Alloy v. Willis Family Trust
| Decision Date | 31 March 2008 |
| Docket Number | No. 00026, Sept. Term, 2006.,00026, Sept. Term, 2006. |
| Citation | 944 A.2d 1234,179 Md. App. 255 |
| Parties | Martin K. ALLOY, et al. v. The WILLS FAMILY TRUST. |
| Court | Court of Special Appeals of Maryland |
Stephen A. Bogorad (Judith F. Bonilla, Holland & Knight, LLP, on the brief), Washington, DC (Steven B. Gould, Brown & Gould, LLP, on the brief), Bethesda, for appellant.
M. Roy Goldberg (Christopher M. Loveland, Sheppard, Mullin, Richter & Hampton, LLP, on the brief), Washington, DC (David C. Driscoll, Jr., Stein, Sperling, on the brief), Rockville, for appellee.
Panel: ADKINS, CHARLES E., MOYLAN, JR. (Retired, Specially Assigned), JOSEPH F. MURPHY, JR.* JJ.
After the smoke cleared in this courtroom battle between commercial real estate partners, general partners Martin K Alloy and Fred Farshey,1 appellants and cross-appellees, owed limited partner The Wills Family Trust, appellee and cross-appellant, one dollar in nominal damages, for breaching their fiduciary duties by secretly acquiring and leasing competing warehouse properties. Neither side is happy with that result.
On appeal, Alloy and Farshey raise a single issue:
I. Did the trial court err in denying judgment in favor of Alloy and Farshey on the grounds that the conduct complained of is explicitly authorized in the Partnership Agreement and there was no evidence of actual damage to the Trust?
In its cross-appeal, the Trust presents five issues:
II. Did the trial court err in refusing to permit the Trust to seek relief in connection with appellants' efforts to "freeze" them out of the Partnership through oppressive conduct?
III. Did the trial court err in excluding evidence that the Trust suffered actual damages arising from appellants' breach of fiduciary duties, including striking the expert testimony of William C. Harvey and Thomas Porter?
IV. Did the circuit court err in forcing the Trust to separately litigate certain breach of fiduciary duty claims against appellants, by striking the Trust's third amended complaint, and denying leave to voluntarily dismiss the case?
V. Did the circuit court err in granting appellants' motion for summary judgment against the Trust's request for dissolution of the partnership?
VI. Did the circuit court err in granting appellants' motion for summary judgment against the Trust's request for reformation of the partnership?
We find no error in the trial court's ruling that there was sufficient evidence to send the breach of fiduciary duty claim to the jury on the Trust's "secret competition" theory. We conclude, however, that the Trust's alternative breach of fiduciary duty theory arising from an alleged "freeze-out" scheme should also have been presented to the jury. To the extent relevant on remand, we briefly address the remaining issues.2
SMC-United Industrial Limited Partnership (the Partnership) was formed in 1985, under District of Columbia law, for the purpose of purchasing, holding, and leasing commercial warehouses in the vicinity of 33rd and V Streets, N.E., Washington, D.C. By its terms, the Partnership is to continue for fifty years, until December 31, 2035, and is governed by D.C. law.
None of the original partners owned any other warehouses in the V Street area when the Partnership was formed. Most of the Partnership properties were acquired upon formation of the Partnership. The Partnership portfolio also included three properties purchased between 1986 and 1990, with the unanimous consent of partners, in accordance with the Partnership Agreement, as amended.3 The total of Partnership properties exceeds one million square feet. The Trust estimates the value of these properties at more than $50 million.
From its inception, the Partnership has had two distinct groups of partners — the SMC Group, led by Alloy and Farshey, and the Wills Group, led by P. Reed Wills, II. These allegiances are reflected in the Partnership's two classes of general partners (Class I — SMC Group, Class II — Wills Group) and three classes of limited partners (Class A — SMC Group; Classes B and C — Wills Group). Among its constituent members, each group collectively owns 50% of the Partnership, with 3% of each Group share allocated to the general partners for that Group, and the remaining 47% allocated to the limited partners for that Group.
Within the SMC Group, the 3% Class I general partner interest is divided evenly among Alloy, Farshey, and SMC Second L.P. The 47% Class A limited partnership interest is allocated 29% to Alloy, 16 percent to Farshey, and 2% to SMC Second L.P.
Within the Wills Group, Reed Wills held the 3% Class II general partner interest, as well as a 4% interest as a Class B, limited partner. The Trust holds a 38% interest as a Class B limited partner. Reed Wills's longtime employee, Robert Raymond, held a 5% interest as the sole Class C limited partner.4
In 1991, Reed Wills went into bankruptcy. In February 1993, both his general and limited partnership assets were transferred to a committee of his creditors. As a result, both the management control rights associated with Wills's 3% general partnership interest, and the cash flow rights associated with Wills's 4% limited partnership interest, were held by the creditors' committee.
The committee sought to raise money to pay off Wills's debts, by offering Wills's partnership interests for sale to both the Trust and the SMC Group partners. The Trust did not exercise its right of first refusal under the Partnership Agreement. To avoid dealing with strangers to their business, Alloy and Farshey formed SMC-V Street Limited Partnership, which purchased Wills's partnership interests from the bankruptcy estate in July 1994, for $860,000.5 Consequently, SMC-V Street stepped into Wills's shoes as the 3% Class II general partner and the 4% Class B limited partner.
Thus, as initially allocated and subsequently transferred, Partnership interests were as follows:
SMC Group Wills Group
General Class I General Partners (3%): Class II General Partner (3%)
Partners
Martin K. Alloy 1% P. Reed Wills, II 3%
(managing general partner) (managing general partner)
(purchased by SM C-V Street Ltd. Partnership in
July 1994)
Fred Farshey 1%
(managing general partner)
SMC Second Ltd. Partnership 1%
Limited Class A Limited Partners (47%): Class B Limited Partners (42%)
Partners
Martin K. Alloy 29% P. Reed Wills, II 4%
(purchased by SM C-V Street Ltd. Partnership in
July 1994)
Fred Farshey 16%
SMC Second Ltd. Partnership 2% The Wills Family Trust 38%
Class II Limited Partners (5%)
Robert Raymond 5%
Total
Interest 50% SMC Group 50% Wills Group
Cash Flow Distributions And Allocations Of Taxable Income
Under the terms of their Partnership Agreement, the Trust, as a limited partner, would have no voice in managing the Partnership's business. The Agreement provides that the "business and affairs of the Partnership shall be controlled by the General Partners." "No limited Partner (in its capacity as a Limited Partner) shall (i) have the right or authority to act for or bind the Partnership [or] (ii) take part in the conduct or control of the Partnership's business." Thus, the Trust agreed to be bound by the business decisions of the Wills Group's Class II general partner, who was initially Reed Wills but later SMC-V Street L.P.
Critical to understanding the events surrounding this litigation, is one of the two cash flow allocation provisions in the Agreement. Most commonly, limited partners have the right to receive a pro rata share of any cash distributions made to partners, along with a pro rata share of any Partnership income for purposes of income tax liability, in proportion to the limited partner's equity interest in the partnership. If that had been the case here, the Trust would have been entitled to a share of any distributions as follows:
• The Class B taxable income share would equal 42% of total distributions, because that is the total equity interest of the two Class B limited partners (Reed Wills's 4% + the Trust's 38%).
• With its 38% equity interest, the Trust holds 90% of the total Class B equity. With his 4% equity interest, Reed Wills held 10% of the total Class B equity.
• If distributions to partners were allocated pro rata in the amount of each Class B partner's equity share, the Trust would receive 90% of the Class B distributions, or 37.8% of the total distributions paid to all partners (i.e., 90% of the 42% share going to Class B partners). Conversely, Wills's Class B limited partnership interest of 4% would receive 10% of the total Class B distribution, or 4.2% of the total distributions made to all partners.
But that is not what happened, because, although Reed Wills preserved these pro rata allocations for taxable income, he modified them for distributions of Capital Cash Flow, and "flipped" them for distributions of Operating Cash Flow. In doing so, Wills limited the Trust's economic rights to receive income from ongoing Partnership operations, while maintaining pro rata the Trust's responsibilities to pay income taxes. Once Reed Wills lost his partnership interests in bankruptcy, the cumulative effect of these provisions has been to leave the Trust with a negative cash flow created by taxable income allocations that exceed Partnership distributions. Ultimately, this situation has given the Trust a strong financial incentive to force the sale of Partnership properties and/or dissolution of the...
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