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Medical Plaza One, LLC v. Davis

Court of Appeals of Missouri, Western District, Third Division

May 29, 2018

MEDICAL PLAZA ONE, LLC, Respondent,
v.
JESS DAVIS AND DOUGLAS SQUARE II, LLC, Appellants.

          Appeal from the Circuit Court of Jackson County, Missouri The Honorable Sandra Midkiff, Judge.

          Before Victor C. Howard, Presiding Judge, Cynthia L. Martin, Judge and Gary D. Witt, Judge

          OPINION

          CYNTHIA L. MARTIN, JUDGE.

         Jess Davis ("Davis") and Douglas Square II, LLC ("DSII") (collectively "Appellants") appeal from the trial court's entry of a judgment incorporating jury verdicts and determining court-tried equity claims in a dispute between Appellants and Medical Plaza One, LLC ("MPO") regarding performance of a settlement agreement and a ground lease. We affirm the judgment of the trial court as herein modified.

         Factual and Procedural Background[1]

         MPO is a Missouri limited liability company which was formed to build and operate a medical office building in Lee's Summit, Missouri. The medical office building was to be constructed on ground owned by DSII, also a Missouri limited liability company. Davis is the sole member of DSII. In connection with the arrangement, Davis was made a 40% member of MPO, and was named as MPO's managing member.

         MPO and DSII signed a ground lease in October 2004 ("Ground Lease"). The Ground Lease was amended on March 4, 2005 to extend to MPO an absolute option to purchase the ground on which the medical office building was being constructed for the agreed upon amount of $650, 000. Davis signed the Ground Lease and the amendment on behalf of MPO and DSII.

         By 2012, disputes had arisen between Appellants and MPO regarding (among other things) the fact that Davis, in his capacity as managing member of MPO, had been paying DSII more monthly rent than was owed under the Ground Lease. In addition, Appellants had assigned the Ground Lease rents to BMO Harris Bank as security for a loan unrelated to MPO's operations. The assignment of Ground Lease rents had exposed MPO and its members to a lawsuit filed by BMO Harris Bank to enforce the assignment of rents. As a result of these disputes, the members holding a majority interest in MPO removed Davis as the managing member on September 24, 2012, and named Mitchell Fiser ("Fiser") as the new managing member. Appellants then initiated a lawsuit against MPO and its individual members seeking dissolution of MPO, partition, and damages for breach of the Ground Lease for nonpayment of rent. MPO asserted counterclaims against Davis and DSII alleging breach of fiduciary duty, misappropriation of funds, and breach of MPO's operating agreement. In the meantime, MPO was required to interplead Ground Lease rent payments into court because BMO Harris Bank was claiming it had the right to collect the rents at the same time that Appellants were suing MPO for the rents.

         On December 27, 2013, MPO, all of the members of MPO, Davis, and DSII entered into a written settlement agreement to resolve their disputes ("Settlement Agreement"). Relevant to this case, the Settlement Agreement required MPO to immediately authorize the release of $59, 800 in interpleaded rent payments to BMO Harris Bank to facilitate a settlement between BMO Harris Bank, Davis, and DSII. It is uncontested that MPO performed this term of the Settlement Agreement.

         The Settlement Agreement expressed that MPO's monthly rent obligation under the Ground Lease should always have been $3, 520, and that Davis had been causing MPO to overpay rent for the period from October 2012 through October 2013, resulting in an overpayment in the total amount of $14, 040.[2] Commencing with the November 2013 rent payment, DSII agreed to credit MPO's monthly Ground Lease rent obligation by $1, 500 per month until the overpaid rent amount was recouped.

         Central to the Settlement Agreement was Davis's agreement to be removed as a member of MPO. Section 1.D of the Settlement Agreement described the agreed upon process for acquiring and calculating the value of Davis's member interest as follows:

Jess Davis agrees to sell his interest in Medical Plaza for 40% of the net asset value of Medical Plaza, which includes the funds in the Medical Plaza bank account at time of closing, subject to Sections 1.E through 1.H below, and the net equity in the building, less accrued real estate taxes at time of closing. The net equity in the building will be determined by an appraisal of the building. The appraisal shall be a fair market value appraisal prepared by a qualified appraiser selected by a lending institution chosen by the Manager of Medical Plaza, Mitchell S. Fiser, using his discretion to find a lending institution providing the best terms for the potential refinancing to obtain the funds to purchase Davis'[s] interest in Medical Plaza; and all of the members of Medical Plaza will sign a Unanimous Written Consent in lieu of a meeting of the members, authorizing Medical Plaza to enter into this Agreement and to take all steps necessary to implement the terms of this Agreement. Each member of Medical Plaza, including Davis, may make recommendations to Mitchell S. Fiser concerning potential lenders to fund the purchase of Davis'[s] interest in Medical Plaza.

         When the Settlement Agreement was entered into, MPO's members knew that MPO owed approximately $2, 680, 360 on a loan for which the building served as collateral, and as to which MPO's members, including Davis, were personal guarantors. MPO's members, including Davis, were thus aware that MPO's net equity in the building would be determined by subtracting this loan balance from the building's appraised value. Though the evidence suggested that MPO's members anticipated that the building's appraised value would exceed the outstanding balance on MPO's loan, Section 1.D of the Settlement Agreement did not condition Davis's obligation to sell his 40% member interest in MPO on receiving a building appraisal that exceeded MPO's outstanding loan balance.

         The Settlement Agreement did not expressly state that MPO would be exercising the purchase option in the Ground Lease in connection with Davis's sale of his 40% member interest in MPO. However, the Settlement Agreement referred to the Ground Lease in provisions that suggested the parties expected the severing of relations between Davis and MPO would also include the severing of relations between MPO and DSII. The Settlement Agreement provided that should Davis fail to timely close on the sale of his 40% member interest, MPO would be permitted to offset the price to be paid upon exercise of the purchase option in the Ground Lease by amounts Davis owed MPO (Section 1.H of the Settlement Agreement). The Settlement Agreement also included a provision that addressed the Appellants' agreement to correct a scrivener's error that had resulted in Appellants' erroneous conveyance of a portion of the land legally described in the Ground Lease to an unrelated entity. (Section 1.I of the Settlement Agreement). With respect to this provision, Appellants agreed to take steps to remediate the error "such that the Leased/Option Property is included as a portion of the property to be conveyed to [MPO] (as set forth in the Ground Lease) and may be included in any deed of trust obtained by [MPO] in connection with its exercise of the Option to Purchase."

         Pursuant to Section 1.D of the Settlement Agreement, and in order to determine MPO's net equity in the building, Fiser contacted lenders who might be willing to fund the purchase of Davis's member interest in MPO and the purchase of the land from DSII. Consistent with the discretion afforded Fiser by the Settlement Agreement, Fiser chose First Citizens Bank as the potential lender. First Citizens Bank then employed processes required by law to select an independent appraiser to value MPO's building and the land. First Citizens Bank selected Valbridge Property Advisors ("Valbridge") as the appraiser.

         When Davis learned the identity of the appraiser, he expressed disapproval, characterizing Valbridge as too conservative. Davis did not contend, however, that Valbridge had been selected through a process that failed to comply with Section 1.D of the Settlement Agreement.

         Valbridge's appraisal determined the fair market value of MPO's building and the land on which it was constructed to be $2, 660, 000. The value assigned to the land was $650, 000, as that was the value agreed upon by the parties in connection with the absolute purchase option set forth in the Ground Lease. Subtracting the value of the land from the total appraised value yielded an appraised value for MPO's building of $2, 010, 000. When netted against MPO's outstanding loan balance, the building had a negative net equity value of $670, 360.

         Section 1.D of the Settlement Agreement provided that the value of Davis's 40% interest in MPO was to be calculated by offsetting amounts Davis owed MPO (as described in Sections 1.E, 1.F, 1.G, and 1.H of the Settlement Agreement) against Davis's 40% share of MPO's net asset value, an amount that included the building's net equity value. The building's negative net equity value virtually ensured that MPO had a negative net asset value. Because Davis's 40% interest in MPO's negative net asset value was a negative number, the "offset" of that amount by additional amounts Davis owed MPO pursuant to Sections 1.E, 1.F, 1.G, and 1.H of the Settlement Agreement meant that Davis would be required to pay MPO in order to be removed as a member of MPO and as a personal guarantor on MPO's loan.

         Davis was unwilling to accept the building's appraised value determined by Valbridge. He advised Fiser that Integra Realty Resources ("Integra") had performed an appraisal of the building and land in 2010 and had arrived at a fair market value of $3, 600, 000. Though the Settlement Agreement did not obligate MPO to do so, Fiser contacted Integra and arranged for a second appraisal of MPO's building and the land on which it was constructed.

         In the meantime, the Settlement Agreement had anticipated a closing date of February 28, 2014. Given MPO's willingness to secure a second appraisal, the parties entered into an addendum to the Settlement Agreement on February 26, 2014, extending the closing date by forty-five days to April 14, 2014, and substituting "April 14, 2014" for "February 28, 2014" in Sections 1.E, 1.F, 1.G, and 1.H of the Settlement Agreement.

         The Integra appraisal determined the fair market value of MPO's building and the land on which it was located to be $2, 650, 000, using $650, 000 as the agreed upon value for the land. The Integra appraisal thus yielded an appraised value for MPO's building that was $10, 000 less than had been determined by Valbridge.

         On April 14, 2014, counsel for MPO sent a letter to counsel for Davis and DSII outlining MPO's intention to move forward to close on the transactions anticipated by Settlement Agreement. In the letter, MPO expressed its willingness to work cooperatively with Davis to "select a final closing date to afford both parties the opportunity to consider final numbers and transaction documents." The letter noted that the delay in securing the Integra appraisal had interfered with the parties' ability to close by April 14, 2014, the closing date set forth in the addendum to the Settlement Agreement.

         The April 14, 2014 letter calculated the value of Davis's 40% member interest in MPO. Using the formula set forth in Section 1.D of the Settlement Agreement, the letter added amounts Davis owed MPO pursuant to Sections 1.E, 1.F, 1.G, and 1.H of the Settlement Agreement to Davis's 40% share of MPO's negative asset value to determine that Davis was required to pay MPO $256, 200 in order to be removed as a member of MPO and as a personal guarantor on MPO's loan.

         The April 14, 2014 letter exercised MPO's purchase option as described in the Ground Lease, and netted $650, 000, the agreed purchase price for the land, against the amount Davis owed MPO to be removed as a member of MPO, resulting in a net amount of $393, 800 to be paid by MPO to Appellants at closing in order to acquire Davis's 40% member interest in MPO and the land owned by DSII.

         Appellants did not respond to MPO's April 14, 2014 letter. On April 22, 2014, MPO's counsel again wrote to Appellants' counsel advising that MPO intended to proceed to closing, and noting that Appellants' cooperation was required. The April 22, 2014 letter advised that if Appellants did not cooperate to facilitate closing, MPO would proceed accordingly.

         In subsequent email communications, the parties' counsel settled upon May 22, 2014 as an agreed closing date for the transactions anticipated by the Settlement Agreement. Appellants' counsel continued to advise, however, that Davis did not agree that an accurate fair market value had been determined for MPO's building. Davis did not otherwise challenge the calculations set forth in MPO's April 14, 2014 letter, and did not challenge that MPO had exercised the purchase option described in the amendment to the Ground Lease. Davis confirmed during later trial testimony that he had no disagreement with the calculations set forth in the April 14, 2014 letter other than the building's appraised value; that he was satisfied with the manner in which MPO had exercised the Ground Lease purchase option; and that he had always anticipated that MPO would buy the land on which the building was located at the same time he was removed as a 40% member in MPO, as the parties' objective had been to sever all business relationships between them.

         Beyond agreeing to May 22, 2014 as an extended closing date, Davis made no further efforts to close on the transactions anticipated by the Settlement Agreement. Davis contended that he had no obligation to close because the building appraised at an amount that was less than the balance owed on MPO's loan, and because it was never anticipated that he would have to pay MPO in order to be removed as a member. After the May 22, 2014 closing date passed, MPO ceased paying rent under the Ground Lease from and after June 1, 2014.

         On May 30, 2014, MPO filed a lawsuit against Davis and DSII in the Circuit Court of Jackson County, Missouri. Davis and DSII filed counterclaims in response, and joined Fiser as a third-party defendant.

         By the time of trial, MPO's claims against Davis and DSII were set forth in a first amended petition as follows: Count I (seeking specific performance of the Settlement Agreement); Count II (seeking damages for breach of the Settlement Agreement); and Count III (seeking damages for breach of the covenant of good faith and fair dealing implied in the Settlement Agreement). Davis and DSII's counterclaims were set forth in a pleading styled "second amended counterclaims" as follows: Count I (seeking damages from MPO for breach of the Ground Lease for non-payment of rent); Count II (seeking a declaratory judgment terminating the Ground Lease); Count III (seeking damages from MPO and third-party defendant Fiser for breach of the Settlement Agreement based on use of an appraisal that did not fairly calculate the building's value); Count IV (seeking damages from third-party defendant Fiser for breach of fiduciary duty)); and Count V (seeking a declaratory judgment directing MPO and third-party defendant Fiser to afford access to records for inspection and copying).

         Prior to trial, the parties agreed that MPO's Count I (seeking specific performance of the Settlement Agreement) and Appellants' counterclaims Count II (seeking a declaratory judgment terminating the Ground Lease) and Count V (seeking a declaratory judgment to inspect records) would be determined by the court in equity. The parties agreed to try all other claims to the jury, leaving the equity claims to be determined post-jury verdict.

         After all evidence had been presented to the jury, the trial court entered a directed verdict in favor of third-party defendant Fiser on Counts III and IV of Appellants' counterclaims. Davis and DSII contemporaneously agreed to voluntarily dismiss with prejudice Count V (the equity claim seeking a declaratory judgment to inspect records). As a result, at the close of the evidence, MPO's Counts II and III remained to be determined by the jury; Counts I and III of Appellants' counterclaims (against MPO only) remained to be determined by the jury; MPO's Count I remained to be determined by the court in equity; and Count II of Appellants' counterclaims remained to be determined by the court in equity.

         The jury returned verdicts in favor of MPO and against Appellants on MPO's Count II for breach of the Settlement Agreement, and on MPO's Count III for breach of the implied covenant of good faith and fair dealing. The jury awarded MPO $150, 000 in damages on each count.

         The jury returned a verdict in favor of DSII and against MPO on Count I of Appellants' counterclaims for breach of the Ground Lease for nonpayment of rent, and awarded damages of $54, 000. The jury returned a verdict in favor of MPO and against Appellants on Count III of the counterclaims which sought damages for breach of the Settlement Agreement for using an appraisal that did not determine fair market value of the building.

         Following the jury verdicts, the parties extensively briefed the remaining issues to be determined by the court in equity. Ultimately, the trial court entered its judgment dated January 11, 2017 ("Judgment"). The Judgment incorporated the jury verdicts, and entered judgment in favor of MPO and against Appellants on Count I, MPO's claim for specific performance of the Settlement Agreement. The Judgment also entered judgment in favor of MPO on Count II of Appellants' counterclaims which had sought a declaration terminating the Ground Lease and ordering the payment of attorneys' fees for MPO's breach of the Ground Lease by not paying rent. With respect to Appellants' declaratory judgment claim, the trial court found that Davis and DSII were the first to breach the Ground Lease when they failed to close on the transactions anticipated by the Settlement Agreement, and that the failure to close was not in good faith and warranted the denial of equitable relief.

         In connection with the judgment in favor of MPO ordering specific performance, the Judgment ordered Davis and DSII to close on the sale of Davis's member interest and on the sale of the land described in the Ground Lease pursuant to the calculations set forth in MPO's letter dated April 14, 2014, which was attached to and incorporated into the Judgment.[3] The Judgment ordered that MPO's monetary obligations to Appellants: (i) for $54, 000 in unpaid rent due (based on the jury's verdict), (ii) for the amount calculated by the April 14, 2014 letter to acquire Davis's 40% interest in MPO and the land owned by DSII, and (iii) for a $1, 000 discovery sanction, would be offset/reduced by $150, 000, the damages the jury awarded MPO on its claim for breach of contract, [4] and that this net amount would be paid to Appellants in exchange for Davis's 40% interest in MPO and for DSII's conveyance of the land described in the Ground Lease by warranty deed.

         Davis and DSII filed a motion for judgment notwithstanding the verdict and/or for new trial which was denied by the trial court. This appeal follows. Other facts will be discussed as pertinent to the points on appeal.

         Summary of Issues on Appeal and our Standard of Review

         Appellants assert eight points on appeal. Our review of Points One through Six, which claim errors with respect to court-tried matters, is pursuant to the standard established by Murphy v. Carron,536 S.W.2d 30, 32 (Mo. banc 1976). Rissler v. Heinzler,316 S.W.3d 533, 536 (Mo. App. W.D. 2010). "Under this standard, the 'trial court's decision will be affirmed unless it is not supported by substantial evidence, it is against the weight of the evidence, or it misstates or misapplies the law.'" Browning v. GuideOne Specialty Mut. Ins. Co.,341 S.W.3d 897, 899 (Mo. App. W.D. 2011) (quoting Rissler, 316 S.W.3d at 536). We therefore "view the ...


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