Lex Loci
| Citado como | Vol. 53 No. 1 Pg. 0032 |
| Páginas | 0032 |
| Año de Publicación | 2013 |
Spring/Summer 2013
By David W. Ruoff.
Lakes Region Gaming v. Jeremy Miller, issued Feb. 13, 2013, is a case that went to the dogs. Literally. The dispute centered on the deterioration of a transaction to purchase and develop the Lakes Region Greyhound Park. In order to purchase the dog track, the investors formed Lakes Region Gaming LLC. The members of the LLC were the plaintiffs (who provided the $205, 000 deposit for the purchase) and the defendants (Miller and Johnston Development LLC). Johnston Development was to contribute its right to purchase the track to the LLC (it had previously submitted a winning bid of $4.1 million).
In furtherance of chasing their white rabbit, Lakes Region Gaming and Johnston Development had two months to conduct their "due diligence" portion of the acquisition transaction. If, by the end of that period, they opted not to go ahead with the transaction, the deposit was forfeited to the seller.
Here's how the transaction "went to the dogs." Over the next two months, a dozen people involved in the operation of the dog track were indicted by a New Hampshire grand jury. Thus, Lakes Region Gaming decided to reconsider purchasing the track. Instead of walking away from the deal, Lakes Region Gaming decided it would try to sell its right to purchase the property to recoup any potential losses. However, defendants Miller and Johnston Development - both minority members of the LLC - had already begun to broker a deal without the other LLC members knowing.
The defendants executed three agreements unbeknownst to the plaintiffs on the date that the due diligence deadline was set to expire: one to extend the due diligence deadline (so the Lakes Region Gaming deposit securing the purchase rights would not be forfeited to the seller); another with the ultimate buyer to buy the right to purchase the track (this netted a $900, 000 profit to the defendants); and a third by which the buyer would replace the $205, 000 deposit. On the very next day, the buyer substituted the deposit held in escrow, the original funds were released to the Lakes Region Gaming member that contributed them, and the buyer took over the transaction. The defendants were paid their $900, 000 profit.
The plaintiff - Lakes Region Gaming LLC - sued the lead dogs, Miller and Johnston Development, for breach of fiduciary duty, breach of contract, and a host of causes of action unspecified in the opinion. Ultimately, Johnston Development defaulted and judgment was entered against it. The trial proceeded against Miller, an attorney, who received $445, 000 from the sale of the right to purchase the track.
The trial court (no jury trial) found for the plaintiff on most counts, ordered damages in the amount of the net profits, found Miller jointly and severally liable for the damages and awarded attorney's fees. On appeal, he offered four main arguments: that he did not owe a fiduciary duty to the plaintiffs, that the trial court erred in finding him jointly liable, that the plaintiffs lacked standing to bring a claim, and that the trial court erred in failing to consider a paragraph in the Lakes Region Gaming LLC operating agreement that allowed members to enter into business dealings that competed with the LLC.
Remarkably, only one of the four arguments was preserved for appellate review. On the breach of fiduciary duty claim, Miller argued that he did not owe such a duty to the plaintiffs because he was a minority member of the Lakes Region Gaming LLC. In the trial court, his argument was a dog of a different color - that he did not owe a fiduciary duty because the purpose for which the LLC was formed had been abandoned. Not good enough for appellate review. In similar fashion, the Court held that Miller's challenge to joint and several liability with Johnston Development was also not raised before the trial court. Nor was Miller's argument about standing. Miller argued that the LLC lacked standing because none of the assets involved in the sale (the $205, 000 deposit and its right to purchase) actually belonged to the LLC (they actually belonged to two of the members). The Supreme Court opted to address this issue, because it addressed the subject matter jurisdiction of the Court... and, as the first (or second) lesson in 1L civil procedure teaches us... subject matter jurisdiction can be raised at any time.
In response to this dogged argument about subject matter jurisdiction, the Court held that Lakes Region Gaming had vested rights to both assets - that it could force Johnston Development to transfer his right to purchase and to a transfer of the deposit. In effect, both were held in trust for the benefit of Lakes Region Gaming. Thus, there were sufficient facts to establish that Lakes Region Gaming had standing to file suit.
Lastly, the Court addressed the defendant's claim that the trial court erroneously ignored a provision in the Lakes Region Gaming LLC Operating Agreement that allowed its members to participate in activities and investments that were in competition with the LLC. Can we call that a "dog-eat-dog" clause? The problem with the application of that provision of the operating agreement arose, as the Court logically found, when the defendants used the LLC's only business assets (the deposit and right to purchase the track) to procure the "competing" sale. Such conduct, it reasoned, could not reasonably be read into the operating agreement.
Paul...
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