Monterey Bay Military Hous., LLC v. Pinnacle Monterey LLC

• Decision Date: 23 July 2015
• Docket Number: Case No. 14–cv–03953–BLF
• Court: U.S. District Court — Northern District of California
• Parties: Monterey Bay Military Housing, LLC, et al., Plaintiffs, v. Pinnacle Monterey LLC, et al., Defendants.

116 F.Supp.3d 1010

Monterey Bay Military Housing, LLC, et al., Plaintiffs,

v.Pinnacle Monterey LLC, et al., Defendants.

Case No. 14–cv–03953–BLF

United States District Court, N.D. California, San Jose Division .

Signed July 23, 2015

Daniel G. Hildebrand, Greenberg Traurig, LLP, Jeffrey L. Willian, Jessica Jane Bluebond–Langner, Yates McLaughlin French, Donna Marie Welch, Kirkland and Ellis, Daniel C. Moore, Chicago, IL, Karen P. Kimmey, Farella Braun & Martel LLP, San Francisco, CA, Marc Howard Cohen, Kirkland & Ellis LLP, Palo Alto, CA, Ronald S. Granberg, Granberg Law Office, Salinas, CA, for Plaintiffs.

Thomas Edward Dutton, Daniel G. Hildebrand, Ian David Burkow, Greenberg Traurig, LLP, Jason B. Elster, Chicago, IL, William J. Goines, Alice Y. Chu, Amanda D. Donson, Cindy Hamilton, Lindsay Erin Hutner, Greenberg Traurig, LLP, East Palo Alto, CA, Andrew Lee Mathews, American Management Services, Seattle, WA, Karen P. Kimmey, Christoffer Lee, Douglas R. Young, Janice W. Reicher, Farella Braun and Martel LLP, San Francisco, CA, for Defendants.

AMENDED ORDER ON MOTIONS FOR SUMMARY JUDGMENT¹

BETH LABSON FREEMAN, United States District Judge

Before the Court are four motions for summary judgment by parties in this complex contract dispute. Pls.' Mot., ECF 151; Pinnacle Mot., ECF 153; Harrelson Mot., ECF 154; Goodman Mot., ECF 147. With leave of court, the defendants in this action also filed a supplemental motion for partial summary judgment. Defs.' Supp. Mot., ECF 206. The Court heard oral argument on all motions on May 14, 2015 and thereafter took the matters under submission. For the reasons stated herein, all four motions are GRANTED IN PART and DENIED IN PART. Defendants' supplemental motion is DENIED.

I. BACKGROUND

A. The Parties

This case concerns a crumbling business relationship that has devolved into years of increasingly acrimonious scorched-earth litigation. At a high level, the parties in this action are, on the one side, entities affiliated with or controlled by Clark Realty Capital, LLC ("Clark Realty") and, on the other side, entities and individuals affiliated with American Management Services LLC ("AMS"), which does business as "Pinnacle."

The principal claims in this action are asserted in the Fifth Amended Complaint filed by the following plaintiffs: (1) Monterey Bay Military Housing, LLC ("MBMH"), a Delaware limited liability company; (2) Clark Pinnacle Monterey Bay LLC ("CPMB"), a California limited liability company; (3) Clark Monterey Presidio LLC, a Delaware limited liability company; (4) California Military Communities LLC ("CMC"), a Delaware limited liability company; (5) Clark Pinnacle California Military Communities LLC ("CPCMC"), a California limited liability company; and (6) Clark Irwin LLC, a Delaware limited liability company. Pl.'s Fifth Amended Compl. ("5AC") ¶¶ 8–13, ECF 186.

The defendants named in the Fifth Amended Complaint are: (1) AMS, a Washington State limited liability company that is the corporate parent of a number of property management "affiliates" including (2) American Management Services California Inc. ("AMSC"), a California corporation. The other defendants are: (3) Pinnacle Monterey LLC, a Washington State limited liability company; (4) Pinnacle Irwin LLC, a Washington State limited liability company; (5) Goodman Real Estate, Inc., a Washington corporation and Goodman Financial Services, Inc. (now doing business as Goodman Real Estate, Inc.) ("GRE"); (6) Stanley Harrelson, the former Chief Executive Officer ("CEO") for AMS; and (7) John Goodman, AMS's founder and Chairman of the Board. Id. ¶¶ 14–21, 25.

Also before the Court are claims that Pinnacle Monterey and Pinnacle Irwin asserted against Clark Realty, CPMB, and CPCMC in a Second Amended Complaint filed in state court on October 24, 2013. Pinnacle Second Amended Compl. ("Pinnacle SAC"), ECF 1–18. This Second Amended Complaint also identifies AMS, AMSC, MBMH, CMC, Clark Monterey Presidio, and Clark Irwin as "interested non-parties." Id. ¶¶ 15–16, 20–23. Similarly, defendants AMSC and AMS have asserted counterclaims against plaintiffs MBMH and CMC in connection with Plaintiffs' Fifth Amended Complaint. Counterclaims, ECF 214. Clark, CPMB, CPCMC, Clark Monterey Presidio, Clark Irwin, Pinnacle Monterey, and Pinnacle Irwin are likewise identified as "interested non-parties." Id. ¶¶ 13, 15–16, 18–19, 22–23.

Thus, at a high level, Clark Realty, CPMB, CPCMC, Clark Monterey Presidio, Clark Irwin, MBMH, and CMC, which the Court shall collectively refer to as "Plaintiffs," are aligned against AMS, AMSC, Pinnacle Monterey, and Pinnacle Irwin (collectively, the "Pinnacle Entities"), as well as John Goodman, GRE, and Stanley Harrelson. The Court shall refer to the Pinnacle Entities, Goodman, GRE, and Stanley Harrelson collectively as "Defendants."

B. Factual Overview

In 2001, when this saga began, Clark Realty and AMS joined together to bid for privatization projects in U.S. military housing.² After some rejected bids, the partners eventually won contracts to develop and manage residential properties at Monterey Presidio and Fort Ord in California; Fort Belvoir in Virginia; Fort Irwin, Moffett Field and Parks Reserve Training Grounds in California; and Fort Benning in Georgia. This lawsuit concerns only the Monterey and Fort Irwin projects, though the parties are embroiled in similar litigation in Georgia concerning Fort Benning and Fort Belvoir.

Both of the Monterey and Irwin projects are 50–year projects on land leased from the Army pursuant to 50–year ground leases. At each location, Clark Realty and AMS set up a series of interrelated limited liability companies to manage, own, and operate the housing projects. Those agreements are at the heart of this disagreement.

i. The Agreements at Issue

The bulk of the parties' contract dispute concerns Property Management Agreements ("PMAs") appointing defendant AMSC as the property manager at the Monterey and Irwin projects. See Decl. of Yates M. French, ECF 151–1 Exh. 2 (Monterey PMA); Exh. 3 (Irwin PMA). The Monterey PMA was entered in 2003 between MBMH—the "Owner" of the property—and AMSC as "Manager." At Fort Irwin, the PMA was entered in 2004 between CMC—the "Owner"—and AMSC as "Manager."³ The PMAs set forth AMSC's responsibilities as property manager for the Owners, which include the authority to enter into residential leases and incur expenses as needed. Monterey PMA §§ 6–9.⁴ It is undisputed that AMS carries out AMSC's property management responsibilities, as AMSC has no employees. AMSC moreover undertook the responsibility to secure insurance for itself and for the Owners, which took the form of including the Owners and the projects in a Master Insurance Program ("MIP") administered by AMS and its insurance broker, Denver Series of Lockton LLC ("Lockton"). Id. ¶ 12.1; 5AC ¶ 117. Section 18 of the PMAs provides that each PMA "shall terminate" "upon the occurrence of" certain "events" including, inter alia, material breach, substantial damage to the project property, default, or sale of the Owners' interest in the projects. Id. ¶ 18.1. Important to the issues before the Court, "theft, fraud, or other knowing or intentional misconduct by [AMSC] or its employees or agents" is considered an "event of default by the party in respect of which such event occurs" under subpart (C)(6) of this paragraph. Id. ¶ 18.1(C)(6).

MBMH and CMC each act at the direction of their managing members—CPMB and CPCMC respectively. Of course, CPMB and CPCMC, being limited liability companies in their own right, cannot act except within the bounds of their own operating agreements. See French Decl. Exh. 13 (CPMB Op. Ag.); Exh. 14 (CPCMC Op. Ag.). The parties' other contract disputes revolve around the allocation of corporate power under these CPMB and CPCMC operating agreements. CPMB and CPCMC are comprised of groups of member entities affiliated with Clark Realty and AMS, and each group appoints one Manager—the "Clark Manager" for the Clark-affiliated members and the "Pinnacle Manager" for the AMS-affiliated members. See CPMB Op. Ag. ¶ 2.1(a); ¶ 3.1(a).⁵ For CPMB, the appointed Clark Manager is Clark Realty, and the Pinnacle Manager is Pinnacle Monterey. Id. For CPCMC, the appointed Clark Manager is also Clark Realty, but the Pinnacle Manager is Pinnacle Irwin. Id. Each operating agreement states that the members consent to MBMH and CMC entering into service contracts with Clark Realty and AMS affiliates. The CPMB operating agreement requires MBMH to enter "into one or more property management agreements ... with Pinnacle Realty Management Company, an Affiliate of the Pinnacle Group" before the effective date of the agreement, id. ¶ 3.15(a)(3), which agreement could be freely transferred, assigned, or subcontracted to AMSC without consent of the Clark Manager, id. ¶ 3.15(b). The CPCMC operating agreement simply requires CMC to "enter into one or more property management agreements ... with [AMSC]" before the effective date of that agreement. CPCMC Op. Ag. ¶ 3.15(a)(3).

The CPMB and CPCMC operating agreements delineate what actions each Manager can take without the approval of the other. Notably, the Clark Manager has "acting authority to make all decisions regarding the management of the Company's business and affairs" except with respect to "Major Decisions." CPMB Op. Ag. ¶ 3.1(b)(2). The Pinnacle Manager, as the representative for the minority members, has no authority to "make decisions regarding the management of the Company's business and affairs or to act on, consent to or approve matters of the Company without the vote or signature of the Clark Manager." Id. The Pinnacle Manager does have the power, however, to vote on Major Decisions, which require the consent of both Managers. Id. ¶ 3.1(b)(3); CPCMC Op. Ag. ¶ 3.1(b)(2). The key Major Decision in dispute here is defined in the section titled "Management and Rights of Members" at paragraph 3.1(b)(2)(E): "Adjustments to the terms or conditions of the...