Opinion
Docket No. CL17-1096
02-16-2018
RE: Williamson Equity Partners, LLC v. Richard Jackson, Jr., et al.
Shawn A. Voyles, Esquire
McKenry Dancigers Dawson, P.C.
192 Ballard Court, Suite 400
Virginia Beach, Virginia 23462 John C. Lynch, Esquire
Megan E. Burns, Esquire
Troutman Sanders LLP
222 Central Park Avenue, Suite 2000
Virginia Beach, Virginia 23462 Dear Counsel:
This case was last before the Court on January 22, 2018, for a hearing (the "Hearing") on (1) Plaintiff's motion for partial summary judgment on its causes of action for breach of contract, breach of fiduciary duties, conversion, and unjust enrichment as they relate to the $1,849,590 distribution that Defendants paid to themselves, and (2) Defendants' motion for partial summary judgment on the causes of action for breach of fiduciary duties, conversion, unjust enrichment, Virginia statutory civil conspiracy, negligence, fraud, and punitive damages. After the Hearing, the Court took the motions under advisement.
BACKGROUND
Plaintiff Williamson Equity Partners, LLC ("WEP") brings this suit derivatively on behalf of Meritage Fund I, LLC (the "Fund"), and individually as a member thereof, against Defendants Richard H. Jackson, Jr., Harrison J. Perrine, JP Fund Management LLC ("JP Fund"), Perrine Investments, LLC ("Perrine Investments"), and Jackson Property Company, LLC ("Jackson Property") (collectively "Defendants") alleging that they misappropriated funds and assets and paid themselves unlawful fees and distributions as Manager of the Fund.
Although many facts are still in dispute in this case, it is undisputed that in December 2007, the Fund issued a Confidential Private Placement Memorandum (the "PPM") offering limited liability company membership interests to potential investors. (Pl.'s Mot. Partial Summ. J. and Mem. Supp. ("Pl.'s Mot.") 3; Defs.' Mot. and Mem. Supp. Mot. Partial Summ. J. ("Defs.' Mot.") 3.) An operating agreement (the "Operating Agreement") was then later executed between the member investors and Defendants, with JP Fund being the Manager of the LLC. (Pl.'s Mot. 4; Defs.' Mot. 4.) Among other provisions, the Operating Agreement contains a specific provision for winding up, which includes the following language:
The LLC shall be dissolved and wound up upon the first occurrence of any one of the following events: (i) upon liquidation of all of the LLC's investments as determined by the Manager in its sole discretion; or (ii) the occurrence of any event causing dissolution under the Act. If, in connection with, as part of or immediately preceding any dissolution or windup up of the LLC, the LLC receives Net Cash from a Sale or Refinancing, then such Net Cash from a Sale or Refinancing shall be distributed and allocated among the Members in accordance with Articles 8 and 9 of this Agreement.(Operating Agreement 17-18.)
The Fund went on to invest in five or six real estate properties. (Pl.'s Mot. 5; Defs.' Mot. 6.) However, after losing money and obtaining loans, the Fund began winding up in 2015. (Pl.'s Mot. 5-7; Defs.' Mot. 7.) As part of the windup process, the Manager facilitated final distributions from the Fund to the member investors and the Manager, including a $1,849,590 distribution to Defendants. (Pl.'s Mot. 9; Defs.' Mot. 8.)
On December 15, 2017, Defendants filed a motion for partial summary judgment arguing that (1) the economic loss doctrine bars WEP's tort claims, (2) the conspiracy claims do not allege a primary purpose of injury, (3) the tort claims related to fees paid before February 3, 2015 are barred by statute of limitations, and (4) the unjust enrichment claim is barred because the relationship between the parties is governed by a written contract. On that same day, WEP filed its own motion for partial summary judgment alleging that the facts relating to the $1,849,590 distribution paid to Defendants during the windup are undisputed, and according to the Operating Agreement, the distribution was unlawful. In addition to the motions being fully briefed, the Court heard argument on these motions on January 22, 2018, after which the Court took the matters under advisement.
POSITION OF THE PARTIES
I. WEP's Position
WEP moves the Court for partial summary judgment on its causes of action for breach of contract, breach of fiduciary duties, conversion, and unjust enrichment pertaining to Defendants' alleged unlawful payment of $1,849,590 to themselves. (Pl.'s Mot. 1.) In support of their motion, WEP argues that according to the Operating Agreement, these distributions would have only been proper had the Fund made money, and then only after the members were provided an 8% cumulative return on the members' Net Capital. (Id. at 12.) As such, it asserts that the distributions to Defendants were improper because the Fund lost money and the investors had not received their 8% cumulative return on their Net Capital. (Id. at 13.) An additional basis on which WEP bases its motion is the fact that the Operating Agreement prohibits the distribution taken by Defendants because it caused Defendants to have an increased modified negative capital account. (Id. at 14- 16.) On these two arguments, WEP's claim that Defendants breached the Operating Agreement as a contract and should be liable for the distribution. (Id. at 16.)
WEP also argues that the same distributions constitute a breach of the fiduciary duties of care, loyalty, candor, and good faith and fair dealing. (Id. at 16-17.) It bases this on the fact that they were not entitled to the money under the Operating Agreement and should have paid it to the investors. (Id.)
Furthermore, WEP alleges that the distributions also constitute conversion because Defendants exercised dominion and control over the money that belonged to the investors. (Id. at 17.) It asserts that this control was at least inconsistent with, if not a denial of, the investors' rights, and the investors suffered damages as a result. (Id.)
Lastly, WEP asserts that the distributions meet the elements of unjust enrichment. (Id.) Importantly, WEP acknowledged at the Hearing that if the Court were to grant summary judgment on the breach of contract claim, it would become proper for the Court to dismiss the unjust enrichment claim. (Hearing Transcript ("Tr.") 18.)
In opposition to Defendants' motion, WEP first argues that the Court should only hear WEP's motion because that was the issue that the parties agreed to submit to summary judgment. (Pl.'s Mem. Opp'n Defs.' Mot. Partial Summ. J. ("Pl.s' Mem.") 1-2.) It also argues that the Court should not allow Defendants to attempt to substitute summary judgment for a demurrer. (Id. at 2-4.) Furthermore, WEP contends that each tort claim has its own source of duty outside of the Operating Agreement. (Id. at 7-10, 12-13.) On the conspiracy claim, WEP argue that Defendants misconstrue the malice required for a valid conspiracy claim. (Id. at 10-11.) Lastly, WEP argues that material facts are in dispute, and thus Defendants statute of limitations argument fails. (Id. at 14-15.)
II. Defendant's Position
Defendants first argue that the economic loss doctrine bars the causes of action for fraud, conversion, negligence, and breach of fiduciary duty, and thus they are entitled to summary judgment on those counts. (Defs.' Mot. 10-12.) On that point, Defendants argue that WEP's claims arise out of the contractual relationship created by the Operating Agreement, and there is no claim independent of that agreement. (Id. at 11.) Defendants further allege that they are entitled to summary judgment on the breach of fiduciary duty claim in which WEP brings in its individual capacity, arguing that "the General Assembly intended that LLC members owe no fiduciary duty to other LLC members." (Id. at 13 (citing Waka, LLC v. Humphrey, 73 Va. Cir. 310, 314 (Fairfax 2007)).)
Next, Defendants assert that, in addition to being barred by the economic loss doctrine, the statutory conspiracy claim is improper because it fails to allege that the primary purpose of the conspiracy was to injure the investors in their trade or business (Id. at 13-16.) Additionally, Defendants claim that tort claims related to fees paid prior to February 3, 2015, are barred by the two-year statute of limitations. (Id. at 16-17.) Lastly, Defendants argue that the unjust enrichment claim is improper because the parties' relationship is governed by the Operating Agreement. (Id. at 17-18.)
In opposition to WEP's motion, Defendants make three main arguments. First, they allege that the distributions complied with the terms of the Operating Agreement based on Article 8 of the Operating Agreement (Defs.' Mem. Opp'n Pl.'s Mot. Partial Summ. J. ("Defs.' Opp'n") 2, 10-14.) They contend that Article 8 applies because the money from the sale constituted a Net Cash Flow from a Sale, and they argue that they consequently followed Article 8 by providing the member investor with "8% of the "member's capital contributions, less prior distributions." (Id. at 10-12.) Additionally, they allege that although there was a negative capital account, there was not a modified capital account under the Operating Agreement. (Id. at 13-14.) Second, Defendants argue that the Operating Agreement is at least ambiguous and thus requires presentation of extrinsic evidence to demonstrate the parties' intent. (Id. at 2, 14-16.)
Lastly, Defendants assert that, even if the distribution was not authorized, the Court must permit extrinsic evidence on the issue of gross negligence and misconduct, which they argue would show that Defendants "are entitled to the benefit of the limitation of liability set forth in [Article 18 of] the Operating Agreement," which states the following:
To the fullest extent permitted by law, no . . . Manager . . . and no member [or] manager . . . or Affiliate of the Manager (collectively, the Covered Persons) shall be liable to the LLC or any other person or entity that is a party to or is otherwise bound by this Agreement for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Covered Person in good faith on behalf of the LLC and in a manner reasonably believed to be within the scope of the authority conferred on such Covered Person by this Agreement except that a Covered Person shall be liable for any such loss, damage or claim incurred by reason of such Covered Person's gross negligence or willful misconduct.(Id. at 2, 16-19.) Relatedly, Defendants also contend that they are protected from liability because the distributions were based on a good-faith reliance on information and opinions presented to them from professionals that they hired to determine the distributions. (Id. at 17-19.) On this point, they quote the Operating Agreement as stating,
[u]pon such information, opinions, reports or statements presented to the LLC by any person or entity as to matters the Covered Person reasonably believes are within such other person's or entity's professional or expert competence and who has been selected with reasonable care by or on behalf of the LLC, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, or any other facts pertinent to the existence and amount of assets from which distributions to the Members might properly be paid.(Id. at 17-18.) They further reference Virginia Code Section 13.1-1024.1(A)(2) (2016 Repl. Vol.) which states:
Unless a manager has knowledge or information concerning the matter in question that makes reliance unwarranted, a manager is entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, if prepared and presented by: . . . 2. Legal counsel, public accountants, or other persons as to matters the manager believes, in good faith, are within the person's professional or expert competence.Based on this provision and law, Defendants assert that they relied on professionals in order to determine the appropriate amount of distributions, and as such, should not be liable for the distributions. (Id.)
ANALYSIS
I. Legal Standard
Virginia Supreme Court Rule 3:20 states that "[i]f it appears . . . that the moving party is entitled to judgment, the court shall enter judgment in that party's favor." In contrast, "[s]ummary judgment shall not be entered if any material fact is genuinely in dispute." Va. Sup. Ct. R. 3:20. "Summary judgment is not appropriate if reasonable persons may draw different conclusions from the evidence." Condo. Servs. v. First Owners' Ass'n of Forty Six Hundred Condo. Inc., 281 Va. 561, 575, 709 S.E.2d 163, 171 (2011).
When there is a summary judgment motion, the trial court is tasked with reviewing the record, "accepting as true those inferences from the facts that are most favorable to the nonmoving party, unless the inferences are forced, strained, or contrary to reason." Fultz v. Delhaize Am., Inc., 278 Va. 84, 88, 677 S.E.2d 272, 274 (2009). The Virginia Supreme Court has "repeatedly held that summary judgment is a drastic remedy, available only when there are no material facts genuinely in dispute." Id. In sum, "if the evidence is conflicting on a material point or if reasonable person may draw different conclusions from the evidence, summary judgment is not appropriate." Id.
In contrast to a demurrer, a motion for summary judgment allows "the court to evaluate and decide the merits of a claim." Fun v. Va. Military Inst., 245 Va. 249, 252, 427 S.E.2d 181, 183 (1993). As such, "[t]he motion for summary judgment is appropriate 'after the parties are at issue' and is not intended to substitute for a demurrer to the evidence or a motion to strike." Goode v. Courtney, 200 Va. 804, 807-08, 108 S.E.2d 396, 399 (1959) (quoting Carwile v. Richmond Newspapers, Inc., 196 Va. 1, 5-6, 82 S.E.2d 588, 591 (1954) ("It will be observed that the motion for summary judgment in the instant case is in many respects similar to a demurrer; however, when a demurrer is sustained there is not necessarily finality to the case since the pleading may be amended, while sustaining a motion for summary judgment is a final disposition in the case. When the defendant filed its grounds of defense the parties were 'at issue,' and then when it filed its motion for summary judgment the defendant in effect said there was no fact genuinely in dispute because the plaintiff's motion for judgment, when admitted to be true, does not state a cause of action.")).
II. Breach of Contract
In general, "[t]he elements of a breach of contract action are (1) a legally enforceable obligation of a defendant to a plaintiff; (2) the defendant's violation or breach of that obligation; and (3) injury or damage to the plaintiff caused by the breach of obligation." Filak v. George, 267 Va. 612, 619 (2004). Sections 13.1-1048 and 13.1-1049 ofthe Code of Virginia provide instruction for the dissolution of a limited liability company. Va. Code §§ 13.1-1048-13.1-1049 (2016 Repl. Vol.). Both statutes clearly assert that once debts, liabilities, obligations, and creditors have been paid, the windup should conclude in accordance with the operating agreement. Id.
Article 14 of the Operating Agreement in this case deals directly with withdrawal, dissolution, and winding up of the company at issue. (Operating Agreement 17.) This provision states that "[t]he LLC shall be dissolved and wound up upon the first occurrence of any one of the following events: (i) upon liquidation of all of the LLC's investments as determined by the Manager in its sole discretion; or (ii) the occurrence of any event causing dissolution under the Act." (Id.) The same paragraph goes on to state:
If, in connection with, as part of or immediately preceding any dissolution or winding up of the LLC, the LLC receives Net Cash from a Sale or Refinancing, then such Net Cash from a Sale or Refinancing shall be distributed and allocated among the Members in accordance with Articles 8 and 9 of this Agreement.Id. at 17-18 (emphasis added). The Operating Agreement defines "Net Cash from a Sale or Refinancing" as
the net proceeds from (i) any sale, exchange, condemnation or other disposition of any portion of the LLC's assets, (ii) any sale, exchange, condemnation or other disposition of any of the Properties or any part thereof, and (iii) any borrowing by the LLC or any Property Owner, in each case less all costs, fees (including Management Fees), expenses and obligations of the LLC and reserves determined by the Manager in its sole discretion.The plain language from these provisions demonstrates that when a sale or refinancing during a winding up nets a profit, then the Operating Agreement provides for distributions under Article 8 of the Agreement.
In this case, however, the record reflects that there were no net proceeds from any of the sales of the properties, including the final sale. (Pl.'s Mot. 8, 10; Defs.' Mot. 6-7.) With the loss, there were no "net proceeds" to distribute. As such, it was improper for Defendants to make distributions pursuant to Article 8. Given this conclusion, the Court finds that it would be superfluous to analyze what proper distributions would have been had the properties garnered net proceeds, and thus does not analyze appropriate distribution procedure under Articles 8 and 9 of the Operating Agreement.
Additionally, Defendants argue that even if the Court were to find that the distributions were improper, they are still not liable unless their conduct rose to the level of gross negligence or willful misconduct according to the indemnification provision of the Operating Agreement. Although the Operating Agreement does contain such a provision, it is importantly limited to "the fullest extent permitted by law."
The Code of Virginia states that "[i]f a member has received a distribution in violation of the articles of organization or an operating agreement . . . then the member is liable to the limited liability company for a period of two years thereafter for the amount of the distribution wrongfully made." Va. Code § 13.1-1036 (2016 Repl. Vol.). In this case, Defendants paid themselves a distribution that was unlawful under the agreed upon terms of the Operating Agreement. Thus, according to Virginia law, they must pay the money back. It would be unlawful and inequitable to permit Defendants to keep the unlawful distribution under the guise that they are indemnified from claims against them.
Defendants further argue that they should not be liable according to section 13.1-1024.1(A)(2) of the Code of Virginia and the Operating Agreement because they relied on professionals in order to determine the appropriate distributions. Va. Code § 13.1-1024.1 (2016 Repl. Vol.). However, this provision of the Operating Agreement provides that the decision must be made on behalf of the company. Furthermore, the Virginia Supreme Court has acknowledge that the protection provided under Section 13.1-1024.1 requires that "an act [be] taken with the intent of benefitting the company." Flippo v. CSC Assocs. III, LLC, 262 Va. 48, 57, 547 S.E.2d 216, 222 (2001). In Flippo, the court held that because the advice sought was not for the benefit of the limited liability company, but rather for the goals and benefit of the Defendants, the lower court was proper in deciding that the Defendants could not assert a defense under section 13.1-1024.1(B). Id. Similar to Flippo, the decision to pay themselves distributions was not for the benefit of the company, but rather for the benefit and goals of Defendants. As such, it would be inappropriate for this Court to limit Defendants liability on that basis.
Thus, based on the foregoing analysis, WEP's motion for partial summary judgment on the breach of contract claim regarding the $1,849,590 distribution made by Defendants to themselves is GRANTED.
Given that the Court grants summary judgment for WEP on the breach of contract claim for the $1,849,590 distribution, and given the disputed nature of tort claims asserted, the Court does not view it as necessary or appropriate to rule on WEP's claims for breach of fiduciary duty and conversion, and thus DENIES its partial summary judgment motion as it pertains to those tort claims.
III. Unjust Enrichment
A plaintiff may be successful on an unjust enrichment claim if it can show "(1) the plaintiff's conferring of a benefit on the defendant, (2) the defendant's knowledge of the conferring of the benefit, and (3) the defendant's acceptance or retention of the benefit under the circumstances that 'render it inequitable for the defendant to retain the benefit without paying for its value." Microstrategy, Inc. v. Netsolve, Inc., 368 F. Supp. 2d 533, 537 (2005) (quoting Nossen v. Hoy, 750 F. Supp. 740, 744-45 (2005)). Claims for unjust enrichment apply when one has been "allowed to enrich himself unjustly at the expense of another." Kern v. Freed Co., 224 Va. 678, 681, 299 S.E.2d 363, 365 (1983) (quoting Rinehart v. Pirkey, 126 Va. 346, 351, 101 S.E. 353, 354 (1919)). However, when there is "an express and enforceable contract in existence which govern[s] the rights of the parties, the law will not imply a contract in contravention thereof." Ellis & Myers Lumber Co. v. Hubbard, 123 Va. 481, 502, 96 S.E. 754, 760 (1918); see also R.M. Harrison Mech. Corp. v. Decker Indus., Inc., 75 Va. Cir. 404, 412 (Hopewell 2008) (holding that "[f]or a claim of unjust enrichment to stand, the plaintiff must have no adequate remedy at law").
In this case, an express contract governs the relationship between the parties. Although the Court acknowledges that WEP is entitled to bring an unjust enrichment claim as an alternative to a breach of contract claim, the Court finds the Operating Agreement as a contract both express and enforceable, and grants the breach of contract claim as it relates to the $1,850,000 distribution. Given the applicability of an express contract, the unjust enrichment claim is no longer viable.
Furthermore, although the Court acknowledges WEP's argument that Defendants should not be allowed to assert demurrer arguments on a summary judgment motion when the parties are at issue, this argument does not preclude the Court from making final judgments on the issues that warrant such a result. On the issue of unjust enrichment, the WEP no longer has a viable claim given the enforceability of the express contract, and admitted as much during the Hearing. As such, a final judgment dismissing the unjust enrichment claim is proper.
Thus, the Court GRANTS Defendants motion for summary judgment dismissing WEP's claim for unjust enrichment.
IV. Breach of Fiduciary Duty, Conversion, Conspiracy, Negligence, Fraud, and Punitive Damages
On economic loss doctrine, the Virginia Supreme Court in Abi-Najm v. Concord Condominium, LLC stated that:
The law of torts is well equipped to offer redress for losses suffered by reason of a 'breach of some duty imposed by law to protect broad interests of social policy.' Tort law is not designed, however, to compensate parties for losses suffered as a result of a breach of duties assumed only by agreement. That type of compensation necessitates an analysis of damages which were within the contemplation of the parties when framing their agreement. It remains the particular province of contracts.280 Va. 350, 360, 699 S.E.2d 483, 488-89 (2010) (internal citations omitted (quoting Sensenbrenner v. Rust, Orling & Neale, Architects, Inc., 236 Va. 419, 425, 374 S.E.2d 55, 58 (1988)). In contrast, however, this does not preclude an occurrence supporting both a cause of action for breach of contract and a breach of a duty arising in tort:
[A] single act or occurrence can, in certain circumstances, support causes of action both for breach of contract and for breach of a duty arising in tort, thus permitting a plaintiff to recover both for the loss suffered as a result of the breach and traditional tort damages, including, where appropriate, punitive damages.Id. at 361, 699 S.E.2d at 489 (internal citations omitted) (quoting Dunn Construction Co., Inc. v. Cloney, 278 Va. 260, 266-67, 682 S.E.2d 943, 946 (2009)). Given the disputed nature of the facts regarding how these payments were made, the Court finds that it is premature to determine whether there existed an independent cause of action for these tort actions separate from the Operating Agreement.
Furthermore, the Court also finds Defendants' statute of limitations arguments to be inappropriate for summary judgment. The parties having remaining disputes to material facts regarding the remaining fees and payments, and thus it would be improper for the Court to determine whether certain transactions are barred by the statute of limitations at this juncture.
Therefore, given the disputed nature of the tort claims asserted, the Court DENIES Defendants' partial summary judgment motion on the claims of fraud, conversion, negligence, and breach of fiduciary duty.
CONCLUSION
For the reasons stated herein, the Court GRANTS in part WEP's partial summary judgment motion as to the breach of contract claim for the distribution of $1,849,590 and DENIES in part WEP's motion as to the remaining counts in its motion. Furthermore, the Court GRANTS in part Defendants' motion for partial summary judgment regarding the unjust enrichment claim, and DENIES in part Defendants' motion to the remaining counts in its motion. The Court directs counsel for WEP to prepare and circulate an Order consistent with the ruling in this Opinion and submit it to the Court for entry within fourteen (14) days.
Sincerely,
/s/
Michelle J. Atkins
Judge MJA/kml