Opinion
1:17-cv-584-RP-ML 1:17-cv-560-RP)
10-30-2023
PNC BANK, N.A. and COLUMBIA HOUSING SLP CORPORATION, as partners in 2013 TRAVIS OAK CREEK, LP, and 2013 TRAVIS OAK CREEK, LP Plaintiffs, v. 2013 TRAVIS OAK CREEK GP, LLC, 2013 TRAVIS OAK CREEK DEVELOPER, INC., CHULA INVESTMENTS, LTD., and RENE O. CAMPOS, Defendants.
REPORT AND RECOMMENDATION
MARK LANE, UNITED STATES MAGISTRATE JUDGE
Before the Court are: (1) 2013 Travis Oak Creek, LP (the “Partnership”), 2013 Travis Oak Creek, GP (“General Partner”) and Rene Campos's (“Campos”) Motion to Enforce Settlement Agreement against the PNC Parties (Dkt. 209) and (2) Plaintiffs PNC Bank, N.A. (“PNC Bank”) and Columbia Housing SLP Corporation's (“Columbia”) (collectively, the “PNC Parties”) Motion to Enforce Settlement Agreement against the Partnership, General Partner, Campos, 2013 Travis Oak Creek Developer, Inc. (“Developer”), and Chula Investments, Ltd. (“Chula”) (collectively, the “Eureka Parties”) (Dkt. 212), and all related briefing.
On February 17, 2023, U.S. District Judge Robert referred the Motions (Dkts. 209 & 212) to the undersigned for a report and recommendation pursuant to 28 U.S.C. § 636(b)(1)(B), Federal Rule of Civil Procedure 72, and Rule 1(d) of Appendix C of the Local Rules of the United States District Court for the Western District of Texas. Text Order, Feb. 17, 2023.
On August 8, 2023, the court held an evidentiary hearing on the Motions (the “Evidentiary Hearing”), at which both sides appeared and presented evidence in the form of witness testimony and exhibits, as well as argument. The court heard testimony from four witnesses: Kirk Standly, Michael Celkis, Dale Marrison, and David Hasselwander. Dkt. 243. The court admitted into evidence 23 exhibits: JX 1-6, PX 7-9, JX 10, JX 12-19, DX 20, JX 21-23, and PX 24. Dkt. 242. Upon consideration of the filings and relevant case law, as well as the arguments, testimony and evidence presented at the Evidentiary Hearing, the undersigned issues the following Report and Recommendation to the District Court.
I. BACKGROUND
On or about May 23, 2014, the PNC Parties, as the original limited partners, and the General Partner, as the original general partner, entered into an Amended and Restated Agreement of Limited Partnership of 2013 Travis Oak Creek, LP. Dkt. 242-3 at 1 (the “Partnership Agreement”). The purpose of the Partnership was to acquire, construct, develop, and operate an affordable housing apartment complex located in Austin, Texas, more commonly known as the Lucero Apartments (the “Project”). Among other things, the Partnership Agreement anticipated that various low income housing tax credits would be available to the Partnership.
The PNC Parties originally filed this lawsuit, which arose out of a partnership dispute, in 2017 against the General Partner, Campos, Developer, and Chula for breach of the Partnership Agreement and related guaranties. Dkt. 1. The Partnership was subsequently added as a party. See Dkt. 9 at 201. A separate case filed by General Partner against PNC Bank and Columbia in state court was removed (Case No. 1:17-cv-560) and consolidated with the instance case. Dkt. 25. Defendants then asserted counterclaims against the PNC Parties in this case. Dkt. 78.
In February 2019, the PNC Parties and the Eureka Parties entered into the Settlement Agreement, which called for a due diligence period and then a closing transaction effectuating, among other things, the sale of the Partnership. Dkt. 242-3 at 160 (JX 2) (the “Settlement Agreement”). The parties subsequently entered into two amendments to the Settlement Agreement. Dkt. 242-3 at 200 (JX 3), 206 (JX 4). Under the Settlement Agreement, among other things, the PNC Parties agreed to assign their interests in the Partnership to the Eureka Parties in exchange for a payment of $44 million, certain tax credits, certain indemnifications and guarantees, broad releases, and various other agreements. Dkt. 242-3 at 160 (JX 2).
After a due-diligence period, the settlement transaction closed on or about September 27, 2019. Thereafter, the Eureka Parties paid the purchase price, the PNC Parties assigned their partnership interests, and the parties executed the additional documents required under the Settlement Agreement. Those additional settlement documents included: (1) a Tax Credit Compliance, Guaranty, and Indemnity Agreement (the “Tax Credit Guaranty”) executed by the Partnership, General Partner, Developer, Campos, and Chula (Dkt. 242-3 at 212) (JX 5); and (2) a Full and Final Mutual Release and Discharge (Dkt. 242-3 at 226) (JX 6).
On October 4, 2019, after they executed the settlement, the parties filed a Stipulation of Dismissal of All Claims and Counterclaims. Dkt. 202. On October 7, 2019, the District Court entered a Final Judgment, retaining jurisdiction “to enforce the parties' settlement agreement and resolve any disputes related to it.” Dkt. 203.
On December 1, 2021, the Partnership, General Partner, and Campos moved to re-open this case to file a motion to enforce the Settlement Agreement against the PNC Parties. Dkt. 204. On November 18, 2022, the Court granted that motion and re-opened the case for the purpose of enforcing the Settlement Agreement. Dkt. 207.
The parties then filed competing motions to enforce the Settlement Agreement, as well as various appendices, responses, replies, and sur-replies. Specifically, the Partnership, General Partner, and Campos filed their Motion to Enforce Settlement Agreement against the PNC Parties (Dkt. 209), and the PNC Parties filed their Motion to Enforce Settlement Agreement against the Eureka Parties (Dkt. 212). Both sides agree that the Settlement Agreement remains in full effect and is a valid and enforceable agreement. Indeed, both sides seek to enforce its obligations regarding certain tax credits.
The Partnership, General Partner, and Campos contend that the PNC Parties have breached the obligation in the Settlement Agreement to pay the Partnership $1,402,359.75 for the 2019 tax credits. Dkt. 209 at 6.
The PNC Parties contend that the Partnership, General Partner, Campos, Developer, and Chula breached the Settlement Agreement by failing to effectuate the PNC Parties' receipt of the tax credits for years 2015 ($596,279) and 2016 ($1,999,800) and breached the related Tax Credit Guaranty by failing to indemnify the PNC Parties for the losses they sustained as a result of nondelivery of those forecasted tax credits. The PNC Parties further contend that any amount that would have been paid to the Partnership for the 2019 tax credits is fully offset by the larger sum they are owed for the 2015 and 2016 tax credits.
II. APPLICABLE LAW
A. Jurisdiction
This case was originally filed and maintained in federal court under diversity jurisdiction. See, e.g., Dkt. 73 at 9-10. The case was reopened on November 18, 2022, between the same parties. Dkt. 207. Further the District Court, under the 2019 Final Judgment, retained jurisdiction “to enforce the parties' settlement agreement and resolve any disputes related to it.” Dkt. 207. Accordingly, the court has subject matter jurisdiction over the competing motions to enforce the Settlement Agreement.
B. Burden of Proof
“Like any other breach of contract claim, a claim for breach of settlement agreement is subject to the established procedures of pleading and proof.” Castrellon v. Ocwen Loan Servicing, L.L.C., 721 Fed.Appx. 346, 350-51 (5th Cir. 2018) (emphasis added) (quoting FordMotor Co. v. Castillo, 279 S.W.3d 656, 663 (Tex. 2009)). At the Evidentiary Hearing, counsel for the PNC Parties and Counsel for the Eureka Parties agreed that the applicable standard of proof under which the competing Motions should be evaluated is preponderance of the evidence. See Evidentiary Hearing Transcript (“Tr.”) at 10:13-17.
C. Breach of Settlement Agreement
If “[n]either party disputes whether a valid agreement exists”, an “action to enforce a settlement agreement is analogous to an action for breach of contract.” UBEO Bus. Services, LLC v. DOCUmation, Inc., 1:18-CV-415-RP, 2019 WL 5105451, at *3 (W.D. Tex. Jan. 14, 2019) (Pitman, J.). “The construction and enforcement of settlement agreements is governed by principles of state law applicable to contracts.” Id. (citing Lockette v. Greyhound Lines, Inc., 817 F.2d 1182, 1185 (5th Cir. 1987)).
“Under Texas law, a plaintiff alleging breach of contract must show ‘(1) the existence of a valid contract; (2) performance or tendered performance by the plaintiff; (3) breach of the contract by the defendant; and (4) damages to the plaintiff resulting from that breach.'” UBEO, 2019 WL 5105451, at *3. (quoting Villarreal v. Wells Fargo Bank, N.A., 814 F.3d 763 (5th Cir. 2016)).
III. FINDINGS OF FACT
A. The Partnership and the Tax Credits
1. On or about May 23, 2014, the PNC Parties, as the original limited partners, and the General Partner, as the original general partner, entered into the Partnership Agreement. Dkt. 242-3 at 1 (JX 1).
2. Among other things, the Partnership Agreement anticipated that various low-income housing tax credits would be available to the Partnership. See id. at 23.
3. The Partnership Agreement specifically set forth the Forecasted Tax Credit for each year from 2015 to 2025. Id. at 82.
4. The Partnership Agreement states that the Forecasted Tax Credit for 2015 is $596,279, and the Forecasted Tax Credit for 2016 is $1,999,800. Id.
5. Pursuant to the Partnership Agreement, “[t]he General Partner shall ensure that the ILP [PNC Bank] receives the full amount of the Forecasted Tax Credit.” Id. at 23; see id. at 6 (defining “ILP” as PNC Bank).
6. In connection with the Partnership Agreement, Campos, Developer, and Chula also executed an Agreement of Guaranty, which “unconditionally, jointly and severally guarantees to the Partnership and the Limited Partners the full and prompt payment, performance, observance, compliance, and satisfaction of all obligations, covenants, representations, and warranties on the part of the General Partner to be paid, performed, observed, complied with, or satisfied with respect to the Agreement, as and when due.” Id. at 106.
7. The PNC Parties filed this lawsuit in 2017 against General Partner, Campos, Developer, and Chula. See Dkt. 1. Defendants asserted counterclaims against the PNC Parties. See Dkt. 78.
8. On August 2, 2017, the District Court entered an Injunction. Dkt. 73. The Injunction removed the original General Partner and Columbia became the general partner for all purposes. Id. at 27. The Injunction enjoined the Eureka Parties from taking any action that interfered with Columbia's exercise of its role as general partner. Id.
9. On February 18, 2019, the PNC Parties and the Eureka Parties entered into the Settlement Agreement, which called for a due diligence period and then a closing transaction effectuating, among other things, the sale of PNC Parties' interests in the Partnership. Dkt. 242-3 at 160 (JX 2) (Settlement Agreement). The Partnership, which was controlled exclusively by Columbia, was a signatory. Id. The parties subsequently entered into two amendments to the Settlement Agreement. Id. at 200 (JX 3), 206 (JX 4).
10. Under the Settlement Agreement, the PNC Parties agreed, among other things, to assign their interests in the Partnership to the Eureka Parties' control in exchange for a payment of $44 million, certain tax credits, certain indemnifications and guarantees, broad releases, and various other agreements. Id. at 160 (JX 2).
11. Neither the Settlement Agreement nor the two amendments contained a deadline by which the tax credits were to be issued. Tr. 45:16-46:2.
12. After an extended due diligence period, the transaction set forth in the Settlement Agreement closed on or about September 27, 2019. Tr. 39:5-15. As part of the Closing, the General Partner was reinstated as general partner for the Partnership, and the Eureka Parties controlled the Partnership from that point forward. Tr. 47:21-25.
13. The PNC Parties, while Columbia was serving as the general partner, contacted the Texas Department of Housing and Community Affairs (“TDHCA”) for a list of items needed to obtain IRS Forms 8609, which are necessary to obtain the tax credits. DX 20; Tr. 88:14-89:4.
14. As both sides agree, the Settlement Agreement, including its amendments, is a valid and binding contract. Dkt. 242-3 at 160 (JX 2). The signatories to the Settlement Agreement include PNC Bank, Columbia, the Partnership, General Partner, Campos, Developer, and Chula. See id. at 168-70. Each of the signatories assumed new obligations under the terms of the Settlement Agreement. See id. at 160.
15. The Final and Mutual Release and Discharge is a valid and binding contract. Id. at 226 (JX 6).
16. There no dispute that both sides performed the majority of the obligations set forth in the Settlement Agreement at the time of the closing of the transaction on or about September 27, 2019: among other things, the Eureka Parties made the $44 million cash payment to the PNC Parties, the PNC Parties assigned their rights in the Partnership to the Eureka Parties' control, the parties executed the Tax Credit Guaranty and the Full and Final Mutual Release and Discharge, and the parties filed a joint stipulation of dismissal of all claims and counterclaims. See Dkts. 199, 202, 242-3 at 226; Tr. at 47:21-25.
17. After the closing, the Eureka Parties began their efforts to obtain the tax credits as required by the Settlement Agreement. Tr. 48:4-50:12.
18. At all times from the execution of the Settlement Agreement until now, both the PNC Parties and the Eureka Parties have treated the Settlement Agreement as a continuing contract and have insisted on performance from the opposing side. This includes the filing of the instant competing motions to enforce the Settlement Agreement.
19. The Settlement Agreement transaction closed in September 2019. Tr. 39:5-15. The Eureka Parties did not obtain issuance of the low-income housing tax credits via IRS Forms 8609 from TDHCA until March 29, 2021. Dkt. 242-3 at 641 (JX 21); Tr. 50:7-15.
20. On March 29, 2021, TDHCA issued the Form 8609 to the Partnership. Dkt. 242-3 at 641 (JX 21). The Partnership obtained the full amount of the forecasted tax credits or $20 million, equating to $2 million per year for 10 years. Id.
21. Yet as of March 29, 2021, the Partnership had not claimed any low-income housing tax credits on its federal tax return for the years 2015-2019. Dkts. 242-3 at 241 (JX 12), 288 (JX 13), 350 (JX 14), 469 (JX 16), 555 (JX 18). Similarly, as of March 29, 2021, the Partnership had not issued IRS Schedule K-1s allocating such tax credits to any of its partners (including PNC Bank) for the years 2015-2019. See, e.g., id. at 269 (JX 12), 314 (JX 13), 379 (JX 14), 498 (JX 16), 580 (JX 18).
22. Michael Celkis of CohnReznick, the accountants and tax preparers for the Partnership, testified that the Partnership did not claim any low-income housing tax credits on its 2015 or 2016 tax returns. Tr. 89:5-90:21. Mr. Celkis also testified that the Partnership did not allocate any such credits to PNC Bank via a form K-1 for the years 2015 or 2016. Id.
23. Once the tax credits were issued to the Partnership in March 2021, the Partnership amended its tax returns for the years 2017, 2018, and 2019 to (i) claim the low-income housing tax credit on the Partnership's amended tax return for those years (Dkt. 242-3 at 412 (JX 15), 526 (JX 17), 617 (JX 19)), and (ii) issue a form to PNC Bank allocating such tax credit for those years from the Partnership to PNC Bank (Dkt. 242-3 at 447 (JX 15), 537-38 (JX 17), 628-29 (JX 19)). Mr. Celkis confirmed that the Partnership's 2017, 2018, and 2019 returns were amended to claim the low-income tax credits. Tr. 91:23-92:1.
24. Specifically, for the year 2019, the Partnership's amended tax return claimed the low-income housing tax credit in the amount of $2,000,000 (Dkt. 242-3 at 617 (JX 19)) and attached the form allocating $1,499,850 of such credits to PNC Bank for that year (Dkt. 242-3 at 628-29 (JX 19)).
25. Mr. Celkis testified further that once the tax credits were issued to the Partnership on March 29 2021, the Partnership did not amend its 2015 or 2016 tax returns to claim the tax credit for those years, nor did the Partnership issue amended K-1s to PNC Bank reflecting the allocation of such credits for 2015 or 2016. Tr. 92:2-5; 100:5-9. As Mr. Celkis explained, that is because by the time the tax credits were issued to the Partnership on March 29, 2021, the Partnership's three-year deadline to amend its 2015 tax return had already passed on September 16, 2019, and the Partnership's three-year deadline to amend its 2016 tax return had passed on September 16, 2020. See Tr. 97:21-98:19; 99:6-100:9; Dkt. 242-3 at 285.
26. PNC Bank's senior tax manager and Assistant Secretary, Dale Marrison, testified that PNC Bank did not receive a K-1 from the Partnership allocating low-income housing tax credits to PNC Bank for 2016 and, as a result, PNC Bank did not claim any low-income housing tax credits from the Partnership on its 2016 tax return. Tr. 108:15-23. PNC Bank could not claim such credits without a K-1 from the Partnership allocating those credits to PNC Bank. Mr. Celkis and Mr. Marrison both testified to this fact. Tr. 97:5-8; 106:4-12.
27. As Mr. Marrison also testified, by the time the Eureka Parties obtained issuance of the tax credits from the TDHCA to the Partnership on March 29, 2021, the three-year deadline for PNC Bank to amend its 2016 tax return to attempt to claim any such credits for that year had passed in October 2020. Tr. 116:6-10.
28. Although the three-year amendment deadline had not passed to reflect the 2019 tax credits, the PNC Parties never paid the Partnership for the 2019 Tax Credits. Tr. 52:22-53:7.
B. PNC Parties' Claim Regarding the 2016 Tax Credits
1. Settlement Agreement Section 2
29. Regarding tax credits, Settlement Agreement § 2 states that:
Travis Oak GP and/or any of the other Eureka Parties, on their respective behalves and on behalf of the Partnership after Closing, shall comply with the terms of the Partnership Agreement (including the guaranty as it relates to the Tax Credit obligations) regarding the Tax Credit and/or shall incorporate the same into any amended, restated or substitute partnership agreement (or other similar documents relating to the Project), including substitute guaranties, and further shall effectuate the issuance of the Tax Credit to the Partnership and to effectuate Investment Partner's (or its designee's(s')) right to receive, own and benefit fully from the Retained Tax Credit, including signing any documentation required or reasonably requested by Investment Partner or any other PNC Parties after Closing to effectuate the Settlement Agreement Parties' intent regarding the Tax Credit and its allocation to the designated PNC Party.... For the avoidance of doubt, the PNC Parties and the Eureka Parties acknowledge that (i) the Eureka Parties shall use all commercially reasonable efforts to effectuate the issuance of the Tax Credit, and (ii) nothing in this Agreement shall modify the obligations of the general partner under the Partnership Agreement with respect to the Tax Credit.Dkt. 242-3 at 161-62 (JX 2) (emphasis added).
30. The Settlement Agreement defined the “Retained Tax Credit” as “all Tax Credits associated with all tax years through the end of 2018.” Id. at 160 (JX 2).
31. The Partnership, General Partner, Campos, Developer, and Chula breached Section 2 of the Settlement Agreement by failing to “effectuate Investment Partner's [PNC Bank] (or its designee's(s')) right to receive, own and benefit fully from the Retained Tax Credit” with respect to the tax year 2016. Id. at 161-62 (JX 2).
32. Specifically, in order for PNC Bank to receive any tax credit for the year 2016 with respect to the Partnership, the Partnership must have (i) claimed such credit on the Partnership's 2016 federal tax return, and (ii) issued a form K-1 to PNC Bank allocating that tax credit from the Partnership to PNC Bank. Every witness asked about the process of delivering tax credits confirmed that the Partnership must first claim the credit on its tax return and then allocate it to a partner via a form K-1: Mr. Kirk Standly on behalf of the Eureka Parties (Tr. 30:2-10); Mr. Celkis of CohnReznick, the Partnership's accountant, tax preparer, and agent (Tr. 96:17-97:8; 98:25100:1); and Mr. Marrison of PNC Bank (Tr. 112:14-22).
33. With respect to the tax credits for the year 2016, the Partnership did not do either of the two steps. As noted above, the Partnership did not claim any low-income housing tax credits on the Partnership's 2016 federal tax return (Dkt. 242-3 at 288 (JX 13); Tr. 89:24-90:7). Nor did the Partnership issue a form K-1 to PNC Bank allocating such tax credits for the year 2016. Dkt. 242-3 at 314 (JX 13); Tr. 89:24-90:7; 108:20-23. As a result, PNC Bank did not claim any low-income housing tax credits regarding the Partnership on its 2016 tax return. Tr. 108:15-17. Nor could it without a K-1 from the Partnership allocating those credits to PNC Bank. Tr. 97:5-8; 106:4-10.
34. By the time the Eureka Parties obtained issuance of the tax credits on March 29, 2021, the three-year deadline to amend the Partnership's 2016 tax return (to claim the credits for 2016 and allocate them to PNC Bank via form K-1) had passed on September 16, 2020. Tr. 97:2125; Dkt. 242-3 at 285. Similarly, the three-year deadline for PNC Bank to amend its 2016 tax return to attempt to claim any such credits had passed in October 2020. Tr. 116:6-10.
35. The Eureka Parties argue that the standard of their performance under Section 2 was limited to only using “all commercially reasonable efforts to effectuate the issuance of the Tax Credit.” Dkt. 242-3 at 161-62 (JX 2). However, that language does not relieve the Eureka Parties of their explicit agreement that they “shall . . . effectuate [PNC Bank's] right to receive, own and benefit fully from the Retained Tax Credit.” Id. Additionally, Section 2 of the Settlement Agreement states that “nothing in this Agreement shall modify the obligations of the general partner under the Partnership Agreement with respect to the Tax Credit.” Id. In turn, the Partnership Agreement explicitly required that “[t]he General Partner shall ensure that the ILP [PNC Bank] receives the full amount of the Forecasted Tax Credit.” Dkt. 242-3 at 23 (JX 1).
But even if the “all commercially reasonable efforts” standard were applicable to every obligation in Section 2, the Eureka Parties failed to present sufficient evidence to establish that they actually complied with such standard during the 18 months between the closing of the Settlement Agreement transaction September 27, 2019 and the issuance of the tax credits on March 29, 2021. Tr. 145:8-146:4.
36. The Partnership Agreement specifically set forth the Forecasted Tax Credit for each year from 2015 to 2025. See Dkt. 242-3 at 82 (JX 1) (defining Forecasted Tax Credit for 2016 as $1,999,800); Tr. 67:16-68:1.
37. As a result of the Partnership, General Partner, Campos, Developer, and Chula breaching Section 2 of the Settlement Agreement, PNC Bank has suffered damages in the amount of $1,999,800 with respect to the 2016 tax credit.
2. Settlement Agreement Section 11
38. Additionally, Settlement Agreement Section 11 states:
11. Post-Closing Indemnification. The Partnership and the Eureka Parties shall defend, hold harmless, and indemnify the PNC Parties from any and all Claims ... including, without limitation, any and all lawsuits, proceedings, claims, causes of action, liabilities and damages arising out of or relating in any way to the Partnership, the Property, the Tax Credit (including, without limitation, any damages a PNC Party may incur as a result of a failure to deliver any part of the anticipated Tax Credit, . as well as any claims, lawsuits or proceedings of any nature brought by any third-party, the Partnership, or any of the Eureka Parties against any of the PNC Parties (collectively, the “Eureka Indemnification”). This provision shall survive the consummation of the Transaction.Dkt. 242-3 at 166 (JX 2) (emphasis added). As used in the Settlement Agreement, the term “anticipated Tax Credit” is defined to specifically include the “Forecasted Tax Credit.” Dkt. 2423 at 162.
39. The Forecasted Tax Credit for 2016 was $1,999,800. Dkt. 242-3 at 82 (JX 1).
40. As discussed above, the Eureka Parties did not deliver any tax credit for 2016 to the PNC Parties, much less the Forecasted Tax Credit for 2016. Dkt. 242-3 at 288, 314 (JX 13); Tr. 89:24-90:7; 108:20-23.
41. The Eureka Parties do not dispute the fact that they have made no indemnity payment to the PNC Parties under Section 11 of the Settlement Agreement; instead, they argue that Section 11 only applies to damages from claims made against the PNC Parties by third parties. Dkt. 224 at 15-16. However, this position is belied by the text of Section 11, which expressly says it applies to “any damages a PNC Party may incur as a result of a failure to deliver any part of the anticipated Tax Credit, . . . as well as any claims, lawsuits or proceedings of any nature brought by any third-party ....” Dkt. 242-3 at 166 (emphasis added).
42. The Partnership, General Partner, Campos, Developer, and Chula breached Section 11 of the Settlement Agreement by failing to indemnify the PNC Parties for their failure to deliver the 2016 Forecasted Tax Credit to the PNC Parties.
43. As a result of the Partnership, General Partner, Campos, Developer, and Chula breaching Section 11 of the Settlement Agreement, PNC Bank has suffered damages in the amount of $1,999,800 with respect to the 2016 tax credit. See Dkt. 242-3 at 82 (JX 1) (defining Forecasted Tax Credit for 2016 as $1,999,800); Tr. 67:16-68:1.
3. Tax Credit Guaranty
44. The Tax Credit Guaranty, executed in connection with the closing of the transaction set forth in the Settlement Agreement, is also a valid and binding contract. Dkt. 242-3 at 212 (JX 5). The signatories to the Tax Credit Guaranty include PNC Bank and Columbia (as Idemnitees) and the Partnership, General Partner, Campos, Developer, and Chula (as Indemnitors). Id. at 22325.
45. The PNC Parties have performed their obligations under the Tax Credit Guaranty by entering into the Settlement Agreement and performing under its terms, including by assigning their rights in the Partnership to the Eureka Parties' control, executing the Full and Final Mutual Release and Discharge, and filing a joint stipulation of dismissal of all claims and counterclaims. See id. at 212 (JX 6) (“The Withdrawing Partners were unwilling to enter into the Settlement Agreement and assign their respective partnership interests unless the Indemnitors . . . furnish to the Indemnitees the guaranties, indemnities and agreements set forth herein.”); see also Dkts. 199, 202, 242-3 at 226 (JX 6); Tr. 47:21-25.
46. Under the Tax Credit Guaranty, the Eureka Parties guaranteed that the PNC Parties would receive the Forecasted Tax Credits for 2016:
2.2 Guaranty of Indemnity Amounts. The Indemnitors hereby agree to guaranty payment of an amount equal to the Indemnity Amount (the “Indemnity Payment”) to the Indemnitees in full no later than thirty (30) days of receipt of the final calculation of the Indemnity Amount from the Accountant.....Dkt. 242-3 at 214 (JX 5). The Tax Credit Guaranty defines the “Indemnity Amount” to include “the amount of the Tax Credit Shortfall.” Dkt. 242-3 at 213. In turn, the Tax Credit Guaranty defines “Tax Credit Shortfall” to mean “any non-delivery or shortfall with respect to any Forecasted Tax Credits associated with all tax years through the end of 2019 or the disallowance or recapture of any Allocated Tax Credit at any time.” Dkt. 242-3 at 214.
47. The PNC Parties argue that under the definition of Tax Credit Shortfall, there was a “non-delivery or shortfall” with respect to the 2016 Forecasted Tax Credits. Specifically, they argue that the Partnership did not claim any low income housing tax credits on the Partnership's 2016 federal tax return and that the Partnership never issued a form K-1 to PNC Bank allocating such tax credits for the year 2016. Dkt. 242-3 at 314 (JX 13); Tr. 89:24-90:7; 108:20-23.
48. As noted above, the Eureka Parties did not obtain issuance of the tax credits from TDHCA to the Partnership until March 29, 2021. Dkt. 242-3 at 641 (JX 21). By that time, the three-year deadline to amend the Partnership's 2016 tax return (to claim the credits for 2016 and allocate them to PNC Bank via form K-1) had passed on September 15, 2020. Tr. 97:21-25; Dkt. 242-3 at 285.
49. The Eureka Parties also agreed to a process for calculating the Indemnity Amount. The process begins upon the occurrence of a “Shortfall Determination,” defined as “a written determination, audit or other report of the accountants for the Project which evidences that a Tax Credit Shortfall has occurred.” Dkt. 242-3 at 214.
50. It is undisputed that CohnReznick, LLP is the “accountants for the Project,” the Partnership's tax preparer, and the Partnership's agent. Tr. 29:11-14; 73:3-17; 87:24-88:5; 139:414.
51. On January 4, 2022, the PNC Parties emailed CohnReznick, seeking CohnReznick to confirm that the PNC Parties did not receive the Forecasted Tax Credits for 2015 and 2016. Dkt. 242-1 at 1-2 (PX 7). On January 5, 2022, CohnReznick confirmed that fact by email. Id.
52. The PNC Parties argue this email from CohnReznick-evidencing that the PNC Parties did not receive the Forecasted Tax Credits for 2015 or 2016-constituted a Shortfall Determination under the Tax Credit Guaranty.
53. The the parties agreed that, once a Shortfall Determination occurred, the Indemnity Amount would be calculated as follows:
2.1 Calculation of Indemnity Amount. In the event of a Shortfall Determination, the Indemnitees shall cause the Accountant to prepare a calculation of the Indemnity Amount. The Indemnitees and Indemnitors shall provide the Accountant with all of the information necessary to calculate the Indemnity Amount. The Accountant shall make an initial non-binding calculation of the Indemnity Amount and shall deliver copies thereof to the Indemnitors and Indemnitees pursuant to the notice provisions of Section 6.2 of this Agreement. The Indemnitors and Indemnitees shall have thirty (30) days from receipt of the initial calculation to provide additional information and written argument to the Accountant. The Accountant shall consider such additional information (if it is timely submitted during such thirty (30)-day period) and shall thereafter make a final calculation of the Indemnity Amount and deliver the same to the Indemnitors and Indemnitees. Such final calculation shall be final, binding and non-appealable with respect to the Indemnitors, the Indemnitees and all other parties, absent manifest error.Dkt. 242-3 at 214 (JX 5).
54. On February 9, 2022, the PNC Parties sent a letter to CohnReznick to cause the accountant to prepare a calculation of the Indemnity Amount under the Tax Credit Guaranty. Dkt. 242-1 at 3 (PX 8). A copy of the letter and enclosures was also sent to the Eureka Parties and their counsel. Id.
55. On May 3, 2022, CohnReznick sent the PNC Parties and the Eureka Parties its calculation of the Indemnity Amount, stating that the “Indemnity Amount is equal to: $2,596,079.00,” comprised of $596,279 for 2015 and $1,999,800 for 2016. Dkt. 242-1 at 21 (PX 9).
56. The Eureka Parties provided no additional information or argument to CohnReznick within 30 days of receipt of the indemnity calculation. Instead on July 1, 2022, the General Partner sent an email to CohnReznick instructing CohnReznick that: “It is our position as GP to NOT finalize or transmit any of the requested indemnity work for 2013 Travis Oak Creek, LP. The requestors are not legal parties of the LP. Our position is not to send or finalize the requested information at this time.” Dkt. 242-1 at 39-40 (JX 10). CohnReznick complied with this instruction and took no further action regarding the Indemnity Amount. Tr. 123:22-124:3.
57. The Indemnity Amount for the 2016 tax credits is equal to the 2016 Forecasted Tax Credits, $1,999,800.
58. The Eureka Parties have argued that CohnReznick's January 5, 2022 email (PX 7) did not constitute a Shortfall Determination.
59. The PNC Parties have argued that even if the January 5, 2022 email did not constitute a Shortfall Determination, then at the very least CohnReznick's May 3, 2022 calculation of the Indemnity Amount (PX 9) constituted a Shortfall Determination. The PNC Parties further argue that the Eureka Parties breached the Tax Credit Guaranty by preventing the Partnership's agent CohnReznick from proceeding further with the indemnity calculation (JX 10) and that as a result of this breach, PNC Bank suffered damages in the amount of $1,999,800.
60. At the August 8, 2023 hearing, the court indicated that based on the briefing, record, and evidence presented at the hearing, it had enough information to conclude whether a Shortfall Determination occurred. Counsel for the Eureka Parties argued that the question of whether a Shortfall Determination occurred was not properly before the court. The court disagreed.
61. Nevertheless, the court declines to reach the question of whether a Shortfall Determination occurred because the undersigned has concluded that the Eureka Parties breached Sections 2 and 11 of the Settlement Agreement and thus that the PNC Parties suffered $1,999,800 in damages. Because the PNC Parties are entitled to recover the $1,999,800 only once, the undersigned concludes the issues of whether a Shortfall Determination occurred and whether the PNC Parties are entitled to recover under the Tax Guaranty Agreement are moot.
C. PNC Parties' Claim Regarding the 2015 Tax Credits
62. The PNC Parties claim that the Eureka Parties have also breached the same provisions of the Settlement Agreement and the Tax Credit Guaranty regarding the 2015 Forecasted Tax Credit, in the amount of $596,279.
63. The Partnership Agreement states that the Forecasted Tax Credit for 2015 is $596,279. Dkt. 242-3 at 82 (JX 1).
64. Like the year 2016 discussed above, the Partnership did not claim any low-income housing tax credits on the Partnership's 2015 federal tax return. Id. at 241 (JX 12); Tr. 89:5-9. Nor did the Partnership issue a form K-1 to PNC Bank allocating such tax credits for the year 2015. Dkt. 242-3 at 269 (JX 12); Tr. 89:10-15.
65. PNC Bank filed its tax return for the year 2015 in May of 2016. Tr. 109:23-110:9. In anticipation of later receiving a K-1 from the Partnership allocating a low income housing tax credit PNC Bank for the year 2015, PNC Bank initially claimed such credit on its originally filed 2015 return in the amount of approximately $479,000. Tr. 105:18-106:3.
66. But because PNC Bank never received a K-1 from the Partnership allocating the 2015 credits, PNC Bank later removed the claim for such credit from its 2015 tax return during the IRS audit process. Tr. 106:4-16; see Dkt. 242-1 at 43-47 (PX 24).
67. By the time the Eureka Parties obtained issuance of the tax credits on March 29, 2021, the three-year deadline to amend the Partnership's 2015 tax return (to claim the credits for 2015 and allocate them to PNC Bank via form K-1) had passed on September 15, 2019. Tr. 97:2198:9. And the three-year deadline for PNC Bank to amend its 2015 tax return to attempt to claim any such credits had passed in May 2019. Tr. 110:6-19.
68. The Settlement Agreement transaction did not close until September 27, 2019 after the May 2019 deadline to amend the Partnership's and PNC Bank's 2015 tax returns had passed. As part of the Settlement Agreement, the parties executed the Final and Mutual Release and Discharge on the same date, September 27, 2019. Because the Settlement Agreement transaction closed and the Final and Mutual Release and Discharge was signed after the deadline to amend tax returns passed, the ability to obtain the benefit of the 2015 tax credits had expired before the Settlement Agreement Transaction closed and before the Final and Mutual Release and Discharge was signed. Thus, the PNC Parties had released their claim to the 2015 tax credits, and accordingly, the PNC Parties are not entitled to the value of the 2015 tax credits.
D. The Partnership, General Partner, and Campos' Claim Regarding the 2019 Tax Credits
69. The Partnership, General Partner, and Campos claim that the PNC Parties breached the First Amendment to the Settlement Agreement by failing to “to pay to the Partnership for any 2019 Tax Credits that the designated Partnership accountants allocate to the PNC Parties.” Dkt. 242-3 at 200 (JX 3).
70. Once the tax credits were issued by TDHCA to the Partnership on March 29 2021, the Partnership amended its 2019 tax return to claim the low income housing tax credits for the year 2019. Id. at 617 (JX 19).
71. Additionally, the Partnership issued a form allocating $1,499,850 of those 2019 tax credits to PNC Bank. Id. at 628-29 (JX 19).
72. The First Amendment to the Settlement Agreement states that the PNC Parties will pay the Partnership $0.935 per $1.00 credit, due within “thirty (30) days after the 2019 Partnership tax return is filed and the 2019 Tax Credits have been fully and finally allocated to the Partnership.” Dkt. 242-3 at 200 (JX 3). The Partnership's amended 2019 return claiming the credits and allocating $1,499,850 of those credits to PNC Bank was received by the IRS on June 28, 2021. Dkt. 242-3 at 648 (JX 22).
73. Accordingly, the PNC Parties owe $1,402,359.75 to the Partnership for the 2019 tax credits ($1,499,850 x 0.935 = $1,402,359.75), which became due on July 28, 2021.
E. Offset
74. Given the breaches by the Eureka Parties and the corresponding damages owed from the Eureka Parties to the PNC Parties discussed above, the PNC Parties have presented sufficient evidence to establish the affirmative defense of offset (or setoff). The same facts establishing the PNC Parties' claim against the Partnership (and others) with respect to the 2016 tax credits also establish their right to offset, and the amounts.
75. The Partnership, General Partner, Campos, Developer, and Chula owe $1,999,800 to the PNC Parties for the 2016 tax credits.
76. The PNC Parties owe $1,402,359.75 to the Partnership for the 2019 tax credits.
77. The $1,402,359.75 amount owed by the PNC Parties to the Partnership for the 2019
tax credits is fully extinguished the by the $1,999,800 amount owed by the Partnership (as well as General Partner, Campos, Developer, and Chula) to the PNC Parties regarding the 2016 tax credits.
78. As a result of the offset, the Partnership, General Partner, Campos, Developer, and Chula owe the PNC Parties the remaining $597,440.25 (the difference of $1,999,800 minus $1,402,359.75).
IV. CONCLUSIONS OF LAW
A. Eureka Parties' Affirmative Defense of Prior Material Breach
79. The Eureka Parties argue that their breach of the Settlement Agreement regarding the 2016 tax credits is excused under the affirmative defense of prior material breach. The Eureka Parties contend that Columbia breached the Settlement Agreement during the litigation-before the parties effectuated the settlement transaction on September 27, 2019-by “not engaging in commercially reasonable efforts to obtain the required 8609's when they were required to ....” Dkt. 209 at 10. The Eureka Parties' affirmative defense of prior material breach fails for three independent reasons.
80. First, the affirmative defense of prior material breach does not apply here. Even assuming it was possible for Columbia to breach the Settlement Agreement prior to the closing on September 27, 2019 as discussed above the Eureka Parties have at all times since treated the Settlement Agreement as a continuing contract and have insisted on performance from the PNC Parties, including by closing the settlement transaction on September 27, 2019 and filing their motion to enforce the Settlement Agreement for payment regarding the 2019 tax credits. “If the non-breaching party elects to treat the contract as continuing and insists the party in default continue performance, the previous breach constitutes no excuse for nonperformance on the part of the party not in default and the contract continues in force for the benefit of both parties.” T&T Sports Mktg., Ltd. v. Dream Sports Intern., L.L.C., 129 Fed.Appx. 80, 81 (5th Cir. 2005) (quoting Gutpa v. E. Idaho Tumor Inst., 140 S.W.3d 747, 756 (Tex. App.-Houston[14th Dist.] 2004, pet. denied)); see Sw. Elec. Contracting Services, Ltd. v. Indus. Accessories Co., No. MO:18-CV-00123-DC, 2022 WL 1468384, at *45 (W.D. Tex. May 10, 2022) (“A party who elects to treat a contract as continuing, however, deprives itself of any excuse for ceasing performance on its own part.”). Because the Eureka Parties have treated the Settlement Agreement as continuing and insisted on performance from the PNC Parties, the affirmative defense of prior material breach does not apply.
81. Second, as found above, the Final and Mutual Release and Discharge, executed September 27, 2019 is a valid and binding contract. Dkt. 242-3 at 226 (JX 6). Even assuming it was possible for Columbia to breach the Settlement Agreement prior to the closing on September 27, 2019 the Final and Mutual Release and Discharge executed on that date released all such claims, including “whether under contract, common law, statutory right or otherwise, known or unknown, arising, directly or indirectly, proximately or remotely, at any time prior to the Closing Date, including any such claims arising out of or related to the Partnership.” Dkt. 242-3 at 22728. Accordingly, the Final and Mutual Release and Discharge releases the alleged breach on which the Eureka Parties attempt to rely.
82. Third, the Settlement Agreement and Tax Credit Guaranty contain new obligations upon the parties, effective upon the closing of the settlement transaction on September 27, 2019. The Eureka Parties assumed obligations regarding delivery of the tax credits under the Settlement Agreement and the Tax Credit Guaranty. Those documents control the obligations, and the Eureka Parties' arguments about pre-September 27, 2019 actions are irrelevant.
B. PNC Parties' Affirmative Defense of Offset
83. Offset (or setoff) “is the doctrine of bringing into the presence of each other the obligation of A to B and B to A and by the judicial action of the court making each obligation extinguish the other.” LAKXN Income, Inc. v. TLC Hosp., LLC, No. 02-20-00415-CV, 2021 WL 3085755, at *2 (Tex. App.-Fort Worth July 22, 2021, no pet.); see Bandy v. First State Bank, Overton, Tex., 835 S.W.2d 609, 618 (Tex. 1992) (“If the setoff is allowed, the amount that the plaintiff would recover from the defendant is reduced by the amount that the plaintiff owes the defendant.”).
84. Here, the court has found that (i) the Partnership, General Partner, Campos, Developer, and Chula owe $1,999,800 to the PNC Parties regarding the 2016 tax credits; and (ii) the PNC Parties owe $1,402,359.75 to the Partnership regarding the 2019 tax credits.
85. In this circumstance, the application of the doctrine of offset is appropriate.
C. Entitlement to Recovery
86. Based on the foregoing, PNC Bank and Columbia have established their claims for breach of the Settlement Agreement and breach of the Tax Credit Guaranty against the Partnership, General Partner, Campos, Developer, and Chula with respect to the 2016 tax credits in the amount of $1,999,800. PNC Bank and Columbia have established: (i) the existence of the Settlement Agreement, and that it is a valid contract; (ii) that PNC Bank and Columbia performed under the terms of the Settlement Agreement; (iii) that the Partnership, General Partner, Campos, Developer, and Chula breached the Settlement Agreement with respect to the 2016 tax credits; and (iv) that PNC and Columbia suffered damages in the amount of $1,999,800 as a result of the breach of the Settlement Agreement. PNC Bank and Columbia have also established: (i) the existence of the Tax Credit Guaranty, and that it is a valid contract; (ii) that PNC Bank and Columbia performed under the terms of the Tax Credit Guaranty. Because the PNC Parties' recovery under the Settlement Agreement ($1,999,800) is the same as the recovery under the Tax Credit Guaranty ($1,999,800), the undersigned declined to reach the question of whether the PNC Parties are entitled to recover under the Tax Guaranty.
87. Based on the foregoing, PNC Bank and Columbia have not established their claims for breach of the Settlement Agreement or breach of the Tax Credit Guaranty against the Partnership, General Partner, Campos, Developer, and Chula with respect to the 2015 tax credits.
88. Based on the foregoing, the Partnership, General Partner, and Campos have established their claim for breach of the Settlement Agreement against PNC Bank and Columbia with respect to the 2019 tax credits in the amount of $1,402,359.75.
89. After the application of offset, PNC Bank and Columbia are entitled to recover $597,440.25 from the Partnership, General Partner, Campos, Developer, and Chula; and the Partnership, General Partner, and Campos are not entitled to any recovery from PNC Bank or Columbia.
D. Post-Judgment Interest
90. Regarding post-judgment interest, federal law applies on “any judgment in a civil case recovered in a district court . . . including actions based on diversity of citizenship.” Travelers Ins. Co. v. Liljeberg Enters., Inc., 7 F.3d 1203, 1209 (5th Cir.1993) (citation omitted). A court awards post-judgment interest pursuant to 28 U.S.C. § 1961. The current appliable rate of postjudgment interest is 5.39% per anum.
E. Severance of motions to enforce settlement agreement
91. Federal Rule of Civil Procedure 21 permits a court to sever “any claim against a party.” FED. R. CIV. P. 21.
92. “A trial court has broad discretion to sever.” Ledford v. Aubihl, No. 6:18-CV-00371, 2020 WL 4590066, at *1 (W.D. Tex. July 8, 2020) (quoting Anderson v. Red River Waterway Comm'n, 231 F.3d 211, 214 (5th Cir. 2000)). “Severance under Rule 21 creates two separate actions or suits where previously there was but one,” and “a court may render a final, appealable judgment in either one of the resulting two actions ....” Allied Elevator, Inc. v. E. Tex. State Bank of Buna, 965 F.2d 34, 36 (5th Cir. 1992).
93. “Severance is appropriate where it will ‘serve the ends of justice and further the prompt and efficient disposition of the litigation.'” Robinson v. RWLS, LLC, No. 5-16-CV-0201-OLG-RBF, 2018 WL 7198157, at *1 (W.D. Tex. May 23, 2018) (quoting Hines v. Castillo, No. 2:13-CV-120, 2013 WL 2297178, at *1 (S.D. Tex. May 23, 2013)). Severance is appropriate when issues requiring resolution arise after a final judgment is entered. See, e.g., Campbell Harrison & Dagley, L.L.P. v. PBL Multi-Strategy Fund, L.P., 744 Fed.Appx. 192, 194 (5th Cir. 2018) (“Defendant-Appellant Albert Hill III has been involved in lengthy litigation concerning the management of two family trusts. After a final judgment in that underlying case (the ‘2020 case'), the court severed a fee dispute between Hill and his attorneys to create this separate case (the ‘2269 case'). The 2269 case now involves several of Hill's creditors quarreling over the 2020 settlement proceeds.”).
94. Here, the Final Judgment in this case (Dkt. 203) was entered on October 7, 2019. The Final Judgment stated that “all claims and counterclaims brought by all parties to this action are DISMISSED WITH PREJUDICE.” Dkt. 203. No party appealed that judgment, and it remains final.
95. Severance of the post-judgment motions to enforce the Settlement Agreement and all related briefing into a new cause number will serve the ends of justice and further the prompt and efficient disposition of the litigation by allowing the entrance of a final judgment adjudicating the post-judgment motions to enforce and awarding $597,440.25 to the PNC Parties.
V. RECOMMENDATIONS
For the reasons given above, the undersigned RECOMMENDS that the District Court SEVER the motions to enforce settlement agreement (Dkts. 209, 212) and all related briefing and docket entries under Rule 21 into new cause number 1:17-cv-584B involving the same parties. And that all docket entries in this case from Dkt. 209 to present be deemed filed in the newly severed case, No. 1:17-cv-584B.
The undersigned FURTHER RECOMMENDS that the District Court enter an order in the newly severed case:
GRANTING IN PART PNC Bank and Columbia's Motion Enforce Settlement Agreement (Dkt. 212) against the Partnership, General Partner, Campos, Developer, and Chula with respect to the 2016 tax credits in the amount of $1,999,800;
GRANTING IN PART the Partnership, General Partner, and Campos' Motion Enforce Settlement Agreement (Dkt. 209) against PNC Bank and Columbia with respect to the 2019 tax credits in the amount of $1,402,359.75;
ORDERING that as a result of offset: (i) PNC Bank and Columbia shall recover $597,440.25 from the Partnership, General Partner, Campos, Developer, and Chula, and (ii) the Partnership, General Partner, and Campos shall recover $0 from PNC Bank and Columbia;
ORDERING that PNC Bank and Columbia's recovery of $597,440.25 against the Partnership, General Partner, Campos, Developer, and Chula shall bear post-judgment interest at the statutory rate of 5.39% per anum;
DENYING each party's request for attorney's fees; and
DENYING all other relief not expressly set forth herein.
VI. OBJECTIONS
The parties may file objections to this Report and Recommendation. A party filing objections must specifically identify those findings or recommendations to which objections are being made. The District Court need not consider frivolous, conclusive, or general objections. See Battles v. United States Parole Comm'n, 834 F.2d 419, 421 (5th Cir. 1987).
A party's failure to file written objections to the proposed findings and recommendations contained in this Report within fourteen (14) days after the party is served with a copy of the Report shall bar that party from de novo review by the District Court of the proposed findings and recommendations in the Report and, except upon grounds of plain error, shall bar the party from appellate review of unobjected-to proposed factual findings and legal conclusions accepted by the District Court. See 28 U.S.C. § 636(b)(1)(C); Thomas v. Arn, 474 U.S. 140, 150-53 (1985); Douglass v. United Services Automobile Ass'n, 79 F.3d 1415 (5th Cir. 1996) (en banc).