Urban Hotel Development Compan v. President Development Group ( 2008 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 07-2228/2320
___________
Urban Hotel Development *
Company, Inc., *
*
Appellant/Cross-Appellee, *
* Appeal from the United States
v. * District Court for the
* Western District of Missouri.
President Development Group, *
L.C., President Hotel Investors, *
L.C., President Hotel, L.C., *
Ronald D. Jury, Trustee of the *
Ronald D. Jury Trust, and Plaza 45, *
L.C., *
*
Appellee/Cross-Appellant. *
___________
Submitted: March 14, 2008
Filed: July 29, 2008
___________
Before MURPHY, BRIGHT, and BENTON, Circuit Judges.
___________
BENTON, Circuit Judge.
Urban Hotel Development Company, Inc. (“UHDC”) sued President
Development Group, L.C., President Hotel Investors, L.C., President Hotel, L.C.
(collectively “Development Companies”), Ronald D. Jury as Trustee of Ronald D.
Jury Trust (“Jury Trust”), and Plaza 45, L.C. (“Plaza 45”) for declaratory judgment,
breach of contract, and breach of fiduciary duty. UHDC, Jury Trust, and Plaza 45
were all members of the Development Companies, which were limited liability
companies organized to redevelop the President Hotel in Kansas City, Missouri.
Before redevelopment of the hotel, UHDC was removed as a member.
The district court1 granted summary judgment for Jury Trust, Plaza 45, and the
Development Companies, finding UHDC’s removal was valid under the operating
agreements, and there was no evidence of breach of fiduciary duty or a quantum
meruit claim. However, the district court granted summary judgment for UHDC on
the breach of contract claim. After a bench trial, the court entered a $10,000 judgment
for UHDC. On appeal, UHDC insists the removal was invalid and, therefore, it still
is a member of the Development Companies. Alternatively, UHDC seeks $167,667
in damages. The Development Companies cross-appeal, claiming no evidence
supports even $10,000 in damages. Having jurisdiction under 28 U.S.C. § 1291, this
court affirms.
I.
In this diversity suit, this court applies the substantive law of the state in which
the district court sits. Roemmich v. Eagle Eye Dev., LLC, 526 F.3d 343, 348 (8th Cir.
2008). Here, this court applies Missouri law, reviewing de novo the district court’s
interpretation of it. See id.
This court reviews de novo the grant of summary judgment. Id. Summary
judgment is appropriate if the evidence, viewed most favorably to the non-moving
party, establishes that no genuine issue of material fact exists and the moving party
is entitled to judgment as a matter of law. Id.; see also Fed. R. Civ. P. 56(c).
1
The Honorable Gary A. Fenner, United States District Judge for the Western
District of Missouri.
-2-
UHDC asserts its removal was ineffective because the operating agreements
authorized only a redemption, not a removal, of a member; it did not receive written
notice of the redemption, nor was the redemption made with a Major Decision
Approval; and it did not receive the Redemption Price.
UHDC was removed as member of the Development Companies by letter dated
May 2, 2003:
This letter is to serve as official notice that pursuant to the
Operating Agreements of President Hotel, LC, President Hotel Investors,
LC, and President Development Group, LC, that Urban Hotel
Development Company, Inc. is being removed from these companies .
...
The letter was signed by Ronald D. Jury, as Managing Member of the Development
Companies.
Article X, Section 10.1(a) of the operating agreements authorized the
redemption of a member’s interest: “Each member hereby grants to the Company the
right to redeem . . . all or any portion of such Member’s Interest in the Company. The
Company shall exercise any Member Redemption Option by delivering notice to such
Redeeming Member (the ‘Redemption Notice’).” To redeem a member’s interest,
section 10.1(b) required a “Major Decision Approval,” a “written approval by the
holders of more than sixty-five percent . . . of the Distribution Percentages owned by
all the Members.” Under section 10.2, payment of the Redemption Price was to be
made “not more than ten (10) business days following the receipt of the Redemption
Notice.”
The distribution percentages of the Development Companies were:
1. President Development Group, L.C.: Jury Trust and Plaza 45 each
had a 50% distribution percentage and UHDC a 0% distribution
percentage until $1,500,000 in net profits was distributable to the
-3-
members. At that point, Jury Trust would have a 45% distribution
percentage, Plaza 45 a 30% distribution percentage, and UHDC a
25% distribution percentage.
2. President Hotel Investors, L.C.: Jury Trust had a 53% distribution
percentage, Plaza 45 a 27% distribution percentage, and UHDC a
20% distribution percentage.
3. President Hotel, L.C.: Jury Trust had a 53% distribution
percentage, Plaza 45 had a 27% distribution percentage, and
UHDC a 20% distribution percentage.
Under Missouri law, a limited liability company is governed by statute and the
operating agreement. See In re Tri-River Trading, LLC, 329 B.R. 252, 267 (B.A.P.
8th Cir. 2005), citing Mo. Ann. Stat. § 347.010; see also Mo. Ann. Stat. § 347.079.
Operating agreements are interpreted by ascertaining the intent of the parties and
giving effect to it. Am. Anglian Envtl. Techs., L.P. v. Envtl. Mgmt. Corp., 412 F.3d
956, 958 (8th Cir. 2005). This court enforces a clear and unambiguous operating
agreement, giving maximum effect to Missouri’s policy of freedom of contract and
the enforceability of operating agreements. Id. at 958, 962.
As relevant here, the statute states: “A person ceases to be a member of a
limited liability company . . . [when] [t]he member is expelled as a member in
accordance with the operating agreement.” Mo. Ann. Stat. § 347.123(3). The
operating agreements, here, permit the redemption of a member’s interest; the terms
removal or expelled are not used. Emphasizing the distinction between these words,
UHDC insists its removal was ineffective because the letter does not indicate a
redemption of UHDC’s interest. The district court disagreed: “The ultimate question
is whether the operating agreements in this case provided a mechanism by which
Defendants’ could end a member’s relationship with the Development Companies.
Whether that provision in the agreement is called a right of redemption or right of
removal makes no difference to the ultimate outcome.”
-4-
Ascertaining the intent of the parties and giving effect to it, it is clear that the
redemption clause in the operating agreements provides a mechanism to remove or
expel members from the Development Companies. The right to redeem a member’s
interest is broad, granting “the Company the right to redeem . . . all or any portion of
such Member’s Interest in the Company.” This power is not limited by the use of the
word redemption. It requires notice and a Major Decision Approval, and after the
right is exercised, payment of the Redemption Price.
The Development Companies provided written notice to UHDC on May 2.
UHDC’s removal was authorized by a Major Decision Approval. Jury Trust and
Plaza 45 owned more than 65 percent of the distribution percentages of all members
in each of the three companies. The letter was signed by Jury, the managing member
of the Development Companies, Jury Trust, and Plaza 45. Consequently, Jury’s
signature represents the written approval of the members. See In re Tri-River
Trading, 329 B.R. at 267 (“The statute also contemplates that, if the members agree,
a Missouri limited liability company may be operated by a manager selected by its
membership.”), citing Mo. Ann. Stat. § 347.088.1. UHDC, however, was not paid
the Redemption Price within 10 days after the May 2 letter; this was a breach of
contract.
UHDC asserts that the non-payment of the Redemption Price renders its
removal ineffective, claiming a redemption requires all three steps – notice, Major
Decision Approval, and payment. Contrary to UHDC’s assertion, its removal is
effective. Under section 10.1 of the operating agreements, the redemption of a
member’s interest requires notice and Major Decision Approval. Under section 10.2,
payment of the Redemption Price is required. According to the operating agreements,
section 10.2 can be breached without breaching section 10.1. Thus, the district court
did not err in ruling UHDC’s removal was effective, despite non-payment of the
Redemption Price.
-5-
The court also did not err in ruling the value of the Redemption Price is a
question of fact. See Campbell v. Comm’r, 943 F.2d 815, 823 (8th Cir. 1991).
UHDC claims the members of the Development Companies – Jury Trust and
Plaza 45 – breached their fiduciary duties of care and loyalty when they removed
UHDC. Because the members relied in good faith on the operating agreements, the
district court did not err in concluding there was no evidence of breach of fiduciary
duty. See In re Tri-River Trading, 329 B.R. at 267 (“[A] member, manager, or other
person performing duties for or with fiduciary duties to the LLC may rely in good
faith on provisions of the operating agreement.”), citing Mo. Ann. Stat. §
347.088.2(1); see also Unigroup, Inc. v. O’Rourke Storage & Transfer Co., 980 F.2d
1217, 1221 (8th Cir. 1992) (“It does not follow that acting according to the terms of
the by-law is a breach of good faith and fair dealing.”).
II.
UHDC says the Redemption Price is $167,667, while the Development
Companies say it is zero. Under the operating agreements, the Redemption Price here
is “the actual tax basis of the redeeming member.” Actual tax basis is not defined in
the agreements. However, the district court stated: “the redemption price to which
UHDC is entitled . . . [is] the fair market value, if any, of the interests transferred to
UHDC under the terms of the operating agreements at the time of receipt.” After a
bench trial, the district court found the fair market value was $10,000 and entered
judgment for UHDC.
After a bench trial, this court reviews legal conclusions de novo and factual
findings for clear error. Roemmich v. Eagle Eye Dev., LLC, 526 F.3d 343, 353 (8th
Cir. 2008). “Under the clearly erroneous standard, ‘we will overturn a factual finding
only if it is not supported by substantial evidence in the record, if it is based on an
erroneous view of the law, or if we are left with the definite and firm conviction that
an error was made.’” Id., quoting Richardson v. Sugg, 448 F.3d 1046, 1052 (8th Cir.
-6-
2006). There is a strong presumption that the factual findings are correct. Am. Fed’n
of State, County and Mun. Employees v. City of Benton, 513 F.3d 874, 883 (8th Cir.
2008).
For partnerships, a tax basis results from contributing property, including
money, see 26 U.S.C. §§ 722, 723, or assuming the liabilities of a partnership, see 26
U.S.C. § 752.2 A tax basis also can be obtained by exchanging services for a
partnership interest. See Mark IV Pictures, Inc. v. Comm’r, 969 F.2d 669, 672 (8th
Cir. 1992). The value of the services is determined by the fair market value of the
interest received. Id. Generally, the fair market value is “the price at which property
would change hands in a transaction between a willing buyer and a willing seller,
neither being under compulsion to buy nor to sell and both being informed of all the
relevant circumstances.” Campbell v. Comm’r, 943 F.2d 815, 823 (8th Cir. 1991)
(internal quotation marks omitted). Whether UHDC contributed services in exchange
for an interest in the Development Companies is a question of fact, as is the fair
market value of those services. See Mark IV Pictures, 969 F.2d at 672; see also
Campbell, 943 F.2d at 823.
Here, substantial evidence in the record demonstrates UHDC contributed
services to the Development Companies, and the fair market value of those services
was $10,000. Frank Forte, UHDC’s president, contacted several businesses to assist
with financing, financial consulting, interior design, historic preservation,
environmental cleanup, and franchising. Three of these businesses were ultimately
part of the redevelopment efforts: Blackwell Sanders Peper Martin LLP, HVS
International, and Fahnestock & Co. Inc. These firms were instrumental in obtaining
tax increment financing, a necessary step in redeveloping the hotel. Even Jury, in the
removal letter, indicated: “Your experience and knowledge of vendors in the hotel
industry as well as financing sources has been very useful over the last year.” Forte
2
The parties stipulated before trial that UHDC did not provide money or
property to the Development Companies, nor did it assume debt or liability.
-7-
also made several trips to Kansas City from his home in Brentwood, Tennessee,
expending time and money. As for Jury’s testimony that the “actual tax basis” was
zero, this court must give due regard to the district court’s opportunity to judge the
witness’s credibility. See Fed. R. Civ. P. 56(a)(6); see also Allen v. Tobacco
Superstore, Inc., 475 F.3d 931, 936 (8th Cir. 2007) (credibility determinations are
“virtually unassailable on appeal”). Therefore, the district court’s findings of “the
value of the services UHDC provided in exchange for its interests” are not clearly
erroneous.
III.
The judgment of the district court is affirmed.
BRIGHT, Circuit Judge, concurs in the result only.
______________________________
-8-