Corporate Vigilance and the Veil

Birchwood-Manassas Assocs., LLC v. Birchwood at Oak Knoll Farm, LLC

“Equity aids the vigilant, not those who sleep on their rights.”

The Supreme Court of Virginia affirmed this oft-stated maxim in Birchwood-Manassas Assocs., LLC v. Birchwood at Oak Knoll Farm, LLC, No. 141195, 2015 Va. LEXIS 76 (Va. June 4, 2015). There, the Court held that equitable tolling was not available, because neither manager conflicts of interest nor alleged breaches of fiduciary duty constitute an “extraordinary circumstance.”

Birchwood-Manassas Associates LLC (“Birchwood-Manassas”) was formed to own, develop, and sell real estate. Ronald J. Horowitz and Burton Haims were Birchwood-Manassas’s managers, with Horowitz exercising day-to-day control. In addition, two related entities were formed to develop and sell real estate under Horowitz and Haims’ management and control—Birchwood at Oak Knoll Farm (“Oak Knoll”) and Birchwood at Wading River (“Wading River”). Horowitz likewise exercised day-to-day control over Oak Knoll and Wading River.

Between 2004 and 2009, Horowitz and Haims transferred funds from Birchwood-Manassas to Oak Knoll and Wading River. While these transactions and subsequent repayments were recorded by all three entities, there were no loan documents or formal repayment terms. This created demand obligations owed by Oak Knoll and Wading River in favor of Birchwood-Manassas.

In 2011, a non-managing member of Birchwood-Manassas filed suit for the company’s judicial dissolution. The circuit court found that dissolution was proper and appointed a liquidating trustee. As part of its order showing why a liquidating trustee was appropriate, the circuit court found that there was an irreconcilable conflict between Birchwood-Manassas’s managers—Horowitz and Haims—and the companies to which Birchwood-Manassas had lent money—Oak Knoll and Wading River.

In early 2013, the liquidating trustee demanded that Oak Knoll and Wading River repay the borrowed money. Birchwood-Manassas then filed suit against the companies, seeking breach of contract and unjust enrichment damages, as well as a constructive trust. It also alleged numerous breaches of fiduciary duties by Horowitz and Haims.

In a plea in bar, Oak Koll and Wading River asserted that all claims—which the parties agreed each had a three-year statute of limitations—were time-barred. Birchwood-Manassas responded that the limitations periods had been equitably tolled, because it was impossible for Birchwood-Manassas to have brought a claim within the limitations period, due to Horowitz and Haims’ irrevocable conflicts of interest and alleged breaches of their fiduciary duties. The circuit court granted the plea in bar, dismissing Birchwood-Manassas’s suit with prejudice.

The Supreme Court of Virginia affirmed. It observed that, in general, statutes of limitations are strictly enforced, and that equitable tolling is only available in “extraordinary circumstances.” Such circumstances had previously been confined to fraud or affirmative acts by the defendant that hindered assertion of the claim, and the Court declined to extend the grounds for equitable tolling.

In essence, the Court held that even if Birchwood-Manassas’s managers were conflicted or had breached their fiduciary duties, it was not impossible for the company to have timely filed claims based on the managers’ conduct. It reasoned that the company could still have vindicated its rights within the limitations periods, through a member-initiated derivative action.

A derivative action is the company’s lawsuit, albeit filed and maintained by its members (or shareholders in the corporation context). The right to file derivative claims is defined by statute. The Birchwood-Manassas court found that a derivative action could have been filed, particularly in light of the member-initiated dissolution action that had led to the trustee’s appointment.

Birchwood-Manassas thus requires non-managing owners to be vigilant against possible corporate malfeasance as it transpires. Absent fraud or affirmative acts, “the company” must bring suit within the limitations period, either directly or derivatively.

Finally, Birchwood-Manassas may have utility in the piercing the corporate veil context. In Virginia, veil-piercing is an “extraordinary exception” Dana v. 313 Freemason, A Condo. Ass’n, 266 Va. 491, 502, 587 S.E.2d 548, 554 (Va. 2003). As part of its reasoning, the Birchwood-Manassas court commented that “[a]ffiliated entities having overlapping management and the occurrence of transactions between such entities are not extraordinary occurrences.” (emphasis added). With this statement of what—standing alone—is not “extraordinary,” Birchwood-Manassas will likely be used to argue against veil-piercing claims in the future.