges of the adequacy of the consideration.” Hejl v. Hood, Hargett & Assocs.,
Inc., 196 N.C. App. 299, 305, 674 S.E.2d 425, 429 (2009). Taken as true, the

allegations plead the existence of consideration, which our courts define “as some

benefit or advantage to the promisor or some loss or detriment to the promisee.”

Deans v. Layton, 89 N.C. App. 358, 368, 366 S.E.2d 560, 567 (1988).

24. Likewise, in the Profit-Sharing Agreement, Vanguard agreed to pay a bonus

in return for Moody’s assumption of additional responsibilities. (See Countercl. ¶ 68.)

This allegation adequately pleads consideration and provides all the notice that Rule

8 requires. Moody and Nova Trading did not need to go further and “identify what

these additional responsibilities were, or how employment responsibilities could even

be added to someone who was already CEO and President,” as Vanguard contends.

(Reply Br. 6.)

25. As an additional argument, Vanguard asserts for the first time in its reply

brief that the parties to the Profit-Sharing Agreement are not stated clearly enough.

(See Reply Br. 5.) It is doubtful whether this argument is timely, but in any event,

the Court disagrees. As alleged, the profit-sharing bonus was due to “Nova Trading

and/or Moody.” (Countercl. ¶¶ 68, 69.) Taking this allegation in a light most

favorable to Moody and Nova Trading, Moody took on additional duties in return for

a bonus that he directed to be paid to himself or to his wholly owned company. That

leaves some ambiguity, but not one that is insoluble or so unclear that Vanguard

lacks notice of the events giving rise to the claim.

26. The Court has considered Vanguard’s other arguments as to the level of

detail given by the allegations about these two agreements and finds them all
unpersuasive. “There is no rule which requires a plaintiff to set forth in his complaint

the full contents of the contract which is the subject matter of his action or to

incorporate the same in the complaint by reference to a copy thereof attached as an

exhibit.” RGK, Inc. v. U.S. Fid. & Guar. Co., 292 N.C. 668, 675, 235 S.E.2d 234, 238

(1977) (citation and quotation marks omitted). The allegations give Vanguard

“sufficient notice of the events or transactions which produced the claim.” Sutton v.

Duke, 277 N.C. 94, 104, 176 S.E.2d 161, 167 (1970).

27. Accordingly, the Court denies the motion to dismiss the counterclaims for

breach of the Commission Agreement and the Profit-Sharing Agreement.

2. Moody’s Employment Agreement

28. The third disputed contract is Moody’s oral employment agreement. He

alleges that Vanguard breached the employment agreement when it failed to pay him

for accrued but unused vacation time. (Countercl. ¶¶ 140, 143.)

29. Vanguard argues that there is no allegation that Moody’s “oral employment

agreement expressly included a vacation policy, whether from an employee handbook

or elsewhere, that became a binding contract.” (Mem. in Supp. 12.) But there is. The

amended counterclaims allege that “Vanguard maintains a standard vacation policy

that applies to all Vanguard employees” and that this vacation policy “was

incorporated into the employment agreement between Moody and Vanguard, which

is a valid and enforceable contract.” (Countercl. ¶¶ 136, 141.)

30. Next, Vanguard argues that “Moody was placed into the role of CEO and

President through the Operating Agreement” and that, as a result, the terms of the
Operating Agreement supersede any alleged oral employment agreement. (See Mem.

in Supp. 12; Reply Br. 7; Op. Agrmt. § 3.2(a)–(c).) It is entirely possible, however,

that the Operating Agreement named the initial officers and that those officers also

had separate employment agreements. There is no inherent conflict between the two.

See, e.g., Roth v. Penguin Toilets, LLC, 2011 NCBC LEXIS 46, at *12 (N.C. Super. Ct.

Nov. 30, 2011) (“The Court’s determination that the Employment Agreement contains

the terms of Plaintiff’s employment relationship with Defendant is not to say that a

particular relationship can only be controlled by one document.”); see also Urquhart

v. Trenkelbach, 2017 NCBC LEXIS 12, at *3–4 (N.C. Super. Ct. Feb. 8, 2017) (noting

that LLC members executed individual employment agreements in addition to the

operating agreement); Chemcraft Holdings Corp. v. Shayban, 2006 NCBC LEXIS 15,

at *3–5 (N.C. Super. Ct. Oct. 5, 2006) (same).

31. Taking all allegations as true, as the Court must, Moody and Nova Trading

have sufficiently alleged the existence of an employment agreement containing a

vacation policy and a breach of that agreement. The Court denies the motion to

dismiss the counterclaim for breach of the employment agreement.

3. Implied Covenant of Good Faith and Fair Dealing

32. Moody and Nova Trading also adequately state a claim for breach of the

implied covenant of good faith and fair dealing as to these three contracts. “In every

contract there is an implied covenant of good faith and fair dealing that neither party

will do anything which injures the right of the other to receive the benefits of the

agreement.” Heron Bay Acquisition, LLC v. United Metal Finishing, Inc., 245 N.C.
App. 378, 385, 781 S.E.2d 889, 894 (2016) (citation and quotation marks omitted).

Here, Moody and Nova Trading allege the existence of three valid contracts and that

Vanguard breached the contracts as part of a scheme to push them out of the

business. (See, e.g., Countercl. ¶¶ 45, 51–54, 65, 71, 133, 144, 148, 149.) These

allegations are sufficient to state a claim for breach of the implied covenant. See, e.g.,

Sparrow Sys. v. Private Diagnostic Clinic, PLLC, 2014 NCBC LEXIS 70, at *47–48

(N.C. Super. Ct. Dec. 24, 2014); Stec v. Fuzion Inv. Capital, LLC, 2012 NCBC LEXIS

24, at *18–19 (N.C. Super. Ct. Apr. 30, 2012). The Court denies the motion to dismiss

as to this counterclaim.

B. Fiduciary Claims

33. Nova Trading asserts claims for breach of fiduciary duty and constructive

fraud against Pai Lung. Though these two causes of action are distinct, “an essential

element of each claim is the existence of a fiduciary relationship.” Azure Dolphin,

LLC v. Barton, 2017 NCBC LEXIS 90, at *23 (N.C. Super. Ct. Oct. 2, 2017). To state

a claim for breach of fiduciary duty, Nova Trading must plead the existence of a

fiduciary duty, a breach of that duty, and injury proximately caused by the breach.

See Green v. Freeman, 367 N.C. 136, 141, 749 S.E.2d 262, 268 (2013). Constructive

fraud requires Nova Trading to plead, in addition, that Pai Lung sought to benefit

itself through the breach. See White v. Consol. Planning, Inc., 166 N.C. App. 283,

294, 603 S.E.2d 147, 155–56 (2004).

34. The basis for these claims is that Pai Lung, the majority member of

Vanguard, breached a fiduciary duty that it owed to Nova Trading, the minority
member. (See Countercl. ¶¶ 162, 172.) Pai Lung argues that there is no fiduciary

relationship between Vanguard’s members and also that Nova Trading failed to meet

the heightened pleading standard for constructive fraud. (See Mem. in Supp. 14, 17.)2

35. As a general rule, members of an LLC do not owe a fiduciary duty to one

another, but in some circumstances, “a holder of a majority interest who exercises

control over the LLC owes a fiduciary duty to minority interest members.” Fiske v.

Kieffer, 2016 NCBC LEXIS 22, at *9 (N.C. Super. Ct. Mar. 9, 2016); see also Kaplan

v. O.K. Techs., L.L.C., 196 N.C. App. 469, 473, 675 S.E.2d 133, 137 (2009). A majority

interest does not necessarily equate to control. It all depends on what the LLC’s

members agree to in the operating agreement. Because “an LLC is primarily a

creature of contract,” the members are generally free to arrange their relationship

however they wish. Crouse v. Mineo, 189 N.C. App. 232, 237, 658 S.E.2d 33, 36 (2008)

(quoting Russell M. Robinson, II, Robinson on North Carolina Corporate Law § 34.01,

at 34-2 to 34-3 (rev. 7th ed. 2006)). Among other things, they may depart from

statutory default rules, require supermajority votes for some or all company matters,

and impose or eliminate fiduciary duties for members and managers. See, e.g.,

Claudio v. Sellers, 2019 N.C. App. LEXIS 288, at *4–5 (N.C. Ct. App. Mar. 26, 2019)

(supermajority requirement); Plasman v. Decca Furniture (USA), Inc., 2016 NCBC

LEXIS 80, at *36 (N.C. Super. Ct. Oct. 21, 2016) (elimination of fiduciary duties);

2 Pai Lung’s opening brief includes the additional, conclusory assertion that, “even if Pai Lung

owed [a fiduciary] duty, Nova Trading has not alleged sufficient facts demonstrating that Pai
Lung breached that duty.” (Mem. in Supp. 14.) This argument is unexplained and
undeveloped, and the Court rejects it without further discussion.
Island Beyond, LLC v. Prime Capital Grp., LLC, 2013 NCBC LEXIS 48, at *15 (N.C.

Super. Ct. Oct. 30, 2013) (statutory default rules).

36. This is one of the principal differences between LLC members and corporate

shareholders. It has long been the rule that majority shareholders, by virtue of their

majority status, hold control over the corporation and therefore owe a duty to protect

the interests of minority shareholders, who “can act and contract in relation to the

corporate property only through the former.” Gaines v. Long Mfg. Co., 234 N.C. 340,

344, 67 S.E.2d 350, 353 (1951) (citation and quotation marks omitted). Minority

members of an LLC have a much stronger position because, through “the freedom of

contract,” they are able “to obtain minority protections not available to shareholders

of [a] closely-held corporation.” Blythe v. Bell, 2013 NCBC LEXIS 17, at *14 (N.C.

Super. Ct. Apr. 8, 2013).

37. Nova Trading obtained a number of such protections as part of Vanguard’s

Operating Agreement. By way of example, members may not take part in the

company’s management in their capacity as members. (Op. Agrmt. § 4.2.) Nova

Trading is guaranteed the right to elect one manager to the board of managers. (Op.

Agrmt. § 4.3(b)(i).) And a supermajority vote of the members is needed to amend the

Operating Agreement, sell the business, remove a member, or take similarly vital

actions. (Op. Agrmt. § 4.4.) The question is whether, as a matter of law, these

protections blocked Pai Lung from exercising control over the LLC.

38. The answer is no, at least at this early Rule 12 stage. Nova Trading alleges

that Pai Lung is Vanguard’s majority member with an interest edging just over 67%.
(Countercl. ¶ 38.) It further alleges that Pai Lung dominates the board of managers,

which has broad authority to act on behalf of the company. (See Op. Agrmt.

§ 3.1(a)(i)–(x).) The Operating Agreement gives Pai Lung the right to appoint three

of the five possible managers, thus ensuring a majority. (Op. Agrmt. § 4.3(b)(ii).) And

Pai Lung has filled those seats with its agents, all of whom are “acting for or on its

behalf.” (Countercl. ¶¶ 43, 44.)

39. This type of managerial control is one of the clearest attributes of a

controlling member of an LLC, just as control over a board of directors is an attribute

of a controlling corporate shareholder. See, e.g., Plasman, 2016 NCBC LEXIS 80, at

*17–18, 25 (concluding that plaintiff sufficiently alleged existence of fiduciary duty

by 55% majority member with “ultimate decision-making authority”); Kelly v. Blum,

2010 Del. Ch. LEXIS 31, at *54 (Del. Ch. Feb. 24, 2010) (citing control over board of

managers as factor favoring existence of fiduciary duties for majority member under

Delaware law); see also Corwin, 371 N.C. at 616–17, 821 S.E.2d at 737–38 (noting

that, under Delaware law, a controlling stockholder is one who exercises actual

control over the board). By contrast, this Court has cited the absence of managerial

control as a reason supporting dismissal of a claim for breach of fiduciary duty

brought by one LLC member against another. See Strategic Mgmt. Decisions v. Sales

Performance Int’l, 2017 NCBC LEXIS 69, at *13 (N.C. Super. Ct. Aug. 7, 2017)

(granting motion to dismiss in part because 60% majority member had power to

designate only one of two managers).
40. Pai Lung insists that no fiduciary duty arises simply because it exercised its

rights, including the right to appoint a majority of the board, pursuant to the

Operating Agreement. (See Reply Br. 8–9.) But the cases it cites for that proposition

are inapposite. This Court has refused to impose a fiduciary duty on minority

members that exercise their voting rights by joining together to outvote a third

member. See Fiske, 2016 NCBC LEXIS 22, at *9–10; HCW Ret. & Fin. Servs., LLC

v. HCW Emp. Benefit Servs., LLC, 2015 NCBC LEXIS 73, at *46–47 (N.C. Super. Ct.

July 14, 2015); Wortman v. Hutaff, 2013 NCBC LEXIS 47, at *22–23 (N.C. Super. Ct.

Oct. 29, 2013); BOGNC, LLC v. Cornelius NC Self-Storage, LLC, 2013 NCBC LEXIS

22, at *19 (N.C. Super. Ct. May 1, 2013).

41. These decisions underscore the obvious difference between backing a

majority coalition and exercising majority control as of right. In the latter situation,

it is the imbalance of power inherent in the relationship between majority and

minority member that gives rise to a fiduciary duty. Thus, when the operating

agreement confers controlling authority on the majority member, it owes a duty not

to use its control to harm the minority, assuming no other provision disclaims such a

duty. Here, Nova Trading has alleged that Pai Lung is not only the majority member

but also that it exercises control through the board of managers, and the Operating

Agreement does not address, much less disclaim, the duties that Pai Lung might owe

other members. This is sufficient to survive a Rule 12 motion. See Dunn Holdings I,

Inc. v. Confluent Health LLC, 2018 NCBC LEXIS 89, at *19 (N.C. Super. Ct. Aug. 24,
2018) (holding that plaintiff sufficiently alleged that 80% majority member was a

controlling member).

42. To be clear, in permitting the claim to move forward, the Court does not hold

that Pai Lung owed a fiduciary duty to Nova Trading. Pai Lung’s control is

considerable but not complete. Neither Pai Lung nor the board could dissolve the

company, declare bankruptcy, or amend the Operating Agreement without Nova

Trading’s cooperation. (See Op. Agrmt. §§ 3.4, 4.4, 8.1, 8.3, 10.1.) These are serious

limitations on Pai Lung’s authority and meaningful protections for Nova Trading’s

minority interest, which could weigh against the existence of a fiduciary relationship

in the context of a more developed evidentiary record.

43. At this stage, the facts stated in the amended counterclaims, along with the

provisions of the Operating Agreement, suffice to allege the existence of a fiduciary

relationship. The Court therefore denies the motion to dismiss as to the claim for

breach of fiduciary duty.

44. Pai Lung also argues that the claim for constructive fraud should be

dismissed because Nova Trading has not pleaded it with sufficient particularity. Our

appellate courts have made clear that a claim of constructive fraud need not comply

with the particularity requirements of Rule 9 as claims of actual fraud must. See

Terry v. Terry, 302 N.C. 77, 85, 273 S.E.2d 674, 678–79 (1981). Rather, the amended

counterclaims must allege “facts and circumstances ‘(1) which created the relation of

trust and confidence, and (2) which led up to and surrounded the consummation of

the transaction in which [the non-moving party] is alleged to have taken advantage
of his position of trust to the hurt of’” the movant. Id. at 85, 273 S.E.2d at 679 (quoting

Rhodes v. Jones, 232 N.C. 547, 549, 61 S.E.2d 725, 726 (1950)) (alterations omitted).

45. Nova Trading has satisfied this standard. It has alleged a fiduciary duty

based on Pai Lung’s status as a controlling majority member of Vanguard. It has

further alleged that Pai Lung schemed to gain exclusive control over Vanguard. (See

Countercl. ¶¶ 45–53, 65, 71, 115, 167–69, 171–75.) The amended counterclaim goes

beyond mere “cursory allegations” and demonstrates the “facts and circumstances”

giving rise to the claim. Hunter v. Guardian Life Ins. Co. of Am., 162 N.C. App. 477,

482, 593 S.E.2d 595, 599 (2004); see also Global Textile All., Inc. v. TDI Worldwide,

LLC, 2018 NCBC LEXIS 159, at *23 (N.C. Super. Ct. Nov. 29, 2018).

46. The Court denies the motion to dismiss the claim for constructive fraud.

C. Judicial Dissolution

47. Nova Trading asserts two claims for judicial dissolution of Vanguard. By

statute, a member of an LLC may seek judicial dissolution when “it is not practicable

to conduct the LLC’s business in conformance with the operating agreement” or when

“liquidation of the LLC is necessary to protect the rights and interests of the

member.” N.C. Gen. Stat. § 57D-6-02(2). Nova Trading invokes the statutory remedy

on both grounds. It also asserts, separately, that dissolution is appropriate based on

the rule set forth in Meiselman v. Meiselman, which permits minority shareholders

in closely held corporations to seek liquidation when their reasonable expectations

have been frustrated. See 309 N.C. 279, 307 S.E.2d 551 (1983).
48. Vanguard and Pai Lung argue that the claims fail because Nova Trading

has not alleged that it is impracticable to operate the business or that liquidation is

necessary to protect Nova Trading’s interests. They contend that the various

management disagreements set out in the amended counterclaims show only that

Nova Trading is “unhappy with the terms of the Operating Agreement.” (Mem. in

Supp. 18.)

49. The Court concludes that Nova Trading has adequately stated a claim under

section 57D-6-02(2). As discussed, Nova Trading has alleged that Pai Lung breached

its fiduciary duty as part of a scheme to take exclusive control of Vanguard. If true,

these improprieties could support a claim that dissolution is necessary to protect

Nova Trading’s interests. See, e.g., Dunn Holdings I, 2018 NCBC LEXIS 89, at *31–

32. Accordingly, the Court denies the motion to dismiss the claim for judicial

dissolution under section 57D-6-02(2).

50. Likewise, the Court denies the motion to dismiss the Meiselman claim.

“[O]ur courts have not yet decided whether and to what extent the principles of

Meiselman apply to actions” to dissolve an LLC. Bennett v. Bennett, 2019 NCBC

LEXIS 19, at *35 (N.C. Super. Ct. Mar. 15, 2019); see also Pure Body Studios

Charlotte, LLC v. Crnalic, 2017 NCBC LEXIS 98, at *13 (N.C. Super. Ct. Oct. 18,

2017); Brady v. Van Vlaanderen, 2017 NCBC LEXIS 61, at *31–32 (N.C. Super. Ct.

July 19, 2017). Such questions should be addressed on a more fully developed record.

Particularly given that the section 57D-6-02(2) claim is moving forward, it would be

premature to dismiss the Meiselman claim.
51. Finally, it bears noting that it is not clear whether an LLC member may

bring a freestanding Meiselman claim, as Nova Trading has here. There is a

reasonable argument that the legislature intended section 57D-6-02(2) to be the

exclusive avenue for LLC members to seek judicial dissolution, though the

application of section 57D-6-02(2) may be informed by Meiselman principles. Neither

side addressed this issue, however, so the Court leaves it for another day.

III.
CONCLUSION

52. For all these reasons, the Court DENIES Vanguard and Pai Lung’s partial

motion to dismiss.

SO ORDERED, this the 19th day of June, 2019.

/s/ Adam M. Conrad
Adam M. Conrad
Special Superior Court Judge
for Complex Business Cases