Hitchens v. Thompson Nat'l Props., LLC

Decision Date18 March 2014
Docket NumberCivil Action No. 12-cv-02367-LTB-BNB
PartiesDOUG HITCHENS & SHERYL HITCHENS, Plaintiffs, v. THOMPSON NATIONAL PROPERTIES, LLC, Defendant.
CourtUnited States District Courts. 10th Circuit. United States District Court of Colorado

LEWIS T. BABCOCK, JUDGE

ORDER

This matter is before me on Motions for Summary Judgment filed by Defendant Thompson National Properties - seeking dismissal of Plaintiffs Doug and Sheryl Hitchens' claims - as well as a Motion for Summary Judgment filed by Plaintiffs - seeking judgment in their favor as to Defendant's liability. [Docs # 28 & 29]. Oral arguments would not materially aid in my determination of these motions. After consideration of the parties arguments, and for the reasons stated, I DENY IN PART AND GRANT IN PART Defendant's Motion for Summary Judgment [Doc #28], and GRANT IN PART AND DENY IN PART Plaintiffs' Motion for Summary Judgment [Doc. # 29]. The Plaintiffs' motion is granted in favor of Plaintiffs as to liability on their Breach of Guaranty Claim. Defendant's motion is granted on Plaintiffs' Unjust Enrichment Claim and otherwise denied.

I. Facts

The Parties provide that the following facts are undisputed.

Defendant Thompson National Properties ("TNP") was formed in February 2008, by Anthony Thompson for a claimed purpose of investing in the recessionary real estate market. [See Doc. # 34]. The company was to acquire different investments, including commercial properties, real estate loans and operating companies. [Id.] In an effort to raise the funds needed to finance the investments, an aggregate principal amount of up to $18,000,000 of 12% notes due June 10, 2011 were offered by the TNP 12% Notes Program, LLC ("TNP 12%"), in accordance to a Confidential Private Placement Memorandum ("Memorandum"). [Id.] The offering was made to investors across the United States, including the Plaintiffs. [Id.] Investors were required to invest a minimum of $50,000. [Id.]

TNP 12% raised over $21,000,000 from 418 investors. [Id.] Of that amount, TNP 12% took approximately $2.5 million off the top for its fee. [Doc. # 28, Ex. 6, p. 2]. Of the remaining $19,000,000, TNP 12% used $10,000,000 to purchase real estate. [Doc. # 34, Ex. A, p. 7]. Five million dollars was "used to acquire the rights to manage a sponsor's portfolio of 26 [] properties purchased for $700,000,000 in 2005." [Doc. # 28, Ex. 6, p. 2]. Eleven of those properties were then lost to foreclosure. [Id.] TNP 12% used over $8,000,000 of the funds raised from investors to pay those same investors interest in their notes. [Id].

On April 9, 2009, Plaintiffs purchased a note in the amount of $100,000 (the "Note") from TNP 12% and a corresponding Guaranty Agreement from TNP. [Doc. # 28, Ex. 1 & Ex. 8]. Pursuant to the Subscription Agreement (the "Subscription Agreement") with TNP 12%, the Note would become due June 10, 2011. [Doc. # 28, Ex. 1]. Under the Note, TNP 12% wasobligated to pay interest at 12%, and repay the principal of the Note in a lump sum on June 10, 2011, subject to any extension. [Id.; see also Doc. # 34]. TNP and TNP 12% did not issue a physical certificate for the Note, but held all notes in "book-entry" form. [Doc. # 34]. Interest on the Note was 12% and accrued quarterly and was payable on the 15th day of the month following the end of each calendar quarter. [Doc. # 29]. In the event of an extension of the term of the Note, the interest rate would increase by one quarter. [Id.]

The Subscription Agreement states that it is "subject to the terms, conditions, acknowledgments, representations and warranties stated herein and in the Confidential Private Placement Memorandum relating to the" Notes. [Doc. # 28, Ex. 1, p. 1]. Under section 12(b) of the Subscription Agreement, an investor cannot cancel, terminate, or revoke the agreement. [Id. at 5]. Section 12(c) of the Subscription Agreement provides as follows:

[T]his Subscription Agreement and the Memorandum, together with all attachments and exhibits thereto, constitute the entire agreement among the parties hereto with respect to the sale of the Notes and may be amended, modified or terminated only by a writing executed by all parties (except as provided herein with respect to rejection of this Subscription Agreement by the Company).

[Id.]

A Confidential Private Placement Memorandum (the "Memorandum") was also provided to all Note holders in the TNP 12% Notes Program, including Plaintiffs. [See Doc. # 28, Ex. 2]. Under the terms of the Memorandum, all notes issued under the program were to bear non-compounded interest at the annual rate of 12%. [Id.] The notes were set to mature by June 10, 2011. [Id.] However, the company at its discretion could extend the date of maturity for the notes for up to two one-year terms. [Id. at Ex. 2, pp. i, 5, 6, 17]. Under the terms of theMemorandum, TNP 12%'s obligations were unconditionally guaranteed by Defendant. [See Id. at p. 6]. Additionally, the Memorandum provided that TNP 12% is not obligated to redeem the notes prior to the date of maturation "[u]nless an event of default under the Notes exists and the Note holders elect to declare the Notes due and payable." [Id. at p. 17].

As part of the Memorandum and Subscription Agreement, and the offering, Defendant executed a Guaranty Agreement unconditionally guaranteeing the obligations of TNP 12%. [Id. at Ex. 8]. The Guaranty Agreement is "governed by and construed and enforced in accordance with the laws of the State of California." [Id.] Thus, TNP 12%'s obligations under the Note were unconditionally guaranteed by TNP. Specifically, the Guarantee provided that TNP:

unconditionally guarantees the performance of all of the Company's obligations under the Notes, including, without limitation the payment of principal and interest (as such terms are described in the Confidential Private Placement Memorandum dated June 10, 2008 for the sale of the Notes) as provided therein. This Guaranty shall remain in full force throughout the term of the Notes.

[Id.; see also Doc. 3-2, Ex. B]. The Guaranty Agreement also states in pertinent part as follows:

Guarantor acknowledges that the Noteholders may, by simple majority vote or consent, appoint one of them or a third-party attorney or agent, to prosecute the Noteholders' rights hereunder and such party shall be entitled to bring any suit, action or proceeding against the undersigned for the enforcement of any provision of this Guaranty on behalf of all Noteholders .

[Doc. # 28, Ex. 8; see also Doc. 3-2, Ex. B]. Additionally, the Guaranty Agreement provided that TNP agreed to "pay any costs or expenses, including the reasonable fees of an attorney, incurred by the Noteholders in enforcing this Guarantee." Id. The Guaranty Agreement was provided to investors "[i]n order to induce each prospective purchaser . . . to purchase the Notes." Id.

On June 10, 2011, TNP 12% elected to extend the maturity dates on the Notes to June 10, 2012. [See Doc. # 28, Ex. 4]. On March 28, 2012, TNP 12% elected to extend the maturity on the Notes to June 10, 2013. [See Doc. # 28, Ex. 5]. TNP 12% made interest payment to Plaintiffs pursuant to the terms of the Note and indicated that the interest rate would be 12.5% after extension on March 28, 2012. [Id.; see also Doc. # 29].

By 2012, TNP 12% was sustaining substantial operating losses. [Doc. # 29]. In the summer of 2012, TNP 12% defaulted on the Notes and stopped making interest payments. [Id.] On June 26, 2012, Plaintiffs demanded that TNP and TNP 12% redeem the Note. [Id.] TNP 12% then sent a letter to Plaintiffs indicating that all interest payments were deferred through the end of 2012. [Id.] TNP and TNP 12% indicated that they intended to pay all remaining interest and principal on or prior to the maturity date of June 10, 2013. [Id.]

On October 12, 2012, in an effort to avoid redemption of all of the notes, TNP 12% and TNP wrote to its Note holders seeking to re-structure and modify the debt of the TNP 12% Notes Program. [Doc. # 28, Ex. 6, p. 3]. In this "Consent Solicitation" offered by TNP 12% in late 2012, the companies (TNP and TNP 12%) requested that the Noteholders agree to reduce interest, extend the maturity date and waive defaults under their respective notes. [Id.] Specifically, TNP 12% asked its Note holders to (1) extend the maturity of the notes to June 10, 2016; (2) modify the applicable interest rate to 3% in 2013, 4% in 2014, 5% in 2015, and 5% in 2016; and (3) waive any prior defaults under the notes and waive any interest due on the notes and unpaid in 2012. [Id.]

The Consent Solicitation did not reference any part of the Solicitation Agreement or Memorandum that permitted TNP 12% to modify the terms of the Notes in this manner. Rather, TNP 12% simply proclaimed that "[t]o approve the proposal being contemplated in this Consent Solicitation, the affirmative vote of Noteholders holding a majority of the outstanding principal amount of Notes must be cast in favor of the proposal." [Id. at p. 4].

On November 7, 2012, TNP 12% received majority approval to proceed with the modification. [Doc. # 28, Ex 7]. Ultimately, 60.52% of the Note Holders voted for the modification. [Doc. # 28, Ex. 3, ¶¶ 8, 9]. However, Plaintiffs rejected the proposed modification to their Note and continued to demand repayment. [Doc. # 29].

Defendant contends that summary judgment in its favor is appropriate here because, the principal (TNP 12%) has not defaulted or breached under the terms of the Subscription Agreement or any other underlying obligations to Plaintiffs. [See Doc. # 28]. As such, Defendant contends that Defendant cannot be held liable as a guarantor. Defendant also contends that Plaintiffs did not have the right to redeem their investments prior to the date of maturity, which pursuant to the Consent Solicitation, has not occurred. Lastly, Defendant contends that Plaintiffs' claims for unjust enrichment fail as a matter of law because an enforceable express contract exists covering the subject of this dispute.

Plaintiffs...

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