Bakken Residential, LLC v. Cahoon Enters., LLC
| Decision Date | 31 December 2015 |
| Docket Number | Case No. 4:12-cv-146 |
| Parties | Bakken Residential, LLC, Plaintiff, v. Cahoon Enterprises, LLC, Defendant. |
| Court | U.S. District Court — District of North Dakota |
Rachel A. Bruner-Kaufman, Zachary E. Pelham, B. Timothy Durick, Pearce & Durick, Bismarck, ND, for Plaintiff.
Peter H. Furuseth, Furuseth Law Firm, PC, Williston, ND, for Defendant.
FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER FOR JUDGMENT
Plaintiff Bakken Residential, LLC (“Bakken”) commenced this action on October 19, 2012, against Cahoon Enterprises, LLC, (“Cahoon”), several weeks after Cahoon declared that it considered a real estate purchase agreement between the parties to have terminated because of Bakken's failure to close on the property. Bakken had entered into an agreement with Cahoon to purchase 42.74 acres of land in the small community of Ray, North Dakota, during the height of the Bakken oil boom hoping to develop a large mobile home park on the western half of the property and make available for sale developed commercial lots in the eastern half. Bakken's complaint asserts claims for breach of the purchase contract, unjust enrichment, and quantum meruit.
Initially, the major thrust of Bakken's action was to obtain specific performance with its requests for damages being secondary. This is because Bakken continued with its development efforts after the action was filed, including spending money on final engineering and an updated appraisal for its lender. And, in an attempt to prevent the sale of the property to someone else in the interim, Bakken filed a lis pendens. It was not until 2015, when the demand for oilfield workforce housing was collapsing with the falling oil prices that Bakken abandoned its request for specific performance and focused instead on its arguments for damages.
At trial, Bakken's primary focus was upon its claim for unjust enrichment, believing this would result in the largest dollar recovery. Essentially, Bakken's argument is that all of the work it did on its proposed development in terms of planning, engineering, obtaining preliminary governmental approvals, and insuring that the site had adequate utilities (what it refers to collectively as “entitlements”) substantially benefitted Cahoon by making the property more valuable than what it was without all of these things, i.e. , as “unentitled” property. Bakken contends that the court should enter an award against Cahoon for this increased value notwithstanding its own inability to capitalize on what, by its estimates, amounted to more than a doubling of the value of property.
In the alternative, Bakken seeks to recover the amount that it spent on its development as well as for a return of the earnest money deposited as part of the purchase agreement. Bakken contends that these amounts are recoverable at law because of Cahoon's alleged breaches of the purchase agreement or, alternatively, in equity based upon on a claim for quantum meruit.
Cahoon moved at trial for dismissal of the action, contending that North Dakota law prohibits a foreign limited liability company from maintaining any action, suit, or proceeding in any court of this state until it possess a certificate of authority and that Bakken had let its certificate authority lapse prior to initiating this action and did not have one at the time of trial. This was the first time Cahoon raised this issue. Apart from that, Cahoon denies it breached the purchase agreement or that any breach was a proximate cause of the damages being claimed by Bakken. Cahoon also contends that equitable relief is not appropriate.1
The case was tried to the court on June 2-3, 2015. Thereafter the court allowed time for the parties to submit post-trial briefs.
In each instance in which the court reserved ruling on the relevancy of a particular exhibit or item of testimony, the court has overruled the objections and given the evidence the weight it deserves under the circumstances.
What happened
1. Bakken is a Colorado limited liability company. Its members are Todd Oltmans and Michael Wilson, both of whom are from Colorado. Oltmans is a real estate developer and Wilson a dealer of manufactured homes and an investor in mobile home parks.
In 2011, Oltmans and Wilson began exploring the possibility of developing real estate in the Bakken oilfields in northwestern North Dakota because housing was then in short supply and the region one of the top-ten rental markets in the country. Given Oltmans' and Wilson's particular expertise, they were looking for an opportunity to develop a mobile home park for housing oilfield workers. They explored several possibilities and one that they eventually decided upon was a 42.74 acre tract located in Ray, North Dakota, that was listed for sale by Cahoon.
Oltmans and Wilson soon brought on another individual, Brian Robinson, to assist in obtaining the permits and approvals for the development of the property and then later to oversee the construction. Robinson is also from Colorado. He has an engineering degree and substantial prior experience in real estate development. Robinson is described as being a partner in the development of the property although not a member of Bakken.
2. Ray is small community. According to a market analysis obtained by Bakken, Ray had less than 700 persons going into 2012, which was up from a population of a little over 500 just before the Bakken boom. Ray is located along U.S. Highway 2 north and east of Williston, North Dakota, about 35 miles away by vehicle. The 42.74 acre tract owned by Cahoon abuts the south side of Highway 2 in an undeveloped area south and east of the developed area of Ray, which is primarily on the north side of Highway 2.
3. Cahoon is a Montana limited liability company with Mark Cahoon as its only member. Mark Cahoon arranged for the purchase of the 42.74 acre in 2010 from Paul Weyrich for $22,000 with the assistance of his mother. Title to the property was initially put in his mother's name and then later transferred to Cahoon, the limited liability company.
Following the purchase of the property, Cahoon obtained a state license for a mobile home park on the site for up to ninety units. And, while the record is somewhat unclear, it appears he also obtained a more limited initial approval from the City of Ray for a phase I development of 18 units. Eventually, Cahoon decided to abandon his effort to develop the mobile home park because he lacked the resources to put in the paved streets that the City was requiring. He then put the property up for sale.
4. Bakken began negotiating the terms of a purchase agreement with Cahoon's listing agent, Ryan Visser, in the latter part of December 2011. The list price for the 42.74 acre tract was $4.8 million. On January 23, 2012, Bakken executed a written offer to purchase the property for $3.4 million that was accepted by Cahoon on January 30, 2012.
The initial purchase agreement was a two-page document. The first page was a standard offer-to-purchase form used by Visser. The second page, labeled Addendum #1, set forth a number of additional terms and conditions that were specifically negotiated by Bakken. The negotiations leading up to the execution of the initial purchase agreement were between Bakken and Visser. Bakken's members did not actually meet Mark Cahoon until after the initial agreement was signed.
5. The initial purchase agreement provided that the closing on the purchase would take place on or before April 30, 2012, with Bakken's obligation to purchase the property being subject to a number of conditions that are discussed in more detail below, including a 60-day period to conduct “due diligence.” The agreement required the deposit of $20,000 in earnest money that would be refundable under certain circumstances, including the inability of Cahoon to furnish marketable title and the election of Bakken to terminate the agreement prior to the expiration of the 60-day due diligence period.
6. Soon after execution of the purchase agreement, Bakken retained Interstate Engineering to do a preliminary design for its proposed development of the property, which it named “Ray Crossing.” The preliminary layout provided for subdividing the western half of the tract into 102 individual lots along with city streets. Bakken planned on placing mobile homes on each of the lots that it would retain ownership of and rent out on a bedroom basis with no restriction upon the individuals living within the mobile homes having to be a single family or otherwise related. This was because the target market for renters was primarily oilfield workers. The preliminary design further provided for the eastern half of the 42.74 acre tract to be divided into seven lots of various sizes for commercial development, including possibly a truck stop, one or more motels and restaurants, storage units, possible retail, etc.
From the outset, Bakken's proposed development was a highly speculative venture. Bakken itself did not have substantial money to invest in the project. Also, it had no binding commitments from any entity for the purchase of its commercial lots. Essentially, Bakken required 100% financing and, for that, it had turned to Momentum Funding, LLC (“Momentum Funding”), a private capital group. According to Oltmans, Bakken chose Momentum Funding because it had financed mobile home parks in other parts of the country. Also, Oltmans had a prior relationship with the firm.
According to the testimony of Bakken's principals, Momentum Funding needed to do its own evaluation of the viability of the Ray Crossing project (what Oltmans referred to in his testimony variously as Momentum Funding doing its own “due diligence” or “underwriting”) before it would advance even the amount required for the purchase of the property. Based on this testimony as well as various exhibits, the assurances...
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