When the Sponsor Stalls: Governance Lessons from Arctaris v. LC Baltimore for Institutional Investors
Institutional capital regularly takes non-managing positions in real estate joint ventures, relying on sponsor execution and structural protections to safeguard the investment. A February 2025 decision from the Massachusetts Business Litigation Session in Arctaris Opportunity Zone Fund 2020, LLC v. LC Baltimore 1B LLC illustrates how well-drafted governance provisions can protect an investor member when a project stalls, and how a court will enforce those provisions when the drafting is precise.
The deal and the operating agreement
Arctaris, an impact-focused opportunity zone fund managed by Boston-based Arctaris Impact Investors, partnered with a Baltimore-based sponsor to develop age-restricted senior housing with ground-floor retail in an underserved neighborhood. The sponsor’s entity, LC Baltimore 1B LLC, served as managing member of the project company, Phase 1B Holdings, LLC. Both the fund and the project company are Delaware LLCs, and the operating agreement is governed by Delaware law. The project itself is located in Maryland. Arctaris came in as investor member, contributing substantially all of the equity.
The operating agreement, which was attached as an exhibit to the complaint and is the core contract the court interprets throughout its decision, established objective, date-certain milestones for the project, including a July 31, 2024 deadline to commence construction. It defined failure to meet those milestones as “Special Defaults” and gave the investor specific remedies upon a Special Default: the right to remove the managing member under section 11.01 and a “Forced Sale” mechanism under section 17.03, under which the sponsor could either buy out the investor at a formula price or cooperate in a third-party sale of the project. When construction did not start by the deadline and the sponsor could not deliver financing, Arctaris sent notice of the Special Defaults, exercised its contractual right to remove the managing member, and sought a preliminary injunction to enforce the transition of control.
The court’s findings
Justice Salinger, presiding in the Business Litigation Session, found that Arctaris was “extremely likely” to succeed on the merits. The court’s analysis rested on several grounds.
The court concluded that LCB had committed at least one Special Default identified in Arctaris’s January 30, 2025 notice, giving Arctaris the contractual right to remove LCB as managing member. The court enforced the milestone provisions according to their plain language and declined to accept the sponsor’s attempts to attribute delays to the investor.
The court further concluded that Arctaris was likely to show LCB materially breached section 17.03 of the operating agreement by failing to assist with a Forced Sale. That failure, the court held, independently qualified as a Special Default and provided a separate basis for removal, apart from the missed construction deadline.
Finally, the court found that LCB’s continued refusal to stop holding itself out as managing member after its removal constituted a further breach of the operating agreement.
On equitable factors, the court determined that Arctaris had demonstrated irreparable harm absent an injunction, given the risk to its contractual rights and the project’s value. The court characterized any harm to the sponsor from the injunction as limited to consequences it had “accepted and bargained for” in the operating agreement’s remedy structure. The court granted Arctaris’s motion and denied the defendants’ cross-motion, noting that the defendants had not even asserted counterclaims.
The waiver and acquiescence defense
This aspect of the decision deserves particular attention. The sponsor argued that Arctaris’s own alleged breaches, including delays in approving capital draws, should bar it from enforcing default remedies. The court rejected that argument on two independent grounds.
First, the court found that Arctaris likely had not breached the operating agreement at all. Second, and separately, the court found that LCB had knowingly acquiesced in any alleged investor breaches, thereby waiving them as a defense to enforcement.
For investor members, this holding carries significant practical weight. Sponsors facing removal will almost always assert that the investor’s own conduct should preclude enforcement. The Arctaris court’s willingness to treat the sponsor’s continued performance and acquiescence as a waiver underscores the importance of documenting the counterparty’s conduct throughout the life of the deal. Approvals, communications, acknowledgments, and continued performance by the sponsor after any alleged investor misstep all become evidence that the sponsor accepted the situation and cannot later use it as a shield.
Forum selection and governing law
One aspect of the case that practitioners may overlook is where it was filed. The LLCs are organized in Delaware, the operating agreement is governed by Delaware law, and the project sits in Maryland. Yet Arctaris brought suit in Suffolk Superior Court in Massachusetts, where its investment manager is headquartered and where the Business Litigation Session offers a sophisticated forum for complex commercial and LLC-governance disputes.
The court noted that for purposes of the preliminary-injunction analysis, there was “no material difference” between Delaware and Massachusetts law, so it could apply Massachusetts principles without a detailed choice-of-law analysis.
For investors, this is a reminder that forum selection deserves attention at the drafting stage. Where the operating agreement does not contain an exclusive forum-selection clause, the investor may have the ability to bring enforcement actions in its home jurisdiction. Choosing a forum with experience in complex entity-governance disputes, and ensuring nothing in the operating agreement forecloses that option, can meaningfully affect the speed and sophistication of the court’s response when a dispute arises.
Takeaways for investor members
Several features of the operating agreement proved important to the court’s analysis, and each suggests a drafting priority.
Milestones should be objective and date-certain. The court applied the construction-start deadline by its plain terms. Vague performance standards are harder to enforce on a preliminary-injunction record, where the court needs to assess likelihood of success quickly and with confidence.
Removal rights should include a clear process. The Arctaris agreement set out a defined sequence under section 11.01 for noticing defaults, allowing cure periods, and exercising the removal right. The agreement also provided under section 11.06 for arbitration to challenge a removal, giving the sponsor a contractual path to contest the action rather than forcing the dispute into an unstructured procedural posture. That framework allowed the court to verify compliance without extensive factual disputes about whether the investor had followed proper procedure.
Forced-sale provisions should include affirmative cooperation obligations. The operating agreement required the sponsor under section 17.03 to assist in a third-party sale if its buyout election failed. When the sponsor refused to cooperate, the court treated that refusal as a standalone Special Default. Investors should treat cooperation covenants around sales and dispositions as substantive, negotiated obligations, not incidental terms.
Remedies should be drafted with injunctive relief in mind. The preliminary injunction, not a future damages award, was what protected the investor’s position while the project still had value. The court was willing to grant that relief because the operating agreement spelled out what would happen upon a default with enough specificity that the court could enforce the bargain the parties had struck.
Investors should maintain careful, contemporaneous records. The waiver and acquiescence findings depended in part on the evidentiary record of the sponsor’s conduct after any alleged investor missteps. Building that record in real time strengthens the investor’s position considerably.
Finally, consider forum selection at the operating-agreement stage. The ability to litigate in a sophisticated commercial court near the investor’s home base, rather than in the project’s jurisdiction, can affect both the pace and quality of judicial oversight when governance disputes arise.
The broader point
Arctaris v. LC Baltimore arose in the opportunity zone and impact-investment context, but the lessons apply to any real estate joint venture where capital is passive and control sits with a local sponsor. For institutional and family-office investors, the decision is a concrete reminder that governance, enforcement mechanics, and forum selection deserve the same rigor at term sheet and operating-agreement stage as economics and waterfall structures. The operating agreement is where you earn the right to act when a project stalls. The courtroom is where you find out whether the drafting holds up.
David J. Murphy is the managing attorney at Murphy PC in Boston, Massachusetts. He regularly represents real estate developers and investors in real estate development projects.
