Synectic Ventures I, LLC v. EVI Corp.

Investment funds including Synectic Ventures I, LLC (the funds) (plaintiffs) were limited-liability companies (LLCs) managed by Craig Berkman. Berkman was also treasurer and chairman of EVI Corporation (EVI) (defendant). The funds’ operating agreements allowed Berkman’s involvement with EVI. The operating agreements also gave Berkman the authority to control the funds’ business affairs, including acting on the funds’ behalf without the consent of the members. The operating agreements expressly gave third parties the right to rely on Berkman’s authority to bind the funds. In 2003, the funds loaned over $3 million to EVI. The loan agreement provided that if EVI did not repay the funds by December 31, 2004, the funds could foreclose on EVI’s assets. However, if EVI received additional investments of at least $1 million before the repayment deadline, EVI could force a conversion of the debt to equity. Some investors in the funds subsequently hired a law firm to investigate Berkman’s fund management. The investors and Berkman entered into letter agreements requiring Berkman to inform concerned investors about certain activities, but the investors recognized that Berkman still had the authority to act on the funds’ behalf. In September 2004, Berkman executed an amendment to the loan agreement on behalf of the funds, extending EVI’s repayment deadline until December 31, 2005. EVI neither repaid the debt nor obtained $1 million in additional investments by December 31, 2004. In 2005, the funds learned about the purported amendment to the loan agreement and notified EVI that the amendment had not been authorized. Following that notice, another Berkman-managed fund invested $1 million in EVI by December 31, 2005, and EVI purported to convert its debt to the funds into equity. The funds sued EVI, asserting that they were not bound by the amendment to the loan agreement. The trial court granted summary judgment for EVI, and the funds appealed.