Frank Rudy Heirs Associates v. Moore and Associates, Inc., Leon Moore, and Sholodge Inc. - Concurring ( 1995 )

FRANK RUDY HEIRS ASSOCIATES, )
)
Plaintiff/Appellee, )
) Appeal No.
) 01-A-01-9505-CH-00219
VS. )
) Davidson Chancery
) No. 93-2957-II
MOORE & ASSOCIATES, INC., LEON )
MOORE, AND SHOLODGE, INC.,
Defendants/Appellants.
)
)
)
FILED
Nov. 29, 1995
Cecil Crowson, Jr.
COURT OF APPEALS OF TENNESSEE Appellate Court Clerk
MIDDLE SECTION AT NASHVILLE
APPEALED FROM THE CHANCERY COURT OF DAVIDSON COUNTY
AT NASHVILLE, TENNESSEE
THE HONORABLE C. ALLEN HIGH, CHANCELLOR
CHARLES PATRICK FLYNN
GERALD D. NEENAN
Suite 800, Noel Place
200 Fourth Avenue North
Nashville, Tennessee 37219
Attorneys for Plaintiff/Appellee
PETER H. CURRY
TUKE, YOPP & SWEENEY
201 4th Avenue North
Third National Bank Building
17th Floor
Nashville, Tennessee 37219-2040
Attorney for Defendants/Appellants
AFFIRMED AND REMANDED
BEN H. CANTRELL, JUDGE
CONCUR:
TODD, P.J., M.S.
KOCH, J.
OPINION
The general partner in a hotel-keeping operation refused to make
distributions to the limited partner from the revenues of the venture. The limited
partner filed suit against the general partner for breach of contract and breach of
fiduciary duty. The trial court found that the general partner had breached the
partnership agreement, and rendered a partial summary judgment, ordering an
immediate distribution to both partners of over $680,000. We affirm.
I.
Four members of the Rudy family inherited a piece of land on Music
Valley Drive in Nashville, a popular tourist area. In 1986, Gulf Coast Development,
Inc. (GCD), an owner and operator of Shoney's Inns, proposed to buy the property
and erect a hotel on it. The heirs did not want to give up the property, and so the
parties entered into a limited partnership agreement by which GCD was able to build
a Shoney's Inn on the property, and the Rudy heirs acquired a 40% interest in the
proposed hotel enterprise, as well as a $40,000 a year ground lease agreement for
the use of the land.
Gulf Coast Development became the general partner, and retained a
60% interest. The partnership was called Shoney's Inn of Opryland, Ltd. The name
was later changed to Shoney's Inn of Music Valley, Ltd., and GCD later became
ShoLodge, Inc. The August 4, 1986 partnership agreement recited that its execution
coincided with the activation of a management agreement between the partnership
and the general partner, whereby the general partner would receive a fee of 6% of
revenues for managing the affairs of Shoney's Inn of Opryland.
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The agreement also referenced a construction contract to build the
hotel. The firm chosen to build the hotel was Moore & Associates, a company wholly
owned by Leon Moore, who also held a majority interest in Gulf Coast Development.
In the "Abbreviated Form of Agreement Between Owner and Contractor," found in the
record, Leon Moore is the signatory for both parties to the contract.
The terms of the construction contract were summarized in the
partnership agreement as follows:
"The partnership has entered into or will enter into a
construction contract with Moore & Associates, Inc. ("the
Contractor"), an affiliate of the General Partner, whereby the
Contractor will agree to construct the Inn for an amount equal
to the Contractor's cost plus 5 percent (5%) overhead plus
ten percent (10%) profit, but in any event not greater than
$5,885,000 . . . . Each of the partners hereby consents to
the foregoing terms of such construction contract."
The current dispute was set in motion by construction cost overruns of
about $1,800,000 above the $5,885,000 stipulated by the above contract clause.
Before discussing the effect of these overruns, we note in passing that
the agreement provided for other fees to be received by the general partner, including
an interior design fee of 5% of the cost of furniture, fixtures and equipment, a fee for
obtaining financing, amounting to 3% of the principal amount of financing obtained,
and a development fee, equal to 6% of the total cost of the Inn.
II.
The general partner had financed the project with a $6,000,000 issue
of tax-free industrial revenue bonds. When the cost of building and equipping the Inn
exceeded the initial estimates by a substantial amount, the general partner
purportedly lent the partnership over $1,000,000. This created a problem for the
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limited partner because of the way it affected distributions under the partnership
agreement.
The agreement originally provided that each partner was to receive an
annual distribution in the form of a pro rata share of cash flow. Cash flow was defined
in the agreement as amounts reported as net profits (or losses) with the addition or
subtraction of certain items. Net profits or losses were those figures "as finally
determined for Federal Income Tax purposes under the accrual method of
accounting." Items which could be subtracted from net profits to determine cash flow
included repayments of loans made by the partners.
As a result of such loan repayments, the limited partner was incurring
tax liabilities for the net profits, but was not receiving any distribution with which to pay
its taxes. Other items permitted by the contract to be subtracted from net profits for
the purpose of determining cash flow included the funding of a ninety days working
capital reserve, and the creation of a discretionary reserve for capital improvement.
The question of reserves did not become an issue for the parties until the loan was
fully repaid.
The Rudy heirs complained that as a result of the unanticipated loan,
they would not be receiving the distributions they had expected in reliance on
projections prepared by GCD prior to the execution of the partnership agreement.
The parties met to discuss their concerns, and negotiations continued by
correspondence.
On July 13, 1988, Bob Marlowe, Treasurer of Gulf Coast Development,
sent letters to the four Rudy heirs with a proposed agreement to base distributions on
taxable income rather than on cash flow. The letter evidenced the earlier negotiations
by characterizing the enclosed agreement as a "Revised proposed agreement
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regarding future cash distribution, reflecting 75% rather than the 50% stipulated in the
one sent to you in May."
The text of the agreement is reprinted below in its entirety:
AGREEMENT
Gulf Coast Development, Inc. (GCD), General Partner of
Shoney's Inn of Music Valley, Ltd. ("Shoney's"), pursuant to
meetings with Frank Rudy Heirs Associates (a limited partner
of Shoney's), hereby agrees to the following as to prospective
cash distributions of Shoney's.
In recognition of the fact that GCD has voluntarily
loaned substantial sums to Shoney's due to the cost of the
project in excess of bond proceeds, GCD hereby agrees that
at the end of each fiscal year, upon the determination of
taxable income for Shoney's for that year, seventy-five
percent (75%) of the taxable income will not be used to pay
GCD's loans, but instead will be first distributed pro rata to all
partners. The primary purpose of the agreement is to provide
cash flow from Shoney's to the owners from which to pay the
federal income tax on earnings reported to them by Shoney's
on the annual IRS Form K-1.
III.
The Inn had opened on October 23, 1987, and after some slow winter
months, it achieved an average occupancy rate of over 65% for the second quarter
of 1988, with significant improvements in subsequent years. Leon Moore
acknowledged in his 1993 deposition that the Music Valley operation was one of the
most successful of all his hotel ventures. However, according to Mr. Marlowe, the
partnership did not earn any profit for the years 1987, 1988, 1989 or 1990, and the
Rudy heirs did not receive any distributions for those years.
The Rudys filed suit in the Sumner County Chancery Court on
December 21, 1990. They later non-suited, and refiled in the Chancery Court of
Davidson County. The deposition of Mr. Marlowe was taken on April 9, 1992.
Afterwards, $72,225 was distributed to the limited partner, representing its 40% share
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of 75% of the taxable income for the 1991 tax year. The general partner refused to
make a cash distribution for the tax years 1992 and 1993, despite total taxable
earnings of well over $800,000 for those years, according to audited financial
statements.
The general partner's reasoning was that the language of the 1988
agreement implied that it would expire when GCD's loan was repaid, so that after that
time no obligations to the limited partner would arise directly from the existence of
taxable income. Leon Moore testified in deposition that the loan to the partnership
was fully repaid in 1992.
Cash flow otherwise available for purposes of distribution was
purportedly applied to the funding of the ninety days working capital reserve, and to
the creation of the discretionary reserve for capital improvements. However, in a 1994
deposition Mr. Marlowe testified under questioning that no reserve accounts had
actually been set up.
Mr. Marlowe stoutly defended the importance of maintaining capital
reserves, whether or not the funds exist in a separate account earmarked for that
purpose. He further admitted, however, that he had made no effort to calculate what
the future cash needs of the partnership were likely to be, and it appears from his
testimony that the general partner's purpose in withholding distributions had more to
do with punishing the limited partner for filing this lawsuit than with maintaining
prudent future reserves. The affidavit of David Howard, a C.P.A. who examined the
partnership books, indicates that on July 1, 1994, Shoney's Inn of Opryland had cash
on hand of $726,730, held in a bank savings account and earning only a nominal rate
of interest.
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At trial, the Rudy heirs contended that the agreement of July 13, 1988,
had permanently amended the limited partnership agreement, and that they were
immediately entitled to their share of the 1992 and 1993 profits. Gulf Coast
Development argued that the partnership agreement had reverted to its original terms.
The parties filed motions and cross motions for summary judgment on
twelve issues. The trial court granted partial summary judgment to the Rudys on the
question of distributions, and found that ". . . defendants have breached the Limited
Partnership Agreement as amended July 13, 1988 by failing to distribute cash flow."
The court ordered the general partner to make an immediate pro rata distribution to
the partners of 75% of the 1992 and 1993 taxable income of the limited partnership.
Finding no just reason for delay, the court declared that portion of its order to be final
pursuant to Rule 54.02, T.R.C.P., thus making possible the present appeal.
IV.
The main contention of appellants is that the chancellor erred in
concluding that the partnership agreement had been permanently amended by the
July 12, 1988 agreement. They argued rather that it did not modify the partnership
agreement at all, but was only meant to be a temporary arrangement, and that the
provisions for distributions found in the original partnership agreement were reinstated
once the loan was paid off.
We note that the 1988 agreement does not explicitly say that it modifies
the partnership agreement, but appellee correctly points out that it need not do so in
order to effect a modification:
"A second contract of a later date than an earlier contract
containing the same subject matter with the former contract
will supersede the former contract even though there is no
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express agreement that the new contract shall have that
effect."
Decca Records, Inc. v. Republic Recording Company, Inc.,
235 F.2d 360, 363 (6th Cir. 1956).
Of course to be enforceable, a modification of an existing contract
requires mutuality of assent and a meeting of the minds. See Batson v. Pleasant
View Utility District, 592 S.W.2d 578 (Tenn.App. 1979). The appellants characterized
the 1988 agreement as a unilateral offer or proposal, which never rose to the level of
an enforceable contract, since the Rudy heirs did not affix their signatures to it.
We believe to the contrary, however, that there can be no doubt that by
their actions, the appellees accepted the offer expressed in the agreement. These
actions included failure to object (as they apparently had done in relation to the earlier
offer of a 50% distribution), acceptance of the benefits, and the filing of a lawsuit to
enforce the agreement. Nor can there be any question that the parties achieved a
meeting of the minds after a period of negotiation. Under such circumstances, the
absence of the appellees' signatures does not prevent enforcement of the agreement.
An enforceable agreement also requires consideration flowing to both
parties. See American Fruit Growers, Inc. v. Hawkinson, 21 Tenn. App. 127, 106,
S.W.2d 564, 568 (Tenn. App. 1937). In this case, both parties received consideration
as a result of the agreement, in the form of distributions from the partnership. Though
these distributions may have somewhat slowed the repayment of their loan, the
appellants were fully repaid within a few years, and received additional cash that had
not been available to them under the terms of the original agreement.
V.
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We turn now to GCD's argument that the 1988 agreement was meant
to be of limited duration. The general partner insists that the reference to its loan
evidences the parties' clear intention that the agreement end when the loan is repaid.
We do not find any such intention expressed directly by the language of the
agreement. If we examine the possibility that a termination provision is present in the
agreement by implication, we find a possible alternative to the appellants' theory in the
last sentence of the agreement, which would support a contrary implication that it was
the parties' intention that cash distributions be made as long as Shoney's Inns
continued to report earnings to the IRS.
We note that GCD itself drafted the document. It is a well-settled rule
of contract construction that ambiguities in a contract are to be construed against the
party drafting it. See Dunn v. United Sierra Corp., 612 S.W.2d 470, 473 (Tenn. App.
1980), Hanover Insurance v. Haney, 221 Tenn. 148, 425 S.W.2d 590, 592 (1968).
A contract is ambiguous when its meaning is uncertain, and it can be understood in
more ways than one. See Empress Health and Beauty Spa, Inc. v. Turner, 503
S.W.2d 188, 190 (Tenn. 1973).
While the appellant has set forth an arguable case that the 1988
agreement was meant to be of limited duration, terminable on the repayment of the
loan, our obligation to resolve any ambiguities against the drafter of the agreement
compels us to accept the appellees' argument that the partnership agreement has
been permanently amended. GCD had the opportunity to add an explicit termination
provision to the agreement before presenting it to the appellees for their assent, but
they did not do so. They should not now be permitted to acquire the benefits that
would flow to them from such a provision.
VI.
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The judgment of the trial court is affirmed. Remand this cause to the
Chancery Court of Davidson County for further proceedings consistent with this
opinion. Tax the costs on appeal to the appellants.
_____________________________
BEN H. CANTRELL, JUDGE
CONCUR:
_______________________________
HENRY F. TODD, PRESIDING JUDGE
MIDDLE SECTION
_______________________________
WILLIAM C. KOCH, JR., JUDGE
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