Park Regency, LLC v. R&D Dev. of the Carolinas, LLC

• Decision Date: 28 November 2012
• Docket Number: No. 5056.,5056.
• Citation: 741 S.E.2d 528,402 S.C. 401
• Court: South Carolina Court of Appeals
• Parties: PARK REGENCY, LLC, Landy Properties, LLC, and Sowers Properties, LLC, individually and in a derivative capacity on behalf of Crossroads Retail, LLC, Appellants, v. R & D DEVELOPMENT OF THE CAROLINAS, LLC, Hawkensen Construction, Inc., and Carl's Construction, Inc., Respondents. Appellate Case No. 2011–187167.

402 S.C. 401

741 S.E.2d 528

PARK REGENCY, LLC, Landy Properties, LLC, and Sowers Properties, LLC, individually and in a derivative capacity on behalf of Crossroads Retail, LLC, Appellants,

v. R & D DEVELOPMENT OF THE CAROLINAS, LLC, Hawkensen Construction, Inc., and Carl's Construction, Inc., Respondents.Appellate Case No. 2011–187167.

No. 5056.

Court of Appeals of South Carolina.

Heard Oct. 3, 2012.

Decided Nov. 28, 2012.

Walter Keith Martens, of Hamilton, Martens & Ballou, LLC, of Rock Hill, for Appellants.

Thomas B. Roper, of Rock Hill, and James B. Richardson, Jr., of Columbia, for Respondents.

CURETON, A.J.

In this suit arising from a dispute among members of a limited liability company (LLC), the trial court dissociated R & D Development of the Carolinas, LLC (R & D) from the company and ordered the remaining members of the company to purchase R & D's distributional interest. Appellants contend the trial court erred in (1) not consideringthe company's legal obligation to repay debts to its remaining members and other relevant and undisputed evidence when valuing R & D's distributional interest and (2) treating R & D's liability to the other members as an offset to the fair value of its distributional interest instead of entering a judgment against the dissociated member. We affirm as modified.

FACTS

Crossroads Retail, LLC (Crossroads) was formed for the purpose of developing a tract of land in Fort Mill (the Property), which initially consisted of 29.84 acres. After the relationships between members of Crossroads broke down, Park Regency, LLC (Park Regency); Landy Properties, LLC (Landy Properties); and Sowers Properties, LLC (Sowers Properties) (collectively, Appellants) filed this action to dissociate R & D from Crossroads. Appellants joined Hawkensen Construction, Inc. (Hawkensen) and Carl's Construction, Inc. (Carl's) as defendants.

Hawkensen, R & D, and Carl's (collectively, Respondents) were owned, at least in part, by Carl Hawkensen.¹ Hawkensen was an incorporated construction company. R & D was an LLC, in which Carl Hawkensen owned an 85% interest and Chad Whitmire owned the remaining 15%. Originally incorporated in 1990, Carl's was administratively dissolved in 1997. However, after the dissolution, Carl Hawkensen continued to operate Carl's as a sole proprietorship.

I. Acquisition of the Property

In 2006, Hawkensen deposited $75,000 in earnest money on a contract to purchase the Property for $2,957,600. After Hawkensen failed to secure adequate funding, the seller enlisted the assistance of Eric Sowers, a mortgage broker. Sowers referred Carl Hawkensen to Roger Gaines of Park Regency, a company that had recently sold some investment property and was seeking new investment property for a section 1031 exchange.² On July 25, 2006, the three reduced a preliminary acquisition and development agreement to writing. Later, Gaines introduced Carl Hawkensen to Steven Landy of Landy Properties, another investor. Ultimately, Park Regency agreed to provide as much as $800,000 toward the purchase of the Property, and Landy Properties provided $201,100 in additional funds. Park Regency took out a loan in the amount of $1,922,440 to cover the remainder of the purchase price.

On September 27, 2006, Park Regency, Hawkensen, R & D, Sowers, and Landy executed a written contract (the Crossroads Commons Agreement) memorializing their intent to purchase and develop the Property. The Crossroads Commons Agreement established a sequence of events affecting the obligations and ownership interests of the parties. Park Regency agreed to accept title to the Property pending R & D's completion of its obligations and to transfer title as described below. Hawkensen and R & D agreed to assign Hawkensen's rights under the purchase contract to Park Regency, establish an account “insuring Hawkensen ['s] ... performance,” pay the interest and carrying charges on loans used to develop the Property, and maintain at least $80,000 in an escrow account for that purpose. Furthermore, R & D agreed it would “[i]mmediately commence and complete at cost the first phase of clearing and grading of the Property in a good and workmanlike manner” in compliance with a previously established budget.³ Hawkensen agreed to ensure R & D complied with its obligations.

All parties agreed that, upon R & D's fulfillment of its obligations, the remaining members of the group would receive their ownership interests in the Property: R & D would receive a 47.5% interest, Sowers would receive a 5% interest for providing “professional services,” and Landy Properties would receive a 10% interest for supplying funds for the purchase of the Property. On October 6, 2006, Park Regency acquired title to the Property.

II. Formation of CrossroadsA. Agreement among Tenants in Common

On November 9, 2007, Park Regency, R & D, Landy Properties, and Sowers Properties (collectively, the Tenants) executed an Agreement among Tenants in Common (the TIC Agreement). The TIC Agreement recognized that the Tenantsalready owned the Property in the proportions identified in the Crossroads Commons Agreement: Park Regency owned 37.5%, R & D owned 47.5%, Landy Properties owned 10%, and Sowers Properties owned 5%. The TIC Agreement states the Tenants, as owners of the Property:

[D]esire by this Agreement to set forth and confirm their mutual agreements and understandings with respect to their ownership interests in the Property, their respective rights and obligations as tenants in common of the Property, and their right to manage, rent, operate, maintain, alter, improve, lease, transfer, sell or otherwise control the disposition of the property or any part thereof.

The TIC Agreement acknowledged mutual ownership of the Property and established each Tenant's rights and obligations, including requirements concerning a Tenant's withdrawal from the group.

Following the appointment of a property manager, the Tenants anticipated quarterly disbursements of any monies received that exceeded the Property's operating costs. They established an order for these disbursements. First, Park Regency and then Landy Properties would receive payments up to the amounts they had invested. Next, Hawkensen, in its capacity as Horizontal Developer, would receive payments for “its unpaid hard costs including costs prior to closing such as initial contract deposit, engineering, surveying, etc.” Finally, the Tenants would receive payments corresponding to their proportionate shares.

In the event revenues from the Property and the Tenants' reserves were insufficient to pay taxes, loan payments, or other operating costs, the Tenants agreed to contribute the necessary funds in accordance with their proportionate shares. Although any Tenant's failure to contribute would be an event of default, two provisions specifically addressed R & D's participation. First, in the event of R & D's uncured default for failure to contribute, the other Tenants could purchase R & D's interest in the Property for 75% of its fair market value, “reduced further by any payment outstanding by R & D.” Second, R & D agreed to maintain $250,000 in an escrow account for the purpose of paying “all interest and other carrying charges” on the loan or loans encumbering the Property. R & D's failure to do so would be an event of default.

Paragraph 11 of the TIC Agreement addressed transfers of Tenants' interests, with subsection (c) outlining events of default. In the event of a Tenant's default, the remaining Tenants would have the option (1) to cure using funds from the defaulting Tenant's distributions or (2) to purchase the defaulting Tenant's interest in the Property. Paragraph 11(c)(ii) described the method for determining the purchase price of a defaulting Tenant's interest. After an independent appraiser determined the fair market value of the Property, the parties would determine the value of the dissociating Tenant's distributional interest by calculating the difference between (1) the fair market value of the Property, multiplied by the defaulting Tenant's proportionate share; and (2) all outstanding financial obligations as of the date of closing, multiplied by the defaulting Tenant's proportionate share. Paragraph 10(a) defined the specific obligations as taxes and “maintenance expenses required by [Hawkensen] or any property manager and approved by [a 51% majority vote of the Tenants].” The remaining Tenants would then pay the dissociating Tenant 75% of the value of its distributional interest, less any amounts the dissociating Tenant owed.

The Tenants agreed any closing resulting from an event of default and conducted pursuant to the TIC Agreement would take place “within two hundred seventy (270) days from the date of notice of the Event of Default.” However, they could extend the closing date “by any period necessary to determine the purchase price” of the defaulting Tenant's interest. Payment to the defaulting Tenant would be “in cash at closing.”

B. Transfers of Ownership

One week after executing the TIC Agreement, Park Regency conveyed the Property via quit-claim deed to the Tenants, as contemplated in the Crossroads Commons Agreement.⁴ In May 2008, the Tenants sold approximately fifteen acres of the Property to a third party for $750,000.⁵ The Tenants used the proceeds from that sale to pay down the loan on the Property. In addition, they formed Crossroads, with each Tenant receiving a share of ownership in the LLC equal to its proportionate share of the Property under the TIC Agreement. They did not execute an operating agreement. On May 30, 2008, the Tenants executed a quit-claim deed conveying their remaining interest in the Property to Crossroads. In doing so, the Tenants retained the same percentages of ownership in Crossroads, and therefore in the unsold portion of the Property, that they had held in the Property itself.

III. Financial Disputes

Hawkensen established a budget of $596,700 to complete the...