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American Master Lease LLC v. Idanta Partners, Ltd.

California Court of Appeals, Second District, Seventh Division

May 5, 2014

AMERICAN MASTER LEASE LLC, Plaintiff and Respondent,
v.
IDANTA PARTNERS, LTD. et al., Defendants and Appellants.

[As Modified on May 27, 2014]

APPEAL from a judgment and an order of the Superior Court of Los Angeles County, No. BC367987 Ramona G. See, Judge.

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COUNSEL

Lathrop & Gage, John Shaeffer, Jeffrey Grant and Emily Birdwhistell for Defendants and Appellants.

Mayer Brown, Donald Falk; Mayer Brown, Neil M. Soltman and Germain D. Labat for Plaintiff and Respondent.

OPINION

SEGAL, J. [*]

INTRODUCTION

In this appeal we consider the questions (1) whether a defendant can be liable for aiding and abetting breach of fiduciary duty without owing the plaintiff a fiduciary duty, (2) what is the statute of limitations for aiding and abetting breach of fiduciary duty, (3) whether the restitutionary remedy of disgorgement is available for aiding and abetting breach of fiduciary duty, and (4) what is the measure of restitution for aiding and abetting breach of fiduciary duty. We answer these questions (1) yes, (2) three or four years (depending whether the breach is fraudulent or non-fraudulent), (3) yes, and (4) the net profit attributable to the wrong.

Defendants Idanta Partners, Ltd., David J. Dunn, Steven B. Dunn, and the Dunn Family Trust appeal from a judgment on a jury verdict in favor of plaintiff American Master Lease LLC (AML) and from an order denying their motion for judgment notwithstanding the verdict. The jury found defendants liable for aiding and abetting breach of fiduciary duty and awarded restitution in the amount of approximately $5.8 million. Defendants argue that the judgment must be reversed because they cannot be liable for aiding and abetting breach of fiduciary duty in the absence of a duty owed directly to the plaintiff, and because the aiding and abetting claim is barred by the applicable statute of limitations. We find no merit in these contentions, but we do conclude that defendants are entitled to a new trial on the amount of defendants’ unjust enrichment. After having granted a petition for rehearing

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by AML in order to give the parties an opportunity to file supplemental briefs on the valuation timing issue for restitution, we affirm in part and reverse in part for a new trial on the amount of restitution.

FACTUAL AND PROCEDURAL BACKGROUND[1]

A. AML

Neal Roberts formed AML in 1998 for the purpose of investing in real estate. He observed that there were people his age who owned real property but were reaching a point in their lives where they wanted to retire and did not want to continue actively managing their real estate investments. Roberts’ idea was to allow these investors to sell their real estate to a larger entity and then buy interests in the larger entity as tenants in common, which would allow them to avoid adverse tax consequences associated with the sale of the real estate. This investment vehicle became known as a 1031 FORT, where 1031 referred to the section of the Internal Revenue Code applicable to real estate exchanges and FORT stood for Fractionalized Ownership in Real estate Tax deferred.

AML initially had seven members. Roberts and three trusts that he set up for his wife, his son, and his daughter owned 75 percent of AML. Jim Andrews, the Roberts family lawyer, Charles “Duke” Runnels (Runnels), and Michael Franklin owned the remaining 25 percent. Andrews, Runnels, and Franklin had participated in a company Roberts formed prior to AML, and Roberts wanted them involved in AML. Roberts was the managing member of AML.

The AML operating agreement (Operating Agreement included an agreement not to compete. Paragraph 3.9 provided: “The Members agree that the business of the LLC, either to sell AML Products[2]... directly to purchasers or to sell AML Products indirectly through an accommodator as part of a tax-exempt transaction, is unique.... No Member, Principal of a Member or holder of an Economic Interest of a Member, may have any interest, directly or indirectly, in any business that offers to sell or exchange AML Products or is otherwise competitive with [AML], nor may any such Member, Principal or Economic Interest holder be employed by, or act as a consultant to, any such competitive business without the approval of a Majority In Interest of the Class A and Class B Members, voting as a Class....”

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B. The Dunns and Idanta Partners, Ltd. (Idanta)

David J. Dunn was the founder and managing general partner of Idanta, a venture capital firm that for over 40 years had specialized in helping entrepreneurs create and finance new companies. David Dunn was also the sole trustee of the Dunn Family Trust, which held the bulk of his assets. David Dunn’s son, Steven, worked for Idanta for about two-and-a-half years and was a partner in Idanta for some of that time. Steven left Idanta in 1987 or 1988.

David Dunn and the other active partners owned about 20 percent of Idanta. Members of the Bass family, a wealthy Texas family engaged in the oil business, owned the other 80 percent as limited partners. The Bass family invested $7 or $8 million in Idanta.

C. AML Seeks Investment Partners

AML needed an investment partner to provide funding to purchase commercial properties. The first partner, in the late 1990’s, was Ethan Penner and an entity he created for that purpose, T-Rex. Roberts knew about and approved the joint venture with T-Rex. The joint venture was supposed to pay the salaries of Runnels and Franklin, and Roberts contributed money to the joint venture to help pay for their compensation. Before the joint venture could complete any transactions, however, Penner withdrew for financial reasons, and the joint venture was dissolved in 1999.

In January 2000 Roberts, Andrews, Runnels, and Franklin entered into a management agreement with AML. While Roberts remained the managing member and Chairman of the Board, Andrews, Runnels, and Franklin agreed to function as the operational management of AML (collectively the Operating Group). In addition, their interests in AML increased to 13-1/3 percent each, while Roberts's interests decreased to 60 percent. The management agreement also required Runnels and Franklin to use their best efforts to find a new investment partner.

In July 2000 the Operating Group identified CB Richard Ellis as a potential investment partner. Again with Roberts’ knowledge and approval, AML entered into a relationship with the newly formed CB Richard Ellis Investors 1031 (CBREI). In December 2001 AML entered into an exclusive license agreement with CBREI for FORT transactions. During the course of the relationship CBREI grossed $86 million and paid AML $500, 000.

In the summer of 2003 CBREI lost its financing after its funding source refused to fund the transactions. That fall, Roberts told the Operating Group

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that they should consider terminating AML’s relationship with CBREI and searching for a new investment partner.[3]

At a November 7, 2003 AML board meeting, the Operating Group suggested two possibilities for a new investment partner: Idanta and Warburg-Pincus. A dispute arose at the meeting, however, between the Operating Group and Roberts. Roberts was concerned about protecting AML’s business method, while the Operating Group wanted to proceed with finding a new investment partner. Roberts vetoed the Operating Group’s proposal to pursue a new investment partner. Roberts then presented the Operating Group with an amendment to AML’s Operating Agreement, signed by him and the trustee of the three trusts. The purpose of the amendment was to make it “absolutely clear that no deal could get done without the approval of the majority interest in the company.”

D. Idanta and AML Explore the Possibility of a Relationship

Steven Dunn played tennis with Tyler Runnels, Charles Runnels's brother. In the fall of 2003 Tyler Runnels had Steven Dunn introduce him to David Dunn to discuss a loan to AML. Charles Runnels and Franklin were looking for a loan for a FORT transaction in conjunction with the CBREI joint venture. David Dunn initially refused to provide a loan commitment. At some point, however, he provided a loan commitment of $5.1 million in exchange for $177, 000, but he never had to make the loan. David Dunn later tried to put together a joint venture between Idanta and CBREI but was unsuccessful.

In January 2004 David Dunn proposed a transaction that would not include CBREI. Idanta would form and finance a new company in which Idanta would own 80 percent, Runnels and Franklin would own 15 percent and manage the company, and AML would own 5 percent. This proposal was unacceptable to Roberts because Runnels and Franklin would be “getting far too much of the deal when, in fact, it’s an AML deal....” Roberts also objected to the interest rate Idanta wanted to charge for loans to the new company, and he did not want to grant the new company an exclusive license to engage in FORT transactions.[4]

On January 13, 2004 David Dunn met with Runnels to discuss the situation. He told Runnels that he was “still interested” in the transaction. He

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gave Runnels “a lot of good reasons why he [was] better off with an independent entity like Idanta as opposed to being tied to a major realty firm” like CBREI.

By the end of January 2004 the relationship between Roberts and the Operating Group was strained. Roberts and the Operating Group retained separate legal counsel. Roberts was allowed to speak with representatives of Idanta only if Franklin introduced him and was present at the meeting.

On February 5, 2004 Franklin wrote to Roberts to set up a meeting with Steven Dunn. He urged Roberts to review the paperwork, “which shows that the IDANTA offer has an approximate value of $26.5 Million to AML with the majority of that coming from FORT sales activity.... You seem willing to ‘bet the farm’ on potential licensing revenue when we certainly have an excellent opportunity to be in business immediately, producing FORT’s, generating income and creating value.”

On February 10, 2004 Andrews, Runnels, and Franklin sent Roberts a compromise proposal regarding the proposed new company. Under this proposal, “AML [would] accept the Idanta proposal and issue it an exclusive license of the AML business method....” The agreement not to compete would be eliminated from AML’s Operating Agreement. The November 2003 amendment to the Operating Agreement would be rescinded, and any future amendments would require the approval of the Operating Group.

On February 19, 2004 Roberts presented the Operating Group with his counterproposal. His “central policy issue” was the protection of AML’s intellectual property. He proposed entering into a joint venture with Idanta, with AML having at least a 20 percent interest in the new company. AML would grant the new company a nonexclusive license to use the AML business method. The Operating Group sent Roberts’ proposal to Steven Dunn, who forwarded it to David Dunn.

In late February 2004 Roberts met with Steven Dunn. Roberts told Steven Dunn that he did not approve of David Dunn’s proposal and that they “had to work out a way to go forward that was acceptable to the controlling members, ... majority in interest in” AML. Roberts told Steven Dunn about disputes with the Operating Group and “that I controlled the company. And I also specifically told him—I think I used the phrase ‘dirty linen, ’ that we would attempt to clean up the ‘dirty linen’ if we were going to proceed.”

E. The Operating Group Forms a New Company and Grants It a License; Idanta and the Dunns Buy Into It

In approximately mid-March 2004 Runnels incorporated FORT Properties, Inc. (FPI), with himself and Franklin as FPI’s owners. David Dunn had

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already negotiated with Runnels and Franklin an ownership interest in FPI for himself, the Dunn Family Trust, and Idanta. Initially, Runnels and Franklin owned 100 percent of the shares of FPI. In April 2004 defendants purchased preferred shares in FPI for $2.3 million, which gave defendants an 85 percent ownership interest in FPI. The Operating Group, on behalf of AML, then granted FPI a nonexclusive license to use AML’s business method. Runnels signed the licensing agreement on behalf of FPI; Andrews, Runnels, and Franklin signed on behalf of AML.

On March 15, 2004 David Dunn wrote to Sid Bass, one of Idanta’s partners, about the deal. David Dunn expressed his belief that “we are involved with first-rate professionals who have an opportunity to build a very large strongly financed business.” David Dunn further stated that “once we have done a couple of successful transactions and, again, this management has done successful transactions, we will be able to increase the number of deals we do through obtaining additional layers of capital. We also believe that if we become the major player in the industry, we will have a very attractive vehicle for a public offering.” David Dunn explained that Runnels and Franklin “finally lost patience with CBRE” due to the failure to provide the promised financing. While “the majority holder” of AML’s business method (i.e., Roberts) wanted to go after infringers, Runnels and Franklin were not interested in pursuing this course of action. They intended to draft a non-exclusive license for FPI to use the business method. Andrews, Runnels, and Franklin, “as the operating people (non-employees) of AML will inform the majority... holder of their action sending him copies of the FORT Property license and a copy of the deposited check” for the license.

Runnels and Franklin wrote to Roberts on March 17, 2004 that his February 19 proposal “misse[d] the mark.” They explained: “Your opposition to any exclusive license arrangement is noted, and as a result we have been actively seeking parties in addition to CBREI who are willing to enter into nonexclusive licenses. In this regard, the Operating Group has granted a nonexclusive license to [FPI], a newly formed entity.” The royalty rate was the same as the royalty rate paid by CBREI, and FPI paid an advance against royalties of $50, 000. Runnels and Franklin stated that they “believe[d] the license agreement with FPI is fair and reasonable and can provide a launching pad for the AML licensing operation.”

Runnels and Franklin also stated that Roberts’ proposal that they work for the proposed venture between AML and a new company was unacceptable. They pointed out that they “have never been employees of AML and do not plan to be in the future.” They also stated that they had been informed by counsel that paragraph 3.9 of the AML Operating Agreement was “an unenforceable attempt to restrict employment under California law.” They

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notified Roberts that “[Runnels] has decided to join FPI as its President with a view to bringing it into the 1031 TIC[5] business. [Runnels] and other management personnel will purchase an equity interest in FPI. [Franklin] will likely also ...


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