DONNA F. MILLER, Plaintiff,
NATIONAL LAND PARTNERS, LLC, LEON HUNTER WILSON, and HUNTER COMPANY OF WEST VIRGINIA, Defendants. Agreement Parties Dated Effective Profit Distribution Projects
Date Submitted: March 19, 2014
Michael P. Kelly and Daniel J. Brown, of MCCARTER & ENGLISH, LLP, Wilmington, Delaware; OF COUNSEL: James P. Campbell, of CAMPBELL FLANNERY, P.C., Leesburg, Virginia, Attorneys for the Plaintiff.
Daniel F. Wolcott, Jr., of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware, and Nicholas J. Brannick, of COLE, SCHOTZ, MEISEL, FORMAN & LEONARD, P.A., Wilmington, Delaware, Attorneys for Defendant National Land Partners, LLC.
Joanne P. Pinckney and Kevin M. Capuzzi, of PINCKNEY, WEIDINGER, URBAN & JOYCE LLC, Wilmington, Delaware; OF COUNSEL: Charles F. Printz, Jr., of BOWLES RICE LLP, Martinsburg, West Virginia, Attorneys for Defendants Leon Hunter Wilson and Hunter Company of West Virginia.
GLASSCOCK, Vice Chancellor
In November 2008, Plaintiff Donna Miller and Defendant Leon Hunter Wilson were engaged in divorce litigation in West Virginia. They were also each 50% owners of a West Virginia corporation, Defendant Hunter Company of West Virginia. On November 21, 2008, a West Virginia state court, the Berkeley County Family Court, entered an order directing the payment of approximately $4.9 million from Wilson to Miller, in return for which Wilson would receive Miller's half interest in Hunter Company; this decision has since been reversed and remanded. Hunter Company was the partner of Defendant National Land Partners, a Delaware limited liability company, in several real estate development projects. Shortly after the entry of the order directing him to pay approximately $4.9 million to Miller, Wilson caused Hunter Company to pay roughly that amount to National Land Partners. According to Wilson, this payment was owed under Wilson's agreements with National Land Partners. Miller disagrees, and considers the payment a fraudulent conveyance to avoid satisfaction of the Berkeley County Family Court's order. She brought this action, seeking a declaratory judgment confirming her theory, as well as imposition of a trust over the money paid to National Land Partners. The parties agree that the operative agreements between Hunter Company and National Land Partners did not, as written, require the payment, but the Defendants contend that that is because the written agreements inadvertently left out language making Hunter Company responsible for "negative management fees, " which language represented the true agreement among the Defendants.
This matter is presented on cross-motions for summary judgment, and the issue before me is a narrow one: was the payment to National Land Partners required by the agreements between Wilson, Hunter Company and National Land Partners? In order for me to reach that conclusion, the burden is on the Defendants to demonstrate, in effect, that the agreements should be reformed to include the missing term regarding negative management fees. This is a high burden; nonetheless, for the reasons that follow, I conclude that the agreements did contain this term, and that the Defendants are entitled to judgment.
While married, Plaintiff Donna Miller and Defendant Leon Hunter Wilson each owned a 50% interest in Defendant Hunter Company of West Virginia ("HCWV, " and together with Wilson, the "Hunter Defendants"), a real estate development company incorporated in West Virginia. Wilson is HCWV's President, performs the functions of CEO and, since his separation from Miller, has also become involved in the managerial aspects of HCWV. Prior to their divorce, Miller also served as an officer and director of HCWV. Together, Wilson and Miller are the sole directors of HCWV.
Early in their careers, both Miller and Wilson worked for Patten Corporation, a real estate company owned by Harry S. Patten. Patten has since sold his interest in that company and, in 1999, founded Land Partners, LLC ("Land Partners"), a real estate development company that changed its name to National Land Partners, LLC ("National Land Partners") in September 2002. National Land Partners is incorporated in Delaware and managed by American Land Partners, Inc. ("American Land Partners"). Patten serves as an officer of both National Land Partners and American Land Partners. Alan Murray is National Land Partners' CFO and American Land Partners' Vice President. Murray is also an officer of Inland Management Corporation, which manages various financial and human resources functions for National Land Partners, such as its payroll, accounts payable, accounting, financial statement preparation, tax reporting, and marketing.
Wilson's business relationship with Patten began in 1986. In the 1990s, Wilson began managing real estate development projects for Patten in West Virginia through HCWV. Wilson, who has approximately twenty-seven years of experience in land development,  also has an educational background in forestry.Consequently, many of the Defendants' projects also include a timber sales component.
To facilitate these joint projects, National Land Partners owns the properties through a wholly-owned subsidiary, WV Hunter, LLC. National Land Partners, moreover, is responsible for the accounting and financial aspects of these projects, for which HCWV acts as an independent contractor. Generally,
[u]nder the parties' arrangement, the role of [HCWV], through Wilson, includes identifying property that would qualify for development, completing due diligence and feasibility studies to determine if [National Land Partners] should purchase the property, conducting engineering and design work, obtaining all permits and subdivision approval and overseeing the construction of infrastructure. Following completion of road and utility systems, [HCWV] oversee[s] [National Land Partners] employees serving as a sales force, conducting advertising, marketing and other promotions, selling the building lots and overseeing closings of properties.
Wilson does not have any ownership interest in National Land Partners.
A. The Management Agreements
At trial, Patten emphasized that he "like[s] doing business with people who you can trust and shake their hand and a deal's a deal." In accordance with this principle, Patten and Wilson traditionally negotiated the details of each project orally, confirming their agreements with a handshake. As Wilson testified:
. . . most of our deals were done on handshakes. I will tell you that right now. I've shook hands with that man on more deals, and that's the way we did business. And it always seemed to work. No one ever got hurt. . . . I can remember a lot of deals that were never anything more than a handshake.
However, as National Land Partners continued to grow, the Defendants began to convert their informal agreements into written contracts. Consequently, over the years, the Defendants have entered into several management agreements, each drafted by Murray. Among other things, these management agreements governed the profit allocation between HCWV and National Land Partners.
In addition to the management agreements, the Defendants also negotiated schedules for each project, subsequently codified by Murray, which contained the "budget-type numbers" for each project. Each schedule was associated with a particular management agreement. Miller did not participate in negotiating the terms of these management agreements or associated schedules, and was never a signatory to any of these agreements, although Wilson kept her apprised of HCWV's relationship with National Land Partners throughout the years.
Several agreements among the Defendants are pertinent to this litigation; for ease of reference, these agreements are also outlined in Figure I. On July 17, 2000, Wilson, HCWV, and Land Partners entered into a management agreement that governed the Berkeley Glen and Meadows at Sleepy Creek Projects (the "2000 Management Agreement"). On January 15, 2002, Wilson, HCWV, and Land Partners entered into another management agreement, effective as of September 26, 2001, which governed the River Ridge Project (the "2002 Management Agreement"). On October 15, 2002, Wilson, HCWV, and National Land Partners entered into a project addendum, which governed the Ashton Woods Project; this agreement was terminated on April 14, 2003 (the "Project Addendum"). On April 14, 2003, the Defendants entered into a management agreement, effective as of October 15, 2002, which governed the Ashton Woods, Crossings on the Potomac, and Westvaco Romney Tract ("Westvaco") Projects (the "2003 Management Agreement"). On December 3, 2004, the Defendants entered into another agreement in order to adjust the allocation of timber sales, which was effective as of November 3, 2004 (the "2004 Management Agreement"). The 2004 Management Agreement governs the following projects: Westvaco Greenbrier Tract – Hart's Run, the Pointe, and the Long Project. National Land Partners, Wilson, and Wilson's Virginia company, Hunter CO of VA, LLC, also entered into a management agreement on August 18, 2006, effective as of August 8, 2006, which governs the Black Diamond Ranch Project (the "2006 Management Agreement").
B. Profit Allocation for the Defendants' Joint Projects
As reflected in the 2000 Management Agreement, National Land Partners and HCWV initially divided profits and losses from each project evenly. However, the parties aimed for a profit of 25% of gross sales and, by late 2001, certain projects had failed to generate this expected return. Patten, at trial, explained:
[W]e had a string of properties and projects that weren't going well that we didn't make money on. And it was my desire to at least, if I'm investing money, putting time into it—and we invested quite a bit of money in those projects—to have some kind of a minimal return, or a return.
Consequently, Wilson and Patten agreed to modify their arrangement so that National Land Partners was guaranteed a fixed rate of return. Pursuant to this new arrangement, National Land Partners received a preferential profit of 12.5% gross sales. As Murray noted:
The purpose of the Preferential Profit provision of the Management Agreements was to ensure that potential Projects identified by [HCWV] (through Wilson) were consistent with [National Land Partners'] profit expectations [of at least 25% of sales], and generated a return to [National Land Partners] of 12.5% of sales.
This arrangement meant that after National Land Partners received its preferential profit, HCWV would receive the balance. In the event that gross sales fell short of the preferential profit, however, HCWV would be responsible for any shortfall.
The 2002 Management Agreement between the Defendants, which governed the River Ridge Project, was the first agreement to reflect this preferential profit arrangement. Specifically, Section 6.2 of that Agreement provides, in relevant part:
Profit participation by [Land Partners] and [HCWV] shall be as follows: [Land Partners] shall receive a profit participation equal to 10% of gross lot sales and 12.5% of gross timber proceeds. [HCWV] shall receive all remaining Net Profit. In the event that the amount of [Land Partners] profit participation calculated in accordance with the preceding formula exceeds the total Net Profit, then [HCWV] shall receive no profit participation and shall be liable to [Land Partners] for any shortfall amount.
The language providing that HCWV would be liable for any shortfall amount—the "shortfall language"—provided for what the Defendants refer to as "Negative Manager Fees." Negative Manager Fees, in other words, are those fees incurred by HCWV when a project fails to generate sufficient gross sales to satisfy National Land Partners' preferential profit. For clarity's sake, I adopt the Defendants' convention of referring to HCWV's payment of such fees as "Negative Manager Fees."
Wilson explained at trial that the 2002 Management Agreement was "the first agreement where we switched ourselves over to a fixed return, so that [Patten] acted more like a bank and got a guaranteed rate of return on his investment." Similar to a bank, Wilson explained, "if the project didn't do good, [Patten] still wanted his certain rate of return." According to Wilson, therefore, this arrangement "meant that if I did extremely good on the projects, I got it all [above the preferential profit]. And if I didn't, then I had to pay the shortfall."
C. Miller Contends that the Defendants Agreed to Eliminate Negative Manager Fees During a ...