Article Archives >> Lead Stories >> January 1-31, 2008

Director Did Not Breach Fiduciary Duty
In Buying Property for Club in Own Name
Court says arrangement was fully explained
and Board approved transaction with full understanding

A real estate broker who bought property to protect the interests of a nonprofit club of which he was a director did not breach his fiduciary duty to the club when he purchased the property in his own name after the Board approved the transaction with a full understanding of the circumstances, an appellate court in California has ruled.  (South Bay Rod and Gun Club v. Dashiell, Ct. of App., CA, Fourth App. Dist., Div. One, unpublished, No. D048864, 1/3/08.)

The South Bay Rod and Gun Club operates a commercial shooting range on its 300 acre property and members became concerned that it might suffer the same fate as another shooting range that was closed down because of ricochet problems on a neighbor’s property.  The owner of an adjacent property had similar problems but had been sympathetic to the Club.

When the neighbor’s property was listed for sale, it was offered at $450,000, beyond the Club’s capacity to pay.  A real estate broker who was on the Board of the Club kept tabs on the property and asked if members would be willing to contribute personal funds to buy for a lower price. He also attempted to find lenders who would finance the purchase.

When a sale failed and the price dropped to $375,000, the broker obtained approval to make an offer.  When financing could still not be obtained in the name of the Club and the members were unwilling to advance personal funds, the broker proposed that he would contribute $20,000 to the purchase the property in his own name and take a personal loan for the balance if the Club would advance $30,000 for the purchase.  The broker and the Club further agreed that the broker would have the right to buy out the Club’s interest in the first five years and that he would give the Club a right of first refusal if he ever tried to sell the property.  He would lease the property to the Club for no rent, but the cost of maintenance.

After the closing, he negotiated the actual lease and a Property Disposition Agreement spelling out the terms of the deal that was approved by the Board.  The information was sent to the members in a letter signed by six officers and nine other directors of the corporation.

When the broker-director sought to buy out the Club’s interest in 2004, the Club rejected the final payment and sued for a declaratory judgment that the broker had breached his fiduciary duty.

The trial court ruled that the broker had explained the transaction fully to the Board and that the provisions were just and reasonable within the meaning of the conflict of interest provisions of the state Corporations Code.  The Club appealed, but the appellate court has affirmed.

The appellate court ruled that there was substantial evidence that the proposal was approved by the Board in September 1999 after a full exploration of alternatives as an alternative plan if the broker could not obtain a loan for the Club.  It was ratified in October 1999 when the loan could not be obtained.  It was also approved by the Board when it decided to sign the lease and Disposition Agreement after the purchase and was subsequently ratified by the membership.

The Court also noted that a real estate broker owes a fiduciary obligation to a principal, but is permitted to enter into a transaction with the principal if acting in good faith, with all the facts revealed, and the transaction is at a fair price. The Court ruled that there was substantial evidence to support that conclusion as well.

YOU NEED TO KNOW

Even with four approvals and a written agreement, the director-broker has spent nearly four years litigating with his friends at the Club.  The facts in a case like this are stated most favorably to the prevailing party on appeal and may not have been quite so clear before trial, of course, but the case shows how dangerous it can be for a director to engage in economic transactions with his or her organization.

Article Archives >> Lead Stories >> January 1-31, 2008