## Facts

- American Leasing and Management, LLC operated build-to-suit construction and long-term leasing projects.
- In early 2004, American Leasing was working on multiple projects and negotiating three additional build-to-suit leases with O’Reilly Auto Parts.
- Lanier Hobbs initially worked for American Leasing as a contractor on an O’Reilly project.
- In February 2004, Hobbs entered an agreement with the managing member (Richard Pearson) and became a 51% owner; Pearson retained 44% and a third member held 5%.
- In March 2004, Hobbs formed American Development and Leasing, LLC, of which he was the sole member, and learned American Leasing was in serious financial distress.
- Hobbs directed O’Reilly to substitute American Development as landlord for the three proposed O’Reilly projects; O’Reilly agreed after a later agreement recognized Hobbs as American Leasing’s managing member.
- Hobbs used American Leasing’s resources to pay American Development’s and his personal expenses and pursued profits from the three O’Reilly projects outside American Leasing.
- In May 2004, Ann Patmon bought Pearson’s membership interest and, individually and on behalf of American Leasing, sued Hobbs for breach of fiduciary duty and diversion of business opportunities.

## Issues

1. Whether, under KRS 275.170 and fiduciary-duty principles, an LLC manager-member breaches duties of loyalty by diverting to an entity he controls business opportunities that properly belong to the LLC.
2. Whether the LLC’s financial distress and alleged inability to perform categorically bars damages for the value of diverted build-to-suit leases.

## Decision

- The Kentucky Court of Appeals adopted the corporate-opportunity doctrine for LLC manager-members and held that a person entrusted with active management may not appropriate for himself a business opportunity properly belonging to the entity.
- The court affirmed the damages award for Hobbs’s misuse of American Leasing’s resources to pay American Development’s and his own expenses.
- The court vacated the denial of damages for the three diverted O’Reilly build-to-suit leases and remanded for reconsideration under the corporate-opportunity doctrine and KRS 275.170.
- Disposition: affirmed in part, vacated in part, and remanded.

## Legal Principles

- Under KRS 275.170, an LLC manager-member owes fiduciary duties, including loyalty and fair dealing, to the LLC and its members.
- Kentucky recognizes the corporate-opportunity doctrine in the LLC context: one entrusted with active management may not exploit that position by appropriating an opportunity that, in equity and fairness, properly belongs to the LLC.
- Financial distress or difficulty performing does not automatically eliminate the existence of a corporate opportunity; the analysis must consider whether the entity could reasonably have pursued the opportunity and whether it still properly belonged to the entity.
- Misuse of LLC resources for a manager-member’s personal benefit or for another entity he controls supports liability and compensatory damages.

## Conclusion

The court treated an LLC manager-member’s diversion of prospective contracts to his solely owned entity as potential usurpation of a corporate opportunity under KRS 275.170, affirmed damages for misused company resources, and remanded for a proper determination of whether and how to award damages for the diverted build-to-suit leases.


Patmon v. Hobbs, 280 S.W.3d 589 (Ky. Ct. App. 2009)