Terry v. SLICO











Filed 11/18/10 Terry v. SLICO CA1/3







NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.



IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION THREE

WILLIAM C. TERRY et al., Plaintiffs, Cross-defendants and Appellants, v. SLICO, Defendants, Cross-complainant and Respondent.

A127974 (Alameda County Super. Ct. No. HG07334913)

Appellants William C. Terry and SLIMCO, Inc. (SLIMCO) appeal from a judgment entered in favor of respondent SLICO, a California limited partnership (SLICO), on its cross-complaint for breach of contract and breach of fiduciary duty. We shall affirm.
Factual and Procedural Background
In 1992, two brothers formed SLICO as a limited partnership for the primary purpose of engaging “in the business of managing, financing, holding for investment and disposition of property.” The agreement of limited partnership names SLIMCO, in which the brothers were the majority shareholders, as the general partner of SLICO. With the death of the brothers in 1997 and 1999, Terry (the son of one of the deceased brothers) became the majority shareholder in SLIMCO and solely responsible for its operations.[1] From that time until 2006, Terry, as the general partner, managed all operations of SLICO pursuant to the terms of the partnership agreement.
Article 12 of the SLICO partnership agreement vests the general partner with the “exclusive control over the partnership’s business.” Section 12.1 provides in part that the general partner “shall have the right to: [¶] . . . [¶] (b) Acquire, hold, and dispose of property or any interest in property. [¶] (c) Borrow money on behalf of the partnership, encumber partnership assets, or place title in the name of a nominee for the purpose of obtaining financing. [¶] . . . [¶] (e) Manage the property and employ and supervise a property manager. [¶] (f) Employ from time to time, at the partnership’s expense, building management agents, other on-site personnel, insurance brokers, real estate brokers, loan brokers, consultants, accountants, and attorneys. [¶] (g) Pay . . . all operation expenses incurred in the operation of the partnership.” Pursuant to article 8 of the partnership agreement, the general partner is entitled to a property management fee for “professional property management services” and a partnership management fee. Article 9 sets out specific reimbursable and nonreimbursable partnership expenses.
In 2004, three limited partners filed a civil action against Terry for alleged mismanagement of SLICO. The litigation was resolved by an agreement that allowed those limited partners to exit the partnership. In September 2006, additional claims of mismanagement were reported to the remaining limited partners. As a result, in January 2007, a majority of the remaining limited partners voted to remove Terry as SLICO’s general partner.
In July 2007, Terry filed a complaint against SLICO “for conversion and for exemplary damages.” SLICO cross-complained against Terry, alleging, among other things, breach of contract and breach of fiduciary duty. Following a court trial, judgment was entered in favor of SLICO both on the complaint and on the cross-complaint, awarding SLICO $752,133.03 in damages. Terry filed a timely notice of appeal.
Discussion
Terry argues that the trial court erred in finding that he breached the partnership agreement by causing SLICO to pay certain office expenses and by charging excessive property management fees. He also argues that the court erred in finding that he breached his fiduciary duties by engaging in self-dealing with respect to a residential property in Foresthills, California.
1. Breach of Contract: Office-Related Expenses
The following facts are undisputed: When the brothers formed the SLICO partnership, all of its affairs were conducted from a single office in a building that it owned. At some point after the two brothers had died that building was sold. When the office was relocated, Terry caused SLICO to pay the rent and general expenses of the new office. At trial, SLICO argued that Terry breached the partnership agreement by charging SLICO for office-related expenses that were attributable to SLIMCO rather than SLICO. Terry argued and continues to argue on appeal that the office-related expenses were for SLICO’s, not SLIMCO’s, office and that those expenses were properly paid by SLICO. Both the language of the partnership agreement and other evidence presented at trial support SLICO’s position.
As noted above, Terry, as the general partner, was solely responsible for SLICO’s operations. His responsibilities included managing the property owned by SLICO as well as managing SLICO’s other affairs, such as the acquisition of new property. He was compensated for his property management services under section 8.2 of the partnership agreement and for his partnership management services under section 8.3 of the agreement. To the extent that the office space was used for the performance of the services SLIMCO was contractually obligated to provide SLICO, the space was being used by SLIMCO, not SLICO. Under Section 9.1 of the partnership agreement, “overhead expenses of the General Partner [i.e., SLIMCO] . . . including rent and general office expenses” are not reimbursable.
Terry notes correctly that the partnership agreement identifies a principal place of business for SLICO as an address in San Leandro, California or “such other place as the General Partner may choose.” The agreement also provides that “the partnership shall pay all expenses of the partnership including, without limitation, (i) all salaries, compensation, and fringe benefits of personnel employed by the partnership and involved in the partnership business . . . .” Uncontradicted testimony was offered, however, that SLICO did not need an office and did not have any employees. The management of its affairs was performed by SLIMCO under the fee arrangement by which SLIMCO was compensated for its services. Terry did not present any evidence suggesting that any work performed at the office was outside the scope of the work for which SLIMCO was compensated under the fee provisions of the agreement. Therefore, by causing SLICO to pay the rent and other office expenses in addition to the fee to SLIMCO, Terry breached the terms of the partnership agreement and was properly held liable for those payments.
2. Breach of Contract: Excessive Property Management Fees
The following facts were undisputed at trial: SLICO owns a residential apartment building in Chico, California. During the relevant time period, Terry collected a property management fee of 6 percent on the gross revenue generated by the Chico property. At the same time, Terry hired, at SLICO’s expense, a separate property management firm to manage the Chico property. The property management firm charged SLICO 4.5 percent of the gross revenue generated by the property. SLICO argued successfully that Terry breached the partnership agreement by charging SLICO duplicate fees for the management of this property. On appeal, Terry contends that the fees were authorized by the express terms of the partnership agreement. Terry’s argument presents a question of contract interpretation that we review de novo.
Section 8.1 of the agreement provides that SLIMCO “shall receive payments only as specified in the Agreement.” Section 8.2 provides, “The partnership shall pay the general partner . . . , monthly, a property management fee for professional property management services. The property management fee shall be the lesser of (a) 6% percent of the gross revenues from operations of the property or (b) the normal competitive rate for these services in the area where the property is located.” While Terry is correct that section 12.1, subpart (e), authorized him to “employ and supervise a property manager,” that section says nothing about which entity would be responsible for the cost of hiring such a property manager. Reimbursement for such expenses is governed by section 9.1, which provides that “The General Partner shall pay and shall not be reimbursed by the partnership for . . . (c) reimbursement for those services for which the General Partner or Affiliates are entitled to compensation by way of the property management fee.” Because the property management services provided by the outside firm were the same services intended to be compensated by the property management fee, Terry was prohibited from charging SLICO the expense of hiring the property management firm.
3. Breach of Fiduciary Duty
At trial, SLICO argued that Terry engaged in improper self-dealing with regard to an undeveloped lot in Foresthill, California. SLICO offered the following evidence in support of its claim: In August 2005, Terry personally purchased an undeveloped lot in Foresthill, California. Terry and his wife entered into the purchase contract and received title in their names. Terry and his wife personally took out a loan for the purchase price, but used SLICO’s funds for the down payment and other closing costs. These amounts were originally shown on SLICO’s accounting records, but were later removed, with the notation “to remove from SLICO – will be developed by Bill personally.”
After the purchase was complete, Terry hired a contractor and obtained an estimate for the construction of a single family home on the property. The construction plans were described as the “residence for Mr. and Mrs. Bill Terry.” In January 2006, Terry learned that due to the loan ratio on the property he would have to contribute $100,000 to the construction project in order to obtain a construction loan. Rather than do so, he transferred title of the property to SLICO and caused SLICO to pay off the loan he and his wife had taken out for its purchase. Once owned by SLICO, Terry obtained a construction loan and commenced development of the property. After SLIMCO was removed as the general partner, the new general partner tried unsuccessfully to sell the home and ultimately the property fell into foreclosure. SLICO lost a total of $491,434.26 on the property.
In his defense, Terry testified that he purchased the property on behalf of SLICO and always intended it to be an asset of SLICO. He explained that he held title in his name to avoid complications caused by the settlement agreement in the 2004 litigation. He transferred the property to SLICO because he determined that it would not be advisable to hold the undeveloped property for an extended period of time. He denied seeking or obtaining any profit on the transaction.
In closing argument, SLICO’s attorney argued that Terry breached his fiduciary duty to SLICO when he transferred the property to SLICO. He argued, “There is a conflict of interest there between him and SLICO. He cannot do that legally. He is a fiduciary. He cannot enter into that transaction whereby he’s deeding that property to SLICO without there being disclosure to the limited partners and consent by the limited partners to that transaction.” SLICO sought and obtained an award of $461,351 in damages, which includes “every single penny that was put into Foresthill” by SLICO.
On appeal, Terry acknowledges that he had a fiduciary duty to SLICO. He contends, however, that the court erred in determining that he breached that duty or that his alleged breach caused SLICO’s damages. Terry argues that his purchase of the property could not have been a breach of his fiduciary duties because he was expressly authorized under the agreement to take title to SLICO property in the name of a nominee. Likewise, he claims that he was not required to seek approval for the acquisition or development of the property because as general partner he had exclusive control over the partnership’s business. Finally, he suggests the losses incurred by SLICO were caused by the declining housing market rather than any impropriety on his part. Terry’s arguments are not persuasive.
First, while the agreement authorized Terry to “place title in the name of a nominee for the purpose of obtaining financing,” the evidence establishes that he was not exercising that authority when he purchased the property. Rather, the evidence shows that Terry purchased the property and took title in his name for his individual benefit, for the purpose of building a family home, and not as a nominee of SLICO. When Terry subsequently transferred the property to SLICO he did so in his individual capacity.
Second, contrary to Terry’s characterization, the broad authority given the general partner under the agreement did not allow him to engage in self-dealing without consent of the limited partners. “The law does not permit a fiduciary to deal with himself in any transaction in his individual capacity.” (Cagnolatti v. Guinn (1983) 140 Cal.App.3d 42, 48; Bardis v. Oates (2004) 119 Cal.App.4th 1, 13 [“managing partner [is] prohibited from engaging in self-dealing in any way, shape or form”].) “Neither a trustee nor any of his agents may take part in any transactions concerning the trust except when a fully informed beneficiary who is free from the trustee’s influence authorizes the transaction.” (Cagnolatti v. Guinn, supra, at p. 49.) Likewise, “a limited partnership agreement cannot relieve the general partner of its fiduciary duties in matters fundamentally related to the partnership business. . . . ‘Language in the agreement such as “sole discretion” does not metamorphose the document into an unrestricted license to engage in self-dealing at the expense of those to whom the managing partner owes such a duty.’ ” (BT-I v. Equitable Life Assurance Society of the United States (1999) 75 Cal.App.4th 1406, 1412-1413.) The evidence presented at trial supports the inference that Terry’s decision to transfer the property to SLICO was not made with the best interests of SLICO in mind. Rather, it was made because he was no longer interested in developing the property for his personal use. That he continued to believe the investment was sound does not remove the taint arising from his personal self-interest in the transaction. (See Everest Investors 8 v. McNeil Partners (2003) 114 Cal.App.4th 411, 430 [“The business judgment rule does not shield actions taken . . . with improper motives, or as a result of a conflict of interest”].)
Terry’s claim that he did not sell the property to SLICO for a profit does not relieve him of fault. “ ‘Courts will not permit an investigation into the fairness or unfairness of such a transaction or allow the trustee to show that the dealing was for the best interest of the beneficiaries. It is a trustee’s duty in all things to first consider and always to act for the best interests of the trust.’ ” (Cagnolatti v. Guinn, supra, 140 Cal.App.3d at p. 49.) Even if Terry did not sell the property to SLICO at an increased price, he was enriched nonetheless by the transaction by obtaining the release of his personal liability under the purchase loan.
Finally, the decline in the residential housing market does not relieve Terry of liability for SLICO’s losses. When Terry transferred the property to SLICO he transferred the risk associated with any housing development as well. Because the transfer was a breach of his fiduciary duties, he is responsible for all losses arising from that breach, whether or not anticipated, and even though SLICO would have been entitled to the profits had the results of the transaction been otherwise. (6 Witkin, Summary of Cal. Law (10th ed. 2005) Torts, § 1717, p. 1249; Civ. Code, § 3333 [“For the breach of an obligation not arising from contract, the measure of damages . . . is the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not”].) As just noted, the fact that he believed the investment was sound does not excuse the breach of his fiduciary duty. (See Everest Investors 8 v. McNeil Partners, supra, 114 Cal.App.4th at p. 430.)
Disposition
The judgment is affirmed. SLICO is to recover its costs on appeal.


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Pollak, J.


We concur:


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McGuiness, P. J.


_________________________
Jenkins, J.

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