Am. Master Lease LLC v. Idanta Partners, Ltd.

• Decision Date: 27 May 2014
• Docket Number: B244689
• Citation: 171 Cal.Rptr.3d 548,225 Cal.App.4th 1451
• Court: California Court of Appeals Court of Appeals
• Parties: AMERICAN MASTER LEASE LLC, Plaintiff and Respondent, v. IDANTA PARTNERS, LTD. et al., Defendants and Appellants.

225 Cal.App.4th 1451

171 Cal.Rptr.3d 548

AMERICAN MASTER LEASE LLC, Plaintiff and Respondent,

v.IDANTA PARTNERS, LTD. et al., Defendants and Appellants.

B244689

Court of Appeal, Second District, Division 7, California.

Filed May 5, 2014

As Modified May 27, 2014

See 5 Witkin, Summary of Cal. Law (10th ed. 2005) Torts, § 45 et seq.

APPEAL from a judgment and an order of the Superior Court of Los Angeles County, Ramona G. See, Judge. Affirmed in part and reversed in part with directions. (Los Angeles County Super. Ct. No. BC367987)

Lathrop & Gage, John Shaeffer, Jeffrey Grant and Emily Birdwhistell, Los Angeles, for Defendants and Appellants.

Mayer Brown, Donald Falk, Palo Alto; Mayer Brown, Neil M. Soltman and Germain D. Labat, Los Angeles, for Plaintiff and Respondent.

SEGAL, J.^*

INTRODUCTION

In this appeal we consider the questions (1) whether a defendant can be liable for aiding and abetting breach of fiduciary duty without owing the plaintiff a fiduciary duty, (2) what is the statute of limitations for aiding and abetting breach of fiduciary duty, (3) whether the restitutionary remedy of disgorgement is available for aiding and abetting breach of fiduciary duty, and (4) what is the measure of restitution for aiding and abetting breach of fiduciary duty. We answer these questions (1) yes, (2) three or four years (depending whether the breach is fraudulent or non-fraudulent), (3) yes, and (4) the net profit attributable to the wrong.

Defendants Idanta Partners, Ltd., David J. Dunn, Steven B. Dunn, and the Dunn Family Trust appeal from a judgment on a jury verdict in favor of plaintiff American Master Lease LLC (AML) and from an order denying their motion for judgment notwithstanding the verdict. The jury found defendants liable for aiding and abetting breach of fiduciary duty and awarded restitution in the amount of approximately $5.8 million. Defendants argue that the judgment must be reversed because they cannot be liable for aiding and abetting breach of fiduciary duty in the absence of a duty owed directly to the plaintiff, and because the aiding and abetting claim is barred by the applicable statute limitations. We find no merit in these contentions, but we do conclude that defendants are entitled to a new trial on the amount of defendants' unjust enrichment. After having granted a petition for rehearing by AML in order to give the parties an opportunity to file supplemental briefs on the valuation timing issue for restitution, we affirm in part and reverse in part for a new trial on the amount of restitution.

FACTUAL AND PROCEDURAL BACKGROUND¹

A. AML

Neal Roberts formed AML in 1998 for the purpose of investing in real estate. He observed that there were people his age who owned real property but were reaching a point in their lives where they wanted to retire and did not want to continue actively managing their real estate investments. Roberts' idea was to allow these investors to sell their real estate to a larger entity and then buy interests in the larger entity as tenants in common, which would allow them to avoid adverse tax consequences associated with the sale of the real estate. This investment vehicle became known as a 1031 FORT, where 1031 referred to the section of the Internal Revenue Code applicable to real estate exchanges and FORT stood for Fractionalized Ownership in Real estate Tax deferred.

AML initially had seven members. Roberts and three trusts that he set up for his wife, his son, and his daughter owned 75 percent of AML. Jim Andrews, the Roberts family lawyer, Charles “Duke” Runnels (Runnels), and Michael Franklin owned the remaining 25 percent. Andrews, Runnels, and Franklin had participated in a company Roberts formed prior to AML, and Roberts wanted them involved in AML. Roberts was the managing member of AML.

The AML Operating Agreement included an agreement not to compete. Paragraph 3.9 provided: “The Members agree that the business of the LLC, either to sell AML Products ² ... directly to purchasers or to sell AML Products indirectly through an accommodator as part of a tax-exempt transaction, is unique.... No Member, Principal of a Member or holder of an Economic Interest of a Member, may have any interest, directly or indirectly, in any business that offers to sell or exchange AML Products or is otherwise competitive with [AML], nor may any such Member, Principal or Economic Interest holder be employed by, or act as a consultant to, any such competitive business without the approval of a Majority In Interest of the Class A and Class B Members, voting as a Class....”

B. The Dunns and Idanta Partners, Ltd. (Idanta)

David J. Dunn was the founder and managing general partner of Idanta, a venture capital firm that for over 40 years had specialized in helping entrepreneurs create and finance new companies. David Dunn was also the sole trustee of the Dunn Family Trust, which held the bulk of his assets. David Dunn's son, Steven, worked for Idanta for about two-and-a-half years and was a partner in Idanta for some of that time. Steven left Idanta in 1987 or 1988.

David Dunn and the other active partners owned about 20 percent of Idanta. Members of the Bass family, a wealthy Texas family engaged in the oil business, owned the other 80 percent as limited partners. The Bass family invested $7 or $8 million in Idanta.

C. AML Seeks Investment Partners

AML needed an investment partner to provide funding to purchase commercial properties. The first partner, in the late 1990's, was Ethan Penner and an entity he created for that purpose, T–Rex. Roberts knew about and approved the joint venture with T–Rex. The joint venture was supposed to pay the salaries of Runnels and Franklin, and Roberts contributed money to the joint venture to help pay for their compensation. Before the joint venture could complete any transactions, however, Penner withdrew for financial reasons, and the joint venture was dissolved in 1999.

In January 2000 Roberts, Andrews, Runnels, and Franklin entered into a management agreement with AML. While Roberts remained the managing member and Chairman of the Board, Andrews, Runnels, and Franklin agreed to function as the operational management of AML (collectively the Operating Group). In addition, their interests in AML increased to 13–1/3 percent each, while Roberts' interests decreased to 60 percent. The management agreement also required Runnels and Franklin to use their best efforts to find a new investment partner.

In July 2000 the Operating Group identified CB Richard Ellis as a potential investment partner. Again with Roberts' knowledge and approval, AML entered into a relationship with the newly formed CB Richard Ellis Investors 1031 (CBREI). In December 2001 AML entered into an exclusive license agreement with CBREI for FORT transactions. During the course of the relationship CBREI grossed $86 million and paid AML $500,000.

In the summer of 2003 CBREI lost its financing after its funding source refused to fund the transactions. That fall, Roberts told the Operating Group that they should consider terminating AML's relationship with CBREI and searching for a new investment partner.³

At a November 7, 2003 AML board meeting, the Operating Group suggested two possibilities for a new investment partner: Idanta and Warburg–Pincus. A dispute arose at the meeting, however, between the Operating Group and Roberts. Roberts was concerned about protecting AML's business method, while the Operating Group wanted to proceed with finding a new investment partner. Roberts vetoed the Operating Group's proposal to pursue a new investment partner. Roberts then presented the Operating Group with an amendment to AML's Operating Agreement, signed by him and the trustee of the three trusts. The purpose of the amendment was to make it “absolutely clear that no deal could get done without the approval of the majority interest in the company.”

D. Idanta and AML Explore the Possibility of a Relationship

Steven Dunn played tennis with Tyler Runnels, Charles Runnels' brother. In the fall of 2003 Tyler Runnels had Steven Dunn introduce him to David Dunn to discuss a loan to AML. Charles Runnels and Franklin were looking for a loan for a FORT transaction in conjunction with the CBREI joint venture. David Dunn initially refused to provide a loan commitment. At some point, however, he provided a loan commitment of $5.1 million in exchange for $177,000, but he never had to make the loan. David Dunn later tried to put together a joint venture between Idanta and CBREI but was unsuccessful.

In January 2004 David Dunn proposed a transaction that would not include CBREI. Idanta would form and finance a new company in which Idanta would own 80 percent, Runnels and Franklin would own 15 percent and manage the company, and AML would own 5 percent. This proposal was unacceptable to Roberts because Runnels and Franklin would be “getting far too much of the deal when, in fact, it's an AML deal....” Roberts also objected to the interest rate Idanta wanted to charge for loans to the new company, and he did not want to grant the new company an exclusive license to engage in FORT transactions.⁴

On January 13, 2004 David Dunn met with Runnels to discuss the situation. He told Runnels that he was “still interested” in the transaction. He gave Runnels “a lot of good reasons why he [was] better off with an independent entity like Idanta as opposed to being tied to a major realty firm” like CBREI.

By the end of January 2004 the relationship between Roberts and the Operating Group was strained. Roberts and the Operating Group retained separate legal counsel. Roberts was allowed to speak with representatives of Idanta only if Franklin introduced him and was present at the meeting.

On February 5, 2004 Franklin wrote to Roberts to set up a meeting with Steven Dunn. He urged Roberts to review the paperwork, “which shows that the IDANTA offer has an approximate value of $26.5 Million to AML with the majority...