Opinion
23A-PL-2283
06-20-2024
Danny D. Laser, Appellant-Defendant v. Kenneth A. Sebree, Appellee-Plaintiff
ATTORNEY FOR APPELLANT John K. McDavid Indianapolis, Indiana ATTORNEY FOR APPELLEE Graham T. Youngs Danville, Indiana
Pursuant to Ind. Appellate Rule 65(D), this Memorandum Decision is not binding precedent for any court and may be cited only for persuasive value or to establish res judicata, collateral estoppel, or law of the case.
Appeal from the Hendricks Circuit Court Trial Court Cause No. 32C01-1805-PL-72 The Honorable Daniel F. Zielinski, Judge
ATTORNEY FOR APPELLANT John K. McDavid Indianapolis, Indiana
ATTORNEY FOR APPELLEE Graham T. Youngs Danville, Indiana
MEMORANDUM DECISION
Altice, Chief Judge
Case Summary
[¶1] Danny D. Laser appeals from the trial court's judgment on his counterclaim against Kenneth A. Sebree for constructive fraud, arguing that the trial committed "clear error" in concluding that he failed to present sufficient evidence on that claim. Appellant's Brief at 2. Laser contends that the uncontroverted evidence at trial established that Sebree breached a fiduciary duty owed to him, improperly led him to believe that he remained a partner in their business venture, and that Sebree unlawfully benefited from those misrepresentations.
[¶2] We affirm.
Facts and Procedural History
[¶3] Sebree and Laser became friends in the 1960s and eventually became business partners. Sebree is an architect and founded his own firm in Hendricks County. When the two met, Laser owned a construction company.
[¶4] Sometime in 1979, Sebree and Laser started a business called Danken that developed office warehouse buildings in Avon. Sebree provided architectural services for the development, and Laser's company constructed the buildings. Neither Sebree nor Laser received compensation for their respective services. After the buildings were completed, Laser served as Danken's property manager and rented an office in one of the Danken buildings for his construction business.
[¶5] Sebree and Laser subsequently developed the Westridge Office Park (West Ridge), also located in Hendricks County. Laser served as property manager of West Ridge, as well. His duties consisted of paying the mortgage, maintaining property records, and collecting the rent.
[¶6] During the 1980s, Sebree and Laser learned about a program through the Farmers Home Administration for federally subsidized apartments. That program incentivized the construction of affordable apartments in rural communities. Developers who built and owned apartments could receive tax "write-offs" from the buildings' depreciation. Transcript Vol. 2 at 47-48.
[¶7] Sebree and Laser formed two partnerships that qualified them for the federal program. More specifically, in April 1980, they executed a Certificate of Limited Partnership for Waynetown Development (Waynetown). Later that month, they formed Brooklyn Associates (Brooklyn), also a limited partnership. Sebree and Laser were 50-50 partners in both entities. Laser managed the properties, and his duties included screening and interviewing applicants who would be eligible renters under government guidelines.
[¶8] The apartment projects undertaken by Waynetown and Brooklyn were to be financed through loans made or insured by the Farmers Home Administration of Agriculture (FHAA). That capital allowed Waynetown to construct and begin operating a property known as Waynetown Manor in Montgomery County, and Brooklyn Meadows in Morgan County. Certain expenses incurred on the properties, however, were not covered by the loans. Between 1981 and 1982, Sebree spent $13,357 "out of pocket" on the Brooklyn and Waynetown properties. Id. at 53. Sebree also loaned Laser money in the early 1980s and made additional out-of-pocket expenditures on the Danken property. Although Laser was still maintaining an office in the Danken building, he failed to pay rent totaling $5,000. In sum, Sebree spent $103,475 on Brooklyn Meadows and Waynetown Manor. As Sebree and Laser were 50-50 partners, the total of Laser's share of Sebree's personal expenditures on the property amounted to $75,478.
[¶9] At some point, Sebree approached Laser and demanded that he relinquish his partnership interest in Brooklyn and Waynetown to satisfy the outstanding obligations. Laser agreed to execute documents conveying his partnership interest in Brooklyn and Waynetown to Sebree. Thus, on December 28, 1985, Sebree and Laser executed amendments to the partnership certificates as to both entities. Laser also executed a "Resignation and Withdrawal" as general partner of both and assigned his interest in them to Sebree. Exhibit 6, 9. Laser continued to serve as property manager for Brooklyn Manor and Waynetown Manor, and was paid $1000 per month for managing both.
[¶10] At some point, Sebree learned that Laser was not paying the mortgage on the West Ridge building, which was his responsibility as property manager for Danken. At that time, Laser was on the verge of bankruptcy because of issues he was having with the Internal Revenue Service (IRS). More particularly, Laser's construction company had failed to make proper employee withholdings. A notice of Federal Tax Lien showed unpaid assessments of nearly $274,000 between June 2002 and March 2003.
[¶11] Sebree ultimately forced Laser to resign as property manager of both Waynetown Manor and Brooklyn Meadows because money was missing from the Waynetown reserve account, and Laser could not account for the shortage. Following Laser's resignation, Landmark Management (Landmark) began managing both entities.
[¶12] On April 19, 2004, Laser filed a voluntary petition for bankruptcy. One month later, he executed a Summary of Schedules document. The summary indicated that Laser had a 50 percent partnership interest in both Brooklyn and Waynetown, and he specified to the IRS that both entities had zero current market value. Thus, the Bankruptcy Court placed zero value on Brooklyn and Waynetown. At no time did Laser list any funds in the bankruptcy documents that were allegedly owed to him from Sebree, Waynetown, or Brooklyn for his services as property manager.
[¶13] Sometime in 2014, Sebree and Laser learned of a class action lawsuit referred to as the "Fraconia Claims." Id. at 41. Those claims indicated that properties like Brooklyn Meadows and Waynetown Manor might be entitled to recover money from the Federal Government.
[¶14] On April 23, 2015, Sebree's attorney filed certificates of limited partnership with the Indiana Secretary of State for both Brooklyn and Waynetown, along with the resignations and assignments that Laser had executed in 1985. Thereafter, in an August 2015 email, Sebree reminded Laser that he was not a partner in Brooklyn or Waynetown. That email referenced the resignation and assignment paperwork that Laser had executed in 1985.
[¶15] Early in September 2016, Laser sent the following email to Ryan Sellers of Landmark, acknowledging that he had not been a partner in Waynetown or Brooklyn for years:
As you know I am no longer a partner with Ken Sebree at Brooklyn Apartments and Waynetown Development. After all these years, I am near final agreement with the Internal Revenue Service, but they claim I am still a partner because I received year end documents from Landmark all these years. I realize that Landmark provided year end profit and loss statements, K1s, etc., to me because Sebree never notified Landmark until the past year that I am not a partner nor have been a partner for many years. My attorney is negotiating with the IRS and has a request that Landmark provide on Landmark letter head his wording that I have included in this email. Hopefully, your letter can bring to conclusion my negotiations with the IRS.
Please send . . . as soon as possible since the IRS needs this before September 16.Exhibit 15 (emphases added).
[¶16] In October 2016, Laser reached an "Offer and Compromise" resolution with the IRS. Exhibit 16. During negotiations with the IRS, Laser asserted that he was not a partner in Brooklyn or Waynetown. In light of those contentions, the IRS agreed to compromise the outstanding amount that Laser owed from $273,948.21 to $23,865.
[¶17] On May 24, 2018, Sebree filed a complaint for declaratory relief against Laser, alleging entitlement to 100 percent of any settlement proceeds that might be recovered in the Franconia Claims that related to Waynetown or Brooklyn. Sebree sought a judgment declaring that Laser had relinquished "any and all ownership" in Waynetown and Brooklyn in light of the documents that were executed in 1985, and for the trial court to declare him the sole owner of those entities. Sebree further requested that he be awarded "all settlement money recovered for on behalf of those entities" through the Franconia Claims litigation. Appellee's Appendix Vol. II at 10-11.
[¶18] In November 2018, Landmark advised Sebree that Waynetown Manor was struggling with no cash flow. Landmark proposed renewing its management certification for one more year if the owners would finance and maintain its continued operation. Sebree thereafter made payments totaling $15,000 toward Waynetown Manor but Landmark subsequently resigned as the property manager, and the mortgage went into default.
[¶19] In May 2019, Sebree filed a motion in the trial court, requesting permission to transfer the property to a third party. The trial court granted the motion, authorizing Sebree to sell Waynetown Manor. Sebree subsequently transferred Waynetown Manor to an acquisitions corporation by way of a "short sale." Exhibit 19. As a result, Sebree received no proceeds from the sale.
A short sale is the sale of a distressed property for an amount less than the mortgage balance. Transcript Vol. 2 at 67.
[¶20] Laser denied Sebree's allegations and counterclaimed against Sebree for breach of fiduciary duty, constructive fraud, and negligence. Relevant to this appeal is Laser's claim that Sebree's alleged acts of "scheming" him "out of proceeds due him" from the partnerships amounted to breach of fiduciary duty because Sebree intentionally "tried to take 100 percent ownership of the assets of the partnership" that "gives rise to punitive damages." Appellant's Appendix Vol. 2 at 32-33.
[¶21] At a bench trial that commenced on May 23, 2023, Laser testified that he received a management fee of $500 per month each for managing Brooklyn Meadows and Waynetown Manor. Laser, however, claimed that he was entitled to additional compensation from Sebree. When asked to provide an estimate for the alleged additional labor that he supplied, Laser testified "I would guess $15,000 to $16,000 a year." Transcript Vol. 2 at 107. When questioned about a labor estimate on the Waynetown property, Laser testified: "Yea, I figured it out, and I gave it to you. It was like $27,000.00 a year, broke into fifteen." Id. at 115.
[¶22] On cross examination, Laser acknowledged that he could not provide the calculation or basis for those figures. Laser admitted that he did not identify these items as damages in response to written interrogatories or in his deposition. Laser further acknowledged that while one of his roles as property manager for Waynetown Manor and Brooklyn Meadows would have been keeping track of records, he could not provide any documentation regarding the services for which he claimed reimbursement.
[¶23] After considering the evidence, the trial court issued its order on August 28, 2023, determining that "Sebree is the sole and 100% partner of both Brooklyn and Waynetown for the [following reasons]: (A) The amendments, resignations, and assignments paperwork executed in 1985 specify as such; (B) Laser acknowledged at trial that he was no longer a partner. . .; (C) Laser's bankruptcy filing statutorily forced his withdrawal as a General Partner of both Companies." Appendix Vol. II at 19. The trial court further determined that Laser failed to present sufficient evidence on any of his counterclaims.
[¶24] Laser now appeals.
Discussion and Decision
I. Standard of Review
[¶25] As Laser requested the trial court to issue findings of fact and conclusions pursuant Ind. Trial Rule 52, our standard of review is as follows:
First, we determine whether the evidence supports the findings and second, whether the findings support the judgment. In
deference to the trial court's proximity to the issues, we disturb the judgment only where there is no evidence supporting the findings or the findings fail to support the judgment. We do not reweigh the evidence but consider only the evidence favorable to the trial court's judgment. Challengers must establish that the trial court's findings are clearly erroneous. Findings are clearly erroneous when a review of the record leaves us firmly convinced a mistake has been made. However, while we defer substantially to findings of fact, we do not do so to conclusions of law. Additionally, a judgment is clearly erroneous under Indiana Trial Rule 52 if it relies on an incorrect legal standard. We evaluate questions of law de novo and owe no deference to a trial court's determination of such questions.RCM Phoenix Partners, LLC v. 2007E. Meadows, LP, 118 N.E.3d 756, 759-60 (Ind.Ct.App. 2019) (internal citations and quotations omitted). In addition, we "may affirm a judgment on any legal theory, whether or not relied upon by the trial court, so long as the trial court's findings are not clearly erroneous and support the theory adopted." Id.
[¶26] Additionally, because Laser did not prevail on his counterclaim at trial, he is appealing from a negative judgment. As this court recently determined:
A judgment entered against a party bearing the burden of proof is a negative judgment. On appeal from a negative judgment, this Court will reverse the trial court only if the judgment is contrary to law. A judgment is contrary to law if the evidence leads to but one conclusion and the trial court reached an opposite conclusion. In determining whether the trial court's judgment is contrary to law, we will consider the evidence in the light most favorable to the prevailing party, together with all reasonable inferences therefrom. We neither reweigh the evidence nor judge the credibility of witnesses.Ayers v. Stowers, 200 N.E.3d 480, 483 (Ind.Ct.App. 2022).
II. Laser's Constructive Fraud Claim
[¶27] Laser claims that the trial court's judgment for Sebree on the constructive fraud counterclaim is contrary to law. Laser maintains that he should have prevailed because the evidence established the existence of a fiduciary relationship, that Sebree made false statements to him about his status as a partner in Brooklyn and Waynetown, and that Sebree "gained an advantage at Laser's expense while Laser managed the properties at no charge to the partnerships." Appellant's Brief at 2.
[¶28] Constructive fraud is an equitable doctrine "provided to the unwary and unsuspecting, . . . but it does not protect those who stand on equal mental footing and in no fiduciary relationship who fail to exercise common sense and judgment." Harmon v. Fisher, 56 N.E.3d 95, 100 (Ind.Ct.App. 2016). Constructive fraud arises by operation of law from a course of conduct, which, if sanctioned by law, would secure an unconscionable advantage, irrespective of the actual intent to defraud. In re Bender, 844 N.E.2d 170, 182 (Ind.Ct.App. 2006), trans. denied. The elements of constructive fraud are:
(i) a duty owing by the party to be charged to the complaining party due to their relationship; (ii) violation of that duty by the making of deceptive material misrepresentations of past or existing facts or remaining silent when a duty to speak exists; (iii) reliance thereon by the complaining party; (iv) injury to the complaining party as a proximate result thereof; and (v) the gaining of an advantage by the party to be charged at the expense of the complaining party.Sri Shirdi Saibaba Sansthan of Tri State, Inc. v. Farmers State Bank of Alto Pass, Ill., 194 N.E.3d 55, 61 (Ind.Ct.App. 2022) (quoting Rice v. Strunk, 670 N.E.2d 1280, 1284 (Ind. 1996)), trans. denied.
[¶29] A party alleging the existence of constructive fraud has the initial burden of proving the first and last of the elements set forth above. Strong v. Jackson, 777 N.E.2d 1141, 1147 (Ind.Ct.App. 2002), trans. denied. The duty mentioned in the first element may arise by virtue of the existence of a fiduciary relationship. Epperly v. Johnson, 734 N.E.2d 1066, 1073 (Ind.Ct.App. 2000). Once the burden with respect to the first and last element is satisfied, the burden shifts to the other party to disprove at least one of the remaining three elements by clear and unequivocal proof. Strong, 777 N.E.2d at 1147. Put another way, the burden does not shift if the party alleging the existence of constructive fraud fails to prove the existence of a fiduciary relationship. See id.
[¶30] We note that partners owe each other a fiduciary duty until the partnership is terminated. In re Rueth Dev. Co., 976 N.E.2d 42, 53 (Ind.Ct.App. 2012), trans. denied. During the course of the partnership, the fiduciary relationship requires each partner to exercise good faith and fair dealing in partnership matters. That relationship prohibits a partner from taking any personal advantage touching the business aspects or property rights of the partnership. Id.
[¶31] In this case, the evidence at trial established that Laser surrendered his partnership interest when he executed the resignation and assignment documents in 1985. Accordingly, Sebree no longer owed Laser a fiduciary duty. See id. Nonetheless, while Laser contends that his ongoing business relationship with Sebree somehow extended that fiduciary duty, the evidence presented at trial is to the contrary. More specifically, Laser admitted in his 2016 email to the representative at Landmark that he was "not a partner nor have been a partner for many years." Exhibit 15. Laser also settled his tax liability with the IRS on the premise that he was no longer a partner in Brooklyn or Waynetown. As Laser cannot satisfy even the first element of constructive fraud, his claim fails, and the burden never shifted to Sebree to disprove the remaining elements of constructive fraud.
[¶32] Notwithstanding this conclusion, Laser nonetheless maintains that he was entitled to judgment and to punitive damages because Sebree gained an advantage at Laser's expense. Laser posits that "for eleven years after signing the documents in December 1985, [he] continued to manage both Brooklyn and Waynetown, because he believed he was a partner." Appellant's Brief at 19. Laser, however, fails to point to any evidence in the record to support that assertion, and-as discussed above-his execution of the documents in 1985 sufficiently belies such a contention. Additionally, while Laser contends that he worked for little compensation at the apartments because he believed that he remained a partner of both entities, the undisputed evidence established that Laser was paid $1,000 per month over an eleven-year period to serve as property manager of both apartments. From that evidence-along with Laser's execution of the resignation and assignment documents-the trial court could reasonably infer that Laser voluntarily chose to continue serving as property manager because it was financially advantageous for him to do so.
[¶33] Finally, there is no evidence in the record suggesting that Sebree gained an advantage over Laser that resulted from the Franconia Claims. To be sure, it was established at trial that no funds had been recovered by either Waynetown or Brooklyn from any class action lawsuit. And it was unknown whether any money would be recovered. Moreover, the evidence showed that Sebree spent his own funds toward the maintenance of Waynetown Manor, and he received no proceeds from the sale of that property. As a result, Laser failed to establish that Sebree gained an advantage over him at his expense, thus further defeating his constructive fraud claim.
Conclusion
[¶34] In light of our discussion above, we conclude that Laser failed to demonstrate that the evidence led to the sole conclusion that Sebree engaged in constructive fraud. Laser failed to establish that Sebree owed him a fiduciary duty once Laser surrendered his partnership interest in Brooklyn and Waynetown. The undisputed evidence showed that Laser represented to the IRS and Landmark that he had had not been a partner since December 28, 1985. Laser was paid for continuing to work at the apartments once he surrendered his partnership interest, and there was no evidence demonstrating that Sebree gained an advantage over Laser by participating in the class action lawsuit. As a result, the trial court property concluded that Laser failed to present sufficient evidence of his constructive fraud claim against Sebree.
[¶35] Judgment affirmed.
Bradford, J. and Felix, J., concur