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Sanctuary Capital, LLC v. Cloud

Court of Appeals of Louisiana, Second Circuit

November 20, 2019

SANCTUARY CAPITAL, LLC, ET AL. ON BEHALF OF NORTH LOUISIANA BIDCO, LLC Plaintiffs-Appellants
v.
RICHARD D. CLOUD, JAMES RANDOLPH GARNER, AND NORTH LOUISIANA BIDCO, LLC Defendants-Appellees

          Appealed from the Fourth Judicial District Court for the Parish of Ouachita, Louisiana Trial Court No. 2014-1379 Honorable Daniel Ellender, Judge.

          NELSON, ZENTNER, SARTOR & SNELLINGS, LLC By: George M. Snellings IV David H. Nelson Counsel for Appellants, Sanctuary Capital, LLC, J. Bishop Johnston, W. Clinton Raspberry, Jr., MCS Two, LLC, O. A. Cannon, Jr., Nelson D. Abell, III, R. Stewart Ewing, Jr., Carolyn W. Perry, Annette Williams Carroll, Molly Williams, and Clark M. Williams, III, Individually and on Behalf of North Louisiana Bidco, LLC

          BREITHAUPT, DUBOS, & WOLLESON, LLC By: R. Alan Breithaupt James R. Close Counsel for Appellee, Richard D. Cloud

          HECK LAW FIRM, LLP By: Charles H. Heck, Sr. Charles H. Heck, Jr. Counsel for Appellee, James Randolph Garner

          WHEELIS & ROZANSKI By: Stephen D. Wheelis Richard A. Rozanski Shawn M. Bordelon Counsel for Appellee, North Louisiana Bidco, LLC

          Before GARRETT, STONE, and McCALLUM, JJ.

          GARRETT, J.

         This is the third time this lawsuit has come before this court. The suit began when members of a limited liability company ("LLC") sought access to the company's financial records. They have now added claims for damages against the LLC's managers, Richard D. Cloud and James Randolph Garner. This instant appeal was brought by the plaintiffs after the trial court reversed an earlier ruling and granted exceptions of no cause of action filed by the managers. We reverse the trial court judgment and remand for further proceedings.

         FACTS AND PROCEDURAL HISTORY

         This matter is before us on exceptions of no cause of action. Accordingly, all of the facts described below come solely from the allegations in the petitions that are before us for review, together with the attachments filed with those petitions. Since we are dealing with peremptory exceptions that were originally denied but later reurged and granted by the trial court, an explanation of the circuitous route this case has taken is necessary to understand its current procedural posture.

         North Louisiana Bidco, LLC ("NLB"), was organized in 1999 and licensed as a Business Industry Development Corporation to provide financing to small businesses in North Louisiana. In 2000, the members of the company executed a detailed operating agreement, which addressed the management and control of the company.[1] The agreement named Cloud and Garner as the company's managers. It also contained the following provisions pertaining to examination of the company's books and records:

ARTICLE VIII.
BOOKS, RECORDS, ACCOUNTING, AND TAX ELECTIONS
. . . B. Books and Records.
1. The Manager shall keep or cause to be kept complete and accurate books and records of the Company and supporting documentation of the transactions with respect to the conduct of the Company's business. The records shall include, but not be limited to, complete and accurate information regarding the state of the business and financial condition of the Company for the last three most recent years; a copy of the articles of organization and operating agreement and all amendments to the articles and operating agreements; a current list of the names and last known business, residence, or mailing addresses of all Members; and the Company's federal, state, and local tax returns for the last three most recent years.
2. The books and records shall be maintained in accordance with sound accounting practices and shall be available at the Company's principal office for examination by any Member or the Member's duly authorized representative at any and all reasonable times during normal business hours.
3. Each Member shall reimburse the Company for all costs and expenses incurred by the Company in connection with the Member's inspection and copying of the Company's books and records.
. . .
D. Reports. Within seventy-five (75) days after the end of each taxable year of the Company, the Manager shall cause to be sent to each Person who was a Member at any time during the taxable year then ended: (i) an annual financial statements [sic], prepared by the Company's independent accountants in accordance with standards issued by the American Institute of Certified Public Accountants; and (ii) a report summarizing the fees and other remuneration paid by the Company to any Member, the Manager, or any Affiliate in respect of the taxable year. In addition, within seventy-five (75) days after the end of each taxable year of the Company, the Manager shall cause to be sent to each Person who was an Interest Holder at any time during the taxable year then ended, that tax information concerning the Company which is necessary for preparing the Interest Holder's income tax returns for that year. At the request of any Member, and at the Member's expense, the Manager shall cause an audit of the Company's books and records to be prepared by independent accountants for the period requested by the Member.

         In September 2013, NLB, Cloud, Garner and two other companies affiliated with Cloud and Garner were sued by Craig Taylor, Inc. ("CTI"), a company with which these defendants had engaged in business dealings. CTI's demands included a money judgment against NLB, Cloud and Garner. CTI's 185-paragraph petition alleged that Cloud and Garner had engaged in various acts of corporate mismanagement, self-dealing, breaches of fiduciary duty, fraud and forgery.[2]

         In May 2014, 11 members of NLB filed the first petition in the matter before us, which they captioned as a derivative action, the goal of which was to enforce NLB's right to investigate allegations of self-dealing and breach of fiduciary duty by Cloud and Garner.[3] This action was combined with a demand for injunctive relief. The defendants included NLB, Cloud and Garner. The plaintiffs asserted that they sought to enforce NLB's own right to examine the company's "financial and other records," an effort that had been frustrated by Cloud and Garner's refusal to make the records available to them. The plaintiffs asserted that they wished to examine NLB's records due to CTI's allegations of wrongdoing against Cloud and Garner, as well as a $6 million bad debt expense on NLB's 2013 financial statement.

         The petition contained the following specific allegations pertaining to Cloud and Garner:

18.
Under Louisiana law, the manager of a limited liability company is "deemed to stand in a fiduciary relationship to the limited liability company and its members and shall discharge his duties in good faith, with the diligence, care, judgment, and skill which an ordinary prudent person in a like position would exercise under similar circumstances." La. R.S. 12:1314.
19.
In order to protect the financial and legal interests of the Company and all members of the Company, the Company has a right to conduct an independent investigation (i.e., an investigation not controlled by Defendant Cloud or Defendant Garner) of the allegations of self-dealing or any other misconduct on the part of its managers that, if substantiated, would violate the fiduciary duties imposed upon the managers by La. R.S. 12:1314. In order to conduct any such independent investigation, the Company also has a right to obtain any and all financial and all other records of the Company that are necessary to conduct such an investigation.

         "Pending receipt and review of the financial records of the Company or other relevant evidence," the plaintiffs reserved the right to assert additional claims against Cloud and Garner, "including, but not limited to, claims for monetary damages, attorney's fees, and other relief."

         In response to the petition, NLB, Cloud and Garner each asserted an exception of prematurity. They cited the provisions of NLB's operating agreement requiring members of the LLC to mediate their disputes and, if mediation failed, to submit disputes to arbitration. The trial court granted the exceptions of prematurity and dismissed the plaintiffs' action.

         In Sanctuary Capital, LLC ex rel. N. Louisiana Bidco, LLC v. Cloud, 49, 766 (La.App. 2 Cir. 4/15/15), 163 So.3d 890, writs denied, 15-0947, 15-0951 (La. 8/28/15), 176 So.3d 404, 405, this court reversed that judgment. The court found that, "[a]lthough this appears to be a hybrid of a derivative action and an action by individual members, we conclude that the action here is fundamentally a demand by members of the LLC against the company itself. In other words, the members are attempting to enforce their rights to see the company's records against the company, not against other members. Moreover, we believe that this dispute does not 'relat[e] to' the agreement in a sense that triggers the mediation/arbitration clause."

         This court further held that the mediation/arbitration clause of the operating agreement was not triggered for two reasons. First, the dispute was "neither a dispute between members nor a true derivative action to enforce the company's rights. The plaintiff members are seeking to enforce their own rights against the company itself. For purposes of the mediation/arbitration clause, this is not a dispute between members." (Emphasis theirs.) Secondly, there was an absence of a dispute relating to the operating agreement because its provisions made it clear that members had the right to inspect the company's books and records. The matter was remanded for further proceedings.

         NLB, Cloud and Garner then filed dilatory exceptions of improper use of summary proceedings due to the petition's request for a mandatory injunction, which required a trial on the merits. The exceptions were granted at a hearing on September 26, 2016, at which the trial court ruled a summary proceeding was not authorized and the case was to be converted to an ordinary proceeding. Judgment was signed October 11, 2016. At a hearing on February 2, 2017, the trial court ordered that an amended petition converting the case to an ordinary proceeding be filed within 15 days.

         On February 15, 2017, the plaintiffs filed a first amending, supplemental and restated petition for breach of contract and damages. They incorporated the allegations in the original petition while including additional matters. They reiterated that the original lawsuit was filed to protect their investment in NLB and investigate allegations of self-dealing and breach of fiduciary duties by Cloud and Garner, each of whom was named as a defendant in "his capacity as manager of [NLB] only." They added the following specific allegations pertaining to Cloud and Garner:

5.
Notwithstanding the clear provisions contained in Article VIII of NLB's Operating Agreement, Defendants have steadfastly refused to provide Plaintiffs with the requested information and since the filing of this lawsuit have filed multiple exceptions and objections precluding Plaintiffs from exercising their contractual right to review, inspect and examine NLB's books and records. Defendants, Cloud and Garner, in their capacities as managers of NLB, have intentionally breached and violated the clear and unequivocal provisions set forth in Article VIII of NLB's Operating Agreement.
6.
During the approximately three years since the original lawsuit was filed, Defendants have only provided Plaintiffs with sanitized annual audit reports and federal tax returns. Defendants, Cloud and Garner, in their capacities as managers of NLB, have breached their duties owed to Plaintiffs that is [sic] set forth in the clear and unequivocal provisions contained in the ...

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