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Tort/Negligence – Fraudulent Concealment – Vicarious Liability – Potential LLC Purchase – Membership Interest Sales

Where plaintiffs’ allegations could support a determination that the individual defendants were able to defraud plaintiffs by exploiting their assigned duties as employees of the defendant-limited liability company, plaintiffs have sufficiently stated a respondeat superior claim against the LLC.

The court denies the defendant-LLC’s motion to dismiss as to plaintiffs’ (1) vicarious liability/respondeat superior claim, (2) fraud claim, (3) state-law securities fraud claim, and (4) civil conspiracy claim. The court grants the LLC’s motion to dismiss as to plaintiffs’ breach of fiduciary duty, constructive fraud and negligent misrepresentation claims.

Plaintiffs, former members of the defendant-LLC, allege that the individual defendants schemed to have defendant Michael Smith’s business partner, the late Richard Siskey, obtain plaintiffs’ LLC interests at a bargain price at a time when Michael knew there was a private equity firm interested in buying the LLC at a price that would make plaintiffs’ interests worth much more.

Vicarious Liability

Relying on the respondeat superior doctrine, plaintiffs assert the LLC is vicariously liable for the claims they have lodged against the individual defendants (i.e., breach of fiduciary duty, fraud by omission/concealment, fraud in the inducement, state securities fraud, constructive fraud, civil conspiracy, and negligent misrepresentation). Plaintiffs argue the individual defendants’ misconduct was committed within the scope of their employment and in furtherance of the employer-LLC’s business.

The LLC contends that the individual defendants’ alleged misconduct, “engaging in a private fraud scheme,” was “clearly outside the legitimate scope of their relationship with [the LLC].” The court is not persuaded.

To begin with, the LLC does not to cite to, and the court’s research has not revealed, any controlling law requiring a plaintiff to specifically plead that an employer benefited from its employee’s misconduct to sustain a respondeat superior claim against the employer. Therefore, plaintiffs’ failure to specifically allege that the LLC benefited from the invidual defendants’ conduct is not fatal to their vicarious liability/respondeat superior claim against the LLC.

The critical question is whether the misconduct was committed in the course of activities that the employee was authorized to perform. Plaintiffs’ allegations, if proven true, could support a determination that the individual defendants were able to, in conjunction with Siskey, defraud plaintiffs by exploiting their assigned job duties.

At this preliminary stage, plaintiffs have sufficiently stated a respondeat superior claim against the LLC based on a scope of employment theory.

Breach of Fiduciary Duty

A corporation does not owe a fiduciary duty to its directors and officers. Similarly, an LLC does not owe a fiduciary duty to its members.

Plaintiffs appear to contend that the LLC owed them a fiduciary duty based on Michael’s alleged status as the LLC’s majority interest holder. This argument misses the mark. Any fiduciary duty arising from Michael’s status as the LLC’s majority interest holder is a duty he, not the LLC, owed to plaintiffs.

To the extent that plaintiffs seek to hold the LLC vicariously liable for the individual defendants’ alleged breach of fiduciary duty and constructive fraud by operation of the respondeat superior doctrine, this theory fares no better. Permitting plaintiffs, as LLC members, to hold the LLC vicariously liable for its agents’ alleged breach of fiduciary duty or constructive fraud would effectively shift the cost of these torts from the agents to the members, the group harmed by these torts, given that the members own the LLC. Such a result would be flatly inconsistent with the rationale of vicarious liability.

Plaintiffs’ breach of fiduciary duty and constructive fraud claims against the LLC, whether asserted directly or vicariously, are dismissed.

Fraud

Plaintiffs allege that the individual defendants concealed material information from plaintiffs relating to plaintiffs’ decision to sell their ownership interests in the LLC.

Plaintiffs have met the heightened pleading standard for a fraudulent concealment claim based on affirmative steps taken to conceal material facts. Plaintiffs specifically allege that the information that Michael shared with Siskey about an investment group being interested in purchasing the LLC was material to plaintiffs’ decision to sell their LLC interests “because neither … Plaintiffs nor any reasonable person would have sold their shares, much less to … Siskey,” if that information had been disclosed to them.

Plaintiffs also point to specific affirmative acts that the individual defendants took to conceal this alleged material information. These acts include: (1) Michael’s decision to give Siskey the information, but not plaintiffs; (2) the individual defendants’ communications with LLC members in 2007 that omitted this same information (i.e., an email from defendant Jennifer Smith and a business meeting); and (3) the individual defendants’ continued concealment of the information amid their processing/approval of plaintiffs’ stock transfer forms after the LLC’s legal counsel notified Siskey that not disclosing to LLC members the information about the potential sale of the company could trigger a federal securities law violation.

These allegations, viewed together and in the light most favorable to plaintiffs, state with sufficient particularity a fraudulent concealment claim against the LLC based on the individual defendants’ failure to disclose to plaintiffs the same material information that had been provided to Siskey in connection with plaintiffs’ decision to sell their LLC interests. The court declines to dismiss plaintiffs’ fraud claim against the LLC, whether asserted directly or vicariously.

Motion granted in part, denied in part.

Merrell v. Smith (Lawyers Weekly No. 020-093-20, 31 pp.) (Michael Robinson, J.) Aaron Hemmings for plaintiffs; Amanda Groves, Kevin Zhao and Timothy Hughes for defendant. 2020 NCBC 93


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