Jennings v. Kay Jennings Family Ltd.

• Decision Date: 18 April 2008
• Docket Number: Record No. 070498.
• Citation: 275 Va. 594,659 S.E.2d 283
• Parties: Michael F. JENNINGS v. KAY JENNINGS FAMILY LIMITED PARTNERSHIP, et al.
• Court: Virginia Supreme Court

659 S.E.2d 283

275 Va. 594

Michael F. JENNINGS v. KAY JENNINGS FAMILY LIMITED PARTNERSHIP, et al.

Record No. 070498.

Supreme Court of Virginia.

April 18, 2008.

Brad D. Weiss (Charapp & Weiss, on briefs), McLean, for appellant.

Robert E. Scully, Jr. (Emily Harwood Smith; Stites & Harbison, on brief), Alexandria, for appellee Kay Jennings Family Limited Partnership.

No brief filed by appellee Louis A. Jennings, Jr.

Present: HASSELL, C.J., KEENAN, KOONTZ, LEMONS, AGEE, and GOODWYN, JJ., and LACY, S.J.

OPINION BY Senior Justice ELIZABETH B. LACY.

In this appeal we consider whether the trial court erred in dismissing Michael Jennings' derivative suit because Michael, a limited partner in the Kay Jennings Family Limited Partnership, did not "fairly and adequately represent the interests" of the limited partners and the partnership and therefore lacked standing to bring a derivative suit pursuant to Code § 50-73.62.

FACTS and PROCEEDINGS

Louis Allen Jennings operated a car dealership, Springfield Toyota, Inc. (the dealership), in Springfield, Virginia on land which he owned. In 1964, Louis Jennings and his wife, Minnie K. Jennings (Kay) executed a 99-year lease with Avis and Mary R. Boothe (the Boothe lease) for an adjacent parcel of land for use in the operation of the dealership. Following her husband's death, Kay formed the Jennings Family Limited Partnership to own and lease property. Kay was the sole general partner. She and her five children, Michael, Louis, Katherine, Mary and Beverly, were limited partners. In August of 1985, the Jennings Family Limited Partnership and the dealership executed an Agreement of Lease under which the dealership subleased the Boothe land from the partnership.

In 1994 the dealership was reorganized. The dealership redeemed Kay's stock and that of all the siblings except Michael, leaving Michael as the sole stockholder of the dealership.¹ In that same year, the Jennings Family Limited Partnership was renamed the Kay Jennings Family Limited Partnership (the Partnership) and Kay withdrew as general partner. Louis, Katherine, Mary and Beverly were substituted as general partners of the Partnership and all five siblings retained their interests as limited partners. The reorganization of the Partnership was contingent on the execution of a new lease between the Partnership and the dealership for the land on which the dealership operated. The new lease, executed March 29, 1994, provided that the dealership pay the Partnership $50,000 a month for 15 years with options to extend the lease for additional five-year periods.

In 2004, Michael and representatives of Toyota met with the general partners to discuss an expansion of the dealership. The expansion involved extensive improvements that were projected to increase the dealership's sales. To finance the improvements, Michael proposed that the Partnership subordinate the lease to the construction loan. When the general partners declined to do so, Michael offered to buy his siblings' interests in the Partnership for $2,000,000 each, so that "he could control the partnership and control the land." His sister Mary sold her Partnership interest to Michael, but the remaining three siblings refused Michael's offer. Consequently, Louis, Katherine, and Beverly each retained a 5% general partnership interest, and a 15% limited partnership interest, and Michael had a 40% limited partnership interest.

In July 2005, Katherine and Beverly, as general partners of the Partnership, wrote a "To Whom It May Concern" letter stating that "no one general partner could unilaterally make decisions for the [P]artnership or ... bind [it] to specific courses of action." The letter was written in response to Michael's complaints about Louis' actions including an incident in 2003 involving Louis' suggestions to Toyota Motor Sales USA, Inc., an importer of Toyota motor vehicles, and Central Atlantic Toyota Distributors, Inc., a distributor of Toyota motor vehicles and Springfield Toyota's franchisor, that the lease between the dealership and the Partnership was not valid.

On August 18, 2005, Michael filed a derivative suit pursuant to Code § 50-73.62, against the Partnership and Louis Jennings.² In the suit, Michael recited a number of actions taken by Louis which Michael claimed breached Louis' fiduciary duties to the Partnership, endangered the Partnership, and possibly left the Partnership vulnerable to Louis' creditors. Michael also claimed that Louis intentionally interfered with Michael's business relationship with Toyota Motor Sales USA, Inc. and Central Atlantic Toyota Distributors, Inc., when he contacted the Toyota companies and suggested, among other things, that the lease between the dealership and the Partnership was invalid. Michael asked the trial court to expel Louis from the partnership and substitute Michael as a general partner in Louis' stead. Although Michael provided a courtesy copy of the suit papers to Katherine and Beverly, Louis and the Partnership were not served for approximately one year.

During the pendancy of the derivative suit, DAMN, LLC, a business owned and operated by Michael and his wife, Diane, purchased the Boothe's property and notified the Partnership that the rent would increase from $2,500 a month to $10,500 a month based on their interpretation of the lease rent calculation index. The Partnership challenged the rent increase, and the dispute was arbitrated as provided in the lease.

When Michael's derivative action was served on the Partnership in 2006, the Partnership filed a demurrer and plea in bar. The trial court sustained the demurrer with leave to amend, ruling that Michael's individual claims against Louis could not be joined with the derivative suit and that the trial court had no authority to replace Louis with Michael as a general partner. Michael filed an amended bill of complaint, limiting his claims to those held by the partnership in general and requesting, among other things, that the trial court convert Louis' general partnership interest into a limited partnership interest.

The Partnership again filed a plea in bar and motion to dismiss. In the plea in bar, the Partnership asserted that Michael lacked standing to maintain a derivative suit, because he did not "fairly and adequately represent the interests" of the limited partners and the Partnership as required by Code § 50-73.62. At the conclusion of an ore tenus hearing held on the plea in bar, the trial court found that Michael did not fairly and adequately represent the interests of the Partnership or the limited partners because he (1) "has economic interests that are directly adverse to those of the partnership" (2) "maintained as a manager of the DAMN, LLC, an arbitration adverse interest to the partnership as well," and (3) "is pursuing remedies that are not supported by the other parties." The trial court dismissed the derivative proceeding for lack of standing, and also ordered recovery of attorneys' fees against the plaintiff. Michael timely appealed to this Court asserting that he did have standing to pursue the derivative action because as a matter of law he had no interests that were directly economically antagonistic to the interests of the Partnership.

DISCUSSION

On appellate review of a ruling on a plea in bar based on an ore tenus hearing, the trial court's factual findings will not be set aside unless plainly wrong or without evidence to support them. Cooper Indus., Inc. v. Melendez, 260 Va. 578, 595, 537 S.E.2d 580, 590 (2000). Whether the facts found by the trial court in this case rendered Michael unable to fairly and adequately represent the interests of the other limited partners and the Partnership is a mixed question of fact and law which we review de novo. See Purce v. Patterson, 275 Va. 190, 194, 654 S.E.2d 885, 887 (2008), Grandison v. Commonwealth, 274 Va. 316, 320, 645 S.E.2d 298, 300 (2007).

Code § 50-73.62 allows a limited partner to bring an action "in the right of a limited partnership ... to the same extent that a stockholder may bring an action for a derivative suit under the Stock Corporation Act, Chapter 9 (§ 13.1-601 et seq.) of Title 13.1." A derivative action may be pursued if the general partners with authority to bring an action asserting the rights of the partnership have refused to do so or if an effort to cause the partners to bring such an action "is not likely to succeed." Code § 50-73.62. A limited partner cannot maintain a derivative action, however, if "it appears that the plaintiff does not fairly and adequately represent the interests of the limited partners and the partnership in enforcing the right of the partnership." Id. We have not previously addressed the factors a court should consider when determining whether the plaintiff "fairly and adequately" represents the limited partners and partnership in a derivative action, nor have we construed a similar standing requirement for shareholder derivative suits. See Code § 13.1-672.1 (shareholder in derivative action must fairly and adequately represent corporation's interests in enforcing rights of corporation).

Both parties suggest that we consider the factors set out in Davis v. Comed, Inc., 619 F.2d 588, 593-94 (6th Cir.1980). That case involved the application of Rule 23.1 of the Federal Rules of Civil Procedure, which contains a requirement of fair and adequate representation that is substantially similar to the Virginia requirement.³

In Davis, the United States Court of Appeals for the Sixth Circuit reviewed other cases that addressed the standing requirement of fair and adequate representation in derivative suits. The Court stated that, in making this determination,

a court should examine any indications that there are extrinsic factors which render it likely that the representative may disregard the interests of the class members. Indeed, while a plaintiff is not necessarily disabled to bring suit simply because some of...