The North Carolina Business Court’s Message to Limited Liability Companies: Draft the Operating Agreement Before the Dispute

Introduction

The 2025–26 cycle of North Carolina appellate and Business Court decisions produced an unusually clear set of messages about governance of closely held limited liability companies (LLCs). Across multiple opinions, from the North Carolina Supreme Court to North Carolina’s specialised Business Court bench, the judiciary emphasised contractual formalism, strict statutory interpretation, and the primacy of operating agreement language. For owners, founders, investors and their counsel in North Carolina, these decisions are not merely litigation developments; they provide a practical roadmap for drafting and negotiating LLC governance documents.

The core thesis is straightforward: North Carolina courts treat LLCs as creatures of contract, will generally enforce the governance bargain the owners struck, and are cautious about supplying protections the operating agreement omits. Courts will not rescue owners from incomplete, informal, or poorly implemented governance arrangements. The practical lesson for practitioners, founders, family businesses, investors and managers is equally direct: draft carefully before a dispute arises.

This article addresses three principal themes from recent case law in North Carolina: (i) deadlock and dissolution; (ii) transfer restrictions and operating agreement formalities; and (iii) fiduciary duties and the limits of judicial gap-filling. For each theme, the article identifies the key decisions and the practical drafting guidance they provide.

The legal framework

North Carolina General Statutes Section 57D-2-30 permits operating agreements to supplant most default rules of North Carolina’s LLC statute, subject to enumerated non-waivable rights. The practical consequence is that the operating agreement serves as the primary source of governance rights and obligations, not the LLC statute, common law, or the reasonable expectations of individual members.

The North Carolina Supreme Court’s December 2025 decision in Gvest Real Estate, LLC v JS Real Estate Investments, LLC crystallised this principle. The court held that “a majority interest does not necessarily equate to control in an LLC” because “control depends entirely on what the LLC’s members agree to in the operating agreement”. Describing LLCs as “primarily a creature of contract”, the court explained that ownership percentages carry no inherent governance weight; instead, members are free to structure voting, management, and fiduciary obligations however they choose. The court acknowledged that evolving business practices may eventually warrant recognising fiduciary duties between majority and minority members, but declined to “extend the law in a novel direction”. For practitioners, Gvest underscores that the corporate model, where majority share ownership typically carries board election rights and statutory protections, does not translate to the LLC context. In an LLC, member rights generally exist only to the extent the operating agreement creates them.

Although operating agreements enjoy broad freedom to modify default rules, North Carolina’s LLC statute preserves certain non-waivable rights. These include judicial dissolution under Section 57D-6-02(2)(i) unless the operating agreement provides an alternative remedy, derivative actions unless the operating agreement supplies an alternative mechanism, and the implied contractual covenant of good faith and fair dealing. Owners who fail to draft carefully will be governed by default statutory rules they never considered and that may not align with their business expectations.

The corporate setting operates differently. The Business Corporation Act and the shareholder-oppression doctrine under N.C.G.S. Section 55-14-30 supply statutory protections that have no functional equivalent in the LLC context. Because LLCs lack this statutory safety net, a well-drafted operating agreement is the LLC member’s primary source of protection.

The case law: three themes from 2025–2026

Theme 1: deadlock and dissolution

In Davis Trust v JHD Properties, LLC, decided by the North Carolina Supreme Court on 31 January 2025, the court confronted the consequences of a governance structure that lacked a deadlock resolution mechanism. The case involved two family trust LLCs that together owned approximately 68 acres of undeveloped land in Wake County. The operating agreements required two co-managers to act unanimously on all material decisions, but the agreements contained no mechanism for breaking a deadlock if the managers could not agree. Over a period of years, the co-managers proved unable to reach agreement on the use, development or sale of the property, leaving the LLCs functionally paralysed.

The Supreme Court held that judicial dissolution was appropriate because it was “not practicable” to conduct the LLCs’ business in conformance with the operating agreements. Importantly, the court clarified that “not practicable” means “unfeasible,” which is a significant threshold but one that does not require the petitioner to demonstrate impossibility. The distinction matters for practitioners: a member locked in governance paralysis need not wait until the entity’s assets have deteriorated completely but must still demonstrate more than mere disagreement or dissatisfaction.

The Business Court’s decision in Davis v McHatton, decided by Chief Judge Conrad on 12 August 2026, illustrates the other common pathway to dissolution: active usurpation of control by one equal member-manager. Davis and McHatton were equal members and managers of two LLCs operating funeral service businesses, but McHatton allegedly seized unilateral control by changing financial passwords, increasing his own compensation, diverting company assets to other ventures, and using company funds for personal expenses. The court denied the motion to dismiss, holding that these allegations adequately stated a claim for dissolution. As Chief Judge Conrad observed, the Business Court “receives a steady diet” of cases in which one member claims another has wrongfully usurped corporate control – a judicial acknowledgment that reinforces the urgency of drafting governance protections before disputes arise.

The corporate companion, Mauck v Cherry Oil Co., decided by the Supreme Court on 17 October 2025, teaches the flipside. There, minority shareholders of a closely held corporation sought dissolution, but the court affirmed dismissal because the parties’ 1998 Shareholder Agreement contained put-call buyout provisions at fair market value. This contractual exit mechanism, negotiated years before the dispute, defeated the need for judicial dissolution and preserved the enterprise as a going concern.

The drafting lessons are complementary. Davis Trust teaches that equal control structures and unanimous consent provisions need deadlock-breaking mechanisms before conflict arises. There are a variety of tools that parties may use for this purpose, including buy-sell triggers, so-called “shotgun” provisions, third-party manager appointments, mediation followed by forced sale, and court-supervised sale procedures. The appropriate mechanism depends on the business context: a real estate LLC may be best served by a forced-sale procedure; an operating business may require a staged mediation-to-buyout process. While occurring in the corporate context, Mauck teaches that a well-drafted buy-sell provision can pre-empt dissolution entirely and preserve enterprise value. The common thread is that the mechanism must exist in the governing document before the dispute arises.

Theme 2: transfer restrictions and operating agreement formalities

In Gvest Real Estate, LLC v JS Real Estate Investments, LLC, the Supreme Court addressed a dispute arising from a Charlotte-area real estate redevelopment venture. The LLC’s operating agreement required prior written consent of both managers for any transfer of membership interests. Two members attempted to transfer their interests to newly formed holding companies and then purported to vote to remove the plaintiff as manager. The critical factual issue was whether the formal transfer requirements – specifically, the written consent provision – had ever been satisfied. The court found no evidence of compliance with the transfer provisions and held that the original members retained their interests, rendering the attempted removal of the plaintiff as manager invalid.

The court treated the operating agreement as the exclusive source of rights governing transfer, removal and control. The opinion did not reach for equitable principles or common law concepts to supplement the contractual framework. For practitioners, the case establishes that transfer restrictions are not boilerplate; rather, they determine voting power, authority to remove managers, ownership continuity and ultimately litigation outcomes. Diligence on historical transfers is critical, particularly in M&A transactions involving closely held LLCs with complex ownership histories.

The Business Court extended these principles in Hughes v JBS Ventures, LLC, decided on 9 February 2026. In Hughes, the plaintiff claimed a 23% ownership interest in an LLC based on the operating agreement, which was disputed by the majority member and manager of the LLC because the plaintiff allegedly never paid his contemplated capital contribution. The court dismissed claims for breach of fiduciary duty and constructive fraud, applying the economic loss doctrine because the underlying allegations were grounded in the operating agreement rather than in any independent duty. The court further held that a constructive trust claim was subject to the three-year breach of contract statute of limitations, not the ten-year constructive trust period, because the claim arose from the operating agreement. These are somewhat complicated legal principles, but the takeaway is simple – Hughes underscores that the operating agreement controls not only the substance of member disputes, but also the available remedies and limitations periods that apply to resolution of those disputes.

These decisions carry a clear drafting message. Transfer mechanics must be precise and consistently followed throughout the life of the entity. Operating agreements should address permitted transfers, consent standards, rights of first refusal, and drag-along and tag-along rights. Companies should maintain written consents, updated member schedules and complete capitalisation records. For M&A diligence counsel, the lesson is to verify not only the current capitalisation table but also the procedural history of every prior transfer.

Theme 3: fiduciary duties and the limits of judicial gap-filling

Recent case law addresses three related questions: When do fiduciary duties arise? Can they be limited or waived? And when will courts decline to supply protections that the parties did not include in their governing documents? The common thread is judicial restraint. Courts will enforce the bargain the parties struck, but they will not rewrite what the parties left out or rescue owners from the consequences of incomplete drafting.

(i) Fiduciary duties under the operating agreement

Fiduciary duties are obligations of loyalty and care that one party owes to another.  In the corporate world, majority shareholders typically owe fiduciary duties to minority shareholders by operation of law. However, the North Carolina Supreme Court made clear in Gvest Real Estate, LLC v JS Real Estate Investments, LLC that this rule does not automatically apply to LLCs.

In Gvest, a 25% member argued that a coalition of minority members who together controlled 75% of the voting power owed fiduciary duties to him as the remaining member. The Supreme Court disagreed. It reasoned that LLCs are “creatures of contract” and that control depends on what the operating agreement says, not on ownership percentages. Because LLC members can negotiate for minority protections through the operating agreement, the court ruled that it was not appropriate to impose fiduciary duties that the parties never agreed to.

The Business Court extended this principle in Estevez v C&S Commerce, LLC. There, the operating agreement contained an explicit waiver: the minority members agreed not to bring fiduciary duty claims against the majority owner. When a dispute arose, the minority argued that the waiver was unconscionable. The court disagreed, holding that North Carolina public policy favours freedom of contract and that bargained-for waivers are enforceable.

Together, Gvest and Estevez function as bookends. Courts will not supply fiduciary duties that the operating agreement omits, and courts will enforce fiduciary duty waivers that the operating agreement includes. However, Estevez preserved one residual protection: the implied covenant of good faith and fair dealing, which cannot be waived. This means that even where fiduciary duties are limited, members may still have contract-based claims if the majority acts in bad faith.

But waivers are not the end of the story. The Business Court’s decision in Highlights Healthcare, LLC v Abell illustrates what happens when a waiver contains exceptions. The operating agreement for Highlights waived fiduciary duty claims against managers and members but preserved liability for “fraud, willful misconduct or intentional and material breach”. When minority members alleged that the majority owner had used company funds for a personal apartment, a private jet, vacations and home repairs, the court allowed the claims to proceed.

The court also allowed claims against the company’s officers to proceed. Under both North Carolina and Delaware law, officers owe fiduciary duties to the company by virtue of their position, regardless of any member-level waiver. For drafters, Highlights Healthcare teaches that fiduciary duty waivers and their exceptions must be read together. A broad waiver may be enforceable, but carveouts for fraud, bad faith or willful misconduct can reopen the door to liability. Drafters should consider not only the scope of any waiver but also the breadth of any exceptions, particularly where a controlling member also serves as an officer or manager.

The Business Court’s decision in Cranford v Hintz applies this principle in a family-business context. Steele Family Farms, LLC held five parcels of farmland in Rowan County under an operating agreement that required unanimous consent for major decisions. One member allegedly used company land for personal cattle operations without paying rent, while governance gridlock prevented the other members from taking corrective action. Chief Judge Robinson dismissed the plaintiff’s individual fiduciary duty claims because the unanimous consent requirement meant the majority members did not actually “control” the LLC. The court allowed derivative claims against the member-managers to proceed because the operating agreement’s liability limitation clause preserved liability for “gross negligence or willful misconduct”. This case reinforces the lesson from Highlights Healthcare: the scope of a waiver and the breadth of its exceptions determine whether fiduciary claims survive.

(ii) Operating without an agreement

What happens when LLC members never sign an operating agreement at all? The paired decisions in Lafayette Village Pub, LLC v Burnham and Bronson v Burnham provide the answer. The Bronsons and Kenneth Burnham were members of two North Carolina LLCs, one operating a restaurant and the other an office suites business. Neither company had an operating agreement. The Bronsons alleged that Burnham ran the businesses single-handedly, used company funds for personal purposes, made loans on terms he set himself, and denied them access to financial records.

In the first decision, Judge Davis dismissed the Bronsons’ individual claims for breach of fiduciary duty. Because neither LLC had an operating agreement, statutory default rules applied: all three members were co-managers with equal voting power. The court determined that the Bronsons could have outvoted Burnham at any time, but they never called a meeting, voted against his actions or sought a court order. The court declined to create a fiduciary relationship where the complaining members had governance tools available but failed to use them.

The Bronsons’ derivative claims, which were brought on behalf of the LLCs themselves, fared better. In a later summary judgment ruling, Judge Davis found genuine disputes of fact about whether Burnham had entered into loans without approval, directed payments to companies he controlled, and moved restaurant property to his home for personal use. The court held that managers owe statutory duties to the LLC to act in good faith and in the company’s best interests. The business judgement rule, which normally protects management decisions from second guessing, does not shield self-dealing.

The two decisions draw a critical line. A member may lack a direct claim against a fellow member while the LLC retains a claim against its manager for harm to the business. For North Carolina LLCs operating without an agreement, this is both a warning and a roadmap. Members who fail to negotiate protections in an operating agreement may be left relying solely on derivative claims and statutory duties owed to the entity, not direct claims against fellow members.

(iii) When courts will not fill the gaps

The final dimension of this theme concerns the outer boundaries of judicial intervention. Courts will not impose fiduciary duties on parties who stand outside the governing documents.

The Business Court’s decision in Belmont Korners, LLC v Lynk Investments, LLC illustrates this limit. The case arose from a failed Charlotte real estate development. After the original developer defaulted on construction loans, the property owners negotiated a restructuring with the lender, Lynk Investments. Under the new arrangement, a Lynk-affiliated entity would hold 70% of a new LLC. But when the operating agreement was signed, that entity had not yet actually been formed with the Secretary of State.

The plaintiffs later sued Lynk for breach of fiduciary duty, arguing that Lynk’s employee signed the operating agreement as manager and that Lynk should be held accountable as that employee’s employer. Judge Shirley dismissed the claim, ruling that the lender-borrower relationship does not give rise to fiduciary duties under North Carolina law, and further that the operating agreement identified the individual, not Lynk, as manager. Courts will not impose fiduciary duties on an entity that is not a party to the operating agreement and did not assume the role of member or manager.

The Business Court’s decision in Gaston Capital, LLC v Kellar reinforces this boundary from the investor’s perspective. Private equity investors who had loaned over USD10 million to fund biomedical device development sued for breach of fiduciary duty after the borrower allegedly transferred intellectual property rights to separate entities to avoid repayment. Judge Davis dismissed the claim, holding that the debtor-creditor relationship does not give rise to fiduciary duties under North Carolina law, regardless of the size of the investment or the closeness of the business relationship. For investors, the lesson is direct: lending money to an LLC, even in substantial amounts or to facilitate the founding of a venture, does not by itself create the fiduciary protections that come with membership status under an operating agreement.

These cases teach complementary lessons. Belmont Korners and Gaston Capital confirm that fiduciary duties do not extend to parties whose relationship with the LLC is based on lending or external dealings rather than membership or management under the operating agreement. The common drafting message is that operating agreements should clearly define fiduciary standards and their exceptions. Express waivers are enforceable, as Estevez confirms, but minority members should negotiate carefully, because a blanket waiver forfeits protections that may prove critical when disputes arise. Where fiduciary duties are waived, carve-outs for fraud or willful misconduct can reopen liability, as Highlights Healthcare demonstrates. And members who operate without any agreement at all risk losing direct claims entirely, as Lafayette Village Pub and Bronson illustrate.

Conclusion

North Carolina courts are sending a clear and consistent message: owners of North Carolina LLCs should not expect courts to rescue them from incomplete, informal, or poorly implemented governance arrangements. The operating agreement is not a formation formality to be executed at closing and filed away. It is a business-critical document that allocates control, defines exit rights, limits or preserves fiduciary duties, and establishes the procedural framework that will govern disputes if and when they arise. The paired decisions in Lafayette Village Pub, LLC v Burnham and Bronson v Burnham illustrate the consequences of operating without a governing document: individual members may lose direct fiduciary duty claims even while derivative claims on behalf of the entity proceed under statutory default duties.

The best time to negotiate governance protections is before capital is committed, before enterprise value increases, before family relationships deteriorate, and before a buyer begins diligence. Governing documents should be revisited as the company grows, admits new investors, or prepares for a sale or recapitalisation.

The 2025–26 decisions have given practitioners an unusually direct roadmap. Courts will enforce the deal as written. The task for counsel is to ensure that the deal as written reflects the parties’ actual expectations, protects minority interests where appropriate, provides workable mechanisms for resolving disputes, and anticipates the life-cycle events, such as death, incapacity, divorce, deadlock, and departure, that inevitably arise. Treated as a litigation-prevention tool rather than a formation artifact, the operating agreement remains the single most important document in any closely held company’s governance architecture.