Azure Dolphin, LLC v. Barton

Supreme Court of North Carolina
821 S.E.2d 711, 371 N.C. 579 (2018)

ELI5:

Sections

Rule of Law:

Under the internal affairs doctrine, the standing requirements for bringing a derivative action on behalf of a foreign entity—specifically regarding pre-suit demands—are governed by the laws of the entity's state of organization. Furthermore, a business partnership where one party provides capital and the other provides expertise does not automatically create a de facto fiduciary relationship absent evidence of domination or exclusive control.

Facts:

Jean-Pierre Boespflug and Justin Barton worked together in the real estate investment business for approximately thirty years, creating various entities (LLCs and partnerships) organized under the laws of Oregon and California.
The business arrangement generally involved Boespflug contributing the majority of the capital while Barton served as the manager or general partner with discretion to manage the properties.
In 2011, Boespflug moved to Paris and refused to personally guarantee new loans for the investment entities.
In response, Barton converted Boespflug's membership interests in the entities into promissory notes, effectively buying him out.
Barton unilaterally amended the operating agreements to be more favorable to himself and transferred certain properties to himself or his family members.
Barton sent an email to Boespflug in 2013 regarding the buyout and promissory notes, but Boespflug claims he did not read or understand the significance of this communication until 2016.
Boespflug and his company, Azure Dolphin, LLC, sought to sue Barton to remove him as manager and to recover damages for the alleged undervaluation of their interests.

Procedural Posture:

Plaintiffs filed a complaint in Superior Court, Forsyth County.
The case was designated a mandatory complex business case by the Chief Justice.
Defendants filed a motion to dismiss.
Plaintiffs filed a motion for leave to amend, which the trial court granted.
Plaintiffs filed the amended complaint late and initially filed a version differing from the one approved.
Plaintiffs filed a motion for leave to file a second amended complaint.
The trial court denied the motion for a second amended complaint and granted the Defendants' motion to dismiss the first amended complaint.
Plaintiffs appealed the dismissal and the denial of the amendment directly to the Supreme Court of North Carolina.

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Issue:

Does a plaintiff have standing to assert derivative claims for the removal of a manager of foreign entities without satisfying the pre-suit demand or futility pleading requirements of the entities' home states, and does a standard business partnership establish a fiduciary relationship?

Opinions:

Majority - Justice Ervin

No, the Court affirmed the dismissal, holding that plaintiffs failed to meet the specific pleading requirements for derivative actions under Oregon and California law and failed to allege facts sufficient to establish a fiduciary relationship. Regarding the removal claims, the Court determined these were derivative actions because they sought relief for the entities, not special injury to the plaintiff. Under North Carolina's choice of law rules (specifically N.C.G.S. § 57D-8-06 and § 59-901), the internal affairs of foreign entities are governed by the laws of the jurisdiction of organization. Both Oregon and California law require a plaintiff to either make a pre-suit demand on the entity or plead with particularity why such a demand would be futile. The plaintiffs failed to allege demand futility with the required particularity in their complaint. Regarding the fiduciary duty claim, the Court held that a 'de jure' fiduciary relationship did not exist merely because Barton was a 'deal broker.' Furthermore, a 'de facto' fiduciary relationship was not established because the complaint described a balanced power dynamic where one party provided money and the other provided expertise, rather than a relationship where Barton exercised complete domination and influence over Boespflug. Finally, the Court found no abuse of discretion in the trial court's denial of the motion to file a second amended complaint due to undue delay and procedural errors by the plaintiffs.

Analysis:

This decision reinforces the strength of the internal affairs doctrine in North Carolina, clarifying that procedural prerequisites for derivative suits—such as pre-suit demands—are substantive matters governed by the law of the state of incorporation, not the forum state. It emphasizes that plaintiffs cannot bypass strict pleading requirements of foreign jurisdictions (like Oregon's and California's requirement to plead demand futility with particularity) simply by filing suit in North Carolina. Additionally, the ruling sets a high bar for establishing a 'de facto' fiduciary relationship between sophisticated business partners. It clarifies that a division of labor (capital vs. labor) does not inherently create a fiduciary duty; there must be a demonstration of 'special confidence' resulting in one party's superiority and domination over the other.

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