Tuesday, July 17, 2012

Ebenezer United Methodist Church v. Riverwalk Development Phase II, LLC, et al.

Filed: June 6, 2012
Opinion by Judge Albert J. Matricciani, Jr.

Held: Managing Member of an LLC did not usurp a corporate opportunity by failing to disclose a potential real estate investment because, under the interest or reasonable expectancy test, something more than mere proximity of geography and joint management or joint financial risk is required.

Facts: A church purchased a 50% interest in an LLC from a development company. The development company managed the LLC. The LLC owned and developed certain properties in Harford County, MD. Later, the development company formed and managed a second LLC to purchase additional land in Harford County. Subsequently, the two LLC's and a third entity controlled by the development company obtained a collective line of credite secured by deeds of trust to their respective properties.

Two years later, the development company repurchased the church's interest at a profit to the church of $30-35,000. When the church learned that the development company had formed the second LLC to buy property, it sued on the grounds of usurpation of a business opportunity. The church claimed that part of the initial attraction in investing in the first LLC was the potential for the company to purchase and develop the land acquired by the second LLC.

After a bench trial, the trial court entered judgment in favor of the defendants, and the church appealed.

Analysis: Managing members of LLCs owe common law fiduciary duties to the LLC and to the other members, including the duty not to exclude principals from corporate opportunities. Maryland courts examine alleged corporate opportunities under the "interest or reasonable expectancy test" which focuses on whether the corporation could realistically expect to seize and develop the opportunity. If so, the director or officer may not appropriate the opportunity and thereby frustrate the corporate purpose. Instead, the director or officer must first present the opportunity to the corporation and may only exploit it for his own benefit if the corporation rejects it.

The Court rejected the church's argument that the collective security agreement established a corporate opportunity, ipso facto. The church failed to cite or discuss the interest or reasonable expectancy test, claiming instead that the financing arrangement was illegal because the developer had used the proceeds of the transaction to pay for personal vacations, issue a dividend, repurchase stock, and finance other construction projects. This argument failed, the Court stated, because it conflated financial self-dealing with usurpation of a corporate opportunity, with only the latter having been plead and argued on appeal.

The Court then examined the church's claim under the standard set forth in Dixon v. Trinity Joint Venture, 49 Md. App. 379 (1981). In Dixon, the court held that a corporate "interest or expectancy" requires something more than the mere opportunity to develop a neighboring parcel of land. There is no general duty to disclose or to offer participation in other real estate development opportunities. The general partner in Dixon violated his fiduciary duty because the disputed property was more than simply adjoining property under the same management. First, the disputed property presented a direct benefit to the original investment because ownership would have saved the partnership significant development expenses. The church, however, failed to present evidence that the second LLC's property had - or would have had - any effect on the value of the first LLC's property.

Second, in Dixon, restrictions for the disputed property's benefit were imposed on the partnership property at the time of purchase. The Court recognized that while the encumbrance on the first LLC property created by the security agreement was analogous to the restrictions imposed on the partnership property in Dixon, the restrictions in Dixon were imposed for the direct and exclusive benefit of the disputed property. Conversely, the collective security agreement benefited the first LLC and was merely an efficient financial consolidation. Joint financial risk is analogous to consolidated management and therefore is too common to give rise to any particularized interest or expectancy. A reasonable expectation or interest in a corporate opportunity requires something more than mere "proximity" of geography and management, as in Dixon, or of finance, as in this case.

The full opinion is available in pdf.

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