New York Business Litigation Lawyer Blog
An LLC’s managing member, who had “absolute discretion” under its operating agreement to act for the LLC, was found not to have misappropriated the LLC’s corporate opportunities, to the detriment of the other member. The facts as recited by the court address the LLC’s earlier effort to invest in a target’s equity round, in which the members were to take part through the LLC, but when that target switched to a debt issuance, the managing member directed that opportunity to a different LLC. The managing member hid behind his “absolute discretion” to determine the LLC’s investments in claiming that he did nothing wrong. At the end, even though the court did not appreciate the managing member’s conduct, and found him to be less than truthful, it found that the managing member did nothing legally wrong.
The court reasoned that while the general principle that an ‘explicitly discretionary contract right’ cannot be ‘exercised in bad faith’ so as to deprive the other party of the benefit of the bargain, because the equity investment did not proceed, and was in any event an opportunity that became the LLC’s only because it was disclosed and where both members contributed, could not mean that a subsequent investment, even a similar investment, belonged to the LLC. One LLC opportunity did not compel a finding that all similar opportunities belonged to the LLC.
So while agreeing to invest in an equity raise but then failing to do so based on the lie that the opportunity to participate in the raise was no longer available and then diverting the opportunity to participate in that raise to another [LLC] would support a claim for diversion of a corporate opportunity, failing to present a new opportunity about which there was never an agreement to invest does not. Here, since the debt issuance was never an opportunity presented to plaintiff in the first place, that [the Managing Member] may have breached his duty of candor to plaintiff by failing to fully inform him of the full context of [the] changed funding plans … did not actually harm plaintiff or [the LLC]. There is no basis in logic or caselaw to deem an investment a corporate opportunity merely due to a fiduciary’s misrepresentation on which the plaintiff did not detrimentally rely.
In its lengthy decision, the court also found that the managing member’s conduct was not in bad faith, even if he had enriched himself at the other member’s expense.
This was a post-trial decision but with a past, involving multiple appeals and a sanctions award. It seems that while no court approved the conduct of the managing member, it also could articulate no legal wrong that he had committed. Corporate opportunity issues are sometimes hard to discern and potential claims need a trained eye to ascertain.
Shatz v. Chertok, 2022 NY Slip Op 33171 (Supreme Court, N.Y. Cty. 2022)