The Second Circuit Court of Appeal recently reversed Fourth Judicial District Court Judge Daniel “Danny” Ellender’s decision in February to stop a lawsuit against a local business financing company’s officers for wrongdoing, including allegations of fraud and forgery.

The lawsuit pertains to North Louisiana Bidco LLC, a Monroe business industry development corporation offering financing to small businesses in the area. Bidco’s managers include Richard Cloud and James Garner, each of whom were sued in September 2013 along with Bidco and other companies operated by Cloud and Garner. Craig Taylor Inc. alleged that Bidco, Cloud and Garner had engaged in acts of corporate mismanagement, breaches of fiduciary duty, fraud and forgery.

In response to Craig Taylor Inc.’s lawsuit, other members of Bidco tried to investigate the allegations by reviewing Bidco’s financial records, but claimed Cloud and Garner refused to allow inspection of the records. Those Bidco members later filed the lawsuit against Cloud and Garner that was recently decided by the Second Circuit.

The plaintiffs believed they had a right to investigate the allegations as well as the $6-million bad debt expense on Bidco’s 2013 financial statement.

The case was supposed to go to trial in July but from November 2018 to mid-January, Cloud and Garner filed exceptions of no cause of action, arguing the plaintiffs had failed to levy any “definitive” allegations against them.

Without knowing any definitive allegation, they could not defend themselves at trial, Cloud and Garner argued.

Ellender granted the exceptions of no cause of action, ruling that the court could not find any allegations of fraud, breach of professional duty or any other wrong or wrongful acts allegedly committed by Cloud or Garner.

In light of Ellender’s ruling, the plaintiffs appealed the case to the Second Circuit.

“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 (state law),” stated the Second Circuit’s Nov. 20 opinion.

“In their first 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 (Bidco) and damages to the plaintiffs as minority members of (Bidco).”

Second Circuit Judge Jeanette Garrett wrote the Nov. 20 opinion on behalf of a three-judge panel also including judges Shonda Stone and Jay McCallum.

The Second Circuit upheld the plaintiffs’ objection, ruling that the allegations were sufficient to support a cause of action against Cloud and Garner for violation of their fiduciary obligations.

It did not appear that Ellender considered all applicable law or all provisions in Bidco’s operating agreement before reaching his decision to dismiss the lawsuit against Cloud or Garner, the Second Circuit opined.

Ellender’s ruling was reversed and the case remanded to his court for further proceedings.

Costs of the appeal were assessed to Cloud and Garner.

The lawsuit was filed at district court as Sanctuary Capital LLC and others on behalf of North Louisiana Bidco LLC v. Richard D. Cloud, James Randolph Garner, and North Louisiana Bidco LLC.

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