Under the long-established corporate opportunity doctrine, a limited liability company manager that takes advantage of an opportunity that under the circumstances should have belonged to the LLC will be in breach of its fiduciary obligations. In a recent Maryland case the manager of a real estate development LLC caused the LLC to participate in a pooled line of credit. The LLC’s real estate was pledged to secure the borrowings not only of the LLC but also of the two other companies participating in the line of credit. The LLC received its portion of the loan proceeds, proceeded with its development, and obtained lien releases as each of its lots was sold.
When the LLC’s principal investor later learned of the pooled line of credit it sued the LLC’s manager. The investor claimed that the pooled line of credit showed that the manager usurped the LLC’s corporate opportunity by developing the second development. The trial court ruled that the manager had not usurped the LLC’s corporate opportunity and had not breached its fiduciary obligations, and the Court of Special Appeals affirmed. Ebenezer United Methodist Church v. Riverwalk Dev. Phase II, LLC, 45 A.3d 883 (Md. Ct. Spec. App. 2012).
Background. Synvest Real Estate Investment Trust formed River Walk Development, LLC (Riverwalk One) in 2001 and contributed undeveloped real estate to it. In 2002 Ebenezer United Methodist Church purchased a 50% interest in Riverwalk One for $250,000. Before completing its investment in Riverwalk One, Ebenezer United learned that Synvest owned a 32-acre parcel and other lots elsewhere in the county.
In 2003 Synvest formed River Walk Development Phase Two, LLC (Riverwalk Two), which acquired the 32-acre parcel. William Green, Synvest’s president and part owner, then caused Riverwalk One, Riverwalk Two, and a third entity known as Green Spring Valley Overlook to collectively enter into a $2.1 million loan agreement with Regal Bank & Trust. Each of the three entities placed liens on its real estate by granting deeds of trust to Regal to secure the collective line of credit.
Riverwalk One developed and sold several units, conveyed the proceeds to Ebenezer United, and in 2006 repurchased Ebenezer United’s LLC interest. Ebenezer United’s profit on its $250,000 investment was between $30,000 and $35,000.
Ebenezer United later learned of the joint loan agreement and the liens that had encumbered the Riverwalk One properties. In 2009 Ebenezer United filed suit against Green, Synvest, Riverwalk Two, and Green’s family trust, claiming breach of fiduciary duties and usurpation of a corporate opportunity.
At trial Green testified that Riverwalk One had required debt financing to complete its construction, that Regal would not extend credit to Riverwalk One unless all its members guaranteed the loan, and that Ebenezer United was precluded from providing a guarantee because it was a non-profit. Riverwalk Two and Green Spring Valley already had a loan agreement in place with Regal, so Green arranged for Riverwalk One to draw on that loan, which required that Riverwalk One grant Regal a lien on its property to secure the three parties’ obligations on the collective line of credit.
The Court’s Analysis. The court began with the fundamental premise that an LLC’s managing member owes fiduciary duties to the LLC and to the other members, including the duty not to exclude the LLC from corporate opportunities. Id. at 886. Maryland analyzes claims of corporate opportunities under the “interest or reasonable expectancy test,” which focuses on whether the LLC could realistically expect to seize and develop the opportunity. Id. at 887.
Ebenezer United, however, did not plead nor discuss the interest or reasonable expectancy test, but instead argued that the collective security agreement automatically established a corporate opportunity. The court characterized Ebenezer United’s argument as conflating financial self-dealing with usurpation of a corporate opportunity. The court saw the question of whether the financing arrangement was self-dealing as independent of whether the defendants excluded Ebenezer United from a corporate opportunity. Because Ebenezer United had failed to argue or prove that there was self-dealing, the court focused on the interest or reasonable expectancy test for corporate opportunities. Id. at 887-88.
According to the court, “a corporate ‘interest or expectancy’ requires something more than the mere opportunity to develop a neighboring parcel of land.” Id. at 888 (citing Dixon v. Trinity Joint Venture, 431 A.2d 1364 (Md. Ct. Spec. App. 1981)). Fiduciaries do not owe their principals a general duty to offer participation in other real estate development opportunities – there must be something more than superficial similarity between the projects. Id.
There was no evidence, said the court, that Riverwalk Two had any effect on the value of the Riverwalk One project. The lien restriction on Riverwalk One’s property was not for the exclusive benefit of Riverwalk Two but was instead an efficient way to benefit the Riverwalk One project. The court concluded: “In short, 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,” and affirmed the trial court’s conclusion that Green, Synvest, and Riverwalk One had not usurped a corporate opportunity. Id. at 889.
Comment. The court gave such short shrift to Ebenezer United’s argument that one can’t discern the underpinnings of Ebenezer United’s reasoning. But there are cases for the proposition that if a manager uses one LLC’s assets to support a second’s development, then the second development is a corporate opportunity of the LLC whose assets were used. In this case, granting a lien on Riverwalk One’s property to secure borrowings by Riverwalk Two appears to be a use of Riverwalk One’s assets to help develop the assets of Riverwalk Two.
For example, the Illinois Appellate Court, in support of a finding that corporate opportunities were misappropriated, said:
Therefore, when a corporation’s fiduciary uses corporate assets to develop a business opportunity, the fiduciary is estopped from denying that the resulting opportunity belongs to the corporation whose assets were misappropriated, even if it was not feasible for the corporation to pursue the opportunity or it had no expectancy in the project.
Graham v. Mimms, 444 N.E.2d 549, 557 (Ill. App. Ct. 1982) (emphasis added). Similarly, the Bankruptcy Court for the District of Delaware has said: “Thus, a business opportunity falling outside a corporation’s line of business and which would not otherwise be considered a corporate opportunity, nevertheless, will be deemed a corporate opportunity if developed or financed with corporate funds.” In re Trim-Lean Meat Prods, Inc., 4 B.R. 243, 247 (Bankr. D. Del. 1980).
But even so, I think the Ebenezer United facts still fall short of demonstrating a corporate opportunity. One reason is that, as the court pointed out, Riverwalk One’s grant of a lien on its property under the collective loan agreement was for its own benefit. And in fact Riverwalk One was benefited by the joint loan agreement. It was able to obtain its financing even though its 50% member, Ebenezer United, could not provide a guaranty as requested by the bank, and its properties were released from Regal’s lien as they were sold.
The other reason is the lack of direct benefit to Riverwalk Two, given the sequence of events. Riverwalk Two and Green Spring Valley already had a loan agreement in place with Regal when Green arranged for Riverwalk One to be added, so Riverwalk One’s security was irrelevant to Riverwalk Two’s obtaining the Regal credit line.