D'Elia v. Rice Development, Inc.

Decision Date13 October 2006
Docket NumberNo. 20050247-CA.,20050247-CA.
Citation147 P.3d 515,2006 UT App 416
PartiesSerge Max D'ELIA and Lilian C.L.S. d'Elia, Trustees of the d'Elia Family Trust UDT dated August 22, 1990, Plaintiffs and Appellants, v. RICE DEVELOPMENT, INC., a California corporation; Rice Development, L.L.C., a Utah limited liability company; Gerald H. Rice, an individual; Cherry Hills Associates, L.P.; Bridlevale, Ltd.; and John Does I-XV, Defendants and Appellees.
CourtUtah Court of Appeals

Stephen E.W. Hale and Justin P. Matkin, Salt Lake City, for Appellants.

David C. Wright, Salt Lake City, for Appellees.

Before Judges BILLINGS, DAVIS, and ORME.



¶ 1 Plaintiff trustees Serge Max d'Elia and Lilian C.L.S. d'Elia appeal three trial court rulings, made at the conclusion of a five-day trial, against the d'Elia family trust (the Trust) and in favor of Defendants Gerald H. Rice (Mr. Rice); Rice Development, Inc. (Rice Inc.); Rice Development, LLC (Rice LLC), Cherry Hills Associates, LP; and Bridlevale, Ltd. The Trust argues the trial court erred in determining that (1) Mr. Rice is not the alter ego of Rice Inc. and Rice LLC, (2) the Trust must demonstrate self-dealing to hold Mr. Rice personally liable for Rice Inc.'s and Rice LLC's breaches of fiduciary duty, and (3) the Trust cannot hold Defendants liable for constructive fraud because it cannot show fraudulent intent. We affirm in part and reverse and remand in part.


¶ 2 Mr. Rice is the president and sole shareholder of Rice Inc., a California corporation. Mr. Rice is also the former sole managing member and exclusive owner of Rice LLC, a now dissolved Utah limited liability company. For the relevant periods, Mr. Rice exercised exclusive control and direction over Rice Inc.'s and Rice LLC's finances and business affairs.

¶ 3 In August 1990, Rice Inc. joined with the Trust to create Cherry Hills Associates LP (Cherry Hills), a California limited partnership. Cherry Hills was the third partnership Rice Inc. and the Trust formed together. Rice Inc., whose principal place of business is California, was the sole general partner of Cherry Hills. The Trust was the sole limited partner. The parties formed and operated Cherry Hills pursuant to a partnership agreement (the Cherry Hills Agreement). The Cherry Hills Agreement stated that the purpose of the partnership was the construction, development, marketing, and sale of 140 single-family homes.

¶ 4 The Trust advanced funds to Cherry Hills and contributed capital by purchasing land for development and transferring that land to the partnership. In return for the Trust's contributed capital, the Cherry Hills Agreement required Cherry Hills to pay the Trust $20,000 from the sale proceeds of each home. In 1993, California's declining economic conditions led the Trust to reduce Cherry Hills's repayment of the Trust's capital from $20,000 to $17,000 for each home. In 1994, the Trust also agreed to forego interest rate payments and repayment on its advanced funds until after Cherry Hills completed the development project. These allowances by the Trust permitted Cherry Hills to more quickly repay its construction loans and to avoid having to postpone completion of the project until after the recession ended.

¶ 5 Rice Inc. did not make any monetary contributions to Cherry Hills. The Cherry Hills Agreement, however, required Rice Inc., as general partner, to provide the time, skills, and effort necessary to successfully manage and operate the partnership and to accomplish Cherry Hills's business purpose. Mr. Rice received a supervision fee in an amount equivalent to 3.75% of the homes' sale prices. In total, Mr. Rice received $534,767 in supervision fees. Although near the end of the Cherry Hills project's completion, Mr. Rice stopped accepting the supervisory fee in an effort to aid the partnership.

¶ 6 Throughout the Cherry Hills project, Mr. Rice stayed in regular contact with trustee Serge Max d'Elia (Mr. d'Elia). Specifically, Mr. Rice regularly visited Mr. d'Elia at his home, Cherry Hills consistently sent the Trust updates on Cherry Hills's sales and finances, and at each phase of the Cherry Hills project, Mr. Rice sent the Trust a copy of the form the construction lender used to regulate how the construction draws were used.

¶ 7 Mr. d'Elia was also informed of Mr. Rice's one-third ownership interest in Rymco Framing Inc. (Rymco Framing), Rice Inc.'s in-house framing company, and consented to Rice Inc.'s plans to hire Rymco Framing to work on Cherry Hills homes.1 The Cherry Hills Agreement permitted the parties to enter into contracts with affiliated entities "for any purpose or purposes in furtherance of the business of the [p]artnership[,] so long [as] such contracts [were] on terms that would be appropriate in a contract reached on an arms-length basis with a party not affiliated with either [p]artner or the [p]artnership."

¶ 8 Cherry Hills completed its development project six years after it began, ultimately building and selling all 140 homes. Upon the project's completion, Cherry Hills owed the Trust over $1,044,173 in initial capital contributions and approximately $1,200,276 in advanced funds. Additionally, Rice Inc. accrued a deficit of $1,203,684 in its Cherry Hills capital account that the Cherry Hills Agreement required Rice Inc. to pay by giving the partnership cash in the amount of the deficit. Further, Rice Inc. failed to deposit $17,779 received from home purchasers' option upgrades into Cherry Hills's account — instead depositing these funds in Rice Inc.'s individual account. Finally, Rice Inc. failed to account for $9358 in home sale proceeds and $21,725 in utility company deposits.

¶ 9 According to Rice Inc.'s federal income tax returns, in 1991, Rice Inc. retained earnings of $725,282. That same year, Mr. Rice took out a personal loan against Rice Inc. for $325,195. In 1992, Rice Inc. had a negative capital balance of $45,133. And in 1998, Rice Inc. reported negative retained earnings of $754,643.

¶ 10 Over the course of the Cherry Hills project, Rice Inc. occasionally paid Mr. Rice a salary. In 1991, Rice Inc. paid Mr. Rice a $122,000 salary. In 1993, Mr. Rice earned a salary of $460,000 from Rice Inc. In both 1993 and 1995, Mr. Rice took "Partner[']s Draw[s]" from Rice Inc. in the amounts of $552,326 and $296,663, respectively.

¶ 11 In July 1994, approximately four years after the formation of Cherry Hills, the Trust and Bowler & Rice LLC, a company owned by Mr. Rice and Randall Bowler, formed Bridlevale Associates Ltd. (Bridlevale), a Utah limited partnership. The Trust and Mr. Rice later bought Bowler's share in Bowler & Rice LLC. In purchasing Bowler's share, Mr. Rice caused $147,000 in Bridlevale funds, one-half of which the Trust owned, to be paid to Bowler without the Trust's consent.

¶ 12 Rice LLC became the sole general partner of Bridlevale. The Trust served as Bridlevale's exclusive limited partner. As with Cherry Hills, the parties formed and operated Bridlevale pursuant to a partnership agreement (the Bridlevale Agreement). According to the Bridlevale Agreement, the parties formed Bridlevale to construct, develop, market, and sell 108 single-family homes. After its formation, Bridlevale began a residential development project in West Valley City, Utah.

¶ 13 Bowler & Rice LLC contributed $55,272 to the Bridlevale project, and in accordance with the Bridlevale Agreement, Rice LLC, as general partner, committed the time, effort, and skill necessary to accomplish Bridlevale's business purpose. As it did with Cherry Hills, the Trust purchased land and transferred the land to Bridlevale for development. Under the terms of the Bridlevale Agreement, which was in all other respects nearly identical to the Cherry Hills Agreement, Bridlevale would only return the Trust's capital at the end of the project when all the homes were built and sold. The agreement also entitled Rice LLC to a supervisory fee that toward the end of the project Rice LLC declined to receive.2

¶ 14 At some point during the Bridlevale project, Mr. d'Elia told Mr. Rice that the Trust was having cash flow difficulties and asked Bridlevale to distribute, in violation of the Bridlevale Agreement, any available funds. Mr. Rice informed Mr. d'Elia that there were no Bridlevale funds available, but Mr. Rice did transfer $100,000 from his personal retirement fund to the Trust. Mr. Rice claimed that the transfer was a personal loan and that Mr. d'Elia told Mr. Rice he would repay him when future revenues from the Bridlevale project materialized. The Trust, however, treated and recorded the transfer as a return of capital from Bridlevale. The Trust never repaid Mr. Rice.3

¶ 15 Eventually, Bridlevale constructed and sold all 108 homes. At the project's conclusion, Bridlevale owed the Trust $294,255 of the Trust's initial capital contribution. Rice LLC accrued a $237,893 deficit in its capital account that the Bridlevale Agreement required Rice LLC to repay. Additionally, Rice LLC did not account for $25,785 in missing escrow payments made to Bridlevale and $53,450 in missing option and upgrade payments made by Bridlevale home buyers. Further, Rymco Framing LLC (Rymco LLC), a Utah framing company in which Mr. Rice shared an ownership interest, charged Bridlevale $270,315 over the contract prices Rice LLC and Rymco LLC had agreed to for Rymco LLC's work on the development project. Although neither Mr. Rice nor Rice LLC provided an explanation for the overcharge, Mr. Rice testified that Rymco LLC's purpose was not to make or lose money but simply to break even. The same year that Rymco LLC overcharged Bridlevale, Rymco LLC's federal income tax return reported an operating profit for the company of $190,586.

¶ 16 In addition to missing and unaccounted for monies, Mr. Rice also misinformed the Trust about the release of $80,679 in Bridlevale improvement bonds. Although Mr. Rice told Mr....

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