Stevensen 3RD East, Lc v. Watts

• Citation: 2009 UT App 137,210 P.3d 977
• Decision Date: 21 May 2009
• Docket Number: No. 20070765-CA.,20070765-CA.
• Parties: STEVENSEN 3RD EAST, LC, a Utah limited liability company, Plaintiff and Appellee, v. Russell K. WATTS, an individual; R.K.W. 96, LC, a Utah limited liability company; The Club Condominium, LC, a Utah limited liability company; and John Does 1-100, Defendants and Appellant.
• Court: Court of Appeals of Utah

210 P.3d 977

2009 UT App 137

STEVENSEN 3RD EAST, LC, a Utah limited liability company, Plaintiff and Appellee, v. Russell K. WATTS, an individual; R.K.W. 96, LC, a Utah limited liability company; The Club Condominium, LC, a Utah limited liability company; and John Does 1-100, Defendants and Appellant.

No. 20070765-CA.

Court of Appeals of Utah.

May 21, 2009.

Dennis K. Poole and Elizabeth P. Miller Evans, Salt Lake City, for Appellant.

Thor B. Roundy, Midvale, for Appellee.

Before Judges GREENWOOD, BENCH, and McHUGH.

OPINION

BENCH, Judge:

¶ 1 Defendant Russell K. Watts appeals from a jury verdict finding that he breached his fiduciary duties as a manager of a real estate development limited liability company and caused damage to Plaintiff Stevensen 3rd East, LC (3rd East) in the amount of $474,000. On appeal, Watts claims that the trial court erred in instructing the jury as to the standard of care for a limited liability company manager and the measure of damages for a breach of fiduciary duty. Watts also challenges the trial court's ruling regarding the admissibility of certain expert testimony, the sufficiency of the evidence in support of the verdict, and the award of prejudgment interest, attorney fees, and costs. We affirm in part, and we reverse and remand in part.

BACKGROUND

¶ 2 In 1995, Ted Stevensen and Watts decided to develop real estate owned by Stevensen. To effectuate their plans, the parties formed The Club Condominium, LC (The Club) by signing an operating agreement (the Operating Agreement). The Club was to be owned equally by its two members: (1) R.K.W. 96, LC (RKW 96), managed by Watts, and (2) 3rd East, managed by Stevensen. Watts and Stevensen ultimately decided to build a residential condominium project, for which 3rd East contributed land valued at $631,000 and RKW 96 contributed $180,000 in cash and a development fee booked at $451,000. The "sole purpose" of The Club was "the acquisition, development, ownership, management, sale and/or leasing of [the real property contributed by 3rd East], and other related business."

¶ 3 The Operating Agreement named Watts as manager of The Club. It authorized Watts Corporation (Watts Corp), an affiliate of Watts, to act as the general contractor for The Club, and it also authorized Kevin Watts Architects (the Architect), Watts's father's architectural firm, to act as the project's architect. The Operating Agreement stated that Watts Corp and the Architect "shall be paid [their] normal and customary fees charged on an arms-length basis to third parties for similar services." The Operating Agreement further provided, "Neither the scope and nature of the Project nor such budget shall be subject to change unless such change is agreed to in writing by the holders of a majority of the Interest ... and both [RKW 96] and [3rd East]."

¶ 4 In order to obtain financing for this project, The Club had an appraisal prepared. The appraisal included figures on absorption rates—the time it takes for buyers in a particular market to purchase units offered for sale. It warned that the absorption of higher priced condominium units may be problematic, noting that higher priced units would likely sell more slowly in 1998 than in 1997. Watts was aware of the appraisal and its cautions about the market for higher priced units.

¶ 5 The Club subsequently obtained a bank construction loan in an amount smaller than needed to complete the project. Watts, as manager, intentionally procured a smaller loan with the plan to use proceeds of early sales to complete remaining units and, if needed, to borrow additional funds from private lenders. The maturity date for the bank loan was March 1999.

¶ 6 The Architect finalized the plans in June 1997, and construction began two months later. The contract between Watts Corp and The Club required completion by November 1998. Watts Corp had originally indicated that it could have the project completed by July 1998.

¶ 7 Ultimately, The Club held its grand opening in February 1999, although it did not receive its certificate of occupancy until July 1999. Once the grand opening had occurred, Stevensen and Watts split floor time between themselves to market and show the units to prospective buyers. By March 1999, Watts suggested that Stevensen should no longer participate in showing the units because Stevensen had not made any sales. In response, the parties signed an agreement (the March 1999 Agreement) under which Watts Group, a marketing group also affiliated with Watts, would take over marketing and selling the units. Under the March 1999 Agreement, Watts Group would receive a 3% commission on the sales it made and 3rd East would receive a 1% fee of the sales price of every unit sold to buyers through the Watts Group. The March 1999 Agreement also established a priority of debt repayments and reduced the interest on outstanding payments to Watts Corp from 12% to 9%.

¶ 8 Between 1996 and 1998, Watts produced several budgets representing the costs associated with the project's construction, taxes, marketing, and maintenance, as well as the projected profit for The Club's members. 3rd East received copies of these budgets in January 1997, October 1997, and October 1998. Although the costs associated with building the project continued to increase, the projected profit in each of these budgets remained at approximately $800,000.

¶ 9 By September 1999, half of the condominium units remained unsold. At that point, Watts provided 3rd East with yet another budget estimate, which for the first time showed a significant decrease in projected profits. The September 1999 budget indicated that the projected net profit on the project would be $50,000, with a possible net loss of $50,000. 3rd East and Watts had a disagreement as to how to proceed in light of the drastically reduced profit projections. 3rd East claimed that Watts kicked out its principal, Stevensen, and prohibited him from working on behalf of The Club. Watts claims that Stevensen left voluntarily. Nevertheless, after their disagreement, 3rd East was not involved in The Club's decisions and Watts ceased to make profit advances to 3rd East or to pay 3rd East's 1% fee on unit sales. The Club did not sell its final unit until November 2002.

¶ 10 In 2001, 3rd East, along with Stevensen and his wife in their individual capacities, brought suit. They asserted the following claims against Watts and other defendants, including The Club: (1) declaratory relief, (2) breach of contract, (3) breach of the implied covenant of good faith and fair dealing, and (4) unjust enrichment. 3rd East and the Stevensens also brought claims against Watts for breach of fiduciary duty, fraud, and negligent misrepresentation, as well as claims against The Club's attorney for breach of fiduciary duty and negligence.

¶ 11 The claims against The Club's attorney settled prior to trial, and the Stevensens' individual claims were dropped. Also prior to trial, 3rd East succeeded in receiving a requested declaration that it was entitled to a 1% commission on all units sold by Watts Group. After failed attempts to settle, 3rd East proceeded to trial against Watts on the claims of negligent misrepresentation and breach of fiduciary duty, but only the claim of breach of fiduciary duty went to the jury. 3rd East also proceeded to trial against The Club on the claim of breach of the covenant of good faith and fair dealing.

¶ 12 At trial, the jury heard testimony that Watts had worked in real estate development since 1976 and had participated in over a hundred projects. Prior to working with Watts on The Club, Stevensen had no experience in real estate development. He relied on and trusted Watts's judgment and expertise.

¶ 13 The jury also heard testimony from 3rd East's construction expert regarding Watts's performance as manager of The Club. The construction expert opined that Watts had not taken care to ensure that The Club would turn a profit on the project because Watts did not adhere to a fixed plan or a fixed budget. The construction expert stated that Watts was constantly changing the design plans for the project to make a higher priced product. He opined that those changes caused a delay in the project's completion which, in turn, caused the cost of the project to increase through both hard costs and interest payments. The construction expert stated that Watts began to change the design almost as soon as construction began.

¶ 14 The construction expert also testified that Watts failed to properly implement or administer the contracts with Watts Corp and the Architect. Although the parties agreed to use affiliated entities to perform work for The Club, Watts did not enforce contractual provisions with those entities to the benefit of The Club nor did he use them in a manner typical in the industry. In particular, the construction expert took issue with the use of a cost-plus-percentage-fee payment arrangement with Watts Corp because it created a conflict of interest. Because Watts Corp was paid a percentage of the costs of construction, Watts Corp's profits increased as the cost of construction increased. Although Watts, as manager of The Club, had the ability to tell the contractor to finish work within a certain time frame and budget to ensure that The Club still turned a profit, he did not do so. Furthermore, contrary to industry customs, Watts used the Architect only to ensure that the project was built to codes and plans instead of to ensure that the contractor stayed within budget.

¶ 15 Although the construction expert stated that Watts was not "throwing money away," he did not see any evidence that Watts had made an investigation to ensure that The Club's profit would increase proportionately to the cost increases. Because of a lack of set plans and set bids, the construction expert believed that Watts likely lacked sufficient information to even know how far over budget he was as he directed...