Case 15.3: Ebenezer United Methodist Church v. Riverwalk Development Phase II, L
ID: 424024 • Letter: C
Question
Case 15.3: Ebenezer United Methodist Church v. Riverwalk Development Phase II, LLP, 205 Md.App. 496 (2012) (p. 504)
Facts: Green was a real estate developer who was president and part-owner of a Synvest Real Estate Trust (Synvest). Synvest’s practice was to hold undeveloped property in its own name while it arranged construction financing, then transfer the property to a newly-created entity once the funds had been secured and development could begin. In the course of this business, Synvest came to own certain properties which it prepared for construction and conveyed to a new entity known as River Walk Development, LLC (Riverwalk I), which was a wholly owned subsidiary of Synfest. In 2002, Ebenezer United Methodist Church (EUMC) purchased a 50 percent interest in Riverwalk I for $250,000, and construction commenced soon afterwards. In 2003, Synvest formed River Walk Development Phase Two, LLC (Riverwalk II), which purchased a 32-acre parcel later that month. In 2004, Green caused Riverwalk I, Riverwalk II, and a third entity to enter into a line of credit agreement for $2.1 million for the three entities, collectively. Riverwalk I developed and sold several units and conveyed the proceeds to EUMC. Eventually Synvest repurchased EUMC’s interest, which yielded EUMC a profit of $30,000 on its $250,000 investment. Only after this business had concluded did EUMC learn of the line-of-credit agreement that had encumbered the assets of Riverwalk I. EUMC filed suit against Green, Synvest, and Riverwalk II, alleging that they violated the corporate opportunity doctrine by failing to disclose the additional real estate transaction involving a new, 32-acre parcel, transferring it secretly to Riverwalk II, a new entity solely owned by Green. EUMC claimed that it should share in any profits of Riverwalk II.
Issue: Did Green usurp a corporate opportunity owed to EUMC?
Ruling: No. The Maryland Court of Special Appeals upheld the trial court’s judgment in favor of Green/Riverwalk II. The court used the reasonable expectations test to determine if the corporate opportunity was usurped. It held that a reasonable expectation or interest in a corporate opportunity requires something more than mere proximity of geography, management, or finance.
Answers to case questions:
1. Why did EUMC believe that it was entitled to become a partner in Riverwalk II?
2. EUMC reaped a substantial profit from its Riverwalk I investment. Should that be a factor in the court’s analysis?
3. TRUE OR FALSE WITH EXPLANATION:
1. Green vicariously owes the fiduciary duties of due care, loyalty, and good faith to Riverwalk I in his capacity as president of Synfest.
2. Green breached his fiduciary duties to Riverwalk I by failing to offer the opportunity to participate in the Riverwalk II real estate development project.
3. Green breached his duty of self-dealing by using the assets of Riverwalk I to serve as collateral for the financing of the Riverwalk II real estate development project.
4. Assuming EUMC is a non-managing member of Riverwalk I, EUMC can initiate a derivative lawsuit on behalf of Riverwalk I against Green, Riverwalk II and Synfest for breach of fiduciary not to engage in improper self-dealing.
5. If Riverwalk I and Riverwalk II were unable to pay the loan secured by their assets, Riverwalk I would be successful in a lawsuit against Green and Synfest to pierce the corporate veil and make the members personally liable for the default on the loan.
1. Green vicariously owes the fiduciary duties of due care, loyalty, and good faith to Riverwalk I in his capacity as president of Synfest.
2. Green breached his fiduciary duties to Riverwalk I by failing to offer the opportunity to participate in the Riverwalk II real estate development project.
3. Green breached his duty of self-dealing by using the assets of Riverwalk I to serve as collateral for the financing of the Riverwalk II real estate development project.
4. Assuming EUMC is a non-managing member of Riverwalk I, EUMC can initiate a derivative lawsuit on behalf of Riverwalk I against Green, Riverwalk II and Synfest for breach of fiduciary not to engage in improper self-dealing.
5. If Riverwalk I and Riverwalk II were unable to pay the loan secured by their assets, Riverwalk I would be successful in a lawsuit against Green and Synfest to pierce the corporate veil and make the members personally liable for the default on the loan.
Explanation / Answer
1. EUMC believe that it was entitled to become a partner in Riverwalk II since it had purchased an interest in Riverwalk I. And Riverwalk I & II shared a common line of credit. So, it intended to be aware of all the transactions done with Riverwalk II.
2. Although EUMC reaped a substantial profit from its Riverwalk I investment, but it cannot be a factor in court analysis. This is because court analysis is being done with respect to Riverwalk II investment.
3.
1. Green vicariously owes the fiduciary duties of due care, loyalty, and good faith to Riverwalk I in his capacity as president of Synfest.
2. Green breached his fiduciary duties to Riverwalk I by failing to offer the opportunity to participate in the Riverwalk II real estate development project.
True.
As per the view of fiduciary duties, Green should have offered the real estate development project to Riverwalk I, instead of creating Riverwalk II.
3. Green breached his duty of self-dealing by using the assets of Riverwalk I to serve as collateral for the financing of the Riverwalk II real estate development project.
4. Assuming EUMC is a non-managing member of Riverwalk I, EUMC can initiate a derivative lawsuit on behalf of Riverwalk I against Green, Riverwalk II and Synfest for breach of fiduciary not to engage in improper self-dealing.
5. If Riverwalk I and Riverwalk II were unable to pay the loan secured by their assets, Riverwalk I would be successful in a lawsuit against Green and Synfest to pierce the corporate veil and make the members personally liable for the default on the loan.
False, as Line of Credit is in name of Riverwalk I, Riverwalk II & third party.
1. Green vicariously owes the fiduciary duties of due care, loyalty, and good faith to Riverwalk I in his capacity as president of Synfest.
True, because Riverwalk is a subsidiary of Synfest.2. Green breached his fiduciary duties to Riverwalk I by failing to offer the opportunity to participate in the Riverwalk II real estate development project.
True.
As per the view of fiduciary duties, Green should have offered the real estate development project to Riverwalk I, instead of creating Riverwalk II.
3. Green breached his duty of self-dealing by using the assets of Riverwalk I to serve as collateral for the financing of the Riverwalk II real estate development project.
True4. Assuming EUMC is a non-managing member of Riverwalk I, EUMC can initiate a derivative lawsuit on behalf of Riverwalk I against Green, Riverwalk II and Synfest for breach of fiduciary not to engage in improper self-dealing.
True.5. If Riverwalk I and Riverwalk II were unable to pay the loan secured by their assets, Riverwalk I would be successful in a lawsuit against Green and Synfest to pierce the corporate veil and make the members personally liable for the default on the loan.
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