Wilmington North Carolina Business Law and Litigation Attorney Blog

Piercing the Corporate Veil in NC After the Judgment

Over at my North Carolina Judgment Enforcement blog, there is a post about a recent NC Court of Appeals decision regarding an attempt to pierce the corporate veil to levy on shareholder property after judgment against only the corporation.  The short answer is that it cannot be done.  The full post is here.

The Business Judgment Rule and North Carolina LLCs

In North Carolina, the business judgment rule applies to LLC managers. In Mooring Capital Fund, LLC v Comstock North Carolina, LLC (07 CVS 20852, Wake Co., Business Ct.), 2006 WL 46447078, 2009 NCBC 26, Judge Jolly was ruling on motions to stay, dismiss, and appoint a receiver.

In the course of issuing his ruling, the Judge opined, for what appears to be the first time in North Carolina, that, just as directors of a corporation are, the managers of an LLC are protected by the business judgment rule. “The managers of an LLC may also be entitled to the protections of the 'business judgment rule...'" Taking note of similar language found in the NC Business Corporation Act, § 55-8-30, the judge noted the corresponding portions of the North Carolina Limited Liability Company Act:

"See, e.g., G.S. 57C-3-22(d) (“A manager is not liable for any action taken as a manager, or any failure to take any action, if the manager performs the duty of his office in compliance with this section.”) and G.S. 57C-3-22(b) (“A manager shall discharge his duties as manager in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in the manner the manager reasonably believes to be in the best interests of the limited liability company. . . .”). Such language suggests application of the business judgment rule, a matter of common law in North Carolina, to limited liability companies." (emphasis added).

He then went on to state:

"The rule applies in addition to the North Carolina Business Corporation Act (the “NCBCA”), G.S. 55-1-01 to -17-05, and creates an evidentiary presumption that directors acted reasonably and fairly in discharging their corporate duties. State ex rel. Long v. ILA Corp., 132 N.C. App. 587, 601 (1999). The Long court described the business judgment rule as follows:

[It] creates, first, an initial evidentiary presumption that in making a decision the directors acted with due care (i.e., on an informed basis) and in good faith in the honest belief that their action was in the best interest of the corporation, and second, absent rebuttal of the initial presumption, a powerful substantive presumption that a decision by a loyal and informed board will not be overturned by a court unless it cannot be attributed to any rational business purpose.

Id. at 602 (quoting Russell M. Robinson, II, Robinson on North Carolina Corporation Law § 14.6 at 281 (5th ed. 1995)). "

So while it may have seemed a fairly straightforward matter to put the two together and conclude that the Business Judgment Rule should also apply to LLC managers, we now have at least one written opinion stating as much -- though bear in mind that under the local rules of certain districts, you may not be able to cite to this opinion. Hopefully however, any case in which you would need to cite to this would be taking place in the Business Court.

Tacking Tort Claims on to Contract Claims in North Carolina

Most Unfair and Deceptive Trade Practice Act (UDTPA) claims in North Carolina arise out of a contract for goods or services.  Accordingly, it is quite common to see UDTPA claims coupled with breach of contract claims. 

In most cases, however, the addition of a UDTPA claim is improper, since a written contract governs the transaction.  Contract law should, therefore, be the sole arena for resolution of such claims.  This notion has been emphasized repeatedly by the 4th Circuit, the Business Court, and the Court of Appeals (e.g. - -- Broussard v. Meineke Discount Muffler Shops, 155 F.3d 331(4^th Cir. 1998); Strum v. Exxon Co. 15 F.3d 327, 329 (4th Cir.1994); Media Network Inc. v. Mullen Advertising, Inc., 2007 WL 2570175 (NC Business Ct., Mecklenburg Co.).

  The rationale is that once the parties have reduced their agreement to writing, those terms - and the applicable provisions of contract law - should control.  Parties, when contracting, do so in order to define their obligations and, in turn, limit their liabilities.  Doing so reduces the exposure to tort claims -- and treble damages -- provided by UDTPA and tort law.  At least, it should.

Once a UDTPA claim is allowed to proceed, the threat of treble damages significantly alters the negotiation strategies of both parties.  An innocent defendant is more likely to settle, for a higher sum, if facing the threat of treble damages.  A marginal plaintiff, in turn, is more likely to push the case beyond a reasonable point, hoping to pressure the defendant into a higher settlement due to the threat of a large damage award that North Carolina law may not allow, but which the defendant may not be in a position to appeal.  Despite the often harsh language with which the appeals courts treat the practice of "tacking" UDTPA claims on to ordinary contract claims, in many cases the UDTPA claim survives summary judgment, forcing the defendant into a pre-trial settlement posture disproportionate to the true nature of the plaintiff's claim.

Wilmington Approves Moratorium on Video Sweepstakes Games

The Wilmington city council last night voted unanimously to approve a 90-day moratorium on new or expanded sweepstakes parlors.  According to the Star-News, the council will reconvene in June to decide on whether to enact restrictions on the businesses, such as locations, hours of operation, and how much to tax them. 

Opponents of the parlors fear that otherwise-frugal citizens will start spending money playing these games instead of carefully devoting it to such necessities as medical care, milk, bread, vegetables, and their electric bills.  Supporters of the parlors argue that their businesses are helping fill the massive amount of empty commercial space in Wilmington (a market whose prices have remained startlingly resistant to a deep and lengthy lack of demand), and are providing jobs at a time when the city's unemployment rate is around 11%.  

The City is expected to resolve the matter by prohibiting the location of new sweepstakes machines too closely to any churches or schools, then imposing steep fees and taxes on them to help make up for the City's projected $11-14 million budget shortfall. 

Choosing Your North Carolina Business Entity: LLC or Corporation?

Then starting a new business in North Carolina, one of the most common questions people have is what form of business entity to use.  In this post I will compare corporations to LLCs (under North Carolina law only).  To put it mildly, when it comes to dealing with liability issues, there is little question that the LLC is the best choice.

A lot of clients initially prefer corporations.  This may be because they are more traditional, or more familiar.  But for most businesses, it makes much more sense to set up as an LLC.  For one, the LLC has stronger liability protection.  As has been discussed previously on this blog in older posts, North Carolina has a well developed "piercing the veil" doctrine -- a rule which allows courts to "look past" a corporation in order to find its shareholders liable in lawsuits.

In contrast, there is no such doctrine in North Carolina for LLCs.  For most practical purposes, this fact alone makes the LLC the clear-cut choice for most businesses.  But there's another aspect to LLCs that bears mentioning, where LLCs offer an even greater benefit:  if you end up having a judgment against you, individually, North Carolina law allows the other party to seize the shares of stock you hold in a North Carolina corporation, and liquidate them to satisfy the debt.  Whereas the law does not allow a judgment creditor to do the same with a person's membership interest in an LLC.  The most the creditor can do there is obtain a "charging order" to have the LLC pay over any distribution you might be owed - but not any salary.  Obviously then, if you own an LLC, and a court enters a judgment against you, you'll simply consult your accountant to figure out the best way to minimize "distributions" in such situations, in order to remain insulated from the effects of the judgment.  In theory, you could have any number of judgments against you and continue to receive salary from that LLC indefinitely, with creditors virtually powerless to reach that money, owing to the extraordinarily debtor-friendly nature of North Carolina law.  Accordingly, if someone recommends that you form a corporation or a partnership instead of an LLC, you should not hesitate to ask some pointed questions as to exactly why they would recommend such a choice.  The answer had better be quite compelling, because from a liability standpoint, forming any other type of entity besides an LLC is simply giving away a great deal of protection, often for little or no benefit. 

NC Business Court Fee Raised to $1,000.00

As part of a statewide increase in court fees, as of September 1, 2009, the fee for removal of a case to the North Carolina Business Court is now $1,000.00.  This is a sharp increase over the previous $200.00 that had been in effect prior to September 1. 

Judgment Enforcement and Collection in North Carolina: My New Site

I have started a new blog devoted exclusively to North Carolina judgment enforcement and collection issues.  By far, the greatest number of hits I get on this site result from Google searches about how to either enforce, or avoid the enforcement of, judgments in this state, it made sense to break that practice area out into its own separate site.

In the future, I will still add judgment-related posts, but only insofar as they related specifically to either business litigation or collections issues.  So for example, a post about piercing (or reverse-piercing) an LLC after a judgment is entered might still appear here (or I might cross-post it to the new blog as well.).  Anyway, again, the link to it is here for those who have come to this site for questions about judgment collection in North Carolina, and want to know more about it than what I have in the archives on this page.

Port City Java Sues Founder

Wilmington-based coffee-house chain Port City Java has filed suit against its founder and former COO Don Reynolds.  The suit, filed in New Hanover County Superior Court, alleges that Reynolds, his wife, and an LLC held by Reynolds, diverted funds from the company for personal use, including the purchase of real estate in Highland, NC. 

According to the Star-News, the suit was filed on December 23, and in keeping with the Rules of Civil Procedure, does not specify the dollar amount sought, but instead recites the claim for damages as "in excess of $10,000."

NC Gas Stations Settle Price Gouging Cases

The Star-News is reporting that several North Carolina gas station owners have agreed to settle price gouging cases.  The cases were brought by state Attorney General Roy Cooper after Governor Mike Easley invoked a state law prohibiting the charging of prices that are "unreasonably excessive."

The statute - N.C. Gen. Stat. § 75-38 - prohibits such prices on goods that are "consumed or used as a direct result of an emergency or which are consumed or used to preserve, protect, or sustain life, health, safety, or economic well-being of persons or their property."

In order for the law to apply, however, the Governor must first make a finding that there has been an "abnormal market disruption."  This is defined in subsection (d) of the statute to include any declaration of a state of emergency or disaster is issued by the President, or the Department of Homeland Security advisory system issues a Code Red alert.  Triggering events can include war, a terrorist attack, a natural disaster, power outage, or other "extraordinary adverse circumstances."

In the case of the recent September price spikes, the trigger was hurricane Gustav - and the fear that gripped the oil markets - as it moved into the Gulf.

Kerner & Betts Partner Quoted in Article on Economic Downturn and the Legal Industry

Partner Tom Kerner was quoted in The Glass Hammer on how the legal industry is being effected by the economic downturn.