Land Inv., Inc. v. Battleground Associates, 151-78

• Decision Date: 17 April 1980
• Docket Number: No. 151-78,151-78
• Citation: 138 Vt. 316,415 A.2d 753
• Court: Vermont Supreme Court
• Parties: LAND INVESTMENT, INC. v. BATTLEGROUND ASSOCIATES.

Page 753

415 A.2d 753

138 Vt. 316

LAND INVESTMENT, INC. v. BATTLEGROUND ASSOCIATES.

No. 151-78.

Supreme Court of Vermont.

April 17, 1980.

Gary H. Barnes of Downs, Rachlin & Martin, South Burlington, for plaintiff.

Davison Associates, Inc., Stowe, for defendant.

Before BARNEY, C. J., and DALEY, LARROW, BILLINGS and HILL, JJ.

BARNEY, Chief Justice.

This litigation is best understood as a suit by the plaintiff to collect money claimed to be due under transactions in part expressed in a certain $50,000 note. The matter is not as simple as that, but the note obligation is a handy reference point to keep track of the cause.

The action is further confused by the shifting identities involved in the various arrangements and commitments out of which it arose. The plaintiff's side gives little trouble. The named corporate plaintiff, Land Investment, Inc., was a business entity through which Nathan Smith handled real estate transactions and various financing agreements.

The defendant, Battleground Associates, presents a more complex picture. It was a limited partnership, with its general partner being a Delaware corporation, the Sugar River Company. Sugar River, in turn, was the wholly owned subsidiary of another Delaware corporation called Whitecaps. One man, William Murphy, the single largest shareholder in Whitecaps, was a director and chief executive officer of both Sugar River and Whitecaps, and was Battleground's chief operating officer. In part, the litigation involves the exact capacity in which Sugar River acted when it made certain commitments. As can be seen, there are certainly three possibilities: (1) it acted as general partner of Battleground Associates; (2) it acted on its own behalf; or (3) it acted in some capacity for the benefit of Whitecaps, its owner.

Murphy and Smith were known to each other and, through their corporate entities, had, since 1969, engaged in numerous business transactions involving the purchase, sale and mortgaging of real estate. These transactions were handled through the plaintiff's attorney in Maine. Smith, acting through the plaintiff, Land Investment, dealt with both Whitecaps and its subsidiary Sugar River, all in the person of Murphy. The defendant partnership, Battleground Associates, was as yet unformed.

In 1970 through 1972, Whitecaps, acting through Sugar River, assembled about a hundred and fifty-five acres in Fayston, Vermont, for the development of a condominium project. Permits were obtained for 63 units to be built on part of the Sugar River holdings in Fayston, a 76.2 acre parcel. A consortium was put together to invest $250,000 in the project. That was to be done as soon as a limited partnership was formed to serve as the investment vehicle, and title to the 76.2 acre parcel was conveyed to that partnership. The defendant, Battleground Associates, is that partnership.

Prior to the formation of Battleground, in order to provide some short term financing for the condominium project, Murphy, in his capacity as president of Sugar River, approached Smith for a $25,000 loan from Land Investment. The loan was secured by a promissory note from Sugar River secured by a mortgage on the corporation's lands. Payment was due in August 1973, but was delayed into October, at which time the note was repaid and the mortgage discharged. During this interval, Murphy had informed Smith that it was the delay in setting up Battleground Associates that interfered with prompt repayment. When made, repayment was by a check drawn on the account of Battleground Associates, which was just then in being. The check was sent directly to the bank from which the plaintiff, in turn, had borrowed the $25,000 to advance to Sugar River.

The second, and critical, deal between Smith and Murphy arose out of the sequence of events that followed the creation of Battleground Associates. Sugar River participated as Battleground's general partner, with Whitecaps acting as guarantor of all of Sugar River's obligations as general partner. Murphy signed the partnership agreement on behalf of Sugar River, and the guarantee on behalf of Whitecaps. At this point, Sugar River conveyed to Battleground Associates the land on which the condominium project was to be built, with Murphy executing the deed on behalf of Sugar River.

In order to proceed with construction of the project, financing was necessary. Murphy, now acting as chief operating officer of the partnership, arranged for a loan with the Worcester County National Bank, a Massachusetts institution. The agreement for construction financing had many conditions, not all of which are of concern here. But one condition required that Battleground Associates provide for the sale of the first five condominium units before the loan funds were advanced. The financing agreement allowed for the satisfaction of this condition by the agreement of Whitecaps to purchase those five units, secured by "an Irrevocable Letter of Credit in favor of Lender (Worcester County National Bank) in the amount of $38,000." Another provision of the loan agreement prohibited Battleground from transferring or further incumbering any of its interest in the condominium project or the land involved.

Whitecaps did commit itself to purchasing the first five units. The Chittenden Trust Company agreed to provide the long term financing for that purchase. All that remained to make the entire project operable was the $38,000 in cash or letter of credit representing Whitecaps' down payment for the purchase. The evidence was that only a few weeks were available to accomplish this if the agreement was to be carried out.

At this point, Murphy again turned to Smith. The latter eventually agreed that Land Investment would provide the necessary letter of credit. To implement their agreement, substantial documentation was required. It was prepared by Land Investment's attorney. Among these documents was a written memorandum of the agreement which was signed by Smith as president of Land Investment and by Murphy in the following form:

THE SUGAR RIVER COMPANY

by s/William A. Murphy

by Its President

Therefore, the face of the document reflected an agreement solely between Sugar River and Land Investment. It recited that at the request of Sugar River and for the benefit of Whitecaps, Land Investment would use its line of credit to obtain issuance of a $38,000 letter of credit. It stated that plaintiff was charging $12,000, plus all costs and expenses it might incur, for the use of its credit. It further provided that if the letter of credit was called, Sugar River was to repay the amount called, plus interest, in addition to the $12,000.

To secure these obligations, the agreement required that Sugar River execute a $50,000 interest bearing note supported by two mortgages on Sugar River owned real estate in Fayston. The real estate was not further described. Sugar River subsequently executed a first mortgage on a 5.9 acre parcel adjacent to the condominium site and a second mortgage, subject to a prior interest held by the Vermont Federal Savings and Loan Association, on a 50 acre parcel across the road from it.

Whitecaps defaulted under the purchase agreement in March 1974, and the letter of credit was called just prior to its expiration. The plaintiff then sought to enforce its remedies under the note and contract.

One procedure was a suit on the note foreclosing the mortgages on the 5.9 acre and 50 acre parcels owned by Sugar River. Besides suing on the note and mortgage, the plaintiff sought recovery based on certain representations allegedly fraudulently made by Murphy in connection with the letter of credit transaction. The plaintiff obtained a decree of foreclosure against the land, subject to any rights the Vermont Federal Savings and Loan Association had in the 50 acres under its prior mortgage. The Savings and Loan Association foreclosed on the plaintiff's subordinate equity of redemption in the 50 acre parcel and offered to release the parcel to plaintiff in return for $75,000. The plaintiff did not act to redeem and preserve whatever equity might remain.

Almost simultaneously with the action against Sugar River, this action against Battleground Associates was begun. Its fundamental premise was simple enough. The plaintiff argued that all the activities involving the letter of credit arrangement were for the benefit of Battleground Associates and that Battleground received and still retains the benefits of that arrangement. Therefore, says the plaintiff, recovery of the note, fees, interest and damages directly from Battleground Associates is both legal and supported by the facts. In fact, it argues, there are several legal theories applicable, any one of which supports recovery. The trial court rejected each of these theories and rendered judgment for the defendant.

The first contention advanced to support reversal is that the acts of Sugar River in procuring the letter of credit were done as the general partner of Battleground Associates as part of carrying on the usual way the partnership proposes. In such a case, it is argued, the commitment of Sugar River to repayment of the letter of credit, together with its fees and interest, is effectively the commitment of the partnership.

As the general partner of Battleground, Sugar River is the partnership's agent. 11 V.S.A. §§ 1399, 1201(a). Pursuant to 11 V.S.A. § 1201(a), "the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership . . . ." The statute, a portion of our enactment of the Uniform Partnership Act (1941, No. 146, §§ 1 and 9), applies agency principles to partnership problems. Basic to any contract is the identity of the parties. H. Reuschlein & W. Gregory, Agency and Partnership § 23, at 58 (1979). Agency principles operate to make that identification...