Northeast Harbor Golf Club, Inc. v. Harris

Brief Fact Summary. The Northeast Harbor Golf Club, Inc., (Appellant), brought suit against Nancy Harris, (Appellee), for breach of fiduciary duty as its president by purchasing and developing property adjacent to that owned by Appellant. Appellant appeals from the Superior Court judgment in favor of Appellee.

Synopsis of Rule of Law. A corporate opportunity is one that is closely related to a business in which the corporation is engaged or one that accrues to the fiduciary as a result of her position within the corporation. The fiduciary must make a full disclosure prior to taking advantage of any corporate opportunity. The corporation must then formally reject the opportunity. A good faith but defective disclosure may be ratified after the fact only by an affirmative vote of the disinterested directors or shareholders.

Facts. Appellee was president of Appellant. Appellant’s major asset is was a golf course. The board occasionally discussed but always shied away from the possibility of developing some of Appellant’s real estate in order to raise money. Appellant, however, In 1979 a broker approached Appellee because of her position with Appellant about three parcels located among the fairways of the golf course, one of which was encumbered by an easement in favor of the Club. Appellee agreed to purchase the parcels in her own name. She informed the board at the annual meeting of her purchase and intentions and they took no action.
In 1984, she learned of a parcel surrounded on three sides by the golf course that was available for purchase. She informed several members of the board of her intent to acquire the parcel and at the annual board meeting disclosed that she had purchased the property. The board took no formal action. In 1988, Appellee began to develop the property. The board became divided concerning the propriety of the development. Appellant filed a complaint against Appellee alleging that she breached her fiduciary duty in regard to the purchases. The trial court found that Appellee had not usurped a corporate opportunity because the acquisition was not in the Appellant’s line of business and because it lacked the financial ability to purchase the real estate at issue.

Issue. Whether the trial court correctly applied the line of business test in determining that Appellee did not usurp a corporate opportunity.

Held. No. The correct standard by which to judge a corporate opportunity is the ALI test.

Discussion. The line of business test has two flaws. First, whether an opportunity is within a corporation’s line of business is difficult to answer. Second, the evaluation of financial incapacity will often unduly favor the inside director or executive who has command of the facts relating to the finances of the corporation. The fairness test is also unhelpful because it lacks a principled content. The combination of the two tests has resulted in compounding the flaws in both. The ALI test may bring clarity to a murky area of the law because it provides a clear procedure whereby a corporate officer may insulate herself through prompt and complete disclosure form the possibility of a legal challenge. The case is remanded for proceedings consistent with this opinion.