A case recently decided in Mecklenburg County Superior Court highlights the rights members of an LLC have to inspect the company’s records. In this case, the court distinguished between records of the LLC itself and records held by one of the other members of the LLC.
The plaintiffs were investors in a medical laboratory business who collectively put nearly $1 million into the company. Five years passed without the return on their investment that they had been promised. The plaintiffs contended that they were swindled by “dealings with a notorious felon that ended in disaster.”
The plaintiffs attempted to determine what had been done with their money, asking for documentation from the LLC about how their money was used. The owner of the LLC apparently refused to provide the documents they requested. The plaintiffs thus filed a lawsuit alleging fraud and demanding that financial documentation be produced.
The key statutory provision is North Carolina General Statutes § 57D-3-04. This is the section of the North Carolina LLC Act that allows members of an LLC to obtain financial and other documentation, including tax returns, financial statements, and information about the other owners of the LLC. In their lawsuit, the plaintiffs demanded that the LLC provide documentation pursuant to N.C.G.S. § 57D-3-04. The defendant refused.
Ruling in favor of the plaintiffs, a Superior Court judge ruled in cited the applicable law and held that “Section 57D-3-04(a) states that a member may inspect and copy or otherwise obtain [records] from the LLC.” The defendant was ordered to produce the financial documentation in question.
The full language of N.C.G.S. § 57D-3-04(a) is as follows. There is a broad variety of information that can be requested:
Subject to the other provisions of this section, each member may inspect and copy or otherwise obtain from the LLC any of the following:
(1) A copy of the articles of organization and any other writing constituting all or part of the operating agreement, including any executed power of attorney under which all or any part of the operating agreement was adopted, that are in effect or were in effect at any time during any of the LLC's preceding four fiscal years.
(2) Either, as the LLC may elect, (i) a copy of any federal, state, or local income tax returns of the LLC, including any amendments and supplements made to those returns, filed with taxing authorities that pertain to any of the LLC's preceding four fiscal years or (ii) financial statements of the LLC of the type described in subsections (a) and (b) of G.S. 55-16-20 that pertain to any of the LLC's preceding four fiscal years.
(3) A list of the names and last known business, residence, or mailing addresses of the LLC's current interest owners, their status as members or economic interest owners, the date on which each became an interest owner, and, if applicable, the dates on which a person's status as a member changed to that of an economic interest owner or the person's status as an economic interest owner changed to that of a member.
(4) Information, the type and detail of which may be prescribed by the operating agreement, from which (i) the member's capital interest may be ascertained and (ii) unless and to the extent the operating agreement does not provide otherwise, each of the other interest owners' capital interests may be ascertained, including the amount of money and a description and statement of the agreed value of any other property or services that each person who has been an interest owner has paid or otherwise transferred or has agreed to pay or otherwise transfer, and the extent to which that agreement by the interest owner has been fulfilled, to or for the benefit of the LLC in
exchange for a capital interest.
(5) Information from which the status of the business and the financial condition of the LLC may be ascertained.
The plaintiffs were unsuccessful on a related issue, however. They had demanded that the defendant also produce the defendant’s own financial documentation, i.e., documentation not that belonged to the LLC, but that pertained to his own personal financial records. The court again cited N.C.G.S. § 57D-3-04, ruling that the statute only applied to an LLC’s financial information, not to the information belonging to one of its members.
This case is important because it shows the power that an LLC’s members have if they suspect malfeasance or wrongdoing. The North Carolina LLC Act gives broad powers to inspect the LLC’s financial information, as well as other information about ownership and capital interests. Though the manager of a recalcitrant LLC might refuse to provide this information, a Superior Court judge will likely order that it be produced.
A link to the full case is here: Elhulu v. Alshalabi, 2021 NCBC 69
Dye Culik PC is a Charlotte, North Carolina business and litigation law firm. We represent clients in all manners of business disputes involving LLCs and their members, corporations and their shareholders, and other business entities. Contact us or give us a call at 980-999-3557 if you need help or legal advice for your business. Follow us on Instagram for the latest updates on CLT businesses and franchises.