DBSI/TRI v. v. Bender

• Citation: 130 Idaho 796,948 P.2d 151
• Decision Date: 04 September 1997
• Docket Number: No. 22335,22335
• Parties: DBSI/TRI V, an Idaho Limited Partnership, and DBSI/TRI VII, an Idaho Limited Partnership, and DBSI/TRI VIII, an Idaho Limited Partnership, Plaintiffs-Appellants, v. Fred H. BENDER, Philip A. McLennan, Bender and Bender, an Idaho Limited Partnership, Shelter Properties Limited, an Idaho General Partnership, McLennan and Bender, an Idaho General Partnership; and Western States Development Corporation, an Oregon Corporation, Defendants-Respondents. Boise, January 1997 Term
• Court: United States State Supreme Court of Idaho

Page 151

948 P.2d 151

130 Idaho 796

DBSI/TRI V, an Idaho Limited Partnership, and DBSI/TRI VII, an Idaho Limited Partnership, and DBSI/TRI VIII, an Idaho Limited Partnership, Plaintiffs-Appellants, v. Fred H. BENDER, Philip A. McLennan, Bender and Bender, an Idaho Limited Partnership, Shelter Properties Limited, an Idaho General Partnership, McLennan and Bender, an Idaho General Partnership; and Western States Development Corporation, an Oregon Corporation, Defendants-Respondents.

No. 22335.

Supreme Court of Idaho,

Boise, January 1997 Term.

Sept. 4, 1997.

Rehearing Denied Dec. 24, 1997.

Moffatt, Thomas, Barrett, Rock & Fields Chtd., Boise, for Plaintiffs-Appellants. Robert E. Bakes argued.

Cosho, Humphrey, Greener & Welsh, Boise, for Plaintiffs-Appellants. Fredric V. Shoemaker argued.

Hawley, Troxell, Ennis & Hawley, Boise, for Defendants-Respondents. Merlyn W. Clark argued.

SCHROEDER, Justice.

This is an appeal from a series of partial summary judgments dismissing plaintiffs/appellants' Complaint alleging breach of contract, breach of warranty, breach of fiduciary duties, fraud, unjust enrichment, and commercial impracticability.

I. BACKGROUND AND PRIOR PROCEEDINGS

This case involves the purchase of seven rural housing projects ("the Projects") located throughout southern Idaho. The Projects are low-income housing units, financed through subsidized loan arrangements underwritten by the Farmers Home Administration ("FmHA").

The plaintiffs/appellants, Buyer, DBSI/TRI ("DBSI"), is a syndication of Idaho limited partnerships. The defendants/respondents, Seller, Bender and Associates ("Bender" or "Seller") consists of several general and limited partnership interests. Bender constructed the Projects. The defendant/respondent In the fall of 1984, DBSI and Bender began negotiations for the purchase and transfer of the Projects to DBSI. DBSI and Bender entered into two agreements to purchase all seven FmHA financed and regulated Projects, an Earnest Money Agreement dated May 31, 1984, and a Real Estate Sales Agreement dated October 12, 1984. The aggregate purchase price for the Projects was $8,303,000.00. DBSI paid $1,660,000.00 in cash and assumed existing first mortgages or deeds of trust indebtedness to the FmHA in the amount of $4,763,000.00. The balance of the purchase price was to be paid in one payment of $1,880,000.00, plus interest, on October 12, 1999. The Real Estate Agreement provided that "the equity payable to the Seller [at that time] will be provided from outside sources or from any authorized return on investment and not a planned sale of the projects."

Western States Development Corporation ("WSDC"), a corporation wholly owned and operated by Bender, managed the Projects. Prior to negotiations between DBSI and Bender, WSDC managed the units on behalf of Bender pursuant to a written management agreement executed in 1978. WSDC's compensation under this agreement was 9 1/2% of gross rents.

A condition of the sale required DBSI to retain WSDC as the property manager for the Projects while "the deferred balance of the purchase price remains unpaid." DBSI and WSDC executed a Management Agreement on October 12, 1984. According to this Agreement WSDC was to be paid "seven percent (7%) of the approved equivalent market rents for all units occupied during the previous month plus seven percent (7%) of all miscellaneous income collected during the previous month or such lesser amount as FmHA shall approve ... provided that said fee shall not be less than the net fee currently being charged by Agent to manage said projects."

The parties also executed an Addendum to the Management Agreement on October 12, 1984, providing that, "[i]n the event FmHA does not approve the Agent's compensation ... then Agent shall have the sole and exclusive option to terminate said Agreement.... In the event Agent does not terminate ... the allocation and charging of overhead and expenses as provided [in the Management Agreement] is subject to FmHA's approval and the Agent shall not be paid compensation ... in excess of the amount approved by FmHA."

By the terms of the Real Estate Agreement and under federal law, the transfer of ownership of the Projects was subject to prior FmHA approval. Management fees payable under the Management Agreement and Addendum were also subject to FmHA approval, but the parties dispute whether that approval has a retroactive effect on fees paid prior to such approval. According to DBSI, Bender represented that FmHA approval of the Project transfer would be forthcoming within six (6) months from May 31, 1984, and that the Projects were being operated in compliance with FmHA regulations and the loan agreements so that such approvals could be timely obtained. ¹ FmHA approval was delayed because the Real Estate Agreement allowed the Seller to retain a collateral interest in the Projects contrary to restrictions in the loan documents and FmHA regulations. Modification agreements to revise the collateral interest provisions were executed between the parties on September 12, 1985, and approved by the FmHA.

Bender's operations and the financial records of WSDC were also subject to approval by the FmHA. Approval of the financial records was delayed for approximately two (2) years while audited financial statements for 1984 and 1985 were prepared. The FmHA finally approved the transfer of Projects from Bender to DBSI in November of 1986. Between October 12, 1984, and December 31 On December 10, 1986, just prior to a final closing, DBSI and WSDC executed a new 1986 Management Agreement which was approved by the FmHA. Under the 1986 Management Agreement, WSDC was to be paid a monthly management fee of "$25.00 for each occupied unit." This rate was less than the 7% of market rents provided in the 1984 Management Agreement. In addition, the reimbursement for off-site administrative expenses was significantly curtailed. The final documents completing the sale were executed on December 30, 1986.

1986, WSDC managed the Projects for DBSI pursuant to the 1984 Management Agreement and Addendum. The 1984 Management Agreement never received FmHA approval, and DBSI claims that, in fact, the FmHA disapproved the Agreement.

A. Additional Facts

At the time of the initial negotiations between DBSI and Bender, the FmHA permitted two methods of accounting for the declining balance on the outstanding loan. These methods were referred to as the DIAS method and the PASS method. Under the DIAS method, the remaining obligation due in 1999 was based on a book balance. The district court explained that under this method, "a higher percentage of each installment is credited to principal than under the PASS method. Thus, the apparent book balance due appears to decline faster during the early years of the obligations under the DIAS method of accounting." Under the PASS method, the obligation was measured by the present value of remaining installments due at the effective interest rate after subtracting the subsidy. In other words, "the subsidy [is] credited against the dollar amount of the installments ... made." The district court determined that there is no difference in the dollar amount required to service the debt between the two methods. DBSI claims that the PASS method results in a lower representation of the net equity in the underlying mortgage and may impact adversely its ability to attract future investors and purchasers. ²

In 1985 the FmHA announced that it would no longer follow the DIAS method of accounting but would account for the subsidized loans under the PASS method. 7 C.F.R. pt.1951, subpt. K (1985). This regulation became final for all transactions which closed after May 1, 1985, and was in place when the transfer on the Projects finally closed in December of 1986. DBSI claims that the change in accounting method impacts its ability to pay off the balance due, makes the Projects "economically unfeasible" and adversely impacts its ability to pay off the $1,880,000.00 due in 1999 because, after the change, "no one would buy or invest in [the Projects]."

In addition to changes in the FmHA amortization method, the Tax Reform Act of 1986 was passed while the sale of the Projects was pending. Tax Reform Act of 1986, Pub.L. No. 99-514, 100 Stat.2085 (codified in scattered sections of 26 U.S.C.A. (West 1996)). That Act, approved on October 22, 1986, changes the tax consequences of real estate

investments. DBSI claims that a significant reason for purchasing the Projects consisted of the tax incentives it claims were eliminated by the Tax Reform Act.

B. Prior Proceedings

DBSI seeks damages under the Real Estate Agreement and/or 1984 Management Agreement and Addendum and/or rescission or reformation of the Real Estate Agreement. Counts I and II of DBSI's first amended complaint allege commercial impracticability by virtue of the change in FmHA's amortization method and changes in the tax code and prays for rescission of the Real Estate Agreement. Count III alleges breach of warranty against Bender and WSDC resulting in damages in the amount of $937,133.00. Count IV alleges fraud and material misrepresentation against Bender for representing that the Projects were in compliance with FmHA regulations and that FmHA approval could be obtained in a six month period, allegedly resulting in damages in the amount of $200,000.00 ³ paid to WSDC in excess of a "lawful amount," $937,133.00 incurred as a result of closing after the FmHA amortization change, and $1,700,000.00 incurred as a result of closing after the change in the tax code. Count V alleges breach of a written contract and a breach of fiduciary duty against WSDC. DBSI claims that management fees paid to WSDC were contractually subject to prior FmHA approval and that WSDC breached the contract by charging $129,944.00, exclusive of interest, in excess of what DBSI terms "the lawful reasonable allowable fees." DBSI also claims that WSDC owed it a...