Article courtesy of Jeff Dutson of King & Spalding
The Supreme Court of North Carolina, resolving a business dispute, ordered judicial dissolution of multiple limited liability companies, holding that the statute of limitations begins to run on a breach of contract claim upon notice to the non-breaching party and that nominal damages are sufficient to establish breach of fiduciary duties and constructive fraud claims.
Chisum v. Campagna, 376 N.C. 680 (2021).
Mr. Chisum, Rocco Campagna and Richard Campagna formed three limited liability companies (“LLCs”) in the 1990s with the purpose of developing commercial real estate in Wilmington, North Carolina. However, by 2012, several transactions and capital calls initiated by the Campagnas led to the dilution in Mr. Chisum’s membership interest in each of the LLCs. In March of 2016, Mr. Chisum realized that the assets of the LLCs were being sold to third parties without his notification or approval. Following such realization, Mr. Chisum filed a complaint against the Campagnas and each of the LLCs in the North Carolina Business Court alleging numerous claims, including conversion of his ownership interests in the LLCs, unfair and deceptive trade practices through the Campagna’s use of capital calls for the purposes of diluting Mr. Chisum’s ownership interest and unjust enrichment of the Campagnas. Mr. Chisum sought declaratory relief that he continued to own his interests in the LLCs, compensatory and punitive damages and dissolution and liquidation of each of the LLCs.
The dispute was sent to trial in 2018 where the jury returned a verdict requiring the Campagnas to pay compensatory and punitive damages in an amount exceeding half-a-million dollars. In addition, the court issued a declaratory judgement stating that Mr. Chisum continued to own his membership interests in two of the three LLCs and that those two LLCs should be judicially dissolved and liquidated.
On appeal, the Supreme Court of North Carolina dealt largely with the three following issues: (1) the application of the statute of limitations to declaratory judgement claims; (2) the requirement of actual damages (as opposed to mere nominal damages) in a claim for breach of fiduciary duties and constructive fraud; and (3) the alleged error of the trial court in ordering the judicial dissolution of two of the LLCs.
First, the Supreme Court held that in the instance of a declaratory judgement, the court should apply the statute of limitations governing the substantive right that underlies the declaratory judgement. For example, in this case, the court applied the statute of limitations for breach of contract claims. The court further explained that the statute of limitations begins to run upon notice of the breach, including when the non-breaching party reasonably should have known of the breach. Second, in a case of first impression, the court determined that evidence of actual damages is not required to establish a claim for breach of fiduciary duties or constructive fraud, as nominal damages are sufficient. Similarly, nominal damages are sufficient for a jury to award punitive damages to a plaintiff. Lastly, the Supreme Court upheld the lower court’s decision to judicially dissolve two of the LLCs, as dissolution was permitted under N.C.G.S. §57D-6-02(2), the continued operation of the two LLCs in accordance with their operating agreements was not practicable and that the dissolution and liquidation of the two LLCs was necessary to protect the rights of Mr. Chisum.