Synectic Ventures I, LLC v. EVI Corp.

• Decision Date: 20 December 2012
• Docket Number: SC S059454).,CA A139879 (Control), A142184,(CC 060404199
• Citation: 353 Or. 62,294 P.3d 478
• Parties: SYNECTIC VENTURES I, LLC, an Oregon limited liability company; Synectic Ventures II, LLC, an Oregon limited liability company; Synectic Ventures III, LLC, an Oregon limited liability company, Plaintiffs–Appellants, Petitioners on Review, v. EVI CORPORATION, an Oregon corporation, dba Endovascular Instruments, Inc.; Synectic Ventures IV, LLC, an Oregon limited liability company; Synectic Ventures V, LLC, an Oregon limited liability company; and Synectic Asset Ventures, LLC, purportedly an Oregon limited liability company, Defendants–Respondents, Respondents on Review.
• Court: Oregon Supreme Court

353 Or. 62

294 P.3d 478

SYNECTIC VENTURES I, LLC, an Oregon limited liability company; Synectic Ventures II, LLC, an Oregon limited liability company; Synectic Ventures III, LLC, an Oregon limited liability company, Plaintiffs–Appellants, Petitioners on Review,

v.EVI CORPORATION, an Oregon corporation, dba Endovascular Instruments, Inc.; Synectic Ventures IV, LLC, an Oregon limited liability company; Synectic Ventures V, LLC, an Oregon limited liability company; and Synectic Asset Ventures, LLC, purportedly an Oregon limited liability company, Defendants–Respondents, Respondents on Review.

(CC 060404199; CA A139879 (Control), A142184; SC S059454).

Supreme Court of Oregon,

En Banc.

Argued and Submitted Jan. 10, 2012.

Decided Dec. 20, 2012.

On review from the Court of Appeals.^*

Scott A. Shorr, Stoll Stoll Berne Lokting & Shlachter PC, Portland, argued the cause for petitioners on review. With him on the brief were Gary M. Berne, Mark A. Freil, and Roy Pulvers, Hinshaw & Culbertson LLP, Portland.

Kevin H. Kono, Davis Wright Tremine LLP, Portland, argued the cause for respondents on review. With him on the brief were Robert D. Newell and Derek D. Green.

Cody Hoesly, Larkins Vacura LLP, Portland, filed a brief on behalf of amicus curiae Oregon Trial Lawyers Association.

DE MUNIZ, J.

Plaintiffs—Synectic Ventures I, LLC, Synectic Ventures II, LLC, and Synectic Ventures III, LLC—entered into a loan agreement regarding money that they had loaned to defendant EVI Corporation. The loan agreement provided that the loan, which was secured by a security interest in essentially all of defendant's property, would be converted to equity ownership in defendant, if defendant obtained additional financing by a certain date. Shortly before that deadline, the managing member of plaintiffs—who was also chairman of the board and treasurer of defendant and financially interested in defendant—entered into an agreement purporting to extend the loan period by an additional year. During the extension period, defendant obtained the additional financing and converted the debt to equity. Plaintiffs filed an action against defendant, asserting (among other things) that they were not bound by the extension because the managing member had had a conflict of interest and defendant knew of the conflict. The trial court rejected that argument and granted summary judgment for defendant. The Court of Appeals affirmed. Synectic Ventures I, LLC v. EVI Corp., 241 Or.App. 550, 251 P.3d 216 (2011). On review, we conclude that the trial court erred in granting defendant summary judgment. We therefore reverse the decision of the Court of Appeals and the judgment of the trial court.

I. FACTS AND PROCEDURAL POSTURE

A. Underlying Facts

As noted, this case is before us on review from a trial court's grant of summary judgment for defendant. Accordingly, we consider the facts, as well as all reasonable inferences from those facts, in the light most favorable to the nonmoving party—in this case, plaintiffs. Loosli v. City of Salem, 345 Or. 303, 306 n. 1, 193 P.3d 623 (2008); seeORCP 47 C (on summary judgment, trial court must determine whether there is no genuine issue of material fact “based upon the record before the court viewed in a manner most favorable to the adverse party”).

Plaintiffs are manager-managed limited liability companies (LLCs). ¹ Plaintiffs' purpose,as identified in their operating agreements, was to invest plaintiffs' funds in all types of securities of other corporations. Plaintiffs, in turn, were capitalized by their members, who are individuals or entities seeking investment gains from the money they contributed to plaintiffs; plaintiffs are, in effect, investment vehicles for their members. At all relevant times, plaintiffs were managed by Craig Berkman.²

Plaintiffs' operating agreements contained a number of provisions relevant to the scope of Berkman's authority to act on plaintiffs' behalf. Because the scope of that authority is integral to the proper resolution of this case on review, we discuss those provisions in some detail.

First, the operating agreements gave Berkman, as managing member, exclusive control over plaintiffs. Specifically, each operating agreement provided:

“4.1 Management of Company.

“(a) The management and control of the Company and its business and affairs is vested exclusively in the Managing Member of the Company [.] * * * The Managing Member shall have the authority to undertake all actions on behalf of the Company without the consent of the other Members, except to the extent expressly provided in this Agreement. No Member other than the Managing Member shall have the authority to bind the Company. Without limitation of the foregoing, the Managing Member shall have the right, without obtaining the consent of the other Members, to (i) invest the funds of the Company in the securities of one or more issuers and to negotiate the terms of such investment * * *.”

Second, the operating agreements indicated that third parties could rely on the representations of the managing member without needing to make further inquiry. Each operating agreement stated:

“ Right to Rely on Managing Member. Any person or entity dealing with the Company may rely (without further inquiry) upon a certificate signed by the Managing Member as to any matter affecting the Company.”

Finally, the operating agreements allowed each of plaintiff's members to invest in or manage companies in which the plaintiffs themselves invested. Specifically, each operating agreement provided in part:

“3.2 Other Business of Members. Any Member * * * may engage independently or with others in other business and investment ventures of every nature and description and shall have no obligation to account to the Company for such business or investments or for business or investment opportunities. * * * The Members acknowledge that each Member may own securities issued by or participate in the management of companies in which the Company may invest and that neither the other Members nor the Company shall have any claim or cause of action against such Member arising from such ownership or participation.”

One of the businesses in which plaintiffs invested was defendant, a company that develops medical devices. At all relevant times, Berkman—the managing member of plaintiffs—was also chairman of the board and treasurer of defendant. In 2004, Berkman also owned a significant number of shares in defendant, which he had pledged as security for personal debts of between $500,000 and $700,000. Berkman also periodically received interest-free loans from defendant.

Before March 2003, plaintiffs had loaned over $3 million to defendant. ³ In that month, plaintiffs and defendant entered into a loan agreement memorializing those advances. Under the loan agreement, defendant was obligated to pay back the amount of the advances, plus eight percent interest, by December 31, 2004. The debt was secured by a security interest in all of defendant's personal property—specifically, intellectual property relating to medical devices. If defendant obtained an additional $1 million in financing from any source before the loan maturity date, however, then the loan amount would automatically be converted to shares in defendant, and plaintiffs would not be able to foreclose on the security interest.

Later in 2003, a number of the members of plaintiffs, having become disgruntled with Berkman's management, hired a law firm to represent them. On July 28, 2003, the law firm sent Berkman a letter that (among other things) requested Berkman's voluntary resignation as managing member of plaintiffs. In September 2003 and again in June 2004, Berkman signed letter agreements with those members agreeing not to enter into new obligations on behalf of plaintiff's without getting advance approval by those members. On September 2, 2004, the law firm wrote to Berkman and notified him that he would be removed as managing member as soon as the other members could elect a new managing member.

Beginning September 10, 2004—less than four months before plaintiffs' loan to defendant matured, and just over one week after learning that he soon would be removed as managing member—Berkman prepared an amendment to the March 2003 loan agreement. The amendment falsely stated that it had been made on August 15, 2004. The amendment primarily extended the maturity date on the loan agreement for an extra year, from December 31, 2004, to December 31, 2005. Berkman participated on both sides of the transaction: On behalf of defendant he signed a consent resolution of defendant's board of directors authorizing the transaction, while on behalf of plaintiffs he signed the amendment itself. If Berkman had not amended the loan agreement to extend the maturity date, then plaintiffs would have been entitled to foreclose on all of defendant's assets after December 31, 2004. Foreclosure would have made defendant's stock worthless, and would have given plaintiffs control of its intellectual property.

Berkman was removed as the managing member in December 2004. By January 2005, the new managing member had been informed about the amendment to the loan agreement that purported to extend the date for defendant to obtain the additional financing. A law firm acting on behalf of the new managing member notified defendant in late August 2005 that the loan amendment was unauthorized and objected to any attempt to convert the loan amount into shares. Notwithstanding that notification, on December 29, 2005—just before the amended maturity date for the loan expired—defendant received $ 1 million in additional investment. In accordance with the provision of the loan agreement allowing the loan to be converted to equity, defendant converted the amount of the loan into equity shares. Because the conversion eliminated defendant's security interest in favor of plaintiffs, plaintiffs lost their opportunity to foreclose on defendant's property...