1600 Barberry Lane 8 LLC v. Cottonwood Residential OP LP

• Decision Date: 22 August 2019
• Docket Number: No. 20180105-CA,20180105-CA
• Citation: 449 P.3d 949
• Parties: 1600 BARBERRY LANE 8 LLC and 1600 Barberry Lane 9 LLC, Appellants, v. COTTONWOOD RESIDENTIAL OP LP, Cottonwood Capital Property Management II LLC, Cottonwood Capital Property Management Inc., and Daniel Shaeffer, Appellees.
• Court: Utah Court of Appeals

449 P.3d 949

1600 BARBERRY LANE 8 LLC and 1600 Barberry Lane 9 LLC, Appellants,

v.COTTONWOOD RESIDENTIAL OP LP, Cottonwood Capital Property Management II LLC, Cottonwood Capital Property Management Inc., and Daniel Shaeffer, Appellees.

No. 20180105-CA

Court of Appeals of Utah.

Filed August 22, 2019

Kenneth J. Catanzarite and Andrew G. Deiss, Salt Lake City, Attorneys for Appellants

Matthew L. Lalli, Michael A. Gehret, W. Danny Green, Salt Lake City, and Henry H. Oh, Attorneys for Appellees

Judge Diana Hagen authored this Opinion, in which Judges David N. Mortensen and Jill M. Pohlman concurred.

Opinion

HAGEN, Judge:

¶1 Plaintiffs 1600 Barberry Lane 8 LLC and 1600 Barberry Lane 9 LLC (the Owners), two tenant-in-common owners of an apartment complex in Georgia (the Property), appeal the district court's dismissal of their amended complaint. The Owners sued Cottonwood Residential OP LP, Cottonwood Capital Property Management II LLC, Cottonwood Capital Property Management Inc., and Daniel Shaeffer (collectively, Cottonwood) for breach of fiduciary duty or aiding and abetting breach of fiduciary duty and breach of contract or tortious interference with a contract. The Owners' claims arise out of the property management agreement (the Agreement) between the Owners and Todd Mikles and Daymark Residential and Asset Management (collectively, Daymark),¹ who contracted to provide property and asset management services for the Property. The Owners assert that Cottonwood breached the Agreement and its fiduciary duty to the Owners by charging fees that exceeded market rates for property and asset management services or, alternatively, that Cottonwood induced or aided and abetted Daymark in doing so. We conclude that the Owners have not stated a claim for breach of fiduciary duty because the Agreement does not give rise to a fiduciary duty on behalf of either Daymark or Cottonwood with respect to the fees they charged for their services. And because the Agreement contained no provision limiting management fees to market value, we conclude that neither Cottonwood nor Daymark breached the Agreement by charging fees that allegedly exceeded market rate. Accordingly, we affirm the district court's dismissal of the amended complaint for failure to state a claim upon which relief could be granted.

BACKGROUND²

¶2 In 2008, the Owners each acquired a 1.478% interest in the Property, which was a "312 unit garden apartment community" located in a suburb of Atlanta, Georgia. At that time, the Owners entered into the Agreement with Daymark for property and asset management services relating to the Property. The Agreement contained a choice of law provision stating that any disputes arising under the Agreement would be governed by Georgia law.³ In relevant part, the Agreement provided:

2.1 Status of Property Manager. The [Owners] and [Daymark] do not intend to form a joint venture, partnership or similar relationship. Instead, the parties intend that [Daymark] shall act solely in the capacity of an independent contractor for [the Owners]. Nothing in [the] Agreement shall cause [Daymark] and [the Owners] to be joint venturers or partners of each other, and neither shall have the power to or obligate the other party by virtue of [the] Agreement, except as expressly provided in this Agreement. Nothing in [the] Agreement shall deprive or otherwise affect the right of either party to own, invest in, manage, or operate, or to conduct business activities which compete with, the Property. ...

2.2 Management. [Daymark] shall be the sole and exclusive manager of the Property to act on behalf of [the Owners] and shall manage, operate and maintain the Property in an efficient, economic, and satisfactory manner and shall manage the performance of everything reasonably necessary for the proper operation of the Property for the tenants thereof ... [Daymark] shall perform all services in a diligent and professional manner ....

....

2.14 Right to Subcontract Property Management Functions. [Daymark] reserves the right, in its sole discretion, to subcontract some or all of the property management functions described herein to local property managers and certain other parties. However, except as expressly provided herein, the fees to be paid to [Daymark] under [the] Agreement are inclusive of fees payable to such third parties ....

....

9.1 Property Management Fee. [Daymark], or an affiliate, shall receive, for its services in managing the Property in accordance with the terms of [the] Agreement, a monthly management fee ... and a monthly asset management fee .... The Property Management Fee shall be up to three percent (3%) of Gross Revenues ... and the Asset Management Fee shall be up to two percent (2%) of Gross Revenues .... The Property Management Fee is set forth in the annual Budget approved by [the Owners] in accordance with Section 2.5 hereof ....

....

11. Conflicts. [Daymark] shall not deal with or engage, or purchase goods or services from, any subsidiary or affiliated company of [Daymark] in connection with the management of the Property for amounts above market rates ....

....

13.1 Assignment. [Daymark] may not assign [the] Agreement without the prior written consent of each of [the Owners] which consent may be withheld in each [of the Owner's] sole and absolute discretion ....

Section 2.5 also provided that Daymark would prepare and submit to the Owners "an initial capital and operating budget ... for the promotion, operation, leasing ..., repair, maintenance and improvement of the Property" for each calendar year, which the majority of the Owners must approve.

¶3 In October 2012, Daymark announced that it had decided to focus its efforts on its commercial-office-property portfolio and recommended to the Owners that Cottonwood take over management services for the Property. The Owners "acquiesced" and allowed Cottonwood to assume the role of asset and property manager for the Property. But they allege that they would not have consented to this change if Daymark had disclosed that the Agreement's asset and property manager fees exceeded the fair market rate for the services. The Owners allege that the excessively high fees accounted for Cottonwood's willingness to purchase the Agreement from Daymark for $8 million.⁴

¶4 In June 2017, the Owners filed a complaint against Cottonwood, alleging that Cottonwood had breached a fiduciary duty it owed to the Owners or, in the alternative, aided and abetted Daymark in the breach of its fiduciary duty. Specifically, the Owners alleged that Daymark had a fiduciary duty to disclose that transferring the Agreement to Cottonwood was not in the Owners' best interests because it would allow Cottonwood to continue collecting above-market fees. The complaint alleged that Cottonwood both aided and abetted Daymark's breach and was "directly liable ... as the successor fiduciary" to Daymark for failing to disclose facts that would have led the Owners to discover that they were being overcharged.

¶5 Under rule 12(b)(6) of the Utah Rules of Civil Procedure, Cottonwood moved to dismiss the Owners' action for failure to state a claim upon which relief can be granted, to which the Owners responded by filing an amended complaint. In their amended complaint, the Owners again asserted their fiduciary duty claim and added two alternative claims: breach of contract and interference with contract. In their breach of contract claim, the Owners alleged that the fees under the Agreement "were capped at the lesser of market value for the actual services provided or for the maximum listed fee" and that Cottonwood breached the Agreement by "charging and continuing to overcharge[ ] asset and property management fees in excess of fair value." Alternatively, the Owners alleged that, by paying Daymark $8 million in "exchange for all future property management and asset management fees at rates in excess of fair value," Cottonwood "improperly induced" Daymark to breach the provisions of the Agreement that allegedly capped fees "at the lesser of market value or the maximum listed fee."

¶6 In response to the Owners' amended complaint, Cottonwood filed another motion to dismiss for failure to state a claim. The Owners opposed that motion, and the district court heard argument on it. At argument, Cottonwood contended that, as a matter of Georgia law, a property manager does not "owe a fiduciary duty to forego enjoying the benefits of the bargain that the parties struck in a written property management agreement." Because the Owners had not alleged that Daymark and Cottonwood charged more than the negotiated fees set forth in the Agreement, Cottonwood also argued that the Owners' allegations did not amount to either a breach of contract or a breach of fiduciary duty.

¶7 The district court granted Cottonwood's motion to dismiss on a number of alternative grounds. In granting the motion, the district court determined, among other things, that Cottonwood did not owe the Owners a fiduciary duty, because the Agreement between the parties did not give rise to a confidential relationship under Georgia law. The district court also ruled that the Owners could not state a claim for breach of contract or interference with contract based on the alleged practice of charging above-market rates, because nothing in the Agreement limited the property and asset management fees to market rate. The Owners appeal.

ISSUE AND STANDARD OF REVIEW

¶8 The Owners contend that the district court erred in granting Cottonwood's motion to dismiss, arguing that the amended complaint contained sufficient allegations to sustain claims of breach of contract, tortious interference with a contract, and breach of and aiding and abetting the breach of fiduciary duty.⁵ "We review a decision granting a motion to dismiss for correctness, granting no deference to the decision of the district court," Bylsma v. R.C. Willey , 2017 UT 85, ¶ 10, 416 P.3d 595 (quotation simplified), and "likewise review the...