Patmon v. Hobbs
| Decision Date | 15 July 2016 |
| Docket Number | NO. 2014-CA-001411-MR,2014-CA-001411-MR |
| Citation | 495 S.W.3d 722 |
| Parties | Ann Patmon, Individually; and Ann Patmon, in Her Representative Capacity for American Leasing and Management, LLC, Appellant v. Lanier Hobbs, Appellee |
| Court | Kentucky Court of Appeals |
BRIEFS FOR APPELLANT: Chadwick A. McTighe, Ian T. Ramsey, Louisville, Kentucky
BRIEF FOR APPELLEE: F. Larkin Fore, Louisville, Kentucky
BEFORE: DIXON, D. LAMBERT AND THOMPSON, JUDGES.
Ann Patmon, individually and on behalf of American Leasing and Management, LLC, appeals from a judgment of the Jefferson Circuit Court.1 Patmon argues that the trial court awarded inadequate damages on her claims that Hobbs breached his statutory duties owed as a managing member of American Leasing and Hobbs diverted a business opportunity.
The parties have been in litigation for over a decade. In 2004, a bench trial was conducted to determine the membership interests in American Leasing. The trial court found that Hobbs holds a 51% membership interest in American Leasing, Patmon a 44% interest, and Bruce Gray, who is not party to this appeal, the remaining 5%.
A second bench trial conducted in 2007 concerned Hobbs's violations of statutory and common law fiduciary duties owed to American Leasing. An extensive statement of the facts was given in Patmon v. Hobbs , 280 S.W.3d 589 (Ky.App.2009), which we refer to as Patmon I . Those same facts are repeated only as necessary to understand the present appeal.
American Leasing is a Kentucky Limited Liability Company (LLC) involved in construction and build-to-suit leases. In early 2004, American Leasing had two existing leases, including one for O'Reilly Auto Parts in Shively, Kentucky. It was also about to begin three additional leases for O'Reilly Auto Parts (O'Reilly leases).
Soon after joining American Leasing as its managing member, in February 2004, Hobbs formed a competing company, American Development & Leasing, LLC. He later sent a letter to Ed Randall at O'Reilly informing him that the O'Reilly leases would be changed to substitute American Development as the landlord for American Leasing. After convincing Randall that as the managing member of American Development Hobbs had authority to make the substitution, the leases were transferred to American Development without consideration paid to American Leasing and without the consent of the remaining disinterested LLC members.
Hobbs later formed another company, Habeeb & Hobbs, LLC, with Steve Habeeb, and that company assumed the leases. By the end of November 2004, American Development served as general contractor for the O'Reilly leases allowing Hobbs to profit from the construction phase as well as the leases. After the construction of the O'Reilly properties was complete, Hobbs sold his and American Development's interests in Habeeb & Hobbs to H&G Management, LLC, a company partially owned by Habeeb, for $110,000.
Patmon filed an action against Hobbs alleging breach of Kentucky Revised Statutes (KRS) 275.170 and common law fiduciary duties for his diversion of the O'Reilly leases to American Development. At a bench trial, evidence was introduced that during his tenure as a managing member of American Leasing, Hobbs received a benefit from when American Leasing paid $7,500 in his personal legal fees, $853 of his personal telephone bill, and $1,527.45 to create an O'Reilly sign for American Development, all without the consent of American Leasing's disinterested members. In addition to damages claimed for Hobbs's diversion of funds from American Leasing, Patmon presented proof as to the value of the leases based on construction income, profits from rental income, and the value of the land purchased with the rental income.
Hobbs defended his actions opining that American Leasing did not have the financial ability to take advantage of the O'Reilly leases. He testified that American Leasing previously had difficulty in paying a U.S. Bank loan for the existing O'Reilly Shively project. He opined that U.S. Bank indicated it would not provide additional financing and the company had inadequate funding for the O'Reilly leases.
Patmon admitted at trial that she did not know how American Leasing would have financed the O'Reilly leases. However, she argued that while American Leasing did not have sufficient cash to finance the leases, U.S. Bank had previously loaned $520,000 to American Leasing for the Shively O'Reilly lease project. Prior to making that loan, U.S. Bank recommended approval of a $3 million credit line to allow American Leasing to develop the O'Reilly leases. The estimated cost for all four leases, including the Shively O'Reilly lease, was less than that amount. There was also evidence that Gray, who had considerable assets, and gave his personal guaranty to U.S. Bank could have obtained alternative financing if U.S. Bank declined the loan.
The trial court found that Hobbs had wrongfully taken money from American Leasing and awarded Patmon $18,980.46. However, no damages were awarded for the value of the diverted O'Reilly leases which, Patmon asserted, was derived from the construction income, profits from the rental income, and value of the land purchased through the rental income. The court ruled as follows:
In this case the evidence is clear that ALM did not have the financial ability to undertake the [O'Reilly leases]. In fact, Patmon acknowledged that she did not know whether ALM could have gotten the funding for the leases. Moreover, Habeeb, who ultimately provided the financial backing of the leases, testified he would not have had any involvement with ALM due to Richard D. Pearson's affiliation with the company.2 Accordingly, Hobbs's dubious conduct with respect to the [O'Reilly leases] did not rise to the level of a diverted opportunity constituting a violation of KRS 275.170.
Patmon appealed resulting in this Court's opinion in Patmon I , which affirmed the trial court's findings that Hobbs violated his duties owed to American Leasing under KRS 275.170. Patmon I , 280 S.W.3d at 595. KRS 275.170 states in part:
The Patmon I Court held that unless otherwise provided in a written operating agreement, “a member or manager must account to and hold as a trustee for a limited liability company any profit or benefit derived from the use of company property by that member or manager including, but not limited to, confidential, proprietary, or other matters entrusted to that person's status as manager or member.” Patmon I , 280 S.W.3d at 595. Because there was no dispute that Hobbs did not obtain consent from any member of American Leasing to divert the O'Reilly leases to American Development and the leases qualified as confidential or proprietary information, Hobbs violated his statutory duties. Id.
As a matter of first impression, the Patmon I Court then considered the application of the doctrine of diverted corporate opportunity in the context of an LLC. Id. at 597. The Court held that the fiduciary duties a director owes a corporation with shareholders and those owed by a member of a LLC are the same and, therefore, relied on case law applying the doctrine of corporate opportunity. Id. at 596. A new tort emerged in this Commonwealth, the diversion of business opportunity. Id. at 597.
A two-part test was adopted for determining whether liability should be imposed on Hobbs for wrongful diversion of a business opportunity as set forth in Miller v. Miller , 301 Minn. 207, 224, 222 N.W.2d 71, 81 (Minn.1974). Quoting Miller , Patmon I held:
The threshold question to be answered is whether a business opportunity presented is also a ‘corporate’ opportunity, i.e., whether the business opportunity is of sufficient importance and so closely related to an existing or prospective activity of the corporation as to warrant judicial sanctions against its personal acquisition by a managing officer or director of the corporation.
Patmon I , 280 S.W.3d at 597. Because there was no dispute that Hobbs diverted a business opportunity of American Leasing for his personal use, the first part of the test was met. Therefore, much of the focus of Patmon I was on the second part of the test and damages.
Relying on Miller , Patmon I adopted the view that Hobbs cannot be liable for his misconduct unless American Leasing had the financial and legal ability to take advantage of the opportunity. Id. at 598. The case was remanded, in part, to permit Patmon the opportunity to present evidence as to whether American Leasing could have taken advantage of the O'Reilly leases. Id. Patmon I then instructed the trial court as follows:
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