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McWhinney Holding Co., LLLP v. Poag

United States District Court, D. Colorado

September 28, 2018

MCWHINNEY HOLDING COMPANY, LLLP, a Colorado Limited Liability Partnership, MCWHINNEY CENTERRA LIFESTYLE CENTER, LLC, a Colorado Limited Liability Company, and CENTERRA LIFESTYLE CENTER, LLC, a Delaware Limited Liability Company, Plaintiffs,
v.
G. DAN POAG, an individual; JOSHUA D. POAG, an individual; an individual acting as co-trustee of the Josh and Chloee Poag 2004-GST Exempt Trust; an individual acting as co-trustee of the Jeremy and Chloee Poag 2004-GST Exempt Trust; an individual acting as co-trustee of the Mark and Chloee Poag 2004-GST Exempt Trust; an individual acting as co-trustee of the Josh and Dan Poag 2004-GST Exempt Trust; an individual acting as co-trustee of the Jeremy and Dan Poag 2004-GST Exempt Trust; an individual acting as co-trustee of the Mark and Dan Poag 2004-GST Exempt Trust; TERRY W. McEWEN, an individual; POAG & McEWEN LIFESTYLE CENTERS - CENTERRA, LLC, a Delaware Limited Liability Company; POAG & McEWEN LIFESTYLE CENTERS, LLC, a Delaware Limited Liability Company; POAG LIFESTYLE CENTERS, LLC, a Delaware Limited Liability Company; POAG SHOPPING CENTERS, LLC, a Delaware Limited Liability Company; PM LIFESTYLE SHOPPING CENTERS, LLC, a Delaware Limited Liability Company; POAG BROTHERS, LLC, a Tennessee Limited Liability Company; JEREMY M. POAG, an individual acting as co-trustee of the Josh and Chloee Poag 2004-GST Exempt Trust; an individual acting as co-trustee of the Jeremy and Chloee Poag 2004-GST Exempt Trust; an individual acting as co-trustee of the Mark and Chloee Poag 2004-GST Exempt Trust; an individual acting as co-trustee of the Josh and Dan Poag 2004-GST Exempt Trust; an individual acting as co-trustee of the Jeremy and Dan Poag 2004-GST Exempt Trust; an individual acting as co-trustee of the Mark and Dan Poag 2004-GST Exempt Trust; D. MARK POAG, an individual acting as co-trustee of the Josh and Chloee Poag 2004-GST Exempt Trust; an individual acting as co-trustee of the Jeremy and Chloee Poag 2004-GST Exempt Trust; an individual acting as co-trustee of the Mark and Chloee Poag 2004-GST Exempt Trust; an individual acting as co-trustee of the Josh and Dan Poag 2004-GST Exempt Trust; an individual acting as co-trustee of the Jeremy and Dan Poag 2004-GST Exempt Trust; an individual acting as co-trustee of the Mark and Dan Poag 2004-GST Exempt Trust; DOE INDIVIDUALS 1-10; DOE TRUSTS 11-30; and ROE CORPORATIONS 31-60; Defendants.

          ORDER ON MOTIONS TO DISMISS

          R. BROOKE JACKSON UNITED STATES DISTRICT JUDGE

         Five motions to dismiss are before the Court. ECF Nos. 53, 55, 56, 57, 90. For the reasons stated below, my ruling on each motion is as follows: the first motion to dismiss is GRANTED; the second and third motions to dismiss are DENIED; and the fourth and fifth motions to dismiss are DENIED in part and GRANTED in part.

         I. BACKGROUND[1]

         A. The Lifestyle Center Project.

         This lawsuit is the latest chapter in litigation that began in 2011. It all dates back, however, to the mid-1990s when two brothers, Chad and Troy McWhinney, decided to develop a mixed use community on approximately 3, 000 acres of undeveloped land they owned in Larimer County. A centerpiece of the contemplated development would be an upscale fashion shopping center. However, they lacked experience with such a development. Their search for someone who had such expertise eventually led them to Dan Poag, who purportedly invented the concept of a “lifestyle center.” In December 2002, the McWhinneys decided to enter into a joint venture with Poag and his partner, Terry McEwen, to develop a lifestyle center on the McWhinneys' property.

         To this end, in 2004 the parties created a new entity called Centerra Lifestyle Center, LLC (“CLC”). CLC's mission was to build, own, and operate the “Promenade Shops at Centerra.” The facts are somewhat complicated by the penchant of both sides to do their business through holding companies under which sprouted a veritable garden of subsidiaries and affiliates. For present purposes, however, the key McWhinney entity is McWhinney Centerra Lifestyle Center, LLC (“MCLC”), and the key Poag and McEwen entity is Poag & McEwen Lifestyle Center-Centerra, LLC (“P&M”). On September 29, 2004 MCLC and P&M signed a contract entitled “Limited Liability Company Agreement of Centerra Lifestyle Center, LLC, ” sometimes referred to simply as the “Operating Agreement.” Under the Operating Agreement MCLC and P&M each were 50% members and owners of CLC. MCLC contributed land and capital. P&M contributed expertise in building and leasing lifestyle centers and was designated the manager of CLC.

         The Shops were built, but leasing was less successful than had been anticipated. For various reasons a permanent loan was never obtained to pay off the construction loan. Eventually the center was foreclosed by the lenders and sold in foreclosure to a third party. Neither the McWhinneys nor Poag and McEwen retain any ownership interest in the Shops today, although the new owner hired a Poag entity called Poag Lifestyle Centers, LLC (“PLC”) to be the manager of the Shops.

         B. State Court Litigation.

         I need not, at least for present purposes, describe in detail what happened to the project because those facts have been extensively discussed in a state court lawsuit that was filed on May 27, 2011. The plaintiffs originally named in that case were McWhinney Holding Company, LLLP and MCLC, “derivatively on behalf of [CLC], a nominal defendant, ” and three other entities related to the McWhinneys (Centerra Properties West, LLC, SMP4 Investments, Inc. and Centerra Retail Sales Fee Corporation). Complaint, Larimer County District Court, ECF No. 74- 1. The defendants named were P&M, Poag & McEwen Lifestyle Centers, LLC, PLC and several “Does.” Following a 13-day bench trial, the district court, Hon. Thomas R. French, issued a 79-page order and judgment on August 15, 2017. ECF No. 22-1. The order discusses the history of the project and the parties' falling out in great detail. The court discusses and resolves each of the plaintiffs' claims and the defendants' counterclaims in turn as follows:

         1. Plaintiffs' First Claim: Breach of Contract.

         The court found that P&M had breached contractual duties of good faith, loyalty, care, fair dealing and candor owed to MCLC and to CLC under the express terms of the Operating Agreement (which essentially imposed the same duties as would in any event be owed as fiduciary duties under governing Delaware law). Specifically, P&M breached the Operating Agreement in seven different ways:

         a. Purchase of a $155 Million Forward Swap.

         In connection with its obligation to obtain a permanent loan to pay off the construction loan for the Shops, P&M purchased an uncovered or “naked” swap with CLC funds without MCLC's informed knowledge or approval. This was a risky gamble on future interest rates. The state court held that it constituted an exercise of bad judgment; a breach of the duties of good faith and loyalty by favoring the interest of P&M, Dan Poag, his son Josh Poag, and PMLC over the interests of CLC and the Shops; and a breach of the duty of candor. The swap caused CLC to lose $7.5 million. Although the court found that the breach was not sufficiently material to excuse MCLC from performing its duties under the Operating Agreement, it was sufficient to render P&M liable to MCLC for damages under § 6.6(a) of the Operating Agreement because it was accompanied by gross negligence and willful misconduct. ECF No. 22-1 at 39-42 (pp. 38-41 of the court's order).

         b. A $40 Million Loan to Pay Off Terry McEwen.

         A major contributor to the project's financial demise arose after Mr. McEwen informed Dan Poag that he wanted to retire and wished to be paid $40 million for his interest in Poag and McEwen and related entities. Instead of using the Poags' money for this purpose, the decision was made to obtain a $40 million loan and, without MCLC's knowledge or approval, ultimately to repay the loan with CLC's anticipated permanent loan proceeds. P&M surreptitiously increased the size of CLC's permanent loan application by $40 million to provide for funds to repay this loan. A permanent loan in that increased amount was never obtained, resulting in the foreclosure proceedings. The court found that P&M's entry into and concealment of the $40 million loan was, for several reasons, a material breach of fiduciary duties owed to MCLC and CLC as embedded in the Operating Agreement. Id. at 44-51 (pp. 43-50 of the court order).

         c. Sales Negotiations.

         This breach concerns P&M's intentional withholding of material financial information during a time when P&M was attempting to sell its interest in CLC to MCLC. See Id. at 51-53 (pp. 50-52 of court order).

         d. Tax Appeals.

         P&M breached § 6.2(m) of the Operating Agreement by contesting a valuation of the lifestyle center below $190 per square foot without MCLC's consent. Id. at 53- 55 (pp. 52-54 of court order).

         e. Distributions from CLC.

         P&M breached its duty of loyalty under the Operating Agreement by taking cash distributions from CLC to make interest payments on the $40 million loan when CLC could not afford to do. Id. at 55-56 (pp. 54-55 of court order).

         f. Permanent Loan Notice.

         P&M did not provide a permanent loan notice before the maturing date of the construction loan as required by § 7.3(a) of the Operating Agreement. Id. at 56-61 (pp. 55-60 of court order).

         g. Permanent Loan Impasse Notice.

         P&M failed to send MCLC a permanent loan impasse notice as required by § 7.3(a) of the Operating Agreement. Id. at 61-62 (pp. 60-61 of court order).

         2. Damages for Breach of Contract.

         The court held that MCLC had sustained damages caused by P&M's breach of the Operating Agreement in three categories: (1) the tax appeals had cost CLC $12, 065; as a 50% owner of CLC, MCLC was awarded 50% of that cost, i.e. $6, 032.50; (2) the $155 million swap cost CLC $7.5 million; MCLC was awarded 50% of that loss, i.e. $3.75 million; and (3) MCLC lost its equity in the Shops, which the court valued at $38.25 million. Accordingly, the court found P&M to be liable to MCLC for a total of $42, 006, 032.50. Id. at 62-71 (pp. 61-70 of court order).

         3. Plaintiffs' Other Claims.

         The court held that plaintiffs' second claim for indemnification was premature because, under Delaware law, it cannot be pursued until its final judgment withstands appellate review. The court resolved plaintiffs' third claim (fraudulent concealment of intent to breach the contract's requirement for tax appeals) and fourth claim (civil conspiracy) in favor of the defendants. Id. at 71-76 (pp. 70-75 of court order). The Court reserved plaintiffs' claim that the Poag and McEwen entities are alter egos of each other for a second part of the trial, which had not yet been scheduled as of the Scheduling Conference in the present case held on January 10, 2018.

         4. Defendants' Counterclaims.

         Defendants' counterclaims were all resolved in favor of the plaintiffs. Id. at 76-79 (pp. 75-78 of court order).

         5. Judgment.

         The court entered judgment in favor of MCLC and against P&M in the amount of $42, 006, 032.50 plus interest to be determined at a later date. Id. at 79 (p. 78 of court order). The court did not enter judgment on plaintiffs' second claim but entered judgment in favor of defendants on plaintiffs' remaining claims and in favor of MCLC on the counterclaims. Id. at 80 (p. 79 of court order).

         C. The Present Case.

         1. Plaintiffs' Original Complaint.

         McWhinney Holding Company, LLLP, and MCLC filed the present case in the Larimer County District Court on November 8, 2017. The long list of defendants named in the original complaint can, for simplicity, be divided into three groups: (1) Dan Poag, Josh Poag and Terry McEwen individually; (2) six Poag or Poag and McEwen entities (including P&M); and (3) the trustees of three Poag family trusts. See Complaint, ECF No. 17. Plaintiffs allege that the defendants in the state court concealed material information and obstructed plaintiffs' discovery efforts literally for years. After plaintiffs eventually were able, with the assistance of a special master and the court, to obtain necessary documents and depositions, they sought leave to amend their complaint to add the Poags and Mr. McEwen individually as defendants and to assert additional claims. The state court denied their motion, principally-according to plaintiffs- because it would further complicate and extend an already complicated and old case. Instead, the trial court suggested that the new claims could be pled in a separate action. Id. at 17.

         Plaintiffs' inability to pursue claims against the Poags and Mr. McEwen individually and other affiliated entities in that case-and their concern that they will not be able to satisfy their judgment against P&M-are the reasons for the present case. Id. at 18-19.

         Plaintiffs' recitation of the facts in the present case largely repeats the facts they asserted, and in large part the court sustained, in the state case, albeit focused more specifically at the individual defendants. See Id. at 19-46. They assert claims of (1) fraudulent concealment against the three individual defendants; (2) fraudulent misrepresentation against the three individual defendants; (3) breach of fiduciary duty against the three individual defendants; (4) civil conspiracy against the three individual defendants; (5) fraudulent transfer against all defendants; and (6) a declaratory judgment that three individual defendants and the numerous other entities named as defendants are all alter egos of each other. Id. at 46-60.

         In their prayer for relief they request $92, 200, 000 in “general damages” (a number that is not explained and that appears to violate Rule 8(a) of the Colorado Rules of Civil Procedure which prohibits the inclusion of dollar amounts in the prayer for relief) and various other categories of compensatory, punitive and equitable relief. Id. at 60-61. However, in their proposed Scheduling Order, plaintiffs make clear that they seek “[g]eneral economic damages in the amount of $42, 006, 032.50” plus interest, i.e., the amount awarded by the state court. Plaintiffs assert some alternative damages theories, but the essence of this case appears to be plaintiffs' effort to recover the $42 million from whomever within the Poag and McEwen group of individuals and entities is solvent and capable of satisfying a large judgment. ECF No. 47 at 29-32.

         2. Removal of the Case to Federal Court.

         Defendant Poag Shopping Centers, LLC, with the consent of the other defendants, promptly removed the case to this Court on grounds of diversity of citizenship under 28 U.S.C. § 1332. ECF No. 1. It is undisputed that the requirements for diversity of citizenship jurisdiction were met, and that the case was properly removed to this Court.

         3. Plaintiff's Amended Complaint.

         Plaintiffs' then filed their First Amended Complaint (“FAC”). ECF No. 22 (red-lined version at ECF No. 24-1). The primary difference is that CLC was added as a third named plaintiff in the amended version. It is undisputed that if CLC was properly added as other than a nominal plaintiff, then diversity jurisdiction is destroyed. A limited liability company such as CLC assumes the citizenship of its members. CLC and defendants share citizenship in Tennessee, Texas, Washington, Ohio and Utah.

         4. Plaintiff's Motion to Remand.

         Plaintiffs then moved to remand the case to state court based on lack of diversity jurisdiction. Defendants opposed the motion, arguing that CLC is neither a necessary nor an indispensable party, and that the addition of CLC in the amended complaint was a sham done solely to defeat federal jurisdiction. On March 13, ...


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