Donnelly v. Donatelli & Klein, Inc.

• Decision Date: 17 September 1999
• Docket Number: Record No. 982204.
• Citation: 258 Va. 171,519 S.E.2d 133
• Court: Virginia Supreme Court
• Parties: John C. DONNELLY, etc. v. DONATELLI & KLEIN, INCORPORATED, et al.

519 S.E.2d 133

258 Va. 171

John C. DONNELLY, etc. v. DONATELLI & KLEIN, INCORPORATED, et al.

Record No. 982204.

Supreme Court of Virginia.

September 17, 1999.

David J. Gogal (John A.C. Keith; Paul B. Terpak, Fairfax; Meaghan D. Kolebuck, Arlington; Blankingship & Keith, Fairfax, on briefs), for appellant.

Michael McGettigan (Kathleen J.L. Holmes; Richards McGettigan Reilly & West, on brief), Alexandria, for appellees Donatelli & Klein, Inc., Louis T. Donatelli, Ann K. Donatelli, D & K Management, Inc., DKEPA # 7, Douglas J. Donatelli and Nicholas R. Smith.

(Brett A. Kassabian; Albert I. Kassabian; Kassabian & Kassabian, on brief), Annandale, for appellee Donnelly-McKnight, Inc.

(John J. McDermott; Janet A. Brown; Jackson & Campbell, on brief), for appellees First Potomac Realty Investment Limited Partnership, First Potomac Realty Investment Trust, Inc., FPR Realty Limited Partnership, FPR-GP Realty Inc., FPR-Holdings Limited Partnership and FPR-GP Holdings Inc.

(Peter K. Stackhouse; Walsh, Colucci, Stackhouse, Emrich & Lubeley, on brief), Arlington, for appellee Credit Suisse First Boston Mortgage Capital, L.L.C.

No brief or argument on behalf of appellees Wilson Brothers Incorporated, CB & T Corporation, William M. Harvey and William H. McKnight, II.

Present: All the Justices.

CARRICO, Chief Justice.

This appeal involves the Plaza 500 Limited Partnership (the Partnership), which was formed in 1987 for the purpose of owning, developing, leasing, and otherwise dealing with a 34-acre tract of land improved with approximately 500,000 square feet of office/warehouse facilities in Fairfax County. At the time the Partnership was formed, it was composed of Donnelly-McKnight, Inc. (Donnelly-McKnight) and Donatelli & Klein, Incorporated (Donatelli & Klein) as general partners and John C. Donnelly (Donnelly), William H. McKnight (McKnight), Louis T. Donatelli, (Donatelli), William M. Harvey (Harvey), and DKEPA # 7, a Maryland general partnership, as limited partners.¹ Plaza 500 was the fifth partnership created by Donnelly-McKnight and Donatelli & Klein to acquire and develop commercial real estate. Beginning in the mid-1980s, Donnelly and McKnight, both real estate appraisers, would locate an undervalued property and join with Donatelli and his firm, Donatelli & Klein, in forming a partnership to own and manage the property. Donnelly and McKnight contributed the equity in the property and Donatelli provided the financial backing in the form of his financial guaranty.

The arrangement among the parties with respect to Plaza 500 is the subject of a limited partnership agreement (the Agreement) dated October 22, 1987. Section 9 of the Agreement is styled "Legal Title to Partnership Property; Power of General Partners; Indemnities." In pertinent part, Paragraph B of Section 9 provides as follows:

The general partners, acting in their capacity as general partners for and on behalf of the Partnership, and subject to Section 10 hereof, shall have the right, power and authority ... to manage, lease, sell, mortgage, convey, improve, alter, renovate, refinance, grant easements on or dedicate the property of the Partnership. . . . All decisions, including the time and amounts of cash calls, shall be made by the unanimous vote of the general partners.

Paragraph C of Section 9 pertains to "any party dealing with the general partners with respect to any property of the Partnership." Paragraph C provides in pertinent part as follows:

Subject to the provisions of Section 10 hereof, every contract, agreement, deed, mortgage, lease, promissory note or other instrument or document executed by the general partners with respect to any property of the Partnership shall be conclusive evidence in favor of any person relying thereon or claiming thereunder that the general partners were duly authorized and empowered to execute and deliver such instrument or document for and on behalf of the Partnership. Notwithstanding the foregoing, either of the general partners may execute a contract, agreement, deed, mortgage, lease, promissory note or other instrument or document on behalf of the Partnership, and such execution shall be deemed to bind the Partnership, provided that such execution has been specifically authorized pursuant to a written consent or resolution joined by both general partners.

Section 10 of the Agreement, to which both Paragraphs B and C of Section 9 are subject, is styled "Management of Business." Paragraph A of Section 10 provides in pertinent part as follows:

All decisions in the management of the business, affairs and assets of the Partnership shall be made by the general partners by unanimous vote of the general partners. No limited partner ... shall have or exercise any rights in connection with the management of the Partnership business. In the event of any disagreement between the general partners as to any matter, which continues after consultation between the general partners, general partner Donatelli & Klein, Incorporated shall determine the matter in dispute in its sole discretion.

(Emphasis added.)

The italicized language, referred to by the parties as a "tie-breaker provision," was included in the Agreement upon Donatelli's insistence. In a meeting held before the Agreement was executed, with Donatelli, Donnelly, McKnight, and Harvey in attendance, Donatelli stated that "he wanted to control the partnership and have decision-making power." Donnelly and McKnight said they "did not want that." The "resolution [of the question] is contained in the partnership agreement."

The effect of the tie-breaker provision is the crucial issue in the present litigation, which began on July 3, 1997, when Donnelly, in his role as a limited partner, filed a bill of complaint derivatively on behalf of the Partnership. Named as parties defendant were Donatelli & Klein, Donatelli, his wife, Ann K. Donatelli, and D & K Management, Inc. (D & K Management)² (collectively, the Donatelli Parties), as well as Donnelly-McKnight,³ McKnight, Harvey, Wilson Brothers, Incorporated, and DKEPA # 7.

In his bill of complaint, Donnelly asserted against the Donatelli Parties claims of breach of contract, breach of fiduciary duty, tortious conversion, and conspiracy. Donnelly alleged that the Donatelli Parties had charged excessive fees for various services rendered to the Partnership. Donnelly prayed for the return of the excess amounts to the Partnership, an accounting, a declaratory judgment, an injunction removing Donatelli & Klein as a general partner and prohibiting the Donatelli Parties from making further payments to themselves, and the appointment of a receiver to manage the affairs of the Partnership during the pendency of the litigation.

In September 1997, while Donnelly's bill of complaint was pending, Donatelli & Klein informed Donnelly and Donnelly-McKnight of an opportunity to refinance on more reasonable terms the existing encumbrance on the Plaza 500 property. Donatelli & Klein sought the approval of Donnelly and Donnelly-McKnight to a refinancing of the Plaza 500 property with a new lender in conjunction with a proposal to contribute that property and other commercial properties to the formation of an umbrella property real estate investment trust (UPREIT) in return for the issuance of units of limited partnership interest. Donatelli & Klein consulted with Donnelly and Donnelly-McKnight "on numerous occasions" concerning the proposal for refinancing of the existing encumbrance and the creation of an UPREIT. However, in a letter to Donatelli & Klein's counsel dated September 23, 1997, Donnelly voiced objection to the proposal.

In December 1997, Donatelli & Klein entered into a transaction involving a number of entities it created, referred to by the parties as "the FPR Entities."⁴ As part of this transaction, Donatelli & Klein conveyed the Plaza 500 property by special warranty deed to FPR Holdings Limited Partnership (FPR Holdings). In return, the Partnership received partnership units in First Potomac Realty Investment Limited Partnership. This latter organization owns related entities and through such ownership controls four commercial properties, including Plaza 500.

The Plaza 500 property and the three other commercial properties were used as collateral for a portion of a loan of approximately $58 million made to the FPR Entities by Credit Suisse First Boston Mortgage Capital, L.L.C. (Credit Suisse). Of the amount loaned, $32,175,000.00 encumbered the Plaza 500 property in a cross-collaterization with the other properties covered by the $58 million loan. In connection with the loan, FPR Holdings executed a credit line deed of trust, an assignment, and a pledge agreement.

By letter dated January 8, 1998, Donatelli & Klein notified the Plaza 500 partners that the Partnership's property had been conveyed to FPR Holdings. Donnelly then filed an amended bill of complaint and a second amended bill of complaint. He also sought a preliminary injunction restraining Donatelli & Klein from any further efforts to convey the Plaza 500 property to the FPR Entities. The chancellor denied the injunction, but in a "Stipulation and Order" approved by the chancellor on February 12, 1998, Donatelli & Klein agreed that it would "exercise no authority as general partner of Plaza 500 Limited Partnership ... without the express approval of Defendant Donnelly-McKnight, Inc.... as general partner of Plaza 500" and that "[t]he status quo [would] be maintained pending trial or further order of [the] Court."

In his second amended bill of complaint, Donnelly added the FPR Entities as defendants, as well as Credit Suisse and several other parties. Donnelly also added a count in rescission and prayed that the conveyance by Donatelli & Klein to FPR Holdings and the Credit Suisse deed of trust, assignment, and pledge agreement be held void "for lack of authority and/or because such conveyances are fraudulent."

Hence, the proceedings...