Med. Plaza One, LLC v. Davis

• Decision Date: 29 May 2018
• Docket Number: WD 80729
• Citation: 552 S.W.3d 143
• Parties: MEDICAL PLAZA ONE, LLC, Respondent, v. Jess DAVIS and Douglas Square II, LLC, Appellants.
• Court: Missouri Court of Appeals

552 S.W.3d 143

MEDICAL PLAZA ONE, LLC, Respondent,

v.Jess DAVIS and Douglas Square II, LLC, Appellants.

WD 80729

Missouri Court of Appeals, Western District.

OPINION FILED: May 29, 2018

Kevin D. Case and Patric S. Linden, Kansas City, MO, for respondent.

Matthew P. Clune and Thomas A. Hamill, Kansas City, MO, for appellants.

Before Division Three: Victor C. Howard, Presiding Judge, Cynthia L. Martin, Judge and Gary D. Witt, Judge

Cynthia L. Martin, Judge

Jess Davis ("Davis") and Douglas Square II, LLC ("DSII") (collectively "Appellants") appeal from the trial court's entry of a judgment incorporating jury verdicts and determining court-tried equity claims in a dispute between Appellants and Medical Plaza One, LLC ("MPO") regarding performance of a settlement agreement and a ground lease. We affirm the judgment of the trial court as herein modified.

Factual and Procedural Background¹

MPO is a Missouri limited liability company which was formed to build and operate a medical office building in Lee's Summit, Missouri. The medical office building was to be constructed on ground owned by DSII, also a Missouri limited liability company. Davis is the sole member of DSII. In connection with the arrangement, Davis was made a 40% member of MPO, and was named as MPO's managing member.

MPO and DSII signed a ground lease in October 2004 ("Ground Lease"). The Ground Lease was amended on March 4, 2005 to extend to MPO an absolute option to purchase the ground on which the medical office building was being constructed for the agreed upon amount of $650,000. Davis signed the Ground Lease and the amendment on behalf of MPO and DSII.

By 2012, disputes had arisen between Appellants and MPO regarding (among other things) the fact that Davis, in his capacity as managing member of MPO, had been paying DSII more monthly rent than was owed under the Ground Lease. In addition, Appellants had assigned the Ground Lease rents to BMO Harris Bank as security for a loan unrelated to MPO's operations. The assignment of Ground Lease rents had exposed MPO and its members to a lawsuit filed by BMO Harris Bank to enforce the assignment of rents. As a result of these disputes, the members holding a majority interest in MPO removed Davis as the managing member on September 24, 2012, and named Mitchell Fiser ("Fiser") as the new managing member. Appellants then initiated a lawsuit against MPO and its individual members seeking dissolution of MPO, partition, and damages for breach of the Ground Lease for nonpayment of rent. MPO asserted counterclaims against Davis and DSII alleging breach of fiduciary duty, misappropriation of funds, and breach of MPO's operating agreement. In the meantime, MPO was required to interplead Ground Lease rent payments into court because BMO Harris Bank was claiming it had the right to collect the rents at the same time that Appellants were suing MPO for the rents.

On December 27, 2013, MPO, all of the members of MPO, Davis, and DSII entered into a written settlement agreement to resolve their disputes ("Settlement Agreement"). Relevant to this case, the Settlement Agreement required MPO to immediately authorize the release of $59,800 in interpleaded rent payments to BMO Harris Bank to facilitate a settlement between BMO Harris Bank, Davis, and DSII. It is uncontested that MPO performed this term of the Settlement Agreement.

The Settlement Agreement expressed that MPO's monthly rent obligation under the Ground Lease should always have been $3,520, and that Davis had been causing MPO to overpay rent for the period from October 2012 through October 2013, resulting in an overpayment in the total amount of $14,040.² Commencing with the November 2013 rent payment, DSII agreed to credit MPO's monthly Ground Lease rent obligation by $1,500 per month until the overpaid rent amount was recouped.

Central to the Settlement Agreement was Davis's agreement to be removed as a member of MPO. Section 1.D of the Settlement Agreement described the agreed upon process for acquiring and calculating the value of Davis's member interest as follows:

Jess Davis agrees to sell his interest in Medical Plaza for 40% of the net asset value of Medical Plaza, which includes the funds in the Medical Plaza bank account at time of closing, subject to Sections 1.E through 1.H below, and the net equity in the building, less accrued real estate taxes at time of closing. The net equity in the building will be determined by an appraisal of the building. The appraisal shall be a fair market value appraisal prepared by a qualified appraiser selected by a lending institution chosen by the Manager of Medical Plaza, Mitchell S. Fiser, using his discretion to find a lending institution providing the best terms for the potential refinancing to obtain the funds to purchase Davis'[s] interest in Medical Plaza; and all of the members of Medical Plaza will sign a Unanimous Written Consent in lieu of a meeting of the members, authorizing Medical Plaza to enter into this Agreement and to take all steps necessary to implement the terms of this Agreement. Each member of Medical Plaza, including Davis, may make recommendations to Mitchell S. Fiser concerning potential lenders to fund the purchase of Davis'[s] interest in Medical Plaza.

When the Settlement Agreement was entered into, MPO's members knew that MPO owed approximately $2,680,360 on a loan for which the building served as collateral, and as to which MPO's members, including Davis, were personal guarantors. MPO's members, including Davis, were thus aware that MPO's net equity in the building would be determined by subtracting this loan balance from the building's appraised value. Though the evidence suggested that MPO's members anticipated that the building's appraised value would exceed the outstanding balance on MPO's loan, Section 1.D of the Settlement Agreement did not condition Davis's obligation to sell his 40% member interest in MPO on receiving a building appraisal that exceeded MPO's outstanding loan balance.

The Settlement Agreement did not expressly state that MPO would be exercising the purchase option in the Ground Lease in connection with Davis's sale of his 40% member interest in MPO. However, the Settlement Agreement referred to the Ground Lease in provisions that suggested the parties expected the severing of relations between Davis and MPO would also include the severing of relations between MPO and DSII. The Settlement Agreement provided that should Davis fail to timely close on the sale of his 40% member interest, MPO would be permitted to offset the price to be paid upon exercise of the purchase option in the Ground Lease by amounts Davis owed MPO (Section 1.H of the Settlement Agreement). The Settlement Agreement also included a provision that addressed the Appellants' agreement to correct a scrivener's error that had resulted in Appellants' erroneous conveyance of a portion of the land legally described in the Ground Lease to an unrelated entity. (Section 1.I of the Settlement Agreement). With respect to this provision, Appellants agreed to take steps to remediate the error "such that the Leased/Option Property is included as a portion of the property to be conveyed to [MPO] (as set forth in the Ground Lease) and may be included in any deed of trust obtained by [MPO] in connection with its exercise of the Option to Purchase."

Pursuant to Section 1.D of the Settlement Agreement, and in order to determine MPO's net equity in the building, Fiser contacted lenders who might be willing to fund the purchase of Davis's member interest in MPO and the purchase of the land from DSII. Consistent with the discretion afforded Fiser by the Settlement Agreement, Fiser chose First Citizens Bank as the potential lender. First Citizens Bank then employed processes required by law to select an independent appraiser to value MPO's building and the land. First Citizens Bank selected Valbridge Property Advisors ("Valbridge") as the appraiser.

When Davis learned the identity of the appraiser, he expressed disapproval, characterizing Valbridge as too conservative. Davis did not contend, however, that Valbridge had been selected through a process that failed to comply with Section 1.D of the Settlement Agreement.

Valbridge's appraisal determined the fair market value of MPO's building and the land on which it was constructed to be $2,660,000. The value assigned to the land was $650,000, as that was the value agreed upon by the parties in connection with the absolute purchase option set forth in the Ground Lease. Subtracting the value of the land from the total appraised value yielded an appraised value for MPO's building of $2,010,000. When netted against MPO's outstanding loan balance, the building had a negative net equity value of $670,360.

Section 1.D of the Settlement Agreement provided that the value of Davis's 40% interest in MPO was to be calculated by offsetting amounts Davis owed MPO (as described in Sections 1.E, 1.F, 1.G, and 1.H of the Settlement Agreement) against Davis's 40% share of MPO's net asset value, an amount that included the building's net equity value. The building's negative net equity value virtually ensured that MPO had a negative net asset value. Because Davis's 40% interest in MPO's negative net asset value was a negative number, the "offset" of that amount by additional amounts Davis owed MPO pursuant to Sections 1.E, 1.F, 1.G, and 1.H of the Settlement Agreement meant that Davis would be required to pay MPO in order to be removed as a member of MPO and as a personal guarantor on MPO's loan.

Davis was unwilling to accept the building's appraised value determined by Valbridge. He advised Fiser that Integra Realty Resources ("Integra") had performed an appraisal of the building and land in 2010 and had arrived at a fair market value of $3,600,000. Though the Settlement Agreement did not obligate MPO to do so, Fiser contacted Integra and arranged for a second appraisal of MPO's building and the land on...