Business Partner Took a Deal for Himself? The Corporate Opportunity Doctrine in Kentucky

Your business partner mentions, almost in passing, that he bought the building next door. The one your company had been trying to lease for a year. Or you learn that the big account your partner “couldn’t close” for the company signed a contract last month with a new LLC that has your partner’s name on the filing. The corporate opportunity doctrine exists for exactly these moments.

The basic rule

A person who owes fiduciary duties to a business, whether as a corporate director or officer, a manager of an LLC, or a member in a member-managed LLC, may not take for himself a business opportunity that belongs to the company. If the opportunity falls within the company’s line of business and the company has an interest or expectancy in it, the fiduciary must present it to the company first. Only if the company, acting through disinterested decision-makers, declines may the fiduciary pursue it personally.

Kentucky’s adoption of the doctrine

The doctrine developed in corporate law, but Kentucky courts have applied it to limited liability companies as well. In Patmon v. Hobbs, 280 S.W.3d 589 (Ky. App. 2009), the Court of Appeals expressly adopted the corporate opportunity doctrine and held that an LLC’s managing member breached his duty of loyalty by forming a competing business and transferring the company’s build-to-suit leases to it. The court described the rule this way: one entrusted with active management, whether an officer, director, or manager-member, occupies a fiduciary relationship and may not exploit that position by appropriating a business opportunity that properly belongs to the company. Importantly, the court rejected the argument that no “opportunity” existed because the LLC might not have been able to finance the projects on its own; the manager still had to disclose the opportunity and give the other members the chance to pursue it.

The analysis courts apply looks at factors such as whether the opportunity is in the company’s line of business, whether the company had an interest or expectancy in it, whether the fiduciary learned of it through his position, whether company resources were used to pursue it, and whether taking it put the fiduciary in competition with the company.

The statutory anchor for LLCs is KRS 275.170(2), which requires a member or manager to account to the company for any benefit derived from a transaction connected with the company’s business, or from use of company property, without the consent of the disinterested members or managers. For corporations, KRS 271B.8-300 requires directors to act in good faith and in the best interests of the corporation, and the common-law duty of loyalty supplies the rest.

What counts as a company opportunity

Not every deal a partner does on the side is a usurpation. A co-owner of a restaurant who buys a rental house has not taken a restaurant opportunity. The harder cases are the ones in the middle:

• A customer the company was courting who signs with the partner’s new venture.
• Real estate the company needed for expansion that the partner buys personally and then leases back to the company.
• A supplier relationship developed on company time that the partner moves to a competing business.
• An acquisition target the company evaluated and passed on, if the “pass” was engineered by the partner who then bought it.
• A product line adjacent to what the company makes, developed using company engineers.

The more closely the opportunity tracks what the company does, and the more the partner used his position or company resources to find and develop it, the stronger the claim.

The disclosure-and-consent defense

The fiduciary’s best defense is that he told the company about the opportunity, the company declined, and he then pursued it. That defense works only if the disclosure was full and fair and the decision to decline was made by people without a stake in the outcome. A partner who presents the opportunity in a way designed to make it look unattractive, or who “consults” only himself, has not satisfied the rule. Documentation matters enormously here; a contemporaneous email or minutes showing a genuine offer and a genuine refusal will usually end the case, while a later recollection that “we talked about it” will not.

What the operating agreement can do

Kentucky’s policy of freedom of contract in LLC operating agreements means owners can define, limit, or even waive the corporate opportunity doctrine in advance. Agreements sometimes carve out specific categories of permitted outside activity, or allow members to pursue any opportunity without offering it to the company. Those provisions are generally enforced. Before accusing a partner of usurpation, read the agreement; before signing one, understand what you are giving up.

Remedies

The signature remedy is a constructive trust: the court treats the diverted opportunity, and the profits from it, as belonging to the company. The fiduciary must account for and disgorge what he gained. Where the opportunity has produced an ongoing business or a piece of real estate, the court can order that the asset itself be transferred to the company, or that the company receive the profits going forward. Compensatory damages for the company’s lost profits are available where they can be proven with reasonable certainty, and punitive damages may be awarded under KRS 411.184 where the conduct was fraudulent or oppressive.

Because the harm is to the company, these claims are usually derivative, brought by an owner on the company’s behalf. In a two-owner company the practical distinction is small, but the procedural requirements still apply.

Building the case

Start with the paper trail: Secretary of State filings for the partner’s new entities, property records, the company’s own emails and CRM showing it was pursuing the deal, and the operating agreement. Exercise inspection rights under KRS 275.185 to get the company’s financial records. Then send a demand that identifies the opportunity, the duty, and the remedy sought. A partner who knows the facts are documented frequently agrees to put the opportunity, or its value, back into the company rather than litigate.

If a business partner has taken a deal that should have gone to your company, call (859) 225-9540 or contact us online.

Joseph D. Buckles is a civil litigation attorney at Buckles Law Office, PLLC in Lexington, Kentucky, with a focus on civil litigation and probate litigation.