Rock Ivy Holding, LLC v. RC Props., LLC, M2012-02702-COA-R3-CV

• Decision Date: 30 January 2014
• Docket Number: No. M2012-02702-COA-R3-CV,M2012-02702-COA-R3-CV
• Citation: 464 S.W.3d 623
• Parties: ROCK IVY HOLDING, LLC v. RC PROPERTIES, LLC et al.
• Court: Tennessee Court of Appeals

464 S.W.3d 623

ROCK IVY HOLDING, LLC

v.RC PROPERTIES, LLC et al.

No. M2012-02702-COA-R3-CV

Court of Appeals of Tennessee.

Nov. 18, 2013 Session.

Jan. 30, 2014.

Application for Permission to Appeal Denied by Supreme Court June 20, 2014.

John S. Hicks and Elizabeth B. McCostlin, Nashville, Tennessee, for the appellant, Rock Ivy Holding, LLC.

Eugene N. Bulso, Jr., Roger G. Jones, and Paul Joseph Krog, Nashville, Tennessee, for the appellants, H. Preston Ingram and FUM, LLC.

Charles E. Morton, IV, Franklin, Tennessee, for the third party defendant/appellant, Huntly S. Gordon.

John O. Belcher and Curtis R. Harrington, Nashville, Tennessee, for the appellees, Linked, LLC and Stephen T. Church.

Phillip B. Jones, Nashville, Tennessee, for the appellees, Scott Sohr and RC Properties, LLC.

OPINION

FRANK G. CLEMENT, JR., J., delivered the opinion of the Court, in which PATRICIA J. COTTRELL, P.J., M.S., and ANDY D. BENNETT, J., joined.

This multi-faceted business dispute, which arises in principal part from the real estate collapse of 2008, involves five limited liability companies, eight individuals who are either members or officers of the respective companies, 530 acres of undeveloped real estate, and $7 million of secured notes that were personally guaranteed by six of the individuals. Over the course of two years, SunTrust Bank, the holder of the notes, agreed to extensions of the original maturity date; a final extension was granted until August 7, 2008. A call for capital contributions was approved but it produced insufficient funds to pay off the debt. Thereafter, two of the individuals, one of whom was the president of Rock Creek, and both of whom personally guaranteed a portion of the debt, formed another entity which then acquired the notes from the bank. Rock Creek Development, LLC (“Rock Creek”), which owned the real estate, then agreed to sell a substantial portion of its property to pay off the balance owing on the notes. In an attempt to stop the sale, Rock Ivy Holding, LLC (“Rock Ivy”), one of three members of Rock Creek, filed this derivative action for itself and on behalf of Rock Creek against Rock Creek's members: RC Properties, LLC; Linked, LLC; two officers of Rock Creek; and several individuals who were members of the defendant companies. The complaint alleged, inter alia, various conflicts of interests by the individual defendants and various breaches of statutory and contractual duties by members and/or officers. Pursuant to an agreed order, the sale proceeded, the net proceeds were held in the registry of the court, and the remaining claims went to trial. After eights days of a bench trial, the defendants moved to dismiss the complaint pursuant to Tenn. R. Civ. P. 41.02 at the close of the plaintiff's case-in-chief. The trial court granted the motion and dismissed all of the plaintiff's claims. Thereafter, several defendants filed various motions to recover their respective attorneys' fees and expenses. Some of the motions were based on Tenn.Code Ann. § 48–249–804, which pertains to derivative actions, and others were based on indemnification provisions in Rock Creek's Operating Agreement. The trial court granted some of the fee requests and denied others. In this appeal, Rock Ivy challenges the dismissal of its claims and the assessment of attorneys' fees. Two individual defendants appeal the denial of their claims for attorneys' fees. The holder of the notes appeals the denial of its claim for “default interest” and penalties. We affirm the trial court in all respects except for the trial court denying the claim for default interest on the notes. We have concluded that the holder of the notes is entitled to recover default interest from the time the notes were declared to be in default. Accordingly, this issue is remanded for further proceedings.

The business entity at the center of this action is Rock Creek Development, LLC (“Rock Creek”). It has three members, each of which is a limited liability company: RC Properties, LLC (“RC Properties”); Rock Ivy Holding, LLC (“Rock Ivy”); and Linked, LLC (“Linked”). As stated in Rock Creek's Operating Agreement dated May 1, 2006, RC Properties had 50% governance rights and 25% financial rights; Rock Ivy had 25% governance rights and 55% financial rights; and Linked had 25% governance rights and 20% financial rights.

The stated purpose of forming Rock Creek was to acquire, own, and develop real property. Soon after its creation, Rock Creek acquired real estate consisting of approximately 530 acres on the east side of Interstate 65 (“East Side Tract”), and 154 acres on the west side of Interstate 65 (“West Side Tract”) in the counties of Maury and Williamson. Rock Creek also secured two loans from SunTrust Bank (“SunTrust”) totaling over $7 million. The first loan, in the amount of $6,864,000, was issued on September 21, 2006, for the purpose of paying the indebtedness incurred by members for the original real estate purchase. The second, issued on March 2, 2007, in the amount of $487,500, was for the purpose of acquiring additional property.

Both loans, which were originally scheduled to mature on September 21, 2007, were secured by a Deed of Trust on the real estate property and were personally guaranteed by some individuals, specifically Scott Sohr and Preston Ingram, who were individual members of RC Properties; Jeff Ennis and Steve Church, individual members of Linked; and Vicki Gordon and Tom Parkinson, who were two of the four members of Rock Ivy.

Over the course of two years, the original maturity date passed and SunTrust agreed to several extensions of the original maturity date. SunTrust initially agreed to extend the payoff date until December 21, 2007; the date was further extended until June 21, 2008, and then a final extension was granted until August 7, 2008.

Due to the impending payoff date, as well as the onset of the national recession and the dramatic decline in the real estate market during that time, Sohr, acting in his capacity as President of Rock Creek, sent notice to RC Properties, Rock Ivy and Linked on July 25, 2008, of a capital call stating that Rock Creek required additional capital contributions in order to meet its financial obligations to SunTrust. The notice further stated that if approved, the three members would need to make capital contributions on August 5, 2008, in accordance with the percentage of their financial rights in Rock Creek. On July 29, four days after Sohr notified Rock Creek's members of the capital call, SunTrust sent a letter to Rock Creek, demanding payment of its full outstanding debt by August 7, 2008.

At the capital call meeting on August 5, RC Properties and Linked (which together possessed 75% of the governance rights) voted to confirm the capital call; as a consequence, the capital call passed. Accordingly, Rock Ivy was to provide its 55% financial share, which amounted to $4,035,000, RC Properties was to remit its 25% share, which amounted to $1,834,031, and Linked was to remit its 20% share, which amounted to $1,467,225. RC Properties and Linked each promptly remitted their share of the required capital call, while Rock Ivy made no contribution. The contributions by RC Properties and Linked were promptly remitted to SunTrust to reduce the debt on the two notes, and, as a result, SunTrust granted Rock Creek until October 15, 2008, to pay the outstanding debt. Following this payment, the balance owed on the notes was approximately $4,035,000, Rock Ivy's share of the capital call.

Despite this extension, Rock Ivy made no capital contribution. As a result, Sohr and Ingram proposed to Rock Ivy and Linked that the members of Rock Creek collectively purchase the notes from SunTrust; both Rock Ivy and Linked declined. Thereafter, Sohr and Ingram formed another limited liability company, FUM, LLC (“FUM”), which then purchased the notes from SunTrust in December 2008. As a consequence, FUM succeeded to the rights of SunTrust and became the lawful holder of the notes owed by Rock Creek.

On January 7, 2009, FUM's counsel sent Rock Creek a Notice of Assignment and Default officially informing Rock Creek and its members that FUM had purchased the notes and that if Rock Creek did not pay its obligation in full on or before January 20, 2009, it would constitute an Event of Default. The foregoing notwithstanding, no efforts were made to satisfy the obligations owing to FUM on the notes.

In the interim, Vanguard Properties of the Carolinas, LLC (“Vanguard”), expressed an interest in purchasing the East Side Tract of the Rock Creek property. Sohr, as President of Rock Creek, began negotiating the sale of the real estate, and, these negotiations resulted in an offer of $11,673.63 per acre, or approximately $5,925,000, with the additional requirements that Rock Creek shall reinvest over $1,000,000 in the entity formed by Vanguard to acquire the property, and that Vanguard be able to receive any awards given for eminent domain. The offer also provided that Vanguard could purchase the Harrison and Johnson Farm (“the Harrison Farm”), which was adjacent to Rock Creek's property and owned by another partnership of Ingram and Sohr.

As these negotiations were ongoing, the Tennessee Valley Authority (“the TVA”) made an offer to Rock Creek to purchase 20 acres of the East Side Tract for approximately $28,500 per acre, a noticeably higher amount than Vanguard's offer.

On May 26, 2009, when the offers from Vanguard and TVA were presented to the members of Rock Creek for a decision, RC Properties and Linked voted to approve the sale of the East Side Tract and consented to the side agreement involving the Harrison Farm, while Rock Ivy vigorously objected. Because RC Properties and Linked controlled 75% of the governance rights, Rock Creek accepted the offer from Vanguard and signed the contract of sale. Shortly thereafter, on August 28, 2009, and before the closing of the transaction, Rock Ivy filed this derivative action on behalf of Rock...