Sanctuary Capital, LLC on Behalf of North Louisiana Bidco, LLC v. Richard D. Cloud, James Randolph Garner, and North Louisiana Bidco, LLC

Judgment rendered November 20, 2019.
Application for rehearing may be filed
within the delay allowed by Art. 2166,
La. C.C.P.

No. 53,157-CA

COURT OF APPEAL
SECOND CIRCUIT
STATE OF LOUISIANA

*****

SANCTUARY CAPITAL, LLC, Plaintiffs-Appellants
ET AL. ON BEHALF OF NORTH
LOUISIANA BIDCO, LLC

versus

RICHARD D. CLOUD, JAMES Defendants-Appellees
RANDOLPH GARNER, AND
NORTH LOUISIANA BIDCO,
LLC

*****

Appealed from the
Fourth Judicial District Court for the
Parish of Ouachita, Louisiana
Trial Court No. 2014-1379

Honorable Daniel Ellender, Judge

*****

NELSON, ZENTNER, SARTOR Counsel for Appellants,
& SNELLINGS, LLC Sanctuary Capital, LLC,
By: George M. Snellings IV J. Bishop Johnston, W.
David H. Nelson Clinton Raspberry, Jr.,
MCS Two, LLC, O. A.
Cannon, Jr., Nelson D.
Abell, III, R. Stewart
Ewing, Jr., Carolyn W.
Perry, Annette Williams
Carroll, Molly Williams,
and Clark M. Williams,
III, Individually and on
Behalf of North Louisiana
Bidco, LLC

BREITHAUPT, DUBOS, & WOLLESON, Counsel for Appellee,
LLC Richard D. Cloud
By: R. Alan Breithaupt
James R. Close

HECK LAW FIRM, LLP Counsel for Appellee,
By: Charles H. Heck, Sr. James Randolph Garner
Charles H. Heck, Jr.

WHEELIS & ROZANSKI Counsel for Appellee,
By: Stephen D. Wheelis North Louisiana Bidco,
Richard A. Rozanski LLC
Shawn M. Bordelon

*****

Before GARRETT, STONE, and McCALLUM, JJ.

GARRETT, J.

This is the third time this lawsuit has come before this court. The suit

began when members of a limited liability company (“LLC”) sought access

to the company’s financial records. They have now added claims for

damages against the LLC’s managers, Richard D. Cloud and James

Randolph Garner. This instant appeal was brought by the plaintiffs after the

trial court reversed an earlier ruling and granted exceptions of no cause of

action filed by the managers. We reverse the trial court judgment and

remand for further proceedings.

FACTS AND PROCEDURAL HISTORY

This matter is before us on exceptions of no cause of action.

Accordingly, all of the facts described below come solely from the

allegations in the petitions that are before us for review, together with the

attachments filed with those petitions. Since we are dealing with

peremptory exceptions that were originally denied but later reurged and

granted by the trial court, an explanation of the circuitous route this case has

taken is necessary to understand its current procedural posture.

North Louisiana Bidco, LLC (“NLB”), was organized in 1999 and

licensed as a Business Industry Development Corporation to provide

financing to small businesses in North Louisiana. In 2000, the members of

the company executed a detailed operating agreement, which addressed the

management and control of the company.1 The agreement named Cloud and

Garner as the company’s managers. It also contained the following

provisions pertaining to examination of the company’s books and records:

1
The operating agreement was attached to the plaintiffs’ original petition.

ARTICLE VIII.

BOOKS, RECORDS, ACCOUNTING, AND TAX
ELECTIONS

...
B. Books and Records.

1. The Manager shall keep or cause to be kept complete and
accurate books and records of the Company and supporting
documentation of the transactions with respect to the conduct of
the Company’s business. The records shall include, but not be
limited to, complete and accurate information regarding the
state of the business and financial condition of the Company for
the last three most recent years; a copy of the articles of
organization and operating agreement and all amendments to
the articles and operating agreements; a current list of the
names and last known business, residence, or mailing addresses
of all Members; and the Company’s federal, state, and local tax
returns for the last three most recent years.

2. The books and records shall be maintained in accordance with
sound accounting practices and shall be available at the
Company’s principal office for examination by any Member or
the Member’s duly authorized representative at any and all
reasonable times during normal business hours.

3. Each Member shall reimburse the Company for all costs and
expenses incurred by the Company in connection with the
Member’s inspection and copying of the Company’s books and
records.
...

D. Reports. Within seventy-five (75) days after the end of
each taxable year of the Company, the Manager shall cause to
be sent to each Person who was a Member at any time during
the taxable year then ended: (i) an annual financial statements
[sic], prepared by the Company’s independent accountants in
accordance with standards issued by the American Institute of
Certified Public Accountants; and (ii) a report summarizing the
fees and other remuneration paid by the Company to any
Member, the Manager, or any Affiliate in respect of the taxable
year. In addition, within seventy-five (75) days after the end of
each taxable year of the Company, the Manager shall cause to
be sent to each Person who was an Interest Holder at any time
during the taxable year then ended, that tax information
concerning the Company which is necessary for preparing the
Interest Holder’s income tax returns for that year. At the
request of any Member, and at the Member’s expense, the
Manager shall cause an audit of the Company’s books and

2

records to be prepared by independent accountants for the
period requested by the Member.

In September 2013, NLB, Cloud, Garner and two other companies

affiliated with Cloud and Garner were sued by Craig Taylor, Inc. (“CTI”), a

company with which these defendants had engaged in business dealings.

CTI’s demands included a money judgment against NLB, Cloud and Garner.

CTI’s 185-paragraph petition alleged that Cloud and Garner had engaged in

various acts of corporate mismanagement, self-dealing, breaches of fiduciary

duty, fraud and forgery.2

In May 2014, 11 members of NLB filed the first petition in the matter

before us, which they captioned as a derivative action, the goal of which was

to enforce NLB’s right to investigate allegations of self-dealing and breach

of fiduciary duty by Cloud and Garner.3 This action was combined with a

demand for injunctive relief. The defendants included NLB, Cloud and

Garner. The plaintiffs asserted that they sought to enforce NLB’s own right

to examine the company’s “financial and other records,” an effort that had

been frustrated by Cloud and Garner’s refusal to make the records available

to them. The plaintiffs asserted that they wished to examine NLB’s records

due to CTI’s allegations of wrongdoing against Cloud and Garner, as well as

a $6 million bad debt expense on NLB’s 2013 financial statement.

The petition contained the following specific allegations pertaining to

Cloud and Garner:

2
The petition of the CTI lawsuit was attached to the plaintiffs’ original petition in
the instant case.
3
The plaintiffs are: Sanctuary Capital, LLC; J. Bishop Johnston; W. Clinton
Raspberry, Jr.; MSC Two, LLC; O.A. Cannon, Jr.; Nelson D. Abell, III; R. Stewart
Ewing, Jr.; Carolyn W. Perry; Annette Williams Carroll; Molly Williams; and Clark M.
Williams, III. They assert in the petition that they are a numerical majority of NLB’s
members.

3

18.

Under Louisiana law, the manager of a limited liability
company is “deemed to stand in a fiduciary relationship to the
limited liability company and its members and shall discharge
his duties in good faith, with the diligence, care, judgment, and
skill which an ordinary prudent person in a like position would
exercise under similar circumstances.” La. R.S. 12:1314.

19.

In order to protect the financial and legal interests of the
Company and all members of the Company, the Company has a
right to conduct an independent investigation (i.e., an
investigation not controlled by Defendant Cloud or Defendant
Garner) of the allegations of self-dealing or any other
misconduct on the part of its managers that, if substantiated,
would violate the fiduciary duties imposed upon the managers
by La. R.S. 12:1314. In order to conduct any such independent
investigation, the Company also has a right to obtain any and
all financial and all other records of the Company that are
necessary to conduct such an investigation.

“Pending receipt and review of the financial records of the Company

or other relevant evidence,” the plaintiffs reserved the right to assert

additional claims against Cloud and Garner, “including, but not limited to,

claims for monetary damages, attorney’s fees, and other relief.”

In response to the petition, NLB, Cloud and Garner each asserted an

exception of prematurity. They cited the provisions of NLB’s operating

agreement requiring members of the LLC to mediate their disputes and, if

mediation failed, to submit disputes to arbitration. The trial court granted

the exceptions of prematurity and dismissed the plaintiffs’ action.

In Sanctuary Capital, LLC ex rel. N. Louisiana Bidco, LLC v. Cloud,

49,766 (La. App. 2 Cir. 4/15/15), 163 So. 3d 890, writs denied, 15-0947, 15-

0951 (La. 8/28/15), 176 So. 3d 404, 405, this court reversed that judgment.

The court found that, “[a]lthough this appears to be a hybrid of a derivative

action and an action by individual members, we conclude that the action

4

here is fundamentally a demand by members of the LLC against the

company itself. In other words, the members are attempting to enforce their

rights to see the company’s records against the company, not against other

members. Moreover, we believe that this dispute does not ‘relat[e] to’ the

agreement in a sense that triggers the mediation/arbitration clause.”

This court further held that the mediation/arbitration clause of the

operating agreement was not triggered for two reasons. First, the dispute

was “neither a dispute between members nor a true derivative action to

enforce the company’s rights. The plaintiff members are seeking to enforce

their own rights against the company itself. For purposes of the

mediation/arbitration clause, this is not a dispute between members.”

(Emphasis theirs.) Secondly, there was an absence of a dispute relating to

the operating agreement because its provisions made it clear that members

had the right to inspect the company’s books and records. The matter was

remanded for further proceedings.

NLB, Cloud and Garner then filed dilatory exceptions of improper use

of summary proceedings due to the petition’s request for a mandatory

injunction, which required a trial on the merits. The exceptions were

granted at a hearing on September 26, 2016, at which the trial court ruled a

summary proceeding was not authorized and the case was to be converted to

an ordinary proceeding. Judgment was signed October 11, 2016. At a

hearing on February 2, 2017, the trial court ordered that an amended petition

converting the case to an ordinary proceeding be filed within 15 days.

On February 15, 2017, the plaintiffs filed a first amending,

supplemental and restated petition for breach of contract and damages. They

incorporated the allegations in the original petition while including

5

additional matters. They reiterated that the original lawsuit was filed to

protect their investment in NLB and investigate allegations of self-dealing

and breach of fiduciary duties by Cloud and Garner, each of whom was

named as a defendant in “his capacity as manager of [NLB] only.” They

added the following specific allegations pertaining to Cloud and Garner:

5.

Notwithstanding the clear provisions contained in Article
VIII of NLB’s Operating Agreement, Defendants have
steadfastly refused to provide Plaintiffs with the requested
information and since the filing of this lawsuit have filed
multiple exceptions and objections precluding Plaintiffs from
exercising their contractual right to review, inspect and examine
NLB’s books and records. Defendants, Cloud and Garner, in
their capacities as managers of NLB, have intentionally
breached and violated the clear and unequivocal provisions set
forth in Article VIII of NLB’s Operating Agreement.

6.

During the approximately three years since the original
lawsuit was filed, Defendants have only provided Plaintiffs
with sanitized annual audit reports and federal tax returns.
Defendants, Cloud and Garner, in their capacities as managers
of NLB, have breached their duties owed to Plaintiffs that is
[sic] set forth in the clear and unequivocal provisions contained
in the NLB operating agreement making available NLB’s books
and records for Plaintiffs to examine.

7.

Defendants, Cloud and Garner, in their capacities as
managers of NLB, have acted in bad faith in objecting and
refusing to turn over the Company’s books and records to
Plaintiffs resulting in unnecessary legal expenses incurred by
NLB and damages to Plaintiffs as minority members of NLB.

8.

In 2008, when certain Plaintiffs were members of NLB’s
board of directors, they questioned NLB’s managers, Cloud and
Garner, concerning the underwriting process and loan
covenants for related party transactions, i.e., loans made to
Cloud, Garner and/or companies in which Cloud and/or Garner
held an ownership interest. Instead of responding to the
inquiries, Defendants, Cloud and/or Garner, in their capacities

6

as NLB managers, asserted they were under no obligation to
account to the minority NLB members or respond to their
inquiries.

9.

Plaintiffs show that once the complete books and records
of NLB are produced for review, inspection and examination as
required by the Company’s operating agreement, Plaintiffs may
have additional claims, demands and causes of action against
Cloud and Garner, in their capacities as NLB managers, to
include, but not limited to:
a) lending NLB funds to companies owned by Cloud, Garner
and/or Cloud and/or Garner’s family members that are not at
arm’s length or fair market value;
b) not requiring personal guarantees for loans made to
companies owned by Cloud and/or Garner and/or Cloud
and/or Garner’s family members in accordance with the
company’s standard loan covenants;
c) making unsecured loans to companies owned by Cloud
and/or Garner and/or Cloud and/or Garner’s family
members;
d) making loans to companies owned by Cloud and/or Garner
and/or Cloud and/or Garner’s family members on
commercially unreasonable terms;
e) acquiring distressed NLB loans for the personal benefit of
Cloud/Garner and/or Cloud and/or Garner’s family
members;
f) improperly writing off NLB loans in which Cloud, Garner
and/or companies in which they held an ownership interest;
g) usurping business opportunities of NLB;
h) other acts as managers of NLB of self-dealing, breaches of
fiduciary duties and mismanagement of the Company that
may be shown through discovery and trial.

The plaintiffs reserved their right to file another petition after

reviewing NLB’s books and records to assert additional claims against

Cloud and Garner, as set forth in the ninth paragraph. They also requested

that they be awarded “all damages that are reasonable” and prayed “for all

just [and] equitable relief” to which they were entitled.

In response, the defendants filed a variety of exceptions. Among

them were exceptions of no cause of action by Cloud and Garner. All

7

exceptions were denied by the trial court on May 15, 2017. In ruling, the

trial court stated:

I will say now the Court is going to deny the exceptions, and
I’ll go through each one of them. But I will say that I think this
turns, in the Court’s mind, on the broader question of whether
the plaintiffs consider the individuals in their managerial
capacity as opposed to being required to sue them in their
member capacity. And the Court finds that there is sufficient
evidence at this point that at least they’ve stated a cause of
action to be able to maintain that. Will it prevail? I don’t
know. But, the Court finds that there was, and I think that
finding will spill over into the other issues. . . . And then I think
the last grouping in the exceptions, procedural capacity,
improper [cumulation] of actions, vagueness and no cause of
action can be addressed in the same vein, that I do find that
underneath a broad reading of [La. R.S.] 12:1320 that the
claims made by the plaintiffs against the individuals, Cloud and
Garner, are sufficient at this point to maintain this cause of
action. However, you know, as discovery plays out, it could
very well be re-raised if in fact that’s what discovery reveals,
that it’s not what the plaintiff has purported to have happened.

Judgment was signed on May 30, 2017. Cloud, Garner and NLB sought

review before this court. We denied their writ applications. See Sanctuary

Capital, LLC ex rel. N. Louisiana Bidco, LLC v. Cloud, 51,799, 51,800, and

51,801 (La. App. 2 Cir. 9/28/17). The Louisiana Supreme Court likewise

denied their writ applications to that court. See Sanctuary Capital, LLC ex

rel. N. Louisiana Bidco, LLC v. Cloud, 17-1845, 17-1858, 17-1857 (La.

1/9/18), 231 So. 3d 650, 653.

In April 2018, Cloud, Garner and NLB answered the suit and alleged

that the plaintiffs had been provided all records to which they were entitled

under the NLB operating agreement and pled the affirmative defense of

extinguishment. In August 2018, the trial court held a hearing on motions to

compel filed against the defendants by the plaintiffs. The motions to compel

against Cloud and Garner were denied in open court. In its subsequent

8

written reasons for denying the motion to compel against NLB, the trial

court stated:

Except for a separate, now settled, lawsuit attached to the initial
petition where bad acts were alleged, there are no definitive
allegations made against the Defendants herein, other than that
requested documents have not been provided. To allow the
production of these documents in discovery would essentially
answer the questions to be resolved at [trial.] Should the Court
allow Plaintiffs access to some and/or all of the requested
documents following trial, the Plaintiffs would then be able to
file additional claims against Defendants at that time should
they have a good faith belief the requested documents support
the relief they now feel they ‘may’ have. As a result of this
ruling, the Court believes this matter should now be ripe for
trial and directs counsel to obtain a trial date as soon as
possible.

On November 30, 2018, the trial court signed an order setting the matter for

bench trial on May 28, 2019. It was later reset to July 22, 2019.

In the meantime, on November 29, 2018, Garner filed another

exception of no cause of action, in which he asserted that he should not be

subjected to the risk and expense of a trial based upon the petitions which

stated no definitive claims against him. He further alleged that the instant

case was an action against NLB by members seeking documents, no claims

were asserted against him, and arbitration would have been available if there

had been any such allegations because it would be a dispute between

members under the operating agreement. On January 17, 2019, Cloud also

filed another exception of no cause of action in which he adopted and

incorporated by reference portions of Garner’s exception. The plaintiffs

filed an opposition to the exceptions on February 4, 2019.

A hearing was held on February 22, 2019, at which the trial court

granted the exceptions of no cause of action. The court acknowledged its

previous denial of the exceptions but stated that it felt it now had more

9

information and a greater understanding of the issues. In granting the

exceptions, the court relied upon the discussions pertaining to La. R.S.

12:1320(D) in Nunez v. Pinnacle Homes, L.L.C., 15-0087 (La. 10/14/15),

180 So. 3d 285, and An Erny Girl, L.L.C. v. BCNO 4 L.L.C., 2018-0360 (La.

App. 4 Cir. 9/26/18), 257 So. 3d 212. Specifically, the court found that there

were no allegations of fraud, breach of professional duty, or other negligent

or wrongful acts by Cloud or Garner. It noted that, if it was determined that

the members should have been given the documents, this could be remedied

at trial by requiring the LLC to do it and that the LLC could be cast with any

damages. Also, the court opined that, if the documents reflected “untoward”

information, the plaintiffs could still pursue potential claims against the

managers. Judgment granting the exceptions and dismissing all claims

against Garner and Cloud was signed March 7, 2019.

The plaintiffs appealed.

NO CAUSE OF ACTION

The peremptory exception of no cause of action is set forth in La.

C.C.P. art. 927(A)(5). It tests the legal sufficiency of the petition by

determining whether the law affords a remedy on the facts alleged in the

petition. Vince v. Metro Rediscount Co., Inc., 18-2056 (La. 2/25/19), 264

So. 3d 440; Jackson v. City of New Orleans, 12-2742 (La. 1/28/14), 144 So.

3d 876; Port City Glass & Paint Inc. v. Brooks, 52,534 (La. App. 2 Cir.

2/27/19), 266 So. 3d 516; Pesnell v. Sessions, 51,871 (La. App. 2 Cir.

2/28/18), 246 So. 3d 686.

The exception is triable on the face of the petition; and, for the

purpose of determining the issues raised by the exception, the well-pleaded

facts in the petition must be accepted as true. Fink v. Bryant, 01-0987 (La.

10

11/28/01), 801 So. 2d 346; Pesnell v. Sessions, supra. No evidence may be

introduced at any time to support or controvert the objection that the petition

fails to state a cause of action. La. C.C.P. art. 931.

An exception of no cause of action should be granted only when it

appears beyond doubt that the plaintiff can prove no set of facts in support of

any claim which would entitle him to relief. If the petition states a cause of

action on any ground or portion of the demand, the exception should

generally be overruled. Every reasonable interpretation must be accorded

the language used in the petition in favor of maintaining its sufficiency and

affording the plaintiff the opportunity of presenting evidence at trial.

Badeaux v. Southwest Computer Bureau, Inc., 05-0612 (La. 3/17/06), 929

So. 2d 1211; Stonecipher v. Caddo Par., 51,148 (La. App. 2 Cir. 4/7/17),

219 So. 3d 1187, writ denied, 17-0972 (La. 10/9/17), 227 So. 3d 830.

The burden of showing that the plaintiff has stated no cause of action

is upon the exceptor. The public policy behind the burden is to afford the

party his day in court to present his evidence. City of New Orleans v. Board

of Directors of La. State Museum, 98-1170 (La. 3/2/99), 739 So. 2d 748;

Port City Glass & Paint Inc. v. Brooks, supra; Villareal v. 6494 Homes,

LLC, 48,302 (La. App. 2 Cir. 8/7/13), 121 So. 3d 1246.

An appellate court reviews a trial court’s ruling on an exception of no

cause of action de novo because the exception raises a question of law and

the lower court’s decision is based only on the sufficiency of the petition.

Fink v. Bryant, supra; Port City Glass & Paint Inc. v. Brooks, supra.

A peremptory exception may be urged at any time. La. C.C.P. art.

928. And a party may re-urge a peremptory exception after it has been

denied. Landry v. Blaise, Inc., 2002-0822 (La. App. 4 Cir. 10/23/02), 829

11

So. 2d 661. The overruling of a peremptory exception is merely an

interlocutory order, and the court has the right, at any stage of the

proceeding at which the objection was made, to set aside that decree and to

sustain the exception, upon finding that it erred in overruling it. R.G.

Claitor’s Realty v. Juban, 391 So. 2d 394 (La. 1980); Louisiana State Bar

Ass’n v. Carr & Assocs., Inc., 2008-2114 (La. App. 1 Cir. 5/8/09), 15 So. 3d

158, writ denied, 09-1627 (La. 10/30/09), 21 So. 3d 292.

RELEVANT LAW PERTAINING TO LLCs

The law pertaining to LLCs is found in La. R.S. 12:1301 et seq. An

LLC is defined as “an entity that is an unincorporated association having one

or more members that is organized and existing under this Chapter.” La.

R.S. 12:1301(A)(10). An LLC may have an operating agreement, which is

an agreement of the members concerning the affairs of the LLC and the

conduct of its business. See La. R.S. 12:1301(A)(16). If an LLC has no

operating agreement, the default provisions of the Louisiana LLC Law

should govern. Susan Kalinka et al., 9 La. Civ. L. Treatise, Limited

Liability Companies and Partnerships § 1:5 (4th ed. 2015).

The pertinent statues provide, in relevant part, as follows:

La. R.S. 12:1314. Duties of members and managers

A. Subject to the provisions of R.S. 12:1315, a member, if
management is reserved to the members, or manager, if
management is vested in one or more managers pursuant to
R.S. 12:1312:
(1) Shall be deemed to stand in a fiduciary relationship to the
limited liability company and its members and shall discharge
his duties in good faith, with the diligence, care, judgment, and
skill which an ordinary prudent person in a like position would
exercise under similar circumstances. Nothing contained in this
Section shall derogate from any indemnification authorized by
R.S. 12:1315.
...

12

B. Notwithstanding the provisions of Subsection A of this
Section, a member or manager shall not be personally liable to
the limited liability company or the members thereof for
monetary damages unless the member or manager acted in a
grossly negligent manner as defined in Subsection C of this
Section, or engaged in conduct which demonstrates a greater
disregard of the duty of care than gross negligence, including
but not limited to intentional tortious conduct or intentional
breach of his duty of loyalty.
C. As used in this Section, “gross negligence” shall be defined
as a reckless disregard of or a carelessness amounting to
indifference to the best interests of the limited liability company
or the members thereof.
...

La. R.S. 12:1315. Limitation of liability and indemnification of
members and managers

A. Subject to Subsection B of this Section, the articles of
organization or a written operating agreement may:
(1) Eliminate or limit the personal liability of a member or
members, if management is reserved to the members, or a
manager or managers, if management is vested in one or more
managers pursuant to R.S. 12:1312, for monetary damages for
breach of any duty provided for in R.S. 12:1314.
(2) Provide for indemnification of a member or members, or a
manager or managers, for judgments, settlements, penalties,
fines, or expenses incurred because he is or was a member or
manager.
B. No provision permitted under Subsection A shall limit or
eliminate the liability of a member or manager for the amount
of a financial benefit received by a member or manager to
which he is not entitled or for an intentional violation of a
criminal law.

La. R.S. 12:1319. Records and information
...

B. Unless otherwise provided in the articles of organization or
an operating agreement, a member may do any of the
following:
(1) At the member’s own expense, inspect and copy any limited
liability company record upon reasonable request during
ordinary business hours.
(2) Obtain from time to time upon reasonable demand the
following:

13

(a) True and complete information regarding the state of the
business and financial condition of the limited liability
company.
(b) Promptly after becoming available, a copy of the limited
liability company’s federal and state income tax returns for
each year.
(c) Other information regarding the affairs of the limited
liability company as is just and reasonable.
(3) Demand a formal accounting of the limited liability
company’s affairs whenever circumstances render it just and
reasonable. 4

La. R.S. 12:1320. Liability to third parties of members and
managers

A. The liability of members, managers, employees, or agents,
as such, of a limited liability company organized and existing
under this Chapter shall at all times be determined solely and
exclusively by the provisions of this Chapter.
B. Except as otherwise specifically set forth in this Chapter, no
member, manager, employee, or agent of a limited liability
company is liable in such capacity for a debt, obligation, or
liability of the limited liability company.
C. A member, manager, employee, or agent of a limited
liability company is not a proper party to a proceeding by or
against a limited liability company, except when the object is to
enforce such a person’s rights against or liability to the limited
liability company.
D. Nothing in this Chapter shall be construed as being in
derogation of any rights which any person may by law have
against a member, manager, employee, or agent of a limited
liability company because of any fraud practiced upon him,
because of any breach of professional duty or other negligent or
wrongful act by such person, or in derogation of any right
which the limited liability company may have against any such
person because of any fraud practiced upon it by him.

A claim for damages for the breach or bad faith breach of an

obligation owed under an operating agreement is essentially a claim for a

breach of fiduciary duty. See e.g., Coleman v. Querbes Co. No. 1, 51,159

4
In Sanctuary Capital, LLC ex rel. N. Louisiana Bidco, LLC v. Cloud, 163 So. 3d
at 895, this court found that NLB’s operating agreement’s “books and records” provision
was broader than this statutory provision. The operating agreement applied the adjective
“reasonable” only to the “times” when records could be inspected, whereas the statute
required that the “request” for the records be “reasonable.”

14

(La. App. 2 Cir. 2/15/17), 218 So. 3d 665; Risk Mgmt. Servs., L.L.C. v.

Moss, 09-632 (La. App. 5 Cir. 4/13/10), 40 So. 3d 176, writ denied, 10-1103

(La. 9/3/10), 44 So. 3d 683.

DISCUSSION

Cloud and Garner argued below that the allegations set forth in the

plaintiffs’ two petitions were insufficient to state a cause of action against

them. They maintained that the absence of “definitive” allegations against

them made it impossible for them to prepare to defend themselves at trial.

They also asserted that, due to the lack of allegations against them, they had

no way of determining the existence vel non of a basis for an exception of

prematurity to permit the mediation/arbitration provided for under the

operating agreement. The plaintiffs argued otherwise and maintained that

the original ruling made below denying the exceptions of no cause of action

was correct. The plaintiffs further contended that nothing had transpired

since the original ruling to justify a different result.

In support of their argument, Cloud and Garner primarily rely upon

Ogea v. Merritt, 13-1085 (La. 12/10/13), 130 So. 3d 888, Nunez v. Pinnacle

Homes, L.L.C., supra, and An Erny Girl, L.L.C. v. BCNO 4 L.L.C., supra.

However, all of these cases involve La. R.S. 12:1320, an article whose

caption states that it addresses “[l]iability to third parties of members and

managers.”5 (Emphasis ours.) Furthermore, the cited cases arose from legal

disputes between LLCs and third parties with whom the companies engaged

in business transactions. Ogea established the following factors, which were

5
Only La. R.S. 12:1320(C) has relevance here in that it provides that a manager
can be a proper party in a suit to enforce the manager’s liability to the limited liability
company.

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to be considered in determining whether a member could be held personally

liable for his negligent or wrongful acts under La. R.S. 12:1320(D):

1) Whether a member’s conduct could be fairly characterized as
a traditionally recognized tort; 2) whether a member’s conduct
could be fairly characterized as a crime, for which a natural
person, not a juridical person, could be held culpable; 3)
whether the conduct at issue was required by, or was in
furtherance of, a contract between the claimant and the LLC;
and 4) whether the conduct at issue was done outside the
member’s capacity as a member.

The Nunez and An Erny Girl cases discussed and applied these factors.

There are no “third parties” in the instant case. Here we are dealing

with a purely internal dispute over the members’ right to inspect the LLC’s

financial records, an action explicitly permitted by the LLC’s operating

agreement, and now a claim for monetary damages.6

La. R.S. 12:1314(A) establishes that the managers have a fiduciary

relationship to the limited liability company and its members and that they

are required to discharge their duties in good faith. La. R.S. 12:1314(B)

6
A discussion of enforcement of inspection rights is found in Glenn G. Morris
and Wendell H. Holmes, 8 La. Civ. L. Treatise, Business Organizations § 44:21 (2d ed.
2017):

Despite the uncertainties associated with the meaning of the LLC records
inspection language, the risks to controlling LLC members of denying
inspection rights to dissident members appears to be fairly small. The
LLC statute provides no particular remedies in connection with inspection
rights. In corporation law, in contrast, a shareholder is entitled to recover
the litigation expenses he incurs in enforcing his inspection rights unless
the corporation proves that it refused the inspection in good faith because
it had a reasonable basis for doubt about the shareholder’s right to inspect
the records demanded.

For LLCs that deny inspection rights for legitimate reasons, the lack of
fee-shifting sanctions makes sense; it allows an LLC to test the meaning
[sic] the inspection rights provision without the risk of doubling its
litigation expenses. But, unfortunately, the same low risk exists for those
LLCs that deny inspection rights for the wrong reasons. They too are
allowed to litigate the issue, and to pay only their own expenses if they
lose. The statute makes it likely, therefore, that dissident members of an
LLC will be forced to resort to litigation to enforce their inspection rights,
regardless of the propriety or impropriety of their inspection requests.

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absolves managers of personal liability to the LLC or its members for

monetary damages unless they acted in “a grossly negligent manner,” which

is defined as “a reckless disregard of or a carelessness amounting to

indifference to the best interests of the limited liability company or the

members thereof,” or “engaged in conduct which demonstrates a greater

disregard of the duty of care than gross negligence, including but not limited

to intentional tortious conduct or intentional breach of his duty of loyalty.”

La. R.S. 12:1315 provides that the operating agreement may eliminate

or limit a manager’s personal liability for monetary damages for breach of

any duty provided for in La. R.S. 12:1314. Our review of NLB’s operating

agreement reveals the following provisions in Article IV, Management:

Rights, Powers, and Duties.

D. Duties of Parties.

1. The Manager shall not be personally liable, responsible,
or accountable in damages or otherwise to the Company or to
any Member for any action taken or any failure to act on behalf
of the Company within the scope of the authority conferred on
the Manager by this Agreement or by law, unless the action was
taken or omission was made fraudulently or in bad faith or
unless the action or omission constituted gross negligence.
...

E. Liability and Indemnification.

1. The Manager shall not be liable, responsible, or
accountable, in damages or otherwise, to any Member or to the
Company for any act performed by the Manager within the
scope of the authority conferred on the Manager by this
Agreement, except for fraud, gross negligence, or an intentional
breach of this Agreement. [Emphasis added.]

The plaintiffs alleged in their original petition that suit was brought to

investigate allegations of “self-dealing or any other misconduct” by Cloud

and Garner, which, if substantiated, would violate the fiduciary duties

imposed upon them as managers under La. R.S. 12:1314. In their first

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amending, supplemental and restated petition, they further asserted that

Cloud and Garner, as managers, “intentionally breached” the operating

agreement’s provisions pertaining to review of book and records; they “have

acted in bad faith” in refusing to turn over the books and records to the

plaintiffs; and their actions in this protracted litigation have resulted in

unnecessary legal expenses for NLB and damages to the plaintiffs as

minority members of NLB.

Based upon our de novo review, we find these allegations are

sufficient to support a cause of action against Cloud and Garner under La.

R.S. 12:1314 for violation of their fiduciary obligations. Furthermore, the

allegations assert intentional breaches of the operating agreement and

actions in bad faith. Under Article IV (D) and (E) of the operating

agreement, quoted above, the managers may be subjected to liability for bad

faith actions and intentional breaches. It does not appear that the lower court

considered all the applicable law or the provisions in the operating

agreement in reaching its decision. The cases pertaining to liability to third

parties do not govern the situation before us.

Accordingly, we reverse the trial court judgment granting the

exceptions of no cause of action. 7

7
Issues pertaining to the applicability of the mediation/arbitration provisions
contained in the operating agreement are not before us in the current appeal. Our opinion
in the prior appeal in this case was restricted to the allegations made in the original
petition. The plaintiffs have since expanded their claims and are now seeking monetary
damages against Cloud and Garner. These new claims may be subject to the
mediation/arbitration provisions contained in the operating agreement. The defendants, if
they deem it appropriate, should be afforded a reasonable opportunity to exercise any
rights to enforce those mediation/arbitration provisions. The plaintiffs, of course, would
have the right to argue otherwise. We express no opinion on how the trial court should
rule upon such a matter.

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CONCLUSION

The trial court judgment granting the exceptions of no cause of action

filed on behalf of Richard D. Cloud and James Randolph Garner is reversed.

The matter is remanded to the trial court for further proceedings.

Costs of this appeal are assessed to the appellees, Richard D. Cloud

and James Randolph Garner.

REVERSED AND REMANDED.

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