United States District Court, S.D. California
JOHN T. HARDISTY, Plaintiff,
HAROLD MAXINE MOORE, et al., Defendants. AND RELATED COUNTERCLAIM
FINDINGS OF FACT AND CONCLUSIONS OF LAW
CYNTHIA BASHANT, District Judge.
Hardisty ("Hardisty" or "Plaintiff") filed the operative Third Amended Complaint against Harold Maxine Moore ("Hal Moore"), his wife Elaine K. Moore ("Melanie Moore"), The 1998 Harold M. Moore Revocable Trust (the "Moore Trust"), Mark Peluso, and State Insulation LLC, an Arizona limited liability company, and State Insulation LLC, a Nevada limited liability company (collectively "State Insulation"), (collectively "Defendants") on June 1, 2012. (ECF No. 34.) On October 9, 2012, the Court granted Hal Moore's motion to dismiss the first and tenth causes of action, and also granted a motion by Defendants to strike any RICO allegations. (ECF No. 39.) On November 14, 2012, Hal Moore filed a Counterclaim against Hardisty for fraud and negligent misrepresentation. (ECF No. 40.)
On March 18, 2014, the Court granted Defendants' Motion for Summary Judgment with respect to the fifth cause of action alleging quiet title, the eighth cause of action alleging abuse of process, as well as partial summary judgment on the remaining causes of action. (ECF No. 80.) On September 9, 2014, Hal Moore filed a Notice of Acceptance of Offer of Judgment. (ECF No. 130.) Pursuant to Federal Rule of Civil Procedure 68, Counter-Plaintiff Hal Moore accepted Counter-Defendant Hardisty's offer to allow entry of judgment on the Counterclaim. ( Id. )
The following remained for trial: (1) the second cause of action for aiding and abetting intentional torts against Melanie Moore, State Insulation, the Moore Trust, and Mark Peluso; (2) the third cause of action for fraud against all defendants except Mark Peluso; (3) the fourth cause of action for constructive fraud against Hal Moore and Melanie Moore; (4) the sixth cause of action for securities fraud under California Business and Professions Code §25401 et seq. against Hal Moore; (5) the seventh cause of action for conversion against all defendants except Mark Peluso; and (6) the ninth cause of action for conspiracy against all defendants except Mark Peluso. Each of the remaining causes of action was limited to allegations arising from Hardisty's transfer of his 27% ownership interest in Legacy Pointe Apartments, LLC to Hal Moore. In a supplemental ruling on Defendants' Motion for Summary Judgment, the Court agreed to also consider allegations arising from Hardisty's additional transfer of his 5% ownership interest as a 50% owner of Munson-Hardisty, LLC, as well as an amount of $380, 000 allegedly owed by Hal Moore to Hardisty upon completion of the Legacy Pointe Apartments project.
This matter was set for a bench trial. Trial took place on September 16-19, 2014, December 9, 2014, and January 27-29, 2015. The Court heard and weighed the testimony and evidence presented at trial. The Court observed the demeanor of the witnesses, evaluated their candor and credibility, reviewed transcripts and exhibits from the trial, and the Court's trial notes. Having done so, the Court makes the following findings of fact and separate conclusions of law pursuant to Federal Rule of Civil Procedure 52(a).
II. FINDINGS OF FACT
Hardisty and Hal Moore were long-time close business associates. Melanie Moore is, and was at all relevant times, Hal Moore's wife, and in late 2008 and early 2009, she was the Chief Executive Officer of State Insulation,  one of Hal Moore's companies. From 2007 through 2009, Mark Peluso was the Controller of Great Western Drywall, another one of Hal Moore's companies.
In August 2007, Hardisty, Munson-Hardisty, LLC (a general contractor of which Hardisty was a 50% owner), Craig Mason, and Legacy Pointe Apartments, LLC ("Legacy Pointe") entered into an Amended and Restated Operating Agreement with respect to the construction of an apartment complex in Knoxville, Tennessee (hereinafter referred to as the "Project"). This was to be a construction project financed by the United States Department of Housing and Urban Development ("HUD").
In August 2007, Hal Moore agreed to contribute $1.5 million from the Moore Trust to the Project. In exchange, Hardisty agreed to seek approval from HUD for the transfer of a 50% membership interest in Legacy Pointe to Hal Moore and signed a Promissory Note Secured by Deeds of Trust dated August 20, 2007 in the amount of $1.5 million. In the Promissory Note, Hardisty agreed to pay 13% interest per year on the unpaid balance of the $1.5 million investment.
In September 2007, Hal Moore lent $750, 000 to Munson-Hardisty, LLC to help the company obtain payment and performance bonds for the Project. The $750, 000 was deposited into a certificate of deposit ("CD") at 1st Pacific Bank of California on or around September 11, 2007. In exchange for the $750, 000 loan, Hardisty and his wife signed a Promissory Note dated September 11, 2007 promising 13% interest per year on the unpaid balance. The Promissory Note was secured by various deeds of trust on their personal and business properties, including their personal residence.
In the same time frame, as part of the requirement for obtaining a contractor's license in the name of Munson-Hardisty, LLC in Tennessee, Hardisty was required to obtain a personal line of credit in the amount of $380, 000. Hardisty drew upon this personal line of credit and contributed the funds to Legacy Pointe.
On September 13, 2007, Munson-Hardisty, LLC (as the general contractor) and Legacy Pointe (as the owner) entered into a construction contract for the construction of the Project. In the construction contract, Legacy Pointe agreed to pay Munson-Hardisty, LLC a cash payment in the amount of: (1) the actual cost of construction; and (2) a fee of the Builder's and Sponsor's Profit and Risk Allowance ("BSPRA"), not to exceed $18, 047, 049. The construction contract required Munson-Hardisty, LLC to furnish Legacy Pointe with payment and performance bonds in the amount of $18, 047, 049 issued by Great American Insurance Company ("GAIC") to assure completion of the Project. The construction contract provided for completion of construction by January 13, 2009.
On September 13, 2007, Munson-Hardisty, LLC obtained payment and performance bonds with GAIC as the Surety in the amount of $18, 047, 049.
On November 7, 2007, when HUD approved the transfer of a 50% membership interest in Legacy Pointe to Hal Moore, ownership in Legacy Pointe was as follows: Hal Moore (50%), Munson-Hardisty, LLC (10%), Craig Mason (9.9%), and Hardisty (30.1%). Hardisty's interest was later decreased from 30.1% to 27%.
When Hal Moore received 50% equity in Legacy Pointe, the $1.5 million loan was extinguished. Nonetheless, Hardisty continued to pay Hal Moore 13% interest on the $1.5 million investment.
By December 2008, it was clear to all the parties that the Project was, as described by Hal Moore at trial, "going to hell in a hand basket." The Project was not going to be completed on time and was facing numerous cost overruns.
Hardisty explored selling his interest in the Project to a third party. Hardisty was particularly concerned because he faced personal indemnity on the payment and performance bonds Munson-Hardisty, LLC had obtained as general contractor on the Project, so he wanted to ensure that all subcontractors, vendors, and suppliers got paid. He negotiated to sell his interest to a third party for $1, 750, 000. However, when Hal Moore and Melanie Moore got wind of this negotiation, they were very angry, and told Hardisty if he was going to sell his interest, he should sell it to them.
Thus, in January 2009, Hardisty and Hal Moore entered into several agreements. First, Hardisty and Hal Moore entered into a "Letter of Intent, " which they termed the "Incentive Agreement, " dated January 15, 2009 (Exhibit 68). The Incentive Agreement detailed that Hardisty potentially faced personal liability due to his personal indemnity on the payment and performance bonds. Thus, to avoid this liability, Hardisty agreed to immediately transfer his remaining 27% ownership interest in Legacy Pointe to Hal Moore. In exchange, Hal Moore agreed to fund a bridge loan up to $1.5 million to enable Hardisty to make scheduled completion dates.
Hal Moore, through State Insulation, further agreed to purchase and retain all potential claims against the payment and performance bonds by the subcontractors, suppliers, and vendors. Munson-Hardisty, LLC agreed to receive a written collateral assignment from these subcontractors, suppliers, and vendors so that State Insulation could be reimbursed for these payments through the HUD draw process. State Insulation would thus be reimbursed through Legacy Pointe for all money spent. In addition, all unpaid expenses and loans incurred by Hal Moore would be reimbursed by Legacy Pointe through escrow upon the sale of the property or rent proceeds. Finally, Hal Moore agreed to pay Hardisty $380, 000, and both Hardisty and Munson-Hardisty, LLC agreed to forego any salary ($3500/week for Hardisty and $2500/week for Munson-Hardisty, LLC).
Melanie Moore emailed the final draft of the Incentive Agreement to Hardisty on January 15, 2009, asking him to "please review and sign and send back to me; you can fax with an original to follow in the mail." (Exhibit 66.) Hardisty signed the Incentive Agreement on January 16, 2009 and faxed it back to Hal Moore on the same day (Exhibit 68), and sent the original by mail. Although this Incentive Agreement does not have Hal Moore's signature on it, Hardisty understood Hal Moore signed the Incentive Agreement based on representations from Hal Moore and Melanie Moore, and all parties immediately began performing thereunder.
After the Incentive Agreement was entered into, the Moores informed Hardisty that the Incentive Agreement could not be submitted to HUD for approval of the transfer of Hardisty's 27% membership interest. A separate agreement needed to be signed specifically for HUD to effectuate the transfer. Hardisty did not understand this to be a "new agreement" on new terms.
On January 22, 2009, Melanie Moore emailed Hardisty a first draft of a Purchase and Sale Agreement to be presented to HUD. Several versions of the Purchase and Sale Agreement were exchanged between the parties. All versions were drafted by the Moores and/or their counsel. At the last minute, without the knowledge of Hardisty, the Moores added language to the Purchase and Sale Agreement (which was not in the Incentive Agreement or even the first draft of the Purchase and Sale Agreement) saying Hal Moore agreed not to pursue any claims against the payment and performance bonds until May 1, 2009, which was shortly before the new predicted completion date of the Project.
Hardisty was unaware this additional language had been added at the last minute to the Purchase and Sale Agreement. Melanie Moore had represented that the final version of the Purchase and Sale Agreement (Exhibit 21) was substantially the same as earlier drafts Hardisty had read, and he understood it was simply memorializing part of the agreement they had reached through the Incentive Agreement for the purpose of submitting the transfer to HUD.
Even if Hardisty had seen the additional language the Moores added at the last minute to the Purchase and Sale Agreement, he would not have been concerned since, as outlined in the Incentive Agreement, the understanding was that State Insulation would be reimbursed for payments to subcontractors, vendors, and suppliers through the HUD draw process, and anything not paid through the draw process would be reimbursed by Legacy Pointe (of which Hal Moore was now a majority equity owner). So Hardisty was comfortable that State Insulation would be reimbursed for its payments, and Hardisty would no longer be personally liable on the payment and performance bonds.
In fact, State Insulation ultimately paid the subcontractors, vendors, and suppliers $2, 156, 308 as a result of the collateral assignments, and when the Project closed in August 2009, Hal Moore, on behalf of Legacy Pointe, represented to HUD that all claims had been paid, or would shortly be paid through escrow within forty-five days, and that no debts were outstanding to subcontractors, vendors, and suppliers.
However, on October 23, 2009, at the direction of Melanie Moore, State Insulation filed a complaint against GAIC in the Chancery Court for Knox County, Tennessee making a claim in the amount of $2, 120, 537.85 plus costs, prejudgment interest, and attorneys' fees against the payment bond (Exhibit 124).
Since Hardisty was an indemnitor on the payment bond, GAIC requested that Hardisty defend and indemnify the claim. Hardisty was suddenly faced with personal liability in the amount of $2, 120, 537.85 plus costs, prejudgment interest, and attorneys' fees. The only reason he transferred his 27% interest in Legacy Pointe in the first place was to avoid this liability.
The Project was complete in August 2009. Hal Moore signed the Mortgagor's Certificate of Actual Cost on August 10, 2009 and final permission to occupy the living units was granted on August 6, 2009. However, upon completion of the Project, Hal Moore refused to pay Hardisty $380, 000 as agreed to in the Incentive Agreement.
In February 2009, the "Amendment to Operating Agreement" of Legacy Pointe provided that following HUD approval the membership interests in Legacy Pointe would be as follows: Munson-Hardisty, LLC (10%), Craig Mason (13%), and Hal Moore (77%). Hal Moore also replaced John Hardisty as Chief Manager of Legacy Pointe.
In April 2009, Munson-Hardisty, LLC transferred its 10% interest in Legacy Pointe to Hal Moore.
At the time State Insulation and the Moores made a bond claim, GAIC held the $750, 000 deposited in a CD on behalf of Munson-Hardisty, LLC and the balance of the fund control account ...