Bethesda Road Partners, LLC v. Strachan, 832 S.E.2d 503 (N.C. Ct. App. 2019).
A real estate venture (the “Borrower”) executed a promissory note (the “Note”) to a bank (the “Bank”) as part of a project. The Bank required each of the members of the LLC to execute personal guaranties. The project failed, the Note matured, and the Borrower defaulted on its obligations. After the Bank refused to sell the Note to the members or co-guarantors, the sole member-manager (the “Member-Manager”) formed a new limited liability company (the “New LLC”) for the sole purpose of purchasing the Note. The Member-Manager’s wife was the initial sole member-manager of the New LLC and the Member-Manager was added as a member-manager shortly after the closing of the sale of the Note.
The New LLC commenced an action against the other members (each a “Defendant” and collectively, the “Defendants”) of the Borrower in North Carolina seeking damages under the Note for breach of guaranty agreements. The Defendants asserted counterclaims against New LLC and the Member-Manager alleging violations of the Equal Credit Opportunity Act, breach of fiduciary duty, constructive fraud, and violation of Chapter 75 of the North Carolina General Statutes. All but one of the Defendants reached a settlement with the New LLC. The trial court entered summary judgement in favor of New LLC.
On appeal, the Court of Appeals of North Carolina (the “Court”) affirmed the trial court’s ruling that the purchase of the Note was a valid assignment because the guaranties were not cancelled or destroyed at the time of purchase and there was no evidence of the debt was discharged. Additionally, the Court also affirmed the trial court’s rulings that (i) the Member-Manager owed no duty to the Defendants, as members of the Borrower, and (ii) the constructive fraud claim failed because no fiduciary duty was owed to the Defendants. Finally, the Court held that the trial court erred in ruling that the New LLC was limited to recovering half of the purchase price of the Note. The New LLC was entitled to recover the full face value of the Note because the Note Sale and Assignment Agreement evidenced an absolute assignment rather than a discharge.
Contributed by Jeff Dutson of King & Spaulding LLP