In re Lauer

• Decision Date: 10 June 2004
• Docket Number: No. 03-1244.,No. 03-1241.,No. 03-1236.,03-1236.,03-1241.,03-1244.
• Parties: In re: Leroy J. LAUER, Debtor. Harriet Nangle Rose; Ellen Catherine Nangle; Timothy Michael Nangle, Appellants/Cross-Appellees, Land Investment Club, Inc., Appellant, v. Leroy J. Lauer, Appellee/Cross-Appellant, U.S. Bank, N.A., Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 406

371 F.3d 406

In re: Leroy J. LAUER, Debtor Harriet Nangle Rose; Ellen Catherine Nangle; Timothy Michael Nangle, Appellants/Cross-Appellees Land Investment Club, Inc., Appellant, v. Leroy J. Lauer, Appellee/Cross-Appellant U.S. Bank, N.A., Appellee.

No. 03-1236.

No. 03-1241.

No. 03-1244.

United States Court of Appeals, Eighth Circuit.

Submitted: January 12, 2004.

Filed: June 10, 2004.

Rehearing and Rehearing En Banc Denied August 4, 2004.

COPYRIGHT MATERIAL OMITTED

Canice Timothy Rice, Jr., argued, St. Louis, MO, for appellants.

Steven M. Hamburg, argued, St. Louis, MO, for appellant Lauer.

JoAnn T. Sandifer, argued, St. Louis, MO (Harry B. Wilson, Jr., on the brief), for appellee U.S. Bank.

Before LOKEN, Chief Judge, FAGG and BOWMAN, Circuit Judges.

LOKEN, Chief Judge.

These are adversary proceedings arising out of the personal bankruptcy of Leroy J. Lauer, who was a general partner in Crossroads U.S.A. Limited II, a Missouri limited partnership. In October 1982, Lauer and Joseph Graves, the other general partner, purchased the interests of limited partners Harriet Nangle Rose, Timothy Nangle, and Ellen Nangle, financing the purchase with the proceeds of a loan to Crossroads from Mark Twain Bank (now U.S. Bank). The Nangle limited partners sued Lauer and U.S. Bank, seeking to prevent Lauer's discharge in bankruptcy and to recover compensatory and punitive damages for fraud. Land Investment Club, Inc. ("LIC"), brought a separate derivative action, alleging it is still a Crossroads limited partner and seeking similar relief. Plaintiffs alleged that Lauer fraudulently failed to disclose material changes in the Crossroads assets prior to the buyout and that U.S. Bank knew about the fraud and received an improper pledge of partnership assets. On a prior appeal, we reversed the grant of summary judgment to U.S. Bank. In re Lauer, 98 F.3d 378 (8th Cir.1996). The district court then consolidated the cases and assigned them to a special master who held a bench trial and made recommended findings and conclusions that the district court adopted after review and oral argument. See FED. R. CIV. P. 53(g).

The Nangles and LIC appeal, arguing that the district court erred in dismissing all claims by LIC because it was not a Crossroads limited partner; in refusing to award punitive damages against Lauer for his fraud; and in dismissing their claims against U.S. Bank for breach of fiduciary duty. Lauer cross appeals, arguing the court erred in awarding $148,872.72 in compensatory damages, in awarding prejudgment interest, and in declaring his liability to the Nangles nondischargeable in bankruptcy. The applicable state law is the law of Missouri. Lauer, 98 F.3d at 382. Reviewing the district court's findings of fact for clear error and its legal determinations de novo, we reverse the award of prejudgment interest and otherwise affirm.

I. Background.

Among other investments, Crossroads owned a thirty-seven percent minority interest in River Heights Joint Venture, which owned a nursing home. River Heights sold the nursing home in 1982, receiving industrial revenue bonds issued by the City of Boonville, Missouri. Crossroads' share was reflected in a $450,000 industrial revenue bond payable jointly to River Heights and Crossroads ("the Bond"). The Bond paid interest at the rate of twelve percent per annum and matured in 2007.

Later that year, Lauer and Graves purchased the Nangles' limited partnership interests in Crossroads. For her six percent interest, Harriet Nangle Rose received $12,727.28 immediately and a promise of $4,000 annually over the next five years. For their 22% interest (received from their father, Bruce, a lawyer who drafted the sale contracts), Timothy and Ellen Nangle received $40,000 immediately and a promise of $16,000 annually over the next five years. The sale contracts recited that Lauer and Graves were acquiring all limited partner interests, giving them complete ownership of Crossroads. The deferred payments to the Nangles were secured by a pledge of the "partnership... interest ... Crossroads ... has as a joint venturer in a certain nursing home known as River [H]eights Retirement Center." Neither Lauer nor Graves informed the Nangles that River Heights had sold the nursing home. To finance the purchases, Lauer and Graves caused Crossroads to borrow $175,000 from U.S. Bank, secured by the Bond and other Crossroads property. The bank dispersed the loan proceeds to Crossroads which then loaned the proceeds to Lauer and Graves. The special master found that U.S. Bank had no "reason to believe that Lauer and Graves had misrepresented the value of the partnership assets to the limited partners."

After receiving the initial payments of $12,727.28 and $40,000, the Nangles received no deferred payments from Lauer or Graves. Crossroads defaulted on its loan to U.S. Bank. The Nangles learned of the nursing home sale after Graves's death in 1983 and began this litigation in state court. Interest payments on the Bond ceased in 1985. Lauer filed for bankruptcy relief in 1986. These adversary proceedings commenced in February 1987.

II. LIC's Claims.

LIC appeals the district court's judgment dismissing LIC's derivative claims against Lauer and U.S. Bank based on the special master's finding that LIC failed to prove a partnership interest entitling it to sue on behalf of the Crossroads partnership. LIC argues that this finding is clearly erroneous and, in the alternative, that LIC need not be a limited partner to have standing to bring its derivative claims under the applicable Missouri statute. We disagree.

LIC's claim of standing is based on a June 15, 1981, "Assignment and Transfer of Interest" in which Graves purported to assign his eleven percent limited partner interest in Crossroads to LIC in exchange for $75,000. The document recites that LIC will pay for this interest by assigning to Graves 75,000 shares of LIC preferred stock and will amend its articles of incorporation to increase LIC's capitalization "so as to permit ... the sale and transfer of said limited partnership interest." Graves signed the notarized document twice, once for himself as seller of the partnership interest and once for LIC as purchaser. There is no evidence that sixty percent of all Crossroads partners approved the substitution of LIC as a limited partner, as Article 7.2 of the partnership agreement required; no evidence that the Crossroads partnership agreement was amended to reflect LIC as a limited partner; and no evidence that LIC ever amended its articles of incorporation and transferred preferred stock to Graves to complete his assignment of the limited partner interest. Lauer testified that he was not aware in 1982 that LIC had a limited partner interest. Graves's signed financial statement dated August 16, 1982, listed the Crossroads partners, did not list LIC as a limited partner, and stated that Graves still held the eleven percent limited partner interest. Thus, the special master's finding that LIC was never formally substituted as a limited partner is well supported by the record.

The Missouri Limited Partnership Law was amended in 1985 to provide that a limited partner may bring a derivative action on behalf of the partnership if he was a partner at the time of the transaction complained of or "[h]is status as a partner had devolved ... pursuant to the partnership agreement from a person who was a partner at the time of the transaction." MO. REV. STAT. § 359.581. Under this statute, LIC lacks standing because it never acquired limited partner status in accordance with the Crossroads partnership agreement. Under the prior statute, in effect when the transactions complained of occurred, a limited partner had standing to bring a derivative action. See Allright Mo., Inc. v. Billeter, 829 F.2d 631, 635-38 (8th Cir.1987). However, that statute provided that "[a]n assignee, who does not become a substituted limited partner, has no right to require any ... account of the partnership transactions." MO. REV. STAT. § 359.190 (1968) (repealed by the 1985 amendments). Thus, even if LIC was an assignee by reason of the June 15, 1981, document, it lacked standing to assert a derivative claim under Missouri law.

III. The Nangles' Claims.

A. Claims Against Lauer. On appeal, Lauer does not challenge the district court's decision that he committed fraud and breached a general partner's fiduciary duty by misrepresenting the condition of Crossroads' assets prior to purchasing the Nangles' limited partner interests. Instead, Lauer challenges the court's calculation of compensatory damages, the assessment of prejudgment interest, and the determination that his liability is non-dischargeable in bankruptcy. The Nangles appeal the denial of punitive damages and the amount of prejudgment interest.

1. Compensatory Damages. Under Missouri law, a victim of fraud in the inducement may elect to rescind the transaction or sue to recover the benefit of the bargain, that is, "the difference between the actual value of the property and what its value would have been if the property had been as represented," measured as of the time of the transaction that was fraudulently induced. In re Usery, 123 F.3d 1089, 1093 (8th Cir.1997) (quotation omitted).

The special master found that the actual value of the Crossroads partnership was $720,000 when Lauer and Graves purchased the Nangles' limited partner interests. Lauer attacks that finding as speculative, but it is well supported by the evidence and therefore not clearly erroneous. Graves listed the value of Crossroads as $729,875 in an August 1982 financial statement. U.S. Bank officer Darrell Roegner listed the value of Crossroads as $720,000 in a July 1982 memorandum, based on information Lauer and Graves provided to Roegner.

The special master found that, but for Lauer's fraud and breach of fiduciary duty, Harriet Nangle Rose would have received six percent of Crossroads'...