Revisiting Bishop of Victoria Corp. v. Corporate Business Park
Published in 2007, Bishop of Victoria v. Corporate Business Park became a seminal case in the state of Washington with respect to LLCs and fiduciary duties. Times have changed, however, and the law has developed since 2007. Over the next few weeks, we will discuss some of these developments and how current law applies today (RCW 25.15.038).
In the late 1980’s, Joseph Finley (Finley) became indebted to Bishop of Victoria (BV). Later, Finley became aware of a large parcel of land being sold from a foreclosure lender for one-third its appraised value. Finley and BV formed an LLC, Corporate Business Park (CBP), to purchase the property for $5,000,000, develop, and sell the property for $18,000,000, hoping to use the profits to cover the debt. Per their operating agreement, Finley, a manager, agreed to contribute his labor and expertise to CBP, and BV, a manager, agreed to contribute financially to CBP.
Contrary to expectations, the property did not sell quickly, forcing CBP to refinance the mortgage with AG Capital Funding Partners (AG). Eventually, the refinance reserves were exhausted, and BV started making the monthly payments to AG on behalf of CBP. Amidst leadership changes at BV, BV became dissatisfied with their further losses. In April 1999, BV decided not to make CBP’s April payment to AG. After this missed payment AG sued CBP, Finley, and BV for foreclosure and AG obtained a judgment of $8.1 million.
BV created an affiliate, Fisgard Asset Management, for the purpose of purchasing the judgment. Thereafter, AG assigned the judgment and the decree of foreclosure to Fisgard. The court appointed a receiver who was unable to sell the property, resulting in the issuance of a quit claim deed for all CBP’s interest in the property to Fisgard in satisfaction of the judgment and foreclosure actions.
Finley claimed BV breached its fiduciary duties by, among other things, failing to contribute additional capital to fund the debt payments and purchasing the judgment.
Developments in the Law
The Bishop Court stated that fiduciary duties in manager-managed LLCs were identical to those of member-managed LLCs. The Court cited an article I wrote in 2003 as authority for its position. However, the law has changed.
In 2016, Washington revised its LLC Act. In accordance with new RCW 25.15.038, members in manager-managed LLC have no fiduciary duties. On the other hand, members in a member-managed LLC do have fiduciary duties of loyalty and care. As a result, I think there are now different duties in manager-managed v. member-managed LLCs.
Next week, we will look further into the Bishop Victoria case and consider whether the result would be different today under our new LLC Act.