Babb v. Bynum & Murphrey, PLLC, 182 N.C. App. 750, 643 S.E.2d 55 (2007)
NC: Estate planning
Student contributor: David Yanoff
Facts: Plaintiffs were a special trustee (Babb) and a trust beneficiary (Henderson) of a decedent’s estate. Bynum (not a party), a partner in defendant firm (B&M), was the attorney of record for the executrix in decedent’s estate proceeding, and was also named as trustee of the estate. Defendant Murphrey was also partner in the firm.
Plaintiffs complaints primarily involved the actions of Bynum, whom they alleged had mismanaged trust assets and credited his individual account with proceeds from the sale of decedent’s house. Plaintiffs sued for negligence and breach of fiduciary duty. Defendant filed a motion for summary judgment, which was granted, and plaintiffs appealed. Plaintiffs essentially contended that Murphrey, as a partner, owed them a duty under the Limited Liability Company Act to ensure that Bynum acted reasonably, and that he omitted to correct Bynum’s wrongful actions. Plaintiffs also argued that the firm’s operating agreement created a duty owed to them by Murphrey personally, as the agreement stated that “a member shall be liable for all acts or neglect . . . for which he or she is directly responsible.” Plaintiffs insisted they were third party beneficiaries of this contract between individual partners and the firm.
Issue(s):
1) Does the NC Limited Liability Company Act make a partner personally liable for actions of other firm members?
2) Does an operating agreement making members of a partnership personally liable for wrongs (to the firm) also make them personally liable to third parties?
Ruling(s):
1) Not if the defendant partner did not have actual knowledge of the alleged wrongful acts. The LLCA does not create a duty to investigate every act of a partner. Here, Murphrey was not alleged to have done anything wrong himself.
2) Even if an operating agreement makes partners or members individually liable for their acts, this liability is to the firm. To read such an agreement as creating liability to clients would be to read in a third party beneficiary clause. Third party beneficiaries must be expressly intended in a contract to maintain suit.
Lesson(s):
1) While it’s not clear from the opinion what happened to the firm (which was also a defendant), it is certainly clear that personal liability for wrongful acts of one member or partner doesn’t attach simply by virtue of one’s position in the company. Some affirmative wrongdoing is required.
2) As in many jurisdictions, it is difficult in NC to maintain an action against an attorney as a third party beneficiary of the attorney client relationship . This is probably all the more so in a standard form employment or partnership agreement, where every future client could potentially be regarded as a third party beneficiary.
Tagged with: beneficiary, Carolina, fiduciary duties, Fiduciary relationship, intended beneficiaries, LLCA, malpractice, North, North Carolina, Partnership, party, third
Posted in: North Carolina