Friedman v. Kelly & Picerne Inc

• Decision Date: 06 December 2010
• Docket Number: C.A. No. PB 05-1193
• Court: Rhode Island Superior Court
• Parties: DAVID FRIEDMAN; R. JEFFREY KNISLEY, in his capacity as Executor of the Estate of Leon H. Cornell, Jr.; EUSTACE T. PLIAKAS; PETER VICAN; THEONA PASCALIDES; WILLIAM P. VICAN, JR.; CONSTANTINE S. GEORAS; NICHOLAS GOLUSES, JR.; DENA PATEL; GLENN A. CAPALBO; DAVID BOLTON; and the AUDUBON SOCIETY OF RHODE ISLAND v. KELLY & PICERNE, INC.

DAVID FRIEDMAN; R. JEFFREY KNISLEY, in his capacity as Executor of the Estateof Leon H. Cornell, Jr.; EUSTACE T. PLIAKAS; PETER VICAN; THEONA PASCALIDES;WILLIAM P. VICAN, JR.; CONSTANTINE S. GEORAS; NICHOLAS GOLUSES, JR.;DENA PATEL; GLENN A. CAPALBO; DAVID BOLTON; and the AUDUBON SOCIETY OF RHODE ISLAND

v.KELLY & PICERNE, INC.

C.A. No. PB 05-1193

STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS

PROVIDENCE, SC.

SUPERIOR COURT

FILED-DECEMBER 6, 2010

DECISION

SILVERSTEIN, J. This matter is before the Court for decision following a bench trial. The dispute is between the Plaintiffs, limited partners (Limited Partners) of Quaker Towers Associates (QTA or Partnership), and Defendant Kelly & Picerne, Inc. (K&P or General Partner), the general partner of QTA. The Limited Partners allege that K&P breached the terms of the parties' written Limited Partnership Agreement (LP Agreement) by failing to make annual distributions and unjustifiably withholding the Limited Partners' respective shares of the $285,000 remaining from the sale of Quaker Towers in 2004. Additionally, the Limited Partners claim that K&P breached its fiduciary duties of care and loyalty by engaging in self-interested transactions, favoring the interests of its corporate parent—Picerne Investment Corporation (PIC)—over QTA and the Limited Partners, and failing to adequately manage and maintain Quaker Towers. As a result, Plaintiffs seek (1) a full accounting of the amounts due to the Limited Partners under the LP Agreement; (2) an order and judgment in favor of the Limited Partners granting the full amounts due under the LP Agreement; (3) actual and consequential damages proximately caused by K&P's breaches of contract and fiduciary duties; (4) a judgment and order disgorging K&P of its secret profits and proceeds obtained in violation of its fiduciary duties; (5) a declaration of the rights of the Limited Partners to share in distributions provided for in the LP Agreement; and (6) an award of attorney's fees under G.L. 1956 § 9-1-45 and the costs of suit.

IFacts and Travel

On March 30, 1977, the Limited Partners and K&P entered into the LP Agreement creating QTA. See Pls.' Ex. 1. The purpose of the Partnership was to (1) acquire the parcels of real estate known as Quaker Tower Apartments (Quaker Towers or Property), and (2) "to hold, own, improve, operate, manage, service, lease, mortgage and encumber the same... and to acquire additional real and personal property to the extent necessary or appropriate to carry out the foregoing purpose." Id K&P is a Rhode Island corporation and wholly owned subsidiary of PIC.¹ (Tr. 25.) K&P is one of the largest apartment managers in the country, managing between twenty-five and fifty apartment properties in Rhode Island alone Id QTA's original limitedpartners included Eustace Pliakas, Leon Cornell, David Friedman, William Vican, Sr., Constantine Georas, Nicholas Goluses, Sr., Glenn Capalbo, David Bolton, and Louise Durfee.² (Pls.' Ex. 1.)

Quaker Towers was constructed in 1972 and was purchased by QTA in 1977 for approximately $1,600, 000. See Pls.' Ex. 1; Tr. 26-28. Quaker Towers is a 128-unit apartment complex comprised of seven residential buildings and a small commercial building on about six acres. Id. The Property is located on Cowesett Avenue in West Warwick, Rhode Island. Id.

The LP Agreement

In accordance with the terms of the LP Agreement, the Limited Partners contributed a total of $200,000 in exchange for a fifty-percent interest in QTA, and K&P contributed $10 in exchange for its fifty-percent stake. See Pls.' Ex. 1; Tr. 32. As the sole property manager of Quaker Towers from 1977 until its sale in 2004, the LP Agreement entitled K&P to an annual management fee equal to five percent of the gross income actually received from rents.³ Id. ¶ 15.1; Tr. 26.

In addition to the initial capital contributions, the LP Agreement required the General Partner to make loans to the Partnership in the event it incurred an annual operating deficit or annual negative cash flow in the years before 1983. Id. ¶ 11.2. These loans, known as "Class Aloans," were to be repaid to the General Partner without interest before the distribution of any available net income.^{4 5}

Once all Class A loans had been repaid, the LP Agreement specified that income and losses were to be shared by the General Partner and Limited Partners, and the available net income was to be distributed "not less often than annually." Id.¶ 9. The LP Agreement provided that available net income was to be distributed as follows: (1) "all of the available net income for each year up to $18,000 shall be distributed on a non-cumulative basis to the Limited Partners..."; (2) "[a]ll of the available net income for each year in excess of $18,000 and up to $36,000 shall be distributed on a non-cumulative basis to the General Partner"; and (3) "[a]vailable net income for each year in excess $36,000 shall be distributed to the partners (Limited and General), without priority____"⁶ Id.¶¶ 9.1-9.2.

As General Partner, K&P was entrusted with management and control of the Partnership. The LP Agreement provided that

"[t]he management and control of the [P]artnership business shall be exercised, and all decisions to be made by the [P]artnership shall in all cases be made, by the General Partner. Limited Partners may not exercise any voice or control in the management of the [P]artnership business or bind the [P]artnership in any way whatsoever." Id.¶ 14.1.

Among the powers granted to the General Partner, the LP Agreement authorized K&P to

"sell or exchange all or any part of the [P]artnership property and assets...; to acquire and accept, by purchase or otherwise, real property or any interest therein for the [P]artnership...; to enter into contracts for construction and equipping of, and to cause to be constructed and equipped, any building or buildings and/or improvements on real property or leasehold or other interests...; to demolish any building owned or leased by the [P]artnership after the General Partner has made all Class A and Class B loans...; and to erect a new building in its place and/or alter or improve any building owned or leased by the [P]artnership; to obtain loans, secured and unsecured, for the [P]artnership and to secure the same by mortgaging, assigning for security purposes, pledging or otherwise hypothecating all or any part of the [P]artnership property or assets...; to prepay in whole or in part, refinance, recast, increase, modify or extend any such mortgage, security, assignment, pledge or other security instrument, and in connection therewith to execute, for and on behalf of the [P]artnership, any extensions, renewals or modifications thereof and any new mortgage, security assignment, pledge or other security instrument in lieu thereof; and to take all other action and to execute any and all other contracts, documents, and instruments it may deem appropriate to carry out the intents and purposes of this Agreement; provided, however, that nothing contained in this paragraph shall increase the liability of the Limited Partners as herein stipulated." Id.¶ 14.2.

In addition to the specific powers enumerated in¶ 14.2, the LP Agreement authorized the General Partner to exercise all of the "rights and powers of a general partner provided under the laws of the State of Rhode Island."⁷ Id.¶ 14.3.

K&P's liability was also limited by the LP Agreement which provided that

"[t]he General Partner shall not be liable, responsible or accountable in damages or otherwise to any of the partners for any acts performed by it within the scope of the authority conferred on the General Partner by this Agreement or for its failure or refusal to perform any acts except those expressly required by the terms of this Agreement." Id.¶ 15.4.

Additionally, as part of its management power, K&P was authorized to "employ, on behalf of the [P]artnership, such persons, firms or corporations as it in its sole judgment, shall deem advisable in the operation and management of the business of the [P]artnership...." Id.¶ 15.3.

Under the LP Agreement, K&P also reserved the right to engage in "any other business or investment, including the ownership of or investment in real estate and the operation and management of real estate." Id.¶ 15.2. The LP Agreement also ensured that "neither the [P]artnership nor any of the partners thereof [had] any rights in and to" any such business, investments, or income and profits derived therefrom. Id.

In contrast, the terms of the LP Agreement prohibited the Limited Partners from exercising any "voice or control in the management" of the Partnership. See Id.¶ 15.6. In exchange for relinquishing management and control to the General Partner, the Limited Partners were shielded from personal liability. Id. The LP Agreement stated that the Limited Partners "shall not be personally liable for any of the debts of the [P]artnership or for any other losses thereof beyond the amount of [their] interest in the [P]artnership." Id.

Management and Operations

K&P managed Quaker Towers as part of its West Warwick Package (Package), a collection of seven different apartment projects in the area. (Tr. 49-50.) The Package consisted of Quaker Towers, River Run, Pleasant Hill, Maple Leaf, Shady Oaks, Pilgrim Park, and Parkview Terrace.⁸ Id. These projects were managed, at least in part, by PIC employees at PIC's corporate office located on Lambert Lind Highway. Id. Additionally, all of the employees who were assigned to properties within the Package, worked out of an office located at Quaker Towers. Id. at 74.

As part of this arrangement, K&P allocated and shared many of the costs and expenses it incurred across the Package, while others were charged directly to certain properties. Id. Among those shared expenses, employee payroll was allocated on a weekly basis at the Lambert Lind Highway corporate office. Id. at 90. These allocations were not made based on the submission of...