As a matter of business hygiene, North Carolina’s records inspection statute is a bit of an information ATM. But the Business Court recently cautioned that a requester still has to press the right buttons.

In Extra Care, LLC v. Carolinas All. for Residential Excellence, LLC, 2024 NCBC 41, the Court weighed a dispute over an attempted exercise of inspection rights under N.C.G.S. § 57D-3-04 by a preferred member of several LLCs which had contributed $1 million and alleged it wasn’t receiving required distributions.

The statutory procedure for a member seeking to inspect and copy LLC records is straightforward: the demand must be signed by a member and delivered to the entity with at least a seven-day advance notice, state the records or information sought, and describe the purpose of the request. § 57D-3-04(d).

Here, Extra Care had lodged two inspection requests. The first was mostly responded to in three separate productions. The second raised remaining deficiencies in productions to the first request and sought additional materials. Defendants claimed that they first saw the second request after the lawsuit was filed. Extra Care, ¶¶ 8-12.

Each of the inspection demands was signed by Extra Care’s counsel and each were directed to Defendants’ counsel (also their registered agent) – the first delivered by mail to the law firm, the second to the work email address of a lawyer at the firm. Id. ¶¶ 8, 12. Judge Earp held that the second request (the only one at issue in the lawsuit) was unenforceable because it was not signed by a member of Extra Care instead of its lawyer.

The Court observed that the General Assembly amended the statute in 2014 to require an LLC member to exercise the inspection right, even though “[o]nce the demand is signed and delivered” a member’s agent – like its attorney – can act upon the rights attendant to the demand. That legislative change, the Court found, was notable because the General Assembly has shown it can do just the opposite: as it does by not requiring that a shareholder sign an analogous demand notice to a corporation. Id. ¶ 21. Judge Earp noted that the Court had recently decided the issue from the corporation side in Erwin v. Myers Park Country Club, Inc., 2021 WL 3179142 (N.C. Super. Ct. July 27, 2021). We discussed the Myers case here.

The Court also noted that the second inspection demand would also have failed under § 57D-3-04(d), not because it was delivered by email, but because it was not directed to the proper recipient. In accord with the Operating Agreement, the email of the defendants’ outside counsel was not the one “used by [the defendants] at their principal executive offices.” Id. ¶¶ 27-28.

Worth Noting

• The Court rejected Extra Care’s argument that the defendants had waived the member signature requirement by making repeated productions in response to the first inspection demand. The Court distinguished its prior ruling in Brown v. Onslow Bay Marine Grp., 2022 WL 17579104 (N.C. Super. Ct. Dec. 12, 2022), which held that a producing party had waived objection to producing by mail by … producing by mail. Brown was not controlling, the Court held, because the “waiving” conduct there occurred in the context of responding to a single inspection demand. Here, “[w]hile they may have waived their objection to the member signature requirement with respect to the [first demand] by responding,” the Court held defendants retained the option to assert it in response to a separate request. Id. ¶¶ 22-24.

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