King v. Chase
| Decision Date | 17 March 2021 |
| Docket Number | No. M2019-01084-COA-R3-CV,M2019-01084-COA-R3-CV |
| Parties | JONATHAN KING, ET AL. v. DEAN CHASE |
| Court | Tennessee Court of Appeals |
Appeal from the Chancery Court for Davidson County
Ellen Hobbs Lyle, Chancellor
Appellants, partners in a partnership that was the sole member of an LLC, filed suit against the manager of the partnership for alleged breach of fiduciary duties related to the sale of commercial real estate on behalf of the LLC. The manager and his business (a partner in the partnership, and together with manager, Appellees) filed counterclaims against Appellants, alleging breach of contractual and statutory duties. The trial court dismissed Appellants' lawsuit on grant of summary judgment, and we affirm that decision. Appellees' remaining claim for misrepresentation by concealment against Appellants was tried to a jury, which returned a unanimous verdict in favor of Appellees. Prior to the jury trial, the Business Court found, as a matter of law, that Appellees were entitled to indemnification by the LLC, and we affirm that decision. Because Appellants' tort of misrepresentation by concealment resulted in a premature distribution of the sale proceeds by the LLC, the LLC was unable to fully indemnify Appellees. As such, the Business Court entered judgment against Appellants for attorney's fees and expenses as compensatory damages. We affirm.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed and Remanded
KENNY ARMSTRONG, J., delivered the opinion of the court, in which J. STEVEN STAFFORD, P.J., W.S., and CARMA DENNIS MCGEE, J., joined.
W. Gary Blackburn and Bryant Kroll, Nashville, Tennessee, for the appellants, David King, Jonathan King, and Taylor King.
Beau C. Creson, Gayle I. Malone, Jr., and Charles I. Malone, Nashville, Tennessee, for the appellees, Dean Chase, Sandra Chase, and D. F. Chase, Inc.1William Taylor Ramsey, Nashville, Tennessee, for the appellee, James W. Carrell Estate.
Lyndsay Claire Smith, Nashville, Tennessee, for the appellees, Lee Kennedy and Austin Pennington.
William Daniel Leader, Nashville, Tennessee, for the appellee, The Rosemary Grace Dunn 2004 Irrevocable Trust.
Robert Busby, Lithia, Florida, appellee, pro se.2
OPINIONIn late 2013, David Chase sought to purchase real estate located at One Music Row in Nashville (the "Property"), which he planned to sell for development as a hotel under the Virgin brand. To this end, David Chase created two entities for the purchase of the Property and the pre-development stage of the project—NV Partners, a Tennessee general partnership (the "Partnership"), and NV Music Row, LLC, a Tennessee limited liability company (the "LLC," and together with the Partnership, the "NV Entities"). At all relevant times, the NV Partners were: (1) Lee Kennedy (with a 26% interest); (2) The James W. Carrell Estate (with a 16.7% interest); (3) Robert Busby (with a 3.3% interest); (4) Austin Pennington (with a 15.2% interest); (5) The Rosemary Grace Dunn 2004 Irrevocable Trust (with a .3% interest); (6) Jonathan King and Taylor King (together, the"Kings," or "Appellants") (with a 16.7% combined interest); (7) David King (with a 5% interest);3 (8) D.F. Chase, Inc. (with a 16.7% interest); and Sandra Chase (with a 5% interest).
As set out in the NV Music Row, LLC Operating Agreement ("Operating Agreement"), the purpose of the LLC was to "purchase, acquire, own, hold, develop and sell or otherwise dispose" of the Property. According to the Agreement of the Partnership of NV Partners (the "Partnership Agreement"), the Partnership was organized to "purchase, acquire, own, hold, develop and sell or otherwise dispose" of the Property "through a wholly owned limited liability company [, i.e., NV Music Row, LLC]." NV Partners was the sole member of NV Music Row, LLC. At the time of its formation in 2014, David Chase was designated as the Managing Partner of the Partnership. Section 5.1 of the Partnership Agreement vests the Managing Partner with sole "power or authority to act for or bind the Partnership," but it also provides the Managing Partner (and other partners) with indemnity.
Due to unrelated criminal matters involving David Chase, on February 15, 2015, the partners amended the Partnership Agreement "in order to reflect the resignation of David Chase as Managing Partner [and] the election of Dean Chase as successor Managing Partner." Because Dean Chase, individually, was not a partner in the venture, Dean Chase's title was listed as Manager. Pursuant to the amendment to the Partnership Agreement, Dean Chase, a principal of D.F. Chase, Inc., acted as the Manager of the Partnership at all relevant times.
The purchase money for the Property was comprised of contributions from the partners and a $4,500,000 loan from lender, Silverpeak (the "Silverpeak Loan"). In or about June 2015, Silverpeak decided not to exercise an option to convert the Silverpeak Loan into equity in the project. In the absence of repayment, on or about July 1, 2015, Silverpeak declared the NV Entities to be in default on the Silverpeak Loan and demanded repayment of all amounts due (i.e., $6,105,996.29) to avoid foreclosure of the Property. In an effort to raise the money to pay off the Silverpeak Loan, Dean Chase and Austin Pennington met with Avenue Bank. It was decided that a loan from Avenue Bank was not possible because three of the partners were unwilling or unable to personally guarantee the loan. As an alternative, partner Austin Pennington offered to guarantee half of the Avenue Bank loan if Jonathan King would guarantee the other half. Jonathan King refused, and the loan was denied.
After the Avenue Bank loan was denied, on or about September 10, 2015, another partner, The James W. Carrell Estate, offered to make a loan to the partnership to pay off the Silverpeak Loan (the "Carrell Estate Loan"). Specifically, the Carrell Estate offered a loan on the following terms: (1) $100,000 origination fee; (2) 15% annual interest; (3) three-month term with an option for a three-month extension; (4) $100,000 extension fee; (5) $750,000 default/foreclosure fee; and (6) all interest would be earned at the beginning of the applicable term. The partners, including the Kings, voted to approve the Carrell Estate Loan. However, after Steven Kirkham, the NV Entities' attorney, reviewed the foregoing terms, he advised Dean Chase, as Manager of the Partnership, that the 15% interest rate was usurious and illegal under Tennessee law.
On the day before Silverpeak was due to foreclose on the Property, and with no loan options available, Dean Chase caused partner D.F. Chase, Inc. to loan the NV Entities approximately $6,300,000 to pay off the Silverpeak Loan and save the project (the "D.F. Chase Loan"). In making the D.F. Chase Loan, Dean Chase spoke with Mr. Kirkham and instructed him to make the costs of the loan similar to those proposed in the Carrell Estate Loan but to ensure that the terms were compliant with Tennessee law. To this end, Mr. Kirkham arrived at the following terms for the D.F. Chase Loan: (1) $200,000 origination fee; (2) 7.25% annual interest; (3) three-month term with options for two three-month extensions; (4) $20,000 extension fee; and (5) all interest would be calculated as time elapsed rather than up front. Dean Chase did not seek Partnership approval prior to making the D.F. Chase Loan. Rather, he concluded that a vote was not necessary due to the fact that the partners had previously approved the Carrell Estate Loan, which was ostensibly the same as the D.F. Chase Loan, with the exception that the overall cost of the D.F. Chase Loan were approximately $37,744 less than those offered by the Carrell Estate and was legal under Tennessee law. It is undisputed, however, that the partners were advised of the D.F. Chase Loan within twenty-four hours of the distribution of the funds to pay off the Silverpeak Loan.
Having avoided foreclosure on the Property, on November 4, 2015, NV Music Row, LLC, with the vote of a majority of the partners, entered into a contract with Virgin to sell the Property for $11,500,000. The contract provided for a 35 day due diligence period, during which Virgin had the option to rescind. On December 1, 2015, Virgin exercised its option and withdrew its initial offer. Instead, Virgin lowered its purchase offer to $10,500,000. Following a meeting and vote, a majority of the partners directed Dean Chase to reject Virgin's lower offer, which he did. Thereafter, Virgin made another offer of $11,000,000 to purchase the Property. On or about December 2, 2015, a majority of the partners voted to accept Virgin's $11,000,000 offer. Although the Kings voted against the sale, after the majority of the partners voted to accept Virgin's offer, each of the partners, including the Kings, signed a Unanimous Consent directing Dean Chase to consummate the transaction on behalf of the NV Entities. Following the sale, the NV Entities were required, under Article VII of the Operating Agreement, to retain sufficient funds to pay any future contingent liabilities but were otherwise allowed to distribute theremainder of the sale proceeds. As discussed below, each partner had an obligation to disclose any known contingent liabilities. No partner disclosed any potential future liabilities, and, on or about December 21, 2015, the NV Entities made a distribution of all but approximately $68,000 of the sale proceeds. Each partner realized a profit of over 30% of his or her initial investment.
On December 31, 2015, approximately two weeks after distribution of the sale proceeds, the Kings, through their attorney, sent a letter to Mr. Kirkham, in which they: (1) requested to examine, audit, and copy the books and records of the NV Partners; and (2) placed Dean Chase, Mr. Kirkham, his law partners, and his firm on notice of potential claims for fraud, conversion, breach of fiduciary duty, and legal malpractice. Thereafter, on ...
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