Hendry v. Wells

• Decision Date: 10 July 2007
• Docket Number: No. A07A0059.,No. A07A0060.,A07A0059.,A07A0060.
• Parties: HENDRY et al. v. WELLS et al. Wells Real Estate Fund I v. Hendry et al.
• Court: Georgia Court of Appeals

286 Ga. App. 774

650 S.E.2d 338

HENDRY et al. v. WELLS et al.

Wells Real Estate Fund I v. Hendry et al.

No. A07A0059.

No. A07A0060.

Court of Appeals of Georgia.

July 10, 2007.

Reconsideration Denied July 26, 2007.

Vincent T. Gresham, Christopher J. McFadden, Decatur, for appellants.

Anderson, Tate & Carr, Thomas T. Tate, Lawrenceville, Troutman Sanders, James K. Quillian, Merle R. Arnold, III, William M. Droze, Atlanta, for appellees.

ADAMS, Judge.

The Class B limited partners in a real estate investment limited partnership allege that they were duped into investing because sales materials associated with the deal misrepresented what the Partnership Agreement said about how certain proceeds would be distributed between "Class A" and "Class B" partners. But the Class B partners did not attempt to rescind the transaction or sue in tort for fraud. Instead, they allege that for 13 or more years, the general partners breached their fiduciary duties to them by sending numerous communications that repeated the earlier misrepresentations in order to avoid potential claims by the Class B partners and the investing public, and thereby avoid potential liability. They also allege the general partners breached their fiduciary duty in three actions they took in response to their own observation that the Partnership Agreement distribution scheme might be "unfair and inequitable" to the Class B limited partners. The Class B partners brought this class action suit against the general partners and the property manager in five counts. The plaintiffs allege that the partnership is named as a necessary party only; they do not claim that they are entitled to any relief from the partnership itself.

Upon the defendants' motion for summary judgment on Counts I and V (breach of fiduciary duty for the 13 years of misrepresentations), the trial court held that the claims were barred by the applicable statute of limitation. Upon the defendants' motion to dismiss Counts II, III and IV (breaches of fiduciary duty after the defendants acknowledged a problem), the trial court held that the Class B partners had no standing to bring what, the trial court determined, were in fact derivative claims on behalf of the partnership, and therefore these counts were dismissed for failure to state a claim. The Class B partners appeal, and in a cross-appeal, the defendants appeal the denial of their motion for attorney fees.

Most of the facts are not in dispute. We therefore begin with the findings of fact in the trial court's opinion that detail the manner in which, in the mid-1980s, the plaintiffs became limited partners in Wells Real Estate Fund I, a limited partnership involved in commercial real estate development. As will be seen, the plaintiffs are "B" Unit holders, and the key issue in the case involves the manner in which "Net Sale Proceeds" are calculated for B Unit holders when property is sold.

Wells Real Estate Fund I ("the Partnership") is a Georgia limited partnership currently having Leo F. Wells, III ("Wells"), and Wells Capital, Inc. ("Wells Capital"), a Georgia corporation, as its general partners. The Partnership was formed on April 26, 1984 for the purpose of acquiring, developing, constructing, owning, operating, improving, leasing and otherwise managing, for investment purposes, income producing commercial or industrial properties. The Partnership Agreement has been amended on occasion over the years since its inception on July 30, 1984, but the section at issue in this litigation, Section 9.3, "Net Sale Proceeds", has not been amended.

During the period from September 6, 1984 through September 5, 1986 (the "Offering Period"), limited partnership units were offered for sale to qualified investors by financial planners and registered representatives of authorized securities broker/dealers by use of a Prospectus filed with the SEC which was deemed effective as of September 6, 1984. The Prospectus contained as exhibit B the "Restated and Amended Agreement of Limited Partnership of Wells Real Estate Fund F" ("Partnership Agreement") and as exhibit C the "Wells Real Estate Fund I Subscription Agreement & Signature Page" ("Subscription Agreement") to be signed by all investors. Each limited partner unit was sold for $250 or less. An investor could purchase either A units or B units or both. At the close of the Offering Period, 141,000 units (98,716 A units and 42,568 B units) were sold to a total of 4,895 investors for approximately $35,321,000 in proceeds to the Partnership.

The Partnership is structured such that A unit holders receive a preference in cash available for distribution, while B unit holders receive a preference in allocations of net tax losses and deductions. In the event of the sale of properties, the Net Sale Proceeds are to be distributed to each partner in accordance with the positive balance in his or her Capital Account after allocation of Gain on Sale under Section 10.4. Specifically, Section 9.3 of the Partnership Agreement provides as follows:

Except as otherwise provided for in a liquidation in Section 9.4 hereof and except for the reinvestment of Net Sale Proceeds as provided in Section 11.3(g) hereof, Net Sale Proceeds after the payment of all Partnership debts and liabilities and the establishment of any reserves which the General Partners, in their sole discretion, deem reasonably necessary, shall be distributed to each Partner in accordance with the positive balance in his Capital Account as of the date of distribution under this Section 9.3 (after allocation of the Gain on Sale as provided in Section 10.4 hereof).

The terms "Net Sale Proceeds" and "Capital Account" and "Gain on Sale" used in Section 9.3 are defined terms in the Partnership Agreement and in the Prospectus Glossary.

The Prospectus, including its Exhibit B (the Partnership Agreement), and its Exhibit C (the Subscription Agreement and Signature Page), was made available to Plaintiffs through their respective financial consultants prior to their purchase of B units during the Offering Period. Each Plaintiff executed a Subscription Agreement before purchasing units in the Partnership during the Offering Period on the following dates: James Hendry signed his Subscription Agreement on February 27, 1985; Robert and Karen Beneda signed their Subscription Agreement on September 25, 1984; William Mullin and his wife signed their Subscription Agreement on May 20, 1986.

By executing the Subscription Agreement, each Plaintiff agreed to be "bound by the terms and conditions of [the Partnership Agreement] as set forth as exhibit B to the Prospectus." In each Subscription Agreement Plaintiffs also agreed to the following:

I agree that if this subscription is accepted, it will be held, together with the accompanying payment, on the terms described in the Prospectus and that, if admitted to the Partnership, I shall be bound by the terms and conditions of the Restated and Amended Agreement of Limited Partnership (the "Agreement") of the Partnership as set forth as Exhibit B to the Prospectus. In order to induce the General Partners to accept this subscription, I hereby represent and warrant to you as follows: I have received the Prospectus and the Agreement. . . .

Each Plaintiff relied on advice and direction from their financial planners in making their decision to purchase and to hold B units. The record contains evidence from a hearing on August 3, 2004, in the prior Hendry action in which Plaintiffs admitted to consulting with their respective financial planners and having an opportunity to review and read the Prospectus, the Partnership Agreement and the Subscription Agreement before they made a decision to purchase B units in the Partnership.

(Emphasis in original.)¹

In addition to the above facts, construed in favor of the plaintiffs, the "Sales Materials" associated with the investment (collectively, the prospectus along with the accompanying sales brochure and "bucket chart" used to sell Partnership units) show that the "Net Sale Proceeds" from the sale of Partnership properties would be distributed based on the limited partners' original capital investment. Thus, the Sales Materials did not accurately reflect what the Partnership Agreement itself provided — that Net Sale Proceeds "shall be distributed to each Partner in accordance with the positive balance in his Capital Account as of the date of distribution." The difference is critically important because the B unit holders' capital accounts were reduced over the life of the partnership by their allocation of tax losses. Indeed the prospectus explained that sale proceeds "may not always be pro rata among the Limited Partners due to the disproportionate allocations of tax items that will be given to the holders of the Class B units." By the time they filed their complaint, the B unit holders allege that they had essentially nothing in their Capital Accounts, and therefore they will not receive any Net Sale Proceeds in the event partnership property is sold. Nevertheless, the plaintiffs did not rescind, sue for fraud, or otherwise raise any claims either before they invested or in the several years after they invested in the limited partnership.

The plaintiffs assert they did not do so for two reasons. First, they contend the relevant provisions of the Partnership Agreement are difficult to understand. Second, for 13 or more years after the formation of the partnership (from 1987 through 2000), the defendant general partners sent several communications to the class B partners that misrepresented two material facts: (i) that they would distribute Net Sale Proceeds "pro rata," or on an "equal basis" based on the "original amount of money invested"; and (ii) that the Partnership Agreement included a "make-up provision" to ensure class B partners would ultimately receive the same amount as class A partners. Even the Partnership's annual SEC-filed 10-k report, which was sent...