![]() The source of the problems to come was an extremely broad non-compete contained in the LLC agreement, which essentially disallowed all competition with AML unless the majority gave consent. The founder and his family members owned 75% of the AML business three gentlemen (Andrews, Runnels and Franklin, who had been involved in the founder's previous business), owned the remaining 25%. The concept behind the American Master Lease ("AML") business was a twist on familiar Section 1031 real estate exchanges, allowing real estate investors who want to retire or otherwise get out of active management of their properties to exchange their individual real estate interests for a fractional interest in a larger entity. ![]() So what did the defendants do that the jury and appeals court found crossed the line? The opinion is long and complicated, but I'll try to simplify it. The American Master Lease court ruled that even in the absence of a fiduciary duty, a defendant venture firm can be liable for aiding and abetting if it "makes a conscious decision to participate in tortious activity for the purpose of assisting another in performing a wrongful act." It was also interesting from a legal point of view because one of the other main forms of "secondary" liability for breaches of fiduciary duty – conspiracy – had typically required that the defendant owe an independent fiduciary duty to the plaintiff. That was an interesting legal ruling, because venture firms don't ordinarily think of themselves as owing fiduciary duties in arms-length contractual relationships. In American Master Lease LLC v Idanta Partners, Ltd., the Court of Appeals for the Second District made clear that a venture firm can be liable for aiding and abetting a breach of fiduciary duty even though the firm itself owes no fiduciary duties to the injured parties. A recent case in the California Court of Appeals underscores the dangers that await venture capital firms brave (or foolish) enough to fund companies in the midst of internal disputes.
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