Washington Medical Center v. Holle, 88-1205

Citation573 A.2d 1269
Decision Date03 May 1990
Docket NumberNo. 88-1205,88-1285.,88-1205
CourtCourt of Appeals of Columbia District
PartiesWASHINGTON MEDICAL CENTER, INC., et al., Appellants, v. Henry C. HOLLE, et al., Appellees. Henry C. HOLLE, et al., Appellants, v. WASHINGTON MEDICAL CENTER, INC., et al., Appellees.

Paul R. Webber, IV, with whom Steven D. Cundra, Rochelle M. Hindman, and Patricia L. Taylor, Washington, D.C., were on the brief, for appellants/cross-appellees Washington Medical Center, Inc. and H. Charles Deyerberg.

Warren K. Kaplan, with whom Douglas B. Mishkin, Washington, D.C., was on the brief, for appellees/cross-appellants Henry C. Holle and Clyde M. Vernon.

Before ROGERS, Chief Judge, and NEWMAN and FARRELL, Associate Judges.

FARRELL, Associate Judge:

This appeal and cross-appeal arise from the trial court's judgment, following a bench trial, for punitive and compensatory damages against Washington Medieal Center (WMC), the managing general partner of an ill-fated limited partnership formed for the purpose of developing certain real property, and its president, Deyerberg, for breach of fiduciary duties to the other partners, including Holle. WMC filed for bankruptcy when the joint venture went awry, and that fact gives rise to two of its primary claims on appeal. It contends that when it filed its bankruptcy petition and was made a "debtor-in-possession" by the bankruptcy court, that status extinguished any fiduciary duties it owed to the other partners and any liability under state law for breach of those duties. WMC also contests the trial court's refusal to apply principles of res judicata and collateral estoppel to bar Holle from litigating issues and claims addressed in WMC's bankruptcy proceeding. It further challenges the award of punitive damages, asserting that the court erred in finding that WMC's filing of an action for an accounting and winding up of partnership affairs, naming as defendant Holle but none of the other partners, was a breach of fiduciary duty and part of a pattern of willful misconduct toward Holle. On his cross-appeal, Holle asserts that the court erroneously denied his claim against WMC for certain rental payments for real property owned by the partnership stemming from WMC's status as assignee of the leasehold.

We reject WMC's argument concerning the effect of WMC's status as debtor-in-possession on its fiduciary duties as managing partner. We find no indication that Congress intended the changes in a corporate debtor's status worked by the filing of a bankruptcy petition to absolve a partner of the duties of good faith and fair dealing owed to fellow partners during the winding up phase. We also reject WMC's arguments of claim and issue preclusion. We further hold that, although a partner indisputably has a right to seek an in-court accounting for legitimate reasons, the trial judge's finding that WMC's suit was motivated by animus toward Holle and part of a concerted attempt to force Holle to abandon legitimate claims is supported by record evidence and that punitive damages accordingly were proper. Finally, we agree with Holle's contention on cross-appeal that the trial judge erroneously rejected the claim for unpaid rent. We therefore remand solely for a determination of damages on that issue.

I. The Facts
A. Transactional Background

The facts giving rise to this litigation follow a tortuous path, one the reader unhappily cannot be spared. In late 1969 a group of medical professionals and their friends and relatives formed a real estate investment partnership called Medical Center Associates (MCA), and acquired a parcel of land at 1143 New Hampshire Avenue for the purpose of constructing an apartment building. This project was abandoned shortly after construction began, and MCA hired Holle, an architect, to explore the feasibility of alternatively using the property as an extended care medical facility. After a favorable determination by Holle, MCA sought financing. Wachovia Bank and Trust Company agreed to finance construction and Metropolitan Life Insurance Co. to provide permanent financing. However, because MCA was a partnership and the agreed-upon interest rates exceeded the maximum rates for individual borrowers under District of Columbia law, the project could not go forward.

The interest rate limitations did not apply to corporate borrowers, however, and Washington Medical Center, Inc., a Virginia real estate investment corporation controlled by Dr. Oscar Hunter, one of the partners of MCA, agreed to obtain the loans and develop the medical facility. On September 2, 1969, a limited partnership called Metropolitan Hospital for Extended Care (MHEC) was formed consisting of WMC, the former partners of MCA (including Dr. Hunter), Holle, and a number of others.1

Under the partnership agreement, WMC was the managing general partner, and at all times it maintained and controlled the partnership's books and records. Holle was denominated a general partner, but the agreement provided that he had no right to control or participate in the management of the partnership. Moreover, he contributed only $90,000 in architectural services, and the partnership agreed to hold him harmless for any liability exceeding the value of that contribution.

By 1975, when MHEC began receiving rent for the facility, Holle had a total ownership interest of 9.06% (1% as a general partner and 8.06% as a limited partner), and WMC had a total ownership interest of 83.44% (5% as a general partner and 78.44% as a limited partner). Eventually WMC acquired the ownership interests of all the other general partners, including Dr. Hunter, except for that of Holle. Pursuant to the partnership agreement, each of the general partners was liable for a certain percentage of MHEC's debts and liabilities. Although Dr. Hunter transferred his ownership interest to WMC, he remained liable for a share of the firm's liabilities. The final allocation of responsibility for firm debts and liabilities was: WMC, 81.541%; Dr. Hunter, 18.459%.

An additional agreement governing financing, construction and operation of the facility was also executed on September 2. It provided that WMC would hold legal title to the 1143 New Hampshire Avenue property as a "straw party" or agent for MHEC, the beneficial owner, until completion of the building, at which time WMC would convey title to MHEC. The partnership would then lease the building to Doctors' Hospital, Inc. (DHI),2 and WMC would guarantee DHI's performance under the lease to the lenders. If WMC made a payment to any lender as guarantor, or otherwise incurred liability, it could seek reimbursement from MHEC and/or its general partners, except for Holle who was expressly excluded.

Pursuant to the agreement, MHEC authorized WMC to encumber and, in the event the extended care facility was uncompleted, to sell the 1143 New Hampshire Avenue property, subject to MHEC's right of first refusal. WMC obtained a construction loan from the Wachovia National Bank and Trust Company, N.A., and executed a promissory note secured by a deed of trust on the property; Metropolitan Life Insurance Company later purchased this note. On September 22, 1969, WMC obtained another loan from Wachovia that was later purchased by Weaver Brothers, Inc.; this note was also secured by a deed of trust on the New Hampshire Avenue property. WMC, as landlord and agent for MHEC, executed a lease of the property to DHI for a 20-year term.

The building was completed in 1971 and DHI operated it as an extended care medical facility until July 1972.3 Because Medicare, Blue Cross and other insurers refused to reimburse patients for services provided at the facility, the venture was a failure and DHI incurred a $3.3 million loss in the first 1 ½ years of operation. To avoid further losses, in August 1972 DHI assigned its leasehold interest to WMC, the latter agreeing to assume DHI's lease obligations. These included the payment of rent to MHEC which amounted to an annual payment of $700,000.4 Because WMC stood in the position of both landlord (as MHEC's agent and managing partner) and tenant (as DHI's assignee), these payments were but "paper" transactions in which WMC's books were debited and MHEC's credited each month. Significantly, WMC did not disclose the assignment and assumption of rental obligations to the other MHEC partners.

WMC operated the property at a loss as the Metropolitan Hotel from August 1972 to July 1975. In 1975 WMC subleased the entire building to a hotel management company, which operated a hotel on most of the premises until 1978. When losses continued to mount, WMC turned finally to a plan to convert the premises into an acute medical care facility.

This plan answered two critical needs of WMC: first, to turn the New Hampshire Avenue property to profitable use, and second, to find a new home for Doctors' Hospital (owned and operated by WMC's wholly-owned subsidiary, DHI), which was then being forced out of its I Street location. The plan called for WMC to buy out the minority partners of MHEC, and to sell the property to AHS Management Services, Inc. (AHS), a health care management company, for $8.195 million. AHS would then lease the premises back to Doctors' Hospital for twenty years. Although WMC, through its wholly-owned subsidiary DHI, would thus receive substantial profits from operating the acute care facility, WMC did not inform the other MHEC partners of these projections. To accomplish the conversion of the premises to the new Doctors' Hospital, WMC bought out some of the MHEC partners and obtained $2.25 million in loans from AHS secured in part by further encumbrances on the New Hampshire Avenue property. The existence of these encumbrances also was not disclosed to the remaining MHEC partners. Negotiations with AHS collapsed, and in September 1979 WMC, followed shortly by DHI, filed for bankruptcy and reorganization under federal bankruptcy laws.


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