In re Palm Avenue Partners, LLC, No. 8:12-bk-09808-MGW, 2019 WL 6971160 (Bankr. M.D. Fla. December 17, 2019).
Tom Leiter solicited $2.5 million in investments to develop property through Palm Avenue Partners, a company he and his son managed. He (through Beacon Homes, which he solely owned) spent $300,000.00 to acquire the contractual rights to buy the property for $2.2 million. Beacon Homes then sold the rights to Palm Avenue Partners for $1 million days later. In the words of the court, Mr. Leiter “skimmed” investor money for himself through this transaction. The investors sued, alleging breach of various fiduciary duties by Mr. Leiter, his son, his law firm, and his development company, as well as a handful of other claims. The Middle District of Florida Bankruptcy Court previously found in favor of the investors on one fraudulent misrepresentation claim against Mr. Leiter and resolved the remaining claims here.
After concluding that the claims are timely, and that the plaintiffs have standing on most claims, the court ruled in favor of the plaintiffs on four claims. First, Mr. Leiter breached his common law fiduciary duty by not disclosing the $1 million payment, because the investors placed their trust in Mr. Leiter, the use of nearly half the raised capital to pay himself breached his duties, and the investors would not have invested had they known about the payment. Second, Mr. Leiter breached his duty of loyalty under Florida law by causing Palm Avenue Partners to spend $1 million acquiring the contract rights from Beacon Homes because the $1 million purchase price was excessive (however, the payments to his law firm and development company were upheld, as the plaintiffs had not shown that those fees were unreasonable). Third, Mr. Leiter usurped a corporate opportunity by assigning the contract rights to Beacon Homes where Palm Avenue Partners clearly had an interest. Finally, the court found Mr. Leiter liable for negligent misrepresentation by concealing the payment, because Mr. Leiter had a duty to disclose the payment and the payment was material.
However, the remainder of their claims were unsuccessful. The investors lost on their derivative claim of common law breach of fiduciary duty (as opposed to their direct claim), because Mr. Leiter and his son (as managers) had no fiduciary relationship with Palm Avenue Partners. While Mr. Leiter was found directly liable for fraudulent and negligent misrepresentation by concealment, derivative liability did not reach the development company, the law firm, and Beacon Homes, because Mr. Leiter managed them alongside Palm Avenue Partners, making concealment impossible. The investors were not entitled to an accounting in equity, because their legal remedy is adequate. No conspiracy existed, because a conspiracy between Palm Avenue Partners and Beacon Homes would contradict the investors’ derivative claims, and a manager of a corporation (here, Mr. Leiter) is incapable of conspiring with the corporation (here, Beacon Homes). Finally, the investors could not prove that the development company and law firm breached their contracts with Palm Avenue Partners.
Contributed by Jeff Dutson of King & Spaulding LLP