LLC Managing Member Did Not Breach Fiduciary Duty In Diverting Investment Opportunity To Another Company

In a Decision After Trial, decided September 20, 2022, in Shatz v. Chertok, Index No. 655620/2018, 2022 NYLJ LEXIS 1635, Justice Jennifer Schecter held that the defendant managing member of an LLC did not breach his duty to the plaintiff non-managing member when he failed to present an opportunity to invest in a company known as Ripple Labs, Inc. The Court explained:

In the absence of any duty by Chertok to acquire any particular opportunity, neither Shatz nor Vast VI can claim to have had any tangible expectancy in any prospective opportunity until Chertok actually brought the opportunity to them (see Alexander & Alexander of N.Y., 147 AD2d at 248). 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 Vast fund 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 Chertok may have breached his duty of candor to plaintiff by failing to fully inform him of the full context of Ripple's changed funding plans for instance, Chertok's disingenuous October 23, 2013 email did not actually harm plaintiff or Vast VI. 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 the end, these sophisticated parties entered into an operating agreement that is highly protective of Chertok and its terms must be strictly enforced. Having found that Chertok's conduct did not actually rise to the requisite level of culpability because despite his dishonesty towards plaintiff he had the right to present the investment opportunity to Vast V instead of plaintiff and Vast VI, there is no basis to hold defendants liable for any damages suffered by plaintiff and Vast VI due to them not having had the opportunity to invest in Ripple.

As this case demonstrates, Courts will strictly enforce the terms of operating agreements and thus careful attention must be paid to their terms when entering into them. The attorneys at Schlam Stone & Dolan frequently litigate issues between members of LLCs. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning such issues.