Farm Fresh Direct by a Cut Above, LLC v. Downey (Maryland U.S.D.C.)

Filed: October 26, 2017

Opinion by: Judge Ellen Lipton Hollander

Holding:

Under Maryland law, the liability protections afforded to limited liability company (“LLC”) members with respect to obligations of an LLC did not support dismissal of claims that an individual engaged in unfair competition and deceptive trade practices by forming and participating in an LLC, where the plaintiff alleged conduct supporting direct claims against the individual.

Facts:

A Maryland LLC, Farm Fresh Direct by a Cut Above LLC (“Plaintiff”), brought suit against multiple defendants, including another Maryland LLC, Farm Fresh Direct Home Food Services, LLC (“Defendant LLC”), and an individual who allegedly filed Defendant LLC’s Articles of Organization with the Maryland State Department of Assessments and Taxation (“Defendant Individual” and together with Defendant LLC, the “Defendants”), alleging that the Defendants engaged in unfair competition in violation of both Section 43(a) of the Lanham Act, codified at 15 U.S.C. § 1125(a), and Maryland common law, by establishing and engaging in a competing business under a name which was confusingly similar to the name of the Plaintiff.  The Defendant Individual moved, pro se, to dismiss the action.  Despite construing the motion liberally in favor of the Defendant Individual, the district court denied the motion, holding that the Plaintiff had alleged sufficient facts to satisfy the pleading requirements of Fed. R. Civ. P. 8(a).    

Analysis: 

The district court analyzed as a threshold issue whether the Defendant Individual was subject to suit in light of the Defendant LLC’s status as a Maryland LLC.  The district court’s analysis begins with a review of Maryland and Fourth Circuit law regarding the corporate shield and the corresponding LLC shield.  The court then notes that, notwithstanding the LLC shield, which generally protects LLC members from personal liability for obligations of the LLC, the LLC shield does not protect LLC members from direct liability for that member’s own actions.  Because Plaintiff alleged that the Defendant Individual formed the Defendant LLC and acted as its resident agent, the district court held that Plaintiff had alleged sufficient facts to plead direct claims against the Defendant Individual.  Further, because Plaintiff alleged that the name of the Defendant LLC was confusingly similar to the name of the Plaintiff and that the Defendant LLC engaged in substantially the same business as the Plaintiff, the district court held that Plaintiff alleged sufficient facts to plead claims of unfair competition and deceptive trade practices under Maryland and Federal law.  Accordingly, the district court denied Defendant Individual’s motion to dismiss.

The full opinion is available in PDF.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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.

The George Wasserman and Janice Wasserman Goldsten Family Limited Liability Company v. Kay (Ct. of Special Appeals)

Filed: February 9, 2011

Opinion by Judge James R. Eyler

Held: A claim brought by partners in a general partnership or members of an LLC against a managing partner or managing member will survive a motion to dismiss if they sufficiently allege they suffered harm directly and the managing partner or managing member violated duties owed to the partners or members.

Facts: Plaintiffs are partners in five real estate investment general partnerships and two real estate investment LLCs. Defendants are Mr. Kay, an individual that is the managing member or de facto managing member or partner of the partnerships and LLCs, and Kay Management Company, Inc. and Kay Investment Group, LLC, two entities controlled by Kay. Plaintiffs alleged Defendant took money from the partnerships and LLCs and invested the money with Kay Investment through Kay Management. In turn, Kay Investment invested the money with the Bernard Madoff entities. Plaintiffs brought suit following the Madoff ponzi scheme collapse.

The complaint set forth thirteen counts, including, among others, fraud, breach of fiduciary duties, conversion, civil conspiracy and negligence. The Circuit Court granted Defendant's motion to dismiss because none of the claims were individual, the derivative claims involving the partnerships were not agreed to by a majority of the partnership, and the failure to make demand on behalf of the LLCs was unexcused.

Analysis:

After a lengthy discussion of corporations, general partnerships and LLCs, the Court framed the principal issues on appeal as (1) whether Plaintiffs may assert individual claims against Kay and (2) whether Plaintiffs may bring derivative claims on behalf of the partnerships and LLCs against Kay.

(1) Individual Claims

Applying logic from Shenker v. Laureate Education, Inc., which permitted a shareholder to bring a direct action when the shareholder suffers the harm directly or duties owed to the shareholder have been violated, the Court extended the rationale to the law of partnerships and LLCs. The Court then concluded Plaintiffs sufficiently alleged (a) they suffered harm directly and (b) Kay violated duties owed directly to the Plaintiffs.

Plaintiffs alleged Kay took funds that were required to have been distributed. He also took funds required to be held in reserve, further injuring Plaintiffs by forcing them to replace the removed reserves.

Under the Revised Uniform Partnership Act, general partners owe each other, not just the partnership, fiduciary duties. Section 9A-405(b) of the RUPA "clearly provides a mechanism through which partners can sue other partners directly for breach of those obligations and others." However, there is no statute in Maryland expressly addressing LLC members' fiduciary duties. The Court, after finding managing members to be "agents for the LLC and each of the members, which is a fiduciary position under common law," again applied rationale from Shenker, to state where no statute precludes or limits fiduciary duties under common law, the underlying duties apply. Accordingly, the Court found Kay's fiduciary duties as the managing partner/member to run to the partnerships, the LLCs, the partners and the members.

(2) Derivative Claims

The Court found the term "derivative" inappropriate in a general partnership context. Derivative actions are necessary in a corporate and limited partnership context because shareholders and limited partners have no management rights. "Unlike shareholders and limited partners, however, general partners all have the ability to act on behalf of the partnership, and all have management rights." Accordingly, no need for a derivative action exists. The Court turned to whether minority general partners can bring claims against other partners. The Court cited many sections of RUPA to conclude all partners have equal ability to enforce rights involving partnership property. While section 9A-405(j) of RUPA requires unanimous consent of all the partners, the Court felt it should be tempered "when non-plaintiff partners have conflicts of interest." Instead, "the unanimity requirement should not apply to defendant partners and other interested partners."

However, based on the facts, the Court found a suit on behalf of the partnerships unnecessary because Plaintiffs adequately alleged an individual direct injury. If Plaintiff's prove the allegations, complete relief will be afforded. The derivative claims on behalf of the LLC were rejected for the same reason.

Note: In discussing fiduciary duties in the LLC context, the Court, citing section 4A-402(a) of the Maryland Limited Liability Company Act, notes that "one Maryland statute governing LLC operating agreements does suggest that provisions within operating agreements could alter existing duties or create other duties..." However, no such provisions were alleged in the case.

The full opinion is available in pdf.

Maryland Limited Liability Company Revision Act of 2011

The Maryland State Bar Association Business Law Section Committee on Unincorporated Business Associations has drafted a proposed set of revisions to the Maryland Limited Liability Company Act. The proposed revisions can be found here and the report of the drafting committee can be found here.

The proposed revisions have been approved by the Section Council of the MSBA Business Law Section. Needless to say, the proposed revisions are subject to amendment and modification at each step of the process, including modification before the bill is formally submitted to the General Assembly.