Hci Investors, LLC v. Fox

• Decision Date: 08 October 2013
• Docket Number: Nos. WD 75831,WD 75880.,s. WD 75831
• Citation: 412 S.W.3d 424
• Parties: HCI INVESTORS, LLC, et al., Respondents, v. Anthony FOX, et al., Appellants.
• Court: Missouri Court of Appeals

412 S.W.3d 424

HCI INVESTORS, LLC, et al., Respondents,

v.Anthony FOX, et al., Appellants.

Nos. WD 75831, WD 75880.

Missouri Court of Appeals, Western District.

Oct. 8, 2013.

Charles W. German, Lawrence A. Rouse and Daniel B. Hodes, Kansas City, MO, for respondents.

John C. Aisenbrey and Angela G. Nichols, Kansas City, MO, for appellants.

Before Division Three: LISA WHITE HARDWICK, Presiding Judge, MARK D. PFEIFFER, Judge and CYNTHIA L. MARTIN, Judge.

CYNTHIA L. MARTIN, Judge.

Limited liability companies (“LLCs”) were formed to purchase nonperforming assets held by a bank holding company's subsidiary bank in order to remove the assets from the bank's books prior to an FDIC examination. Shareholders of the bank holding company who agreed to participate became members of the LLCs, obligated to make capital calls to fund the LLCs and to execute personal guarantees of loans obtained by the LLCs to acquire the nonperforming assets. The proposed transaction anticipated that shareholders of the bank holding company who refused to participate would be subject to dilution of their share position by the issuance of warrants permitting participating shareholders to acquire additional stock at an inexpensive price. The Fox Family agreed to participate, and thus became members in the LLCs. The Fox Family later refused to pay capital calls made by the LLCs. The LLCs filed suit against the Fox Family to enforce the obligation to pay capital calls. The Fox Family asserted numerous affirmative defenses and counterclaims in response challenging the lawfulness and enforceability of the LLCs' operating agreements. Following trial to the court, a judgment was entered in favor of the LLCs and against the Fox Family on the LLCs claims. The judgment rejected all of the Fox Family's affirmative defenses and counterclaims.

The Fox Family appeals. We affirm.

Factual and Procedural History ¹

Respondents HCI Investors, LLC, HB Investors LLC, and FFBWC Investors, LLC are limited liability companies duly organized and existing under the laws of Missouri (the “LLCs”). Jack Fingersh (“Fingersh”) and Irwin Blitt (“Blitt”) are managers of the LLCs. The LLCs were formed in 2008 to acquire nonperforming assets from Hillcrest Bancshares, Inc., a Kansas corporation, (the “Holding Company”), and its subsidiary Hillcrest Bank (the “Bank”) in advance of an FDIC examination. Fingersh and Blitt are directors of the Holding Company and the Bank.

The Holding Company and the Bank were owned almost entirely by seven families: ² the Fingersh Family (31.663%) (as to which Fingersh is the authorized representative), the Blitt Family (25.453%) (as to which Blitt is the authorized representative), the Copaken Family (10.321%) (as to which Paul Copaken is the authorized representative), the White Family (10.511%) (as to which Jerry White is the authorized representative), the Fox Family (14.71%) (as to which Shayle Fox (“Fox”) is the authorized representative), and the Morgan and Dreiseszun Families (6.940%). These families had a thirty year history of being investment partners and had participated together in many ventures including commercial and residential real estate, and banks. The family representatives are each sophisticated businessmen. Fox is a CPA, and has been a business and commercial transactions attorney for over fifty years.

In 2008, in response to the virtual collapse of the real estate market, an increasing number of the Bank's borrowers were unable to make payments on loans secured by real estate. The ratio between these nonperforming assets (“NPAs”) and total assets on the Bank's books had increased from at or below 1% to approximately 5%. The ratio was expected to increase to over 7%, a level the Bank's directors believed would have undesirable regulatory consequences at a looming FDIC examination scheduled in May 2008.

In an April 14, 2008 memorandum, Fingersh proposed that LLCs be formed to acquire some of the Bank's NPAs, and that all Holding Company shareholders be given the opportunity to participate by agreeing to be members of the LLCs (the “Transaction”). LLC members would be bound by operating agreements to make capital calls to fund LLC obligations,³ and would be required to personally guarantee LLC debt incurred to acquire the NPAs. The LLCs would then work to market and sell the acquired NPAs. The Transaction proposed issuing warrants to Holding Company shareholders who agreed to participate allowing them “on a pro rata basis and without additional consideration, to acquire stock [in the Holding Company] equal to 25% of the stock owned by the non-participating shareholder.” The effect of the issuance of the warrants would be to dilute the share position of Holding Company shareholders who refused to participate in the Transaction. The warrant issuance was thus intended to incentivize participation so that nonparticipating shareholders would not unfairly benefit from the willingness of other shareholders to accept the risk of participation in the Transaction. There was a sense of urgency to the Transaction, as all Holding Company shareholders, including the Fox Family, agreed that doing nothing was not an option as it was essential to improve the Bank's NPA ratio in advance of the FDIC examination.

Operating agreements were presented to participating shareholders for signature in June 2008. All Holding Company shareholders except the Morgan and Dreiseszun Families agreed to participate in the Transaction. A separate agreement addressing the issuance of warrants was also executed in June 2008.

Following the execution of the LLC operating agreements, the LLCs were able to negotiate and close on loans in the approximate amount of $28,000,000 from North American Savings Bank and First State Bank. The members of the LLCs personally guaranteed the LLC loans. The loan proceeds were then combined with capital contributions from the LLC members to permit the acquisition of $40,700,000 of NPAs from the Bank.

Prior to the closing of the Transaction, the Holding Company had been advised by its outside accountants that the issuance of warrants to incentivize the Transaction would require a charge to the Bank's earnings of approximately $250,000. In December 2008, and thus a few months after the Transaction closed, the outside accountants advised the Holding Company that their calculation was in error, and that the issuance of the warrants would require an immediate charge to the Bank's earnings in the approximate amount of $2,500,000. The participating shareholders, including the Fox Family, unanimously agreed to cancel the warrants to avoid this undesirable impact on the Bank's earnings.

The LLCs made periodic capital calls to fund debt service and other costs associated with ownership and marketing of the acquired NPAs. The Fox Family honored all capital calls until September 2009. The Fox Family thereafter summarily announced they would no longer pay capital calls, and that they were no longer willing to participate in the LLCs. On July 30, 2010, the LLCs filed suit against the Fox Family for breach of contract seeking recovery of unpaid capital calls required by the operating agreements, and for a declaratory judgment that the Fox Family remained bound by the operating agreements.

The Fox Family answered the petition and asserted numerous affirmative defenses and counterclaims, all of which sought to negate the obligation to make the capital calls, and/or to declare the operating agreements unenforceable. The counterclaims sought rescission of the operating agreements, and asserted theories of fraudulent misrepresentation, negligent misrepresentation, breach of fiduciary duty, and violation of section 409.5–509 ⁴ against Fingersh in his capacity as the “promoter” of the LLCs. ⁵

In December 2011, the Fox Family sought leave to file an amended answer to add an affirmative defense and a counterclaim asserting an additional theory of breach of fiduciary duty by Fingersh and Blitt in their capacities as directors and controlling shareholders of the Holding Company. Leave was granted in March 2012.

The case was tried to the court in June 2012. It was undisputed that the Fox Family failed to pay capital calls when demanded by the LLCs. On October 29, 2012, the trial court entered its judgment (“Judgment”) finding: that the Fox Family had been in continuous breach of the operating agreements given the nonpayment of capital calls; that the LLCs are entitled to damages in the amount of $1,589,325.70, plus interest, plus attorneys' fees, and expenses in a combined total of $620,600.45; that the newly added counterclaim against Fingersh and Blitt for breach of fiduciary duty in their capacities as directors and controlling shareholders of the Holding Company was barred by the statute of limitations, but that the related affirmative defense was not time barred; that the Fox Family's remaining counterclaims and affirmative defenses (including the newly added affirmative defense asserting breach of fiduciary duty against Fingersh and Blitt) were without merit based upon the evidence presented; ⁶ and that the Fox Family remained a member of the LLCs bound by the operating agreements.

This appeal followed.

Summary of Issues on Appeal

The Fox Family appeals only the trial court's rejection of the breach of fiduciary duty counterclaim and affirmative defense first asserted in March 2012 against Fingersh and Blitt in their capacities as directors and controlling shareholders of the Holding Company. The Fox Family asserts in their first point on appeal that the trial court erred in rejecting the affirmative defense and counterclaim because Fingersh and Blitt were self-dealing directors and shareholders who failed to sustain their burden to establish that the Transaction met the entire fairness standard. In their second point on appeal, the Fox Family asserts that the trial court erred in concluding that the counterclaim was barred by the...