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IN THE SUPREME COURT OF NORTH CAROLINA
No. 507A06
FILED: 9 NOVEMBER 2007
LENNIE and
BONNIE HAMBY
v.
PROFILE
PRODUCTS, L.L.C., TERRA-MULCH PRODUCTS, L.L.C., ROY D. HOFFMAN, and ELECTRIC
SERVICE GROUP, INC.
Appeal pursuant to N.C.G.S. §7A-30(2) from the decision of a divided panel of the Court of Appeals, 179 N.C. App. 151, 632 S.E.2d 804 (2006), dismissing as interlocutory an appeal from an order entered on 23 June 2005 by Judge Nathaniel J. Poovey in Superior Court, Caldwell County. On 16 November 2006, the Supreme Court allowed defendant’s petition for discretionary review as to additional issues. Heard in the Supreme Court 10 April 2007.
Jones
Martin Parris & Tessener Law Offices, P.L.L.C., by John Alan Jones and G.
Christopher Olson; and Carter G. Bishop for plaintiff-appellees.
Womble
Carlyle Sandridge & Rice, PLLC, by Burley B. Mitchell, Jr. and Sarah L.
Buthe; and Joseph W. Moss for defendant-appellant Profile Products, L.L.C.
Shumaker,
Loop & Kendrick, LLP, by William H. Sturges; Kennedy, Covington, Lobdell
& Hickman, LLP, by William G. Scoggin; and Alston & Bird, LLP, by H.
Bryan Ives, III, for North Carolina Citizens for Business
and Industry and North Carolina Associated Industries, amici curiae.
NEWBY, Justice.
This case presents the issue of whether the exclusivity
provision of the Workers’ Compensation Act protects the member-manager of a
limited liability company (“LLC”) with respect to an employee’s injuries
arising out of employment with the LLC.
We hold that the exclusivity provision applies when a member-manager is
conducting the business of an employer LLC.
Accordingly, we reverse the Court of Appeals.
I. BACKGROUND
This action arises from injuries sustained by plaintiff Lennie Hamby (“Hamby”) while working for defendant Terra-Mulch Products, L.L.C. (“Terra-Mulch”). Hamby was hurt when he fell into an auger pit while processing wood chips at Terra-Mulch’s plant in Conover, North Carolina. Hamby and his wife (“plaintiffs”) sued Terra-Mulch, Profile Products, L.L.C. (“Profile”), Roy D. Hoffman (“Hoffman”), and Electric Service Group, Inc. (“ESG”).
Plaintiffs allege ESG was negligent in its performance of contracted electrical work, rendering certain safety equipment inoperable. Profile, Terra-Mulch, and Hoffman filed cross-claims against ESG alleging breach of contract and breach of warranty and seeking contribution in the event plaintiffs recovered damages.
Plaintiffs allege Hoffman, a plant manager and Hamby’s
co-employee, “breached his duty of care” by “engag[ing] in misconduct which was
willful and wanton” and “demonstrat[ing] a manifest indifference to and
reckless disregard for the rights and safety” of the plant workers, directly
and proximately causing Hamby’s injury.
In their complaint, plaintiffs describe Terra-Mulch as “a
wholly-owned subsidiary of Profile Products” and assert that “Profile Products
controls and directs Terra-Mulch with respect to operation of the business” and
“dominates and controls Defendant Terra-Mulch and is the alter ego of Defendant
Terra-Mulch.” Plaintiffs allege that
Profile and Terra-Mulch collectively failed to provide a safe work site for the
inherently dangerous work performed by Hamby and that they thus “engaged in
misconduct which was grossly negligent, willful and wanton, and substantially
certain to lead to death or serious injury with respect to operation of the
plant.”
Pursuant to Rule 56 of the North Carolina Rules of Civil
Procedure, ESG moved for summary judgment on all claims and cross-claims. Profile, Terra-Mulch, and Hoffman also moved
for summary judgment on all claims asserted against them on grounds that
plaintiffs’ exclusive remedy is for workers’ compensation benefits under
Chapter 97 of the North Carolina General Statutes and thus the North Carolina
Industrial Commission has exclusive jurisdiction over the claims at issue. In support of their motion, these defendants
submitted, inter alia, the affidavit of Stephen Ade, Vice President and
Chief Financial Officer for Profile, in which he stated: “Terra-Mulch Products, L.L.C. has at all
relevant times been a limited liability company the sole member and manager of
which has been Profile Products, L.L.C.”
The “Single Member Operating Agreement of Terra-Mulch Products, LLC,”
dated 24 August 1999 and adopted by Profile, designates Profile as the “sole
member” of Terra-Mulch and further states, under the paragraph labeled “Management”: “All decisions relating to the management,
conduct and control of the business of the Company shall be made by the
Member.”
On 6 June 2005, the trial court heard arguments on all
defendants’ summary judgment motions.
By orders filed on 23 June 2005, the trial court granted summary
judgment for Terra-Mulch and Hoffman, but denied summary judgment for Profile
and ESG. Profile appealed to the Court
of Appeals, which, in a divided opinion, dismissed Profile’s appeal as
interlocutory because Profile “failed to show a substantial interest which
would be lost if this appeal is dismissed.”
Hamby v. Profile Prods., L.L.C., 179 N.C. App. 151, 158, 632
S.E.2d 804, 809 (2006). Specifically,
the majority found that plaintiffs were actually alleging a gross negligence
claim based on Woodson v. Rowland, 329 N.C. 330, 407 S.E.2d 222 (1991)
against employer Terra-Mulch; a willful, wanton, and reckless negligence claim
based on Pleasant v. Johnson, 312 N.C. 710, 325 S.E.2d 244 (1985)
against co-employee Hoffman; and an ordinary negligence claim against “third
party” Profile. Hamby, 179 N.C.
App. at 157, 632 S.E.2d at 808. Because
the claims were different as to each defendant, the majority concluded that
there was no risk of inconsistent verdicts.
Id. The dissent contended
that “[a]s the sole member-manager of Terra-Mulch, Profile could only be found
liable to plaintiffs in the superior court under a Woodson claim, which
plaintiffs acknowledged does not exist” and thus the exclusivity provision of
the Workers’ Compensation Act protected Profile. Id. at 165, 632 S.E.2d at 813 (Tyson, J.,
dissenting). As such, the dissent would
have allowed the interlocutory appeal and reversed the trial court’s denial of
Profile’s motion for summary judgment. Id.
at 165-66, 632 S.E.2d at 813.
II. ANALYSIS
Profile’s appeal from the trial court’s denial of its motion
for summary judgment is interlocutory because the trial court’s order “does not
dispose of the case, but leaves it for further action by the trial court in
order to settle and determine the entire controversy.” Veazey v. City of Durham, 231 N.C.
357, 362, 57 S.E.2d 377, 381 (1950). An
interlocutory order is immediately appealable if the trial court certifies
that: (1) the order represents a final
judgment as to one or more claims in a multiple claim lawsuit or one or more
parties in a multi-party lawsuit, and (2) there is no just reason to delay the
appeal. N.C.G.S. §1A-1, Rule 54(b)
(2005). Here, the trial court did not
certify this appeal for review. Absent
a Rule 54(b) certification, an interlocutory order may be reviewed if it will
injuriously affect a substantial right unless corrected before entry of a final
judgment. Harris v. Matthews,
361 N.C. 265, 269, 643 S.E.2d 566, 569 (2007) (citing Goldston v. Am. Motors
Corp., 326 N.C. 723, 725, 392 S.E.2d 735, 736 (1990)).
This Court has recognized that a substantial right is
affected if the trial court’s order granting summary judgment to some, but not
all, defendants creates the possibility of separate trials involving the same
issues which could lead to inconsistent verdicts. See Bernick v. Jurden, 306 N.C. 435, 439, 293
S.E.2d 405, 408 (1982). Profile argues
that if the case continues without its appeal being heard, plaintiffs’ claims
against Terra-Mulch will proceed before the Industrial Commission while
plaintiffs’ claims against Profile will proceed in civil court, even though the
facts and issues before each tribunal would be the same. Specifically, Profile argues that its
liability is inseparable from that of Terra-Mulch because Profile was
conducting Terra-Mulch’s business.
Plaintiffs assert, and the Court of Appeals agreed, that the issues in
each proceeding would be different because plaintiffs alleged different claims
against Terra-Mulch and Profile: gross
negligence as to the former and ordinary negligence as to the latter.
Preliminarily, we note that plaintiffs did not cross-assign
error to the trial court’s grant of summary judgment for Terra-Mulch on grounds
that the exclusive remedy plaintiffs have against Terra-Mulch is under the
Workers’ Compensation Act. Plaintiffs’
complaint, amended three times, asserts all claims against Terra-Mulch and
Profile jointly, and none of these claims allege ordinary negligence as to
those defendants. Before the trial
court, the Court of Appeals, and this Court, plaintiffs have argued that
Profile’s liability is based on ordinary negligence, not gross negligence. The pivotal question presented by this case
is whether, as a matter of law, plaintiffs are able to assert an ordinary
negligence claim in civil court against Profile, the member-manager of the
employer Terra-Mulch. To answer that
question and, in so doing, determine whether the trial court’s order creates
the risk of inconsistent verdicts, we must decide whether Profile, like
Terra-Mulch, is entitled to the protection of the exclusivity provision of
Chapter 97.
The concept of exclusivity is found in two sections of the
Workers’ Compensation Act. N.C.G.S.
§97-9 requires employers to secure payment of compensation to their employees
in accordance with the Act and states:
“[W]hile such security remains in force, [the employer] or those
conducting his business shall only be liable to any employee for personal
injury or death by accident to the extent and in the manner herein
specified.” N.C.G.S. §97-9 (2005). A subsequent section of Chapter 97
specifically excludes other rights and remedies against the employer:
If the employee
and the employer are subject to and have complied with the provisions of this Article,
then the rights and remedies herein granted to the employee, his dependents,
next of kin, or personal representative shall exclude all other rights and
remedies of the employee, his dependents, next of kin, or representative as
against the employer at common law or otherwise on account of such injury or
death.
Id. §97-10.1
(2005). In discussing the exclusivity
provision of Chapter 97, this Court has explained:
[T]he North
Carolina Workers’ Compensation Act was created to ensure that injured employees
receive sure and certain recovery for their work-related injuries without
having to prove negligence on the part of the employer or defend against
charges of contributory negligence. See,
e.g., Pleasant v. Johnson, 312 N.C. 710, 712, 325 S.E.2d 244, 246-47
(1985). In exchange for these “limited
but assured benefits,” the employee is generally barred from suing the employer
for potentially larger damages in civil negligence actions and is instead
limited exclusively to those remedies set forth in the Act. Id.; Woodson, 329 N.C. at 338,
407 S.E.2d at 227.
Whitaker
v. Town of Scotland Neck, 357 N.C. 552, 556, 597 S.E.2d 665, 667 (2003).
By its plain language, N.C.G.S. §97-9 extends exclusivity
protection beyond the employer to “those conducting [the employer’s]
business.” N.C.G.S. §97-9. We have noted that this phrase should be
liberally construed and that “[o]ne must be deemed to be conducting his
employer’s business, within the meaning of this statute, whenever he, himself,
is acting within the course of his employment, as that term is used in the
Workmen’s Compensation Act.” Altman
v. Sanders, 267 N.C. 158, 161, 148 S.E.2d 21, 24 (1966) (citing Essick
v. City of Lexington, 232 N.C. 200, 60 S.E.2d 106 (1950)). Previously, this Court has found certain
individuals and entities, though distinct from the employer, still within the
scope of the Act’s exclusivity provision.
See, e.g., Woodson, 329 N.C. 330, 407 S.E.2d 222 (sole
shareholder and chief executive officer of the corporate employer);
Abernathy v. Consol. Freightways Corp., 321 N.C. 236, 362 S.E.2d 559 (1987)
(injured worker’s co-employees); Bryant v. Dougherty, 267 N.C. 545, 148
S.E.2d 548 (1966) (employer’s workers’ compensation insurance carrier); McNair
v. Ward, 240 N.C. 330, 82 S.E.2d 85 (1954) (employer’s general manager);
Essick v. City of Lexington, 232 N.C. 200, 60 S.E.2d 106 (1950) (treasurer
and superintendent of the employer’s plant).
The decisive question then, whether Profile was conducting
the business of Terra-Mulch, requires us to consider the nature of a limited
liability company (“LLC”) as a business entity and the role of its
member-manager. An LLC is a “statutory
form of business organization . . . that combines characteristics of business
corporations and partnerships.” Russell
M. Robinson, II, Robinson on North Carolina Corporate Law §34.01, at
34-2 (rev. 7th ed. 2006) [hereinafter Robinson]. Similar to statutes
enacted in other states, the North Carolina Limited Liability Company Act
provides for the formation of a business entity combining the limited liability
of a corporation and the more simplified taxation model of a partnership. Id. §34.01, at 34-2 to -3. These state laws provide default rules, most
of which can be varied by the parties forming an LLC. Id. As such, the
“LLC is primarily a creature of contract,” allowing for great flexibility in
its organization. Id. §34.01, at
34-3. However, as its name implies,
limited liability of the entity’s owners, often referred to as “members,” is a
crucial characteristic of the LLC form, giving members the same limited
liability as corporate shareholders. Id.
§34.03[3], at 34-15. Furthermore, LLC member-managers have authority
comparable to corporate directors and officers combined. Id. §34.04, at 34-18. As a corporation acts through its officers
and directors, so an LLC acts through its member-managers, which can be natural
persons or business entities. See Del.
Code Ann. tit. 6, §§18-101(10), (11), (12), 18-402 (2005); N.C.G.S.
§§57C-1-03(13), (14), (17), 57C-3-20 (2005).
Both Profile and Terra-Mulch are LLCs formed under Delaware
law. The North Carolina LLC Act states
that the liability of a foreign LLC’s managers and members is governed by the
laws of the state under which the LLC was formed. N.C.G.S. §57C-7-01 (2005).
Under Terra-Mulch’s operating agreement, Profile is its sole member and
is exclusively charged with management of Terra-Mulch’s business. As such, the liability of Profile in its
role as Terra-Mulch’s member-manager is governed by Delaware law.
The Delaware Limited Liability Company Act is similar to
North Carolina’s LLC statute. It vests
management of an LLC in its managers.
Del. Code Ann. tit. 6, §18-402; accord N.C.G.S.
§57C-3-20(b). In turn, “each member and
manager has the authority to bind the [LLC].”
Del. Code Ann. tit. 6, §18-402; accord N.C.G.S. §57C-3-23 (2005)
(“[T]he act of every manager . . . for apparently carrying on in the usual way
the business of the limited liability company of which he is a manager[] binds
the [LLC]. . . .”). Under Delaware law,
the third-party liability of LLC member-managers is as follows:
(a) Except as otherwise provided by this chapter, the debts,
obligations and liabilities of a limited liability company, whether arising in
contract, tort or otherwise, shall be solely the debts, obligations and
liabilities of the limited liability company, and no member or manager of a
limited liability company shall be obligated personally for any such debt,
obligation or liability of the limited liability company solely by reason of
being a member or acting as a manager of the limited liability company.
(b) Notwithstanding the provisions of subsection (a) of this
section, under a limited liability company agreement or under another
agreement, a member or manager may agree to be obligated personally for any or
all of the debts, obligations and liabilities of the limited liability company.
Del.
Code Ann. tit. 6, §18-303 (2005); accord N.C.G.S. §57C-3-30(a) (2005).[Note
1]
Under these statutes, absent an agreement to the contrary,
member-managers are specifically shielded from liability when acting as LLC
managers. Thus, when a member-manager
acts in its managerial capacity, it acts for the LLC, and obligations
incurred while acting in that capacity are those of the LLC. Accordingly, when a member-manager is
managing the LLC’s business, its liability is inseparable from that of the LLC.
In the instant case, Terra-Mulch’s operating agreement vests
full managerial powers in its member-manager Profile and does not alter Profile’s
limited liability. Thus, under the
applicable law and agreement, Profile manages Terra-Mulch’s business with
limited liability for actions it takes as manager. Plaintiffs do not appear to aver anything other than that Profile
managed Terra-Mulch. In their
complaint, plaintiffs allege that Profile “control[led] and direct[ed]” the
business affairs of Terra-Mulch and do not distinguish their allegations
against, nor the actions of, Terra-Mulch and Profile, claiming both were
grossly negligent and caused Hamby’s workplace injury. Plaintiffs now argue that Profile should be
treated as a third party, liable for its ordinary negligence in managing
Terra-Mulch’s safety program. However,
Profile’s management of this part of Terra-Mulch’s business is no different
from its handling of other aspects of Terra-Mulch’s business. Indeed, maintenance of a safe workplace is a
duty of every employer, see, e.g., N.C.G.S. §95-129(1)-(2) (2005). Finally, while plaintiffs assert that
Terra-Mulch is a wholly-owned subsidiary of Profile, this matter does not
affect our analysis. By their nature,
members of an LLC own the LLC. See,
e.g., Robinson §34.03[1], at 34-10.
Profile’s status as owner of Terra-Mulch does not change the fact that
it manages Terra-Mulch, and is thereby conducting Terra-Mulch’s business. In summary, plaintiffs’ forecast of evidence
shows that Profile did nothing other than conduct Terra-Mulch’s business within
the meaning of the pertinent statutes.
In addition to our statutory analysis, we find support in
our case law for the conclusion that Profile was conducting Terra-Mulch’s
business. As noted, we have recognized
that the exclusivity protection under Chapter 97 extends to entities other than
the employer. Specifically, we have
found that exclusivity applies to officers of a corporation. See Woodson, 329 N.C. at 347-48, 407
S.E.2d at 232-33. In Woodson,
the plaintiff sought to recover from the president and sole shareholder of her
corporate employer in his individual capacity.
Id. at 347, 407 S.E.2d at 232.
We concluded that since the president and sole shareholder “was acting
in furtherance of corporate business, . . . any individual liability on his
part must be based on the same standard as that applied to the
corporation.” Id.
We find the analysis of Woodson equally applicable to
a member-manager of an LLC in this context.
As one conducting the employer’s business and able to bind the employer,
the liability of a member-manager is the same as that of the LLC employer it
manages. As a final observation, we
note that the trial court granted summary judgment in favor of Terra-Mulch
employee Hoffman as to plaintiffs’ Pleasant claim against him. Just as Hoffman as an individual was
conducting his employer’s business, Profile as a business entity was doing the
same and is entitled to the protection of the Workers’ Compensation Act’s
exclusivity provision.
III. DISPOSITION
For the reasons stated, we hold that, as the member-manager
of Hamby’s employer Terra-Mulch Products, L.L.C., Profile was “conducting [the
employer’s] business” within the meaning of the Workers’ Compensation Act and
is thus entitled to the exclusivity provided by statute. We find that the trial court’s interlocutory
order denying summary judgment for Profile is reviewable because Profile’s
liability for actions taken while managing Terra-Mulch is inseparable from the
liability of Terra-Mulch, and thus the trial court’s denial of summary judgment
for Profile while granting summary judgment for Terra-Mulch creates a risk of
inconsistent verdicts. Accordingly, we
reverse the Court of Appeals’ dismissal of Profile’s appeal. We further conclude the trial court erred in
denying Profile’s motion for summary judgment because the denial was premised
on plaintiffs’ assertion of a third-party ordinary negligence claim against
Profile, a claim that, as a matter of law, plaintiffs could not bring against
Profile. Therefore, we remand this case
to the Court of Appeals for further remand to the trial court for entry of
summary judgment in favor of Profile.
REVERSED AND REMANDED.
Justice HUDSON did not participate in the consideration or
decision of this case.
Justice TIMMONS-GOODSON dissenting.
Because I believe that Profile’s appeal is interlocutory,
premised on grounds not raised or ruled on in the trial court, and
misinterprets the LLC statute such that it is likely to have repercussions far
beyond the realm of workers’ compensation, I respectfully dissent.
Interlocutory Nature
In the first instance, assuming arguendo that Profile
is entitled to the immunity it seeks under either the Workers’ Compensation or
the Limited Liability Corporation (LLC) statutes, Profile’s reasoning for why
this appeal should go forward is unconvincing.
It is uncontroverted that Profile’s appeal from the trial court’s denial
of its motion for summary judgment is interlocutory. See Veazey v. City of Durham, 231 N.C.
357, 362, 57 S.E.2d 377, 381 (1950) (“An interlocutory order is one made during
the pendency of an action, which does not dispose of the case, but leaves it
for further action by the trial court in order to settle and determine the
entire controversy.”(citation omitted)). “Generally, there is no right of
immediate appeal from interlocutory orders and judgments.” Goldston v. Am. Motors Corp., 326 N.C.
723, 725, 392 S.E.2d 735, 736 (1990).
There are sound reasons for this. We have previously held that “[t]here is no more effective way to
procrastinate the administration of justice than that of bringing cases to an
appellate court piecemeal through the medium of successive appeals from
intermediate orders.” Veazey,
231 N.C. at 363, 57 S.E.2d at 382.
However, interlocutory orders are immediately appealable if they: “(1) affect a substantial right and (2)
[will] work injury if not corrected before final judgment.” Goldston,
326 N.C. at 728, 392 S.E.2d at 737 (citing Wachovia Realty Invs. v Hous.,
Inc., 293 N.C. 93, 232 S.E.2d 667 (1977)).
Therefore, the only way Profile can maintain this appeal is if it can
show that it will lose a “substantial right” if the case proceeds any further
at the trial level.
To that end, Profile argues that it has the substantial
right not to be potentially subjected to two trials on the same issue, and
therefore to be exposed to inconsistent verdicts. However, Profile’s argument overlooks the key fact that Terra-Mulch
obtained summary judgment in its favor.
Therefore, the only potential trial that Profile could face would be as
the sole defendant in a court proceeding designed to determine its own
liability. With a single defendant and
single set of facts, there is absolutely no possibility of inconsistent
verdicts. As such, there is no
substantial right implicated which would give rise to an immediate appeal.
The majority does not attempt to offer a reason as to why
the Court of Appeals erred in finding that there was no substantial right
generating a right of immediate appeal, other than finding merit in appellant’s
claim that it is entitled to immunity under the LLC or workers’ compensation
statutes. The majority’s approach to
this case is backward. The analysis starts
with evaluating the merits of Profile’s claim. Having ruled in Profile’s favor on the basis of hitherto
unrecognized LLC immunity, only then does it somehow bootstrap that into
a right of immediate appeal.
I note that both this Court and the Court of Appeals have
uniformly rejected similar attempts by non-sovereign appellants claiming
“immunity” in order to obtain immediate appellate review of an adverse
ruling. We have specifically held that
the right to avoid a trial in the wake of an unsuccessful motion for summary
judgment is not a substantial right offering the route of immediate appeal. See, e.g., Tridyn Indus., Inc. v. Am. Mut.
Ins. Co., 296 N.C. 486, 491-92, 251 S.E.2d 443, 447-48 (1979). Furthermore, we have previously noted that
“[p]ractically all courts which have considered the question, including our
Court of Appeals, have held that the denial of a motion for summary
judgment is not appealable.” Waters v. Qualified Pers., Inc., 294
N.C. 200, 208, 240 S.E.2d 338, 344 (1978)(listing cases). See also Robinson
v. Gardner, 167 N.C. App. 763, 769, 606 S.E.2d 449, 453 disc. review
denied, 359 N.C. 322, 611 S.E.2d 417 (2005)(“Defendants do not seek to
avoid inconsistent decisions; they seek to avoid any litigation at all.”)
Since “[i]t is the appellant’s burden to present appropriate
grounds for this Court’s acceptance of an interlocutory appeal,” Johnson v.
Lucas, 168 N.C. App. 515, 518, 608 S.E.2d 336, 338 (quoting Thompson v.
Norfolk S. Ry., 140 N.C. App. 115, 121, 535 S.E.2d 397, 401 (2000)
(citations and internal quotation marks
omitted)), aff’d per curiam, 360 N.C. 53, 619 S.E.2d 502 (2005), I would affirm the determination of the Court
of Appeals that this appeal is interlocutory.
Procedural Posture
Procedurally, I believe that the issue of immunity premised
on the LLC statute is not properly before us.
The majority is correct in its assertion that Profile argued before the
trial court that its conduct was immune as a member-manager, but it is
important to understand that it sought this immunity under the Workers’
Compensation Act not the LLC statute.
An examination of the pertinent portions of the transcript
explains the thrust of Profile’s argument:
[Defendant’s attorney]: . . . The cases, as I understand
them . . . they hold that in order to receive the exclusivity of the
workers’ comp statute, 97-9, I believe it is, that you must control the
business of the employer. . . . Profile
Products operated all the business of Terra-Mulch except the plant itself.
It
is significant that the rejoinder by plaintiff’s attorney also focused on the
exclusivity provisions of the Workers’ Compensation Act.
Indeed, the first reference to LLC immunity apparently
appears in the Court of Appeals dissent and its rejoinder from the majority. Hamby v. Profile Prods., L.L.C., 179 N.C.
App. 151, 163, 632 S.E.2d 804, 812 (2006) (Tyson, J., dissenting). It is
revealing that a review of the Table of Authorities from defendant-appellant’s
briefs before the Court of Appeals reveals no citation to either North
Carolina’s or Delaware’s statutory LLC immunity provisions (N.C.G.S.
§57C-3-30(a) or Del. Code Ann. tit. 6, §18-303(a)), the very basis of this
opinion. Granting immunity on a ground
different from the one requested in the court below raises the specter of a Viar
error. “It is not the role of the
appellate courts, however, to create an appeal for an appellant.” Viar v. N.C. Dep’t. of Transp., 359
N.C. 400, 402, 610 S.E.2d 360, 361 (2005).
Throughout the course of this litigation, Profile has
attempted to gain immunity under the Workers’ Compensation Act. The gist of Profile’s argument was that
their close nexus with Terra-Mulch entitled it to the same employer immunity
enjoyed by the latter. This argument
was considered by the Court of Appeals, evaluated in light of our
jurisprudence, and soundly rejected. Hamby,
179 N.C. App. at 155, 632 S.E.2d at 807 (majority) (“Where a defendant is
nothing ‘more than a related, but separate entity’ from the employer, the exclusivity
provisions of the Workers’ Compensation Act are not an absolute bar to
recovery.”)(citing Cameron v. Merisel, Inc., 163 N.C. App. 224, 233, 593
S.E.2d 416, [423] (2004)).
Profile argued on the basis of workers’ compensation
exclusivity and lost. The majority now
grants Profile immunity under the LLC statute, a different basis than the one
it argued at the trial and intermediate appellate levels. Such a shift runs contrary to our long
standing admonition that parties may not present, nor prevail upon, arguments
in the appellate courts that were not argued in the trial court. Weil v. Herring, 207 N.C. 6, 10, 175
S.E. 836, 838 (1934) (where theory argued on appeal was not raised before the
trial court, “the law does not permit parties to swap horses between courts in
order to get a better mount” before an appellate court).
In this case, as reflected in defendant-appellant’s Table of
Authorities, LLC immunity was not argued before even the Court of Appeals, let
alone the trial court. Therefore, I would hold that Profile may not raise it
now.
Substantive Concerns
Profile is chartered in Delaware, and therefore the outcome
of the case hinges on the application of that state’s law. The majority misinterprets the Delaware
statute such that virtually any conduct by an LLC member is immunized. This radical expansion of the LLC immunity
shield is, in my view, not mandated by the statute itself, and is contrary to
our precedent. The Delaware statute
states only that liability may not be predicated solely on
membership in an LLC. See Del.
Code Ann. tit. 6, §18-303(a) (2005)(“Except as otherwise provided by this
chapter, the debts, obligations and liabilities of a limited liability company,
whether arising in contract, tort or otherwise, shall be solely the debts,
obligations and liabilities of the limited liability company, and no member or
manager of a limited liability company shall be obligated personally for any
such debt, obligation or liability of the limited liability company solely
by reason of being a member or acting as a manager of the limited liability
company.”) (emphasis added). The
majority’s opinion appears to disregard the word “solely,” which appears twice
in the relevant statute. As we have
held “[i]n the absence of contrary indication, it is presumed that no word of
any statute is a mere redundant expression.
Each word is to be construed upon the supposition that the Legislature
intended thereby to add something to the meaning of the statute.” Lafayette Transp. Serv., Inc. v. Cty of
Robeson, 283 N.C. 494, 500, 196 S.E.2d 770, 774 (1973)(citations omitted).
The Delaware Court of Chancery itself, when interpreting the
same statute has not read it to confer the same sweeping immunity on
member-managers as our Hamby opinion.
The Delaware Court observed that “Section 18-303(a) protects members and
managers of an LLC against liability for any obligations of the LLC solely by
reason of being or acting as LLC members or managers. But, [the] phrase,
‘solely by reason of being a member [] does imply that there are situations
where LLC members and managers would not be shielded by this provision.”). Pepsi-Cola Bottling Co. of Salisbury, Md. v.
Handy, No. 1973-S, 2000 WL 364199, at *3 (Del. Ch. Mar. 15, 2000)(No.
1973-S)(Mem.).
Other states, following Delaware’s lead, have similarly
interpreted the statute’s plain meaning to shield LLC members from liability
premised exclusively on their membership, but not from liability on the basis
of their actions. See e.g.,
Weber v. U.S. Sterling Sec., Inc., 282 Conn. 722, 732, 924 A.2d 816, 824
(2007). Federal courts have arrived at
the same conclusion. See e.g., Equipoise
PM LLC v. Int’l Truck & Engine Corp., _ F.3d _, 2006 WL 1594077, at *4
(N.D. Ill. June 5, 2006)(No. 05 C 6008).
Commentators have taken an identical view. See 2 R.
Franklin Balotti, Jesse A. Finkelstein, Martin I. Lubaroff & Paul M.
Altman, Balotti and Finkelstein’s Delaware Law of Corporations and Business
Organizations §20.7 (2007); Practicing Law Inst, Organization and
Operation of the Limited Liability Company: Substantive Issues 937
PLI/Corp. 149, 191 (1996).
It is noteworthy that in the only two prior cases
interpreting the statute, North Carolina courts have demonstrated a grasp of
the key distinction between imposing liability on the basis of a
member-manager’s actions versus mere membership. In State ex rel. Cooper v. NCCS Loans, Inc., 174 N.C. App.
630, 624 S.E.2d 371 (2005), the Court of Appeals held that where an individual
repeatedly set up business entities to evade state usury laws, the trial court
was correct in looking beyond the corporate (LLC) form to the substance of the
transactions in order to restrain the individuals behind conduct. The majority holding here as applied to NCCS
would have effectively subordinated the state’s usury laws to the corporate LLC
form. In Page v. Roscoe, LLC, 128 N.C. App. 678, 686-87, 497
S.E.2d 422, 428 (1998), the only case other than NCCS construing the LLC
immunity statute, our Court of Appeals upheld Rule 11 sanctions against an
attorney whose pleadings against an LLC member were premised solely on the
defendant’s LLC membership, and not his actions.
It is precisely this pivotal membership-action distinction
that the majority obfuscates. Here, plaintiff noted that pursuant to
undisclosed agreements between Profile and employer Terra-Mulch, Profile had
undertaken certain responsibilities regarding the employer’s operations,
including safety. Alleged negligence in performing those operations, and not
Profile’s mere status as an LLC member-manager, is the basis for plaintiff’s
current action. Under the status versus
actions scheme of immunity outlined above therefore, Profile is not entitled to
the blanket immunity the majority awards it.
The Court of Appeals, including the majority in this case, has
recognized this distinction between status and actions, as have virtually all
other jurisdictions. Strong public
policy reasons favor that we follow their lead and not obliterate it. On substantive grounds therefore, I would
uphold the Court of Appeals decision.
Relationship Between Profile and Terra-Mulch
The record reveals that Terra-Mulch and Profile are two distinct entities, with different employees, tax identification numbers, assets, liabilities, product lines and businesses. Furthermore, the record contains evidence about Profile’s role in managing the safety features of Terra-Mulch’s Conover facility, and the deficiencies therein.
Stephen Ade, the Chief Financial Officer of Profile, testified that he coordinated safety activities for the plants. He admitted that the emergency stop button on the machine that maimed plaintiff had been disconnected, and though he blamed a third party vendor for the disconnection, he candidly conceded that the button had not been tested prior to the injury. Surely the failure of the safety program to test a critical emergency feature raises at least a triable issue of fact with respect to Profile’s negligence in conducting the safety program.
Similarly, a February 25, 2002 letter on behalf of St. Paul
Underwriting to Jim Cebulski, Vice President and Controller of Profile warns
that despite “some concern” “there has [sic] been very few or no
management systems developed or implemented to control employee or premise
safety . . .” and that the emphasis remains “on improving productivity.” The record also contains an e-mail,
apparently from the same individual who wrote the above letter, advising his
colleagues at the insurance company:
Basically, the nine recommendations I
submitted with My February Report have not been complied with . . . My
viewpoint is that this location of Profile Products continues to be the worst
workers comp risk I have seen in a long, long time. We should not insure this
one!
It
is worth noting that all the individuals and activities referenced above relate
to Profile, LLC, not Terra-Mulch, the statutory employer. Given the issues
raised with respect to Profile’s own negligence, and its undisputed
status as a separate entity, I cannot agree with the majority’s holding
granting Profile immunity on the basis of its LLC status.
Conclusion
Given the importance of the subject, I believe that in light of (i) this case’s skimpy, almost skeletal, procedural and factual background, and (ii) its origin from the Court of Appeals in a dissent premised on an issue neither argued nor briefed before that Court, this case is an inappropriate vehicle to issue a ruling with such tremendous ramifications. Therefore, I respectfully dissent.
NOTE
1. North Carolina’s third-party
liability statute, N.C.G.S. §57C-3-30(a), is substantially similar to that of
Delaware, Del. Code Ann. tit. 6, §18-303(a).
Both statutes state that members or managers cannot be held liable for
the obligations of an LLC “solely by reason of” being members or managers or
participating in management of an LLC.
Del. Code Ann. tit. 6, §18-303(a); N.C.G.S. §57C-3-30(a). The North Carolina statute also states that
members or managers may be held personally liable for their “own acts or
conduct.” See N.C.G.S.
§57C-3-30(a). However, this language appears
to simply clarify the earlier principle:
the liability of members or managers is not limited when they act
outside the scope of managing the LLC.
For example,
personal
guaranties executed by LLC members or managers are binding[,] . . . a member or
manager can be a co-maker of an LLC obligation[,] . . . [and] a member or
manager charged with collecting and paying over income tax withholding and
other so-called “trust fund taxes” may be held liable for the failure to do so.
H. Bryan Ives, III, North Carolina
Limited Liability Companies 93 (1994).