Woodland Investor Member, L.L.C. v. Soldier Creek, L.L.C.

• Decision Date: 23 May 2012
• Docket Number: Case No. 11-2013-JTM
• Parties: WOODLAND INVESTOR MEMBER, L.L.C., Plaintiff, v. SOLDIER CREEK, L.L.C., ET AL., Defendants.
• Court: U.S. District Court — District of Kansas

WOODLAND INVESTOR MEMBER, L.L.C., Plaintiff, v. SOLDIER CREEK, L.L.C., ET AL., Defendants.

Case No. 11-2013-JTM

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF KANSAS

Dated: May 23, 2012

MEMORANDUM AND ORDER

Before the court is Woodland Investor Member L.L.C.'s (WIM) Motion for Summary Judgment (Dkt. No. 51). WIM and defendants entered into an Operating Agreement for the purpose of building an apartment complex in Topeka, Kansas. With the apartments nearing completion, defendants failed to meet the necessary requirements to receive funding from WIM, and the apartments were never finished. In this motion, WIM seeks summary judgment on its claims against defendants for breach of the Operating Agreement and breach of the Guaranty Agreement. It also seeks summary judgment on the defendants' four Counterclaims. The uncontroverted facts establish that WIM performed its obligations under the Operating Agreement and that defendants are liable for breach of contract and for breach of the Guaranty Agreement. The facts also show that WIM is not liable to defendants for any of the Counterclaims. Therefore, the court grants WIM's motion.

I. Uncontroverted Facts

A. The Parties

WIM is a Delaware limited liability company, whose sole managing member, NEF Community Investments, Inc., is an Illinois not-for-profit corporation with its principal place of business in Chicago, Illinois. WIM's predecessors in interest include NEF Assignment Corporation (NEFAC) and National Affordable Housing Fund I, L.P. (NAHF). Under the Operating Agreement, the Investor Member (WIM and its predecessors in interest) may voluntarily transfer its membership interest at any time as long as certain conditions are met. See § 9.1. In addition to the conditions in § 9.1, the assignment does not become effective "unless and until [Soldier Creek] consents in writing to such substitution, which consent may not be unreasonably withheld; provided that no such consent shall be required for the substitution of an Assignee that is an Affiliate of the Investor Member." Dkt. No. 52, Ex. B., § 9.2. On November 9, 2007, NEFAC entered into an Assignment and Assumption Agreement with NAHF, under which NEFAC transferred its right, title, and interest in Woodland Park to NAHF. Under the terms of the Assignment, NEFAC agreed to "transfer[], assign[] and convey to [NAHF] all of [NEFAC's] right, title and interest in and to its Interest in the Project and [NEFAC's] rights and obligations under the Related Documents. The Interest constitutes all of [NEFAC's] interest in [the Woodland Park Project]." Dkt. No. 52, Ex. A-2, ¶ 2 (alterations added). Further, NAHF accepted the assignment and agreed to be bound "to the same extent as [NEFAC], by the provisions of the Operating Agreement, the Related Documents and any other documents required in connection therewith and to assume the obligations of [NEFAC] thereunder." Id. ¶ 4 (alterations added). On December 30, 2010, NAHF entered into an Assignment and Assumption of Investor Member Interest with WIM, under which NAHF transferred its right, title,and interest in the Woodland Park Project to WIM. NAHF's general partner is NEF Community Investments, Inc., who is also the sole managing member of WIM. WIM is an Affiliate of NAHF, as defined in the Operating Agreement.¹

Defendant Soldier Creek, L.L.C., is a limited liability company organized under Kansas law with its principal place of business in Topeka, Kansas. Its members are the individual defendants George M. Hersh, II, John M. Hersh, and Brian C. Hersh. The individual defendants are all citizens and residents of Kansas. Defendant Hersh Development Company, L.L.C., is a Kansas limited liability company whose sole members are the individual defendants.

B. The Operating Agreement

The Operating Agreement central to this dispute between the parties became effective on May 1, 2007. The Operating Agreement governed the relationship of Soldier Creek and NEFAC, with respect to construction and financing of the Woodland Park at Soldier Creek Apartments Project (Woodland Park Project). Soldier Creek was the "Managing Member" of the Woodland Park Project, and NEFAC, as nominee, was the "Investor Member." All defendants had independent legal counsel during the negotiation and drafting of the Operating Agreement. And defense counsel affirmatively represented to NEFAC that they had "reviewed the . . . Operating Agreement [and] Guaranty Agreement," and that it "constitutes the valid, legal, and binding agreement of [Soldier Creek] and members thereof, enforceable in accordance with its terms." Dkt. No. 52, Ex. D, pgs. 1-2 (alterations added). Section 6.3(dd) of the Operating Agreement provides that "[t]his Operating Agreement is binding upon and enforceable against [Soldier Creek] in accordance with its terms."Dkt. No. 52, Ex. B, § 6.3(dd) (alterations added).

The Woodland Park Project's stated purpose under the Operating Agreement was "(a) to acquire, construct, own, finance, lease, and operate the Project Property as a qualified low income housing project within the meaning of § 42 of the [Internal Revenue] Code; (b) to eventually sell or otherwise dispose of the Property Project in a manner consistent with the provisions of this Operating Agreement; and (c) to engage in all other activities incidental or related thereto." Id. § 2.2 (alterations added). Section 42 provides a tax credit for investment in certain low-income housing buildings. It was clear to all parties that the only way NEFAC or its related entities would obtain a return on investment was to obtain these tax credits. Further, § 6.4(l) provided:

[Soldier Creek] acknowledges that it is of great importance that the federal Tax Credit under § 42 of the Code and all other tax benefits contemplated in the Projections be achieved and maintained. Accordingly, [Soldier Creek] agrees as follows:

(I) No Delays. [Soldier Creek] shall not cause or suffer any delay in Placement in Service or Qualified Occupancy that would reduce such anticipated tax benefits.

Id. § 6.4(l) (alterations added).

NEFAC's obligations to fund the Project, defined in § 3.2 of the Operating Agreement, required it to provide capital contributions of $7,057,000, payable in separate installments. Each installment was due only after specified conditions related to completion of the Woodland Park Project had been met by Soldier Creek. The capital contributions were divided into two types: (1) Non-Developer Fee Equity, and (2) Developer Fee Equity. Under Non-Developer Fee Equity, NEFAC was required to provide capital in five installments: $2,509,140, less $35,000; $1,792,243; $597,414; $466,830; and $608,516. The first, second, and third installments totaling $4,863,797, were paid in accordance with the Operating Agreement. Under Developer Fee Equity, NEFAC wasrequired to provide capital in three installments: $433,143; $541,429; and $108,286. NEFAC funded the first Developer Fee installment. Section 3.8 provides that "[e]xcept as expressly provided in this Operating Agreement, no Member is required to make additional contributions to the capital of [the Woodland Park Project]." Dkt. No. 52, Ex. B. § 3.8.

Section 12.9 provides "[t]his Operating Agreement contains the entire agreement among the Members with respect to the transactions contemplated herein, and supercedes all prior or written agreements, commitments, or understandings with respect to the matters provided for herein and therein." Id. § 12.9. Section 12.11 provides that "[e]xcept as otherwise provided for herein, this Operating Agreement may not be amended in whole or in part except by a written instrument signed by [Soldier Creek] and [WIM]." The Operating Agreement must be interpreted consistently with the laws of Kansas.

C. The Fourth Installment

As noted above, NEFAC was required to pay a fourth Non-Developer Fee Equity installment of $466,830, upon Soldier Creek's satisfaction of 11 specific conditions, which included, in part:

(B) Receipt by [NEF] of an architect's certification indicating that all the work has been substantially completed in accordance with the plans and specifications provided to, and approved by [NEF];

(C) Receipt of final lien waivers from the general contractor and all subcontractors (or evidence that such final waivers are pending conditioned only upon payment of this Installment);

(I) Satisfactory completion of 100% of the construction of the Project as evidenced by the construction disbursement documents and approved by [NEF's] construction inspector.

Dkt. No. 52, Ex. B. § 3.2(a)(iv)(B)-(C), (I). On January 30, 2009, JRMA Architects, Inc., issued nine Certificates of Substantial Completion for nine buildings indicating that the work on those buildingswas "substantially complete." Dkt. No. 56, Ex. 2. But the Certificates "exclude[d] all Punch List items which are outstanding as of the date of this certificate." Id. And the architect testified at the Arbitration that the Certificates certified substantial completion of the interiors of each building but not the entire project. Soldier Creek has not produced a certificate of substantial completion for the entire Woodland Park Project.

On February 11, 2009, Neighbors Construction, the general contractor, issued a "Waiver and Release of Lien" stating that it waived and released all bonds, liens, or claims against the Woodland Park Project on the condition that it received $626,801.86 (draws 20 and 21). Satisfactory completion of 100% of the project as evidenced by the construction disbursement documents and approved by NEF's construction inspector has not occurred.

Section 3.2(c) attaches additional express funding conditions:

The obligation to pay the amounts due under § 3.2(a) and (b) is expressly conditioned upon each of the following requirements, in addition to those requirements that are set forth above, being satisfied at all times prior to and including the due dates of the above payments:

(I) [Soldier Creek] has fully complied

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