Smith v. Fairfax Realty, Inc.

• Decision Date: 03 October 2003
• Docket Number: No. 20010673.,20010673.
• Citation: 2003 UT 41,82 P.3d 1064
• Parties: Armand L. SMITH, individually and as trustee for the Armand L. Smith, Jr., Trust and the Shannon S. Windham Trust, and Virginia L. Smith, Plaintiffs and Appellees, v. FAIRFAX REALTY, INC., formerly Price Development Co., a Utah corporation, North Plains Land Co., Ltd., a Utah limited partnership, and North Plains Development Co., Ltd., a Utah limited partnership, Defendants and Appellants.
• Court: Utah Supreme Court

82 P.3d 1064

2003 UT 41

Armand L. SMITH, individually and as trustee for the Armand L. Smith, Jr., Trust and the Shannon S. Windham Trust, and Virginia L. Smith, Plaintiffs and Appellees, v. FAIRFAX REALTY, INC., formerly Price Development Co., a Utah corporation, North Plains Land Co., Ltd., a Utah limited partnership, and North Plains Development Co., Ltd., a Utah limited partnership, Defendants and Appellants.

No. 20010673.

Supreme Court of Utah.

October 3, 2003.

Rehearing Denied October 29, 2003.

Robert S. Campbell, Clark K. Taylor, Salt Lake City, for plaintiffs.

Harold G. Christensen, Reed L. Martineau, Rex E. Madsen, James S. Jardine, Brent D. Wride, Rick B. Hoggard, Rod N. Andreason, Salt Lake City, for defendants.

PARRISH, Justice:

¶ 1 This case presents issues relating to the propriety of both compensatory and punitive damage awards. At the conclusion of a jury trial, defendant Price Development Company (Price), a Utah corporation now doing business as Fairfax Realty, Inc., was found liable for conversion, breach of partnership agreements, and breach of fiduciary duties. Plaintiffs Armand and Virginia Smith were awarded compensatory damages, including prejudgment interest, and punitive damages.

¶ 2 On appeal, Price contends that (1) the trial court wrongly denied a directed verdict on the issue of whether Price's actions resulted in any damage to the Smiths; (2) the Smiths were not entitled to prejudgment interest as part of the compensatory damages; (3) the prejudgment interest award was excessive; (4) the trial court erred in submitting the issue of punitive damages to the jury; and (5) the punitive damage award was excessive. We affirm the trial court on all issues except the excessiveness of the prejudgment interest award.

BACKGROUND

¶ 3 "On appeal, we recite the facts from the record in the light most favorable to the jury's verdict." Diversified Holdings, L.C. v. Turner, 2002 UT 129, ¶ 2, 63 P.3d 686 (citation and quotation omitted). In 1984, Price purchased a thirty-three-acre parcel of property in Clovis, New Mexico, from the Smiths. As part of the transaction, the Smiths received a 15% limited partnership interest in each of two partnerships formed to build and operate a shopping mall on the property. Price became the general partner, and the remaining limited partnership interests went to Price and related entities that were under the overall ownership and control of John Price.

¶ 4 Construction of the North Plains Mall was financed through a $9 million loan that was later paid with the proceeds of a $12 million loan. The mall opened in 1985 with approximately forty tenants and thereafter maintained a typical occupancy rate of 93%. Price periodically informed the Smiths that it was pleased with the performance of the mall.

¶ 5 In July 1993, Price informed the Smiths that John Price had decided to form a real estate investment trust (REIT) by pooling shopping malls and other commercial properties owned or controlled by John Price entities. Price wanted to include the North Plains Mall in the REIT and told the Smiths that if the mall were included, the Smiths would have three distinct options for handling their 15% interest in the mall.

¶ 6 Price presented the three options to the Smiths, and the Smiths assumed they had time to consider the options and the potential transfer of the mall. Then, without further communication with the Smiths on the matter, Price proceeded to sign contribution agreements and transfer the mall property into the REIT, despite provisions in the partnership agreements that required the Smiths' consent for such transactions.¹ Preparations were then made to initiate a public stock offering in the REIT.

¶ 7 In the ensuing months, the Smiths repeatedly requested information regarding the status of their interests in the mall, but Price failed to disclose its unilateral decision to contribute the mall property to the REIT. Instead, Price fielded the Smiths' questions regarding the three options previously given to the Smiths, leading them to believe the options were still open, even though Price knew that its unilateral action had left the Smiths with no options. When the Smiths inquired as to the possible value of their holdings should the mall be included in the REIT, Price sent various conflicting estimates, ultimately assigning a total value of just $6,160 to the Smiths' interests. In response, the Smiths presented objections and concerns as to the method used for valuing their interests, the proposed uses of proceeds from the sale of stock, and the costs that could be charged against the value of the mall.²

¶ 8 In April 1994, Price finally disclosed to the Smiths that Price had decided to transfer the mall to the REIT the previous September and that the three options originally presented to the Smiths were no longer available. In fact, the REIT had actually gone public on January 21, 1994, selling approximately $198,000,000 in stock. Proceeds from the public offering were used to pay existing mortgage debt on John Price properties, purchase equity interests in other property, and pay debts and expenses associated with the REIT offering. Evidence at trial showed that the overall transaction substantially benefitted John Price personally, as well as the Price Development Company.

¶ 9 The Smiths brought suit against Price based on the foregoing events and on evidence that Price had acted in other inappropriate, self-interested ways. These other actions included the commingling of funds of multiple Price-related entities, payment of inflated management fees to a Price subsidiary, payment of interest to itself on its capital call contributions while withholding interest from the Smiths' contributions, and possible manipulation of partnership tax returns to the benefit of Price and to the detriment of the Smiths.

¶ 10 After a fourteen-day trial, the jury reached a verdict in favor of the Smiths, finding that Price had breached the partnership agreements, breached its fiduciary duty to the Smiths, and converted partnership assets. The jury awarded the Smiths $410,000 in compensatory damages, which, according to the evidence at trial, was the fair market value of the Smiths' partnership interests in the mall property at the time of the transfer. The jury added $690,000 to the compensatory amount in prejudgment interest. The jury also awarded punitive damages in the sum of $5,500,000 against Price.

¶ 11 Following the verdict, Price brought a number of post-trial motions, including motions for judgment notwithstanding the verdict and for new trial or, in the alternative, for a remittitur. The trial court denied these motions and entered special findings on the punitive damage award pursuant to Crookston v. Fire Insurance Exchange, 817 P.2d 789, 811 (Utah 1991) (directing trial judges to articulate grounds for upholding punitive damages when an award exceeds the range of what has consistently been upheld). The special findings upheld the punitive damage award as being "within the zone of reasonableness given the conduct of Price Development and the circumstances of the case."

ANALYSIS

I. DENIAL OF MOTION FOR DIRECTED VERDICT

¶ 12 Price first contends that the district court should have granted its motion for a directed verdict because the Smiths' interests, it argues, were valueless outside of the REIT and Price's actions, therefore, did not result in any damage to the Smiths. "Under Utah law, a party who moves for a directed verdict has the very difficult burden of showing that no evidence exists that raises a question of material fact." Mahmood v. Ross, 1999 UT 104, ¶ 18, 990 P.2d 933 (citations and quotation omitted).

When reviewing any challenge to a trial court's denial of a motion for directed verdict, we review the evidence and all reasonable inferences that may fairly be drawn therefrom in the light most favorable to the party moved against, and will sustain the denial if reasonable minds could disagree with the ground asserted for directing a verdict.

Id. at ¶ 16 (citations and quotation omitted). We note here that a more complete marshaling of the evidence by Price would have facilitated our review of this issue. See Moon v. Moon, 1999 UT App 12, ¶ 24, 973 P.2d 431

("`In order to properly discharge the duty of marshaling the evidence, the challenger must present, in comprehensive and fastidious order, every scrap of competent evidence introduced at trial which supports the very findings the appellant resists.' " (quoting W. Valley City v. Majestic Inv. Co., 818 P.2d 1311, 1315 (Utah Ct.App.1991))).

¶ 13 Price argues that had it not transferred the mall property to the REIT, the mall inevitably would have suffered bankruptcy or foreclosure and the Smiths would have recovered nothing for their partnership interests. To this end, Price presented evidence that the mall's $12 million loan, which had been extended six times, had to be repaid by July 15, 1994. According to Price, there were insufficient resources to pay the approximately $11 million balance on the loan by this date, and foreclosure or bankruptcy was therefore imminent. Price also presented evidence that prior to the transfer, which occurred in the fall of 1993, it had made various unsuccessful attempts to refinance or sell the mall, thereby rendering the transfer to the REIT the only viable option. Price argues that this evidence demonstrates that the Smiths could not have received any value for their shares outside of the REIT.³

¶ 14 The Smiths argue that financial failure of the mall was neither inevitable nor imminent. They presented evidence that the outstanding loan could have been extended again as it had been in the past and that Price's efforts to refinance or sell the mall were not exhaustive. The Smiths also produced evidence that Price and John Price had strong financial incentives to contribute the mall to the REIT, rather than committing to sell it on the market....