Judge rejects breach of fiduciary duty claim of real estate investor
Following a one-week bench trial, a Massachusetts Superior Court judge determined that the majority owners of a closely-held real estate investment LLC did not breach their fiduciary duties to the minority owner when they issued a capital call to all owners in order to satisfy a $3 million loan payment rather than seeking refinancing or loaning their own money to the LLC.
David H. Rich and Josh L. Launer represent the majority stakeholders of the LLC entity owner of a 39-unit apartment building in Malden, Mass.
The judge, sitting in the Business Litigation Session, rejected the minority stakeholder’s claim that the majority owners improperly diluted his ownership interest when he did not contribute his share of the capital call based on his percent ownership and they prevented him from selling his interest to outside parties.
In ruling against the minority stakeholder, the judge determined that the operating agreement governing the LLC is a valid, enforceable contract that gave the majority stakeholders sole authority to seek funds from all owner members to pay off the loan in full.
Despite the desire of the majority stakeholders to extend or refinance the purchase loan with the original lender, under the terms of the loan the lender instead demanded payment of the balance of the loan in a balloon payment due in April 2022.
The minority stakeholder’s failure to contribute any money toward satisfaction of the balloon payment required the majority stakeholders to make up the shortfall.
The LLC made the balloon payment, and the lender released its mortgage against the property.
As a result of not contributing funds toward satisfaction of the loan, the minority owner’s percent ownership dropped from 10 percent to 0.9 percent, consistent with the terms of the operating agreement.
Even in the absence of the operating agreement, however, the judge ruled that the majority owners still did not breach any fiduciary duties to the minority shareholder.