In a dispute about tax preparation businesses that one member of Compass Tax Services LLC was selling to the entity, precious little was for certain. Even the parties’ agreement lacked clarity about whether Compass Tax, or the other two members of Compass, were buying the businesses from the third member, and defendant, Rabindra Karki.

But in Compass Tax Servs. LLC v. Karki, 2024 NCBC 34, what was clear is that the sale of five Liberty Tax franchises (and their assigned territories) by Karki ran a complex and unsuccessful path that included their brief operation by Compass and the ultimate return of their remaining assets to Karki by Compass managing member, plaintiff Ashok Lamichhane. Id. ¶¶ 26, 33.

A host of dueling claims ricocheted between the three members of Compass about the sale and operation of the Liberty businesses, and the financial management of Compass during that time. Karki claimed that plaintiffs halted required installment payments for the Liberty franchises. Id. ¶¶ 21-23. He further alleged that Lamichhane, as managing member, unilaterally increased his management fees – at least in part for personal uses. Id. ¶¶ 27-29. Plaintiffs claimed that Karki had not taken the necessary steps to transfer the tax franchises to them, and as a consequence Compass “was never able to effectively operate” them. Id. ¶¶ 30-32.

Judge Robinson sorted through the claims and counterclaims and provided some initial dismissal relief on portions of the fiduciary duty and constructive fraud claims brought by Karki, as well as on plaintiffs’ breach of contract and good faith and fair dealing claims. But the decision is notable for the ruling that it suggests, but doesn’t, make.

Plaintiffs’ sought dismissal of Karki’s claim for unfair and deceptive trade practices, but only on the first prong of the standard Chapter 75 analysis – that the conduct alleged by Karki did not measure up as “an unfair or deceptive act or practice.” Id. ¶¶ 64-66 (citing Walker v. Fleetwood Homes of N.C., Inc., 362 N.C. 63, 71-72 (2007)). The Court found that contention was a lay-up, given that it already had determined that at least portions of Karki’s fraud, fiduciary duty, and constructive fraud counts survived Rule 12 and thus resulted in a setting where “the UDTPA claim derivative of fraud and other claims ‘rises and falls’ with those claims.” Id. ¶ 66 (quoting Silverdeer, LLC v. Berton, 2013 WL 1792524 (N.C. Super. Ct. Apr. 24, 2013)).

But on what amounted to an “inside baseball” dispute among the three members of an LLC about (i) the sale and payment for the assets of one member to either the LLC itself, or the other two members and (ii) potentially excessive management fees the managing member paid to himself, the Court observed that (Id. ¶ 64):

“Plaintiffs do not raise any argument concerning whether Karki has presented sufficient evidence to show that the alleged conduct satisfies the second required element that the unfair or deceptive act or practice is ‘in or affecting commerce.’”

While the Court noted that it “limit[ed] its analysis accordingly,” the decision tips its cap to the limitation on Chapter 75’s scope that “the Act is not focused on the internal conduct of the individuals within a single market participant, that is, within a single business.” White v. Thompson, 364 N.C. 47, 52 (2010). Given the fairly broad latitude the Business Court has adopted for what conduct is “internal” activity that fails to meet the “in or affecting commerce standard,” the Court seemed to be at least inviting an argument along those lines. We’ve previously written about some of the Business Court’s past decisions on this scope limitation of Chapter 75 here.

Takeaways

• The “inside baseball” restriction on the scope of Chapter 75 is now a well-accepted tool in the defending lawyer’s belt, such that the traditional three-step analysis now effectively includes a fourth: “are you sure there’s no way to characterize the dispute as internal to the company or its members/principals”?

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