JULIE A. ROBINSON, District Judge.
Plaintiffs Tony Bettis, Eric Comeau, Steven Seat, and National Realty Capital, LLC ("NRC") filed this action against Defendants Gary L. Hall, Bentley Investments of Nevada, LLC ("Bentley"), and the Gary L. Hall Revocable Trust ("Trust") for breach of contract and quantum meruit. After the Court's ruling on Defendants' earlier dispositive motion, Plaintiffs' remaining claims allege breach of contract against Defendant Gary Hall and quantum meruit against Defendants Bentley and the Trust. Plaintiffs seek damages for unpaid profits that they claim are owed under the contract they entered into with Hall; Plaintiffs allege that these profits were instead paid to Bentley, Hall, and the Trust.
This matter is before the Court on Defendants' Motion for Partial Summary Judgment (Doc. 86) and Plaintiffs' Motion for Partial Summary Judgment on the Issue of Contract Interpretation (Doc. 88). As fully explained below, because the contract states that the full amount of overhead needed to be repaid before any profits were distributed, the Court denies Plaintiffs' motion for summary judgment. But because Plaintiffs may still be entitled to profits under the proper interpretation of the contract for a number of projects and Plaintiffs' evidence shows that Bentley received and retained a benefit from Plaintiffs, Defendants' motion is granted in part and denied in part.
Summary judgment is appropriate if the moving party demonstrates that there is "no genuine dispute as to any material fact" and that it is "entitled to a judgment as a matter of law."
The moving party initially must show the absence of a genuine issue of material fact and entitlement to judgment as a matter of law.
Finally, summary judgment is not a "disfavored procedural shortcut"; on the contrary, it is an important procedure "designed to secure the just, speedy and inexpensive determination of every action."
District of Kansas Local Rule 56.1 outlines the proper procedures for stating the material facts and for addressing the other party's statement of material facts. When opposing a motion for summary judgment, a party must begin its memorandum in opposition "with a section containing a concise statement of material facts as to which the party contends genuine issues."
With the above rules of law and principles of application in mind, the following facts are stipulated to or uncontroverted.
To memorialize the agreement, Comeau, Bettis, Seat, and Hall entered into a written contract, the Funding Agreement. In accordance with the Funding Agreement, Comeau, Bettis and Seat formed NRC to locate the real estate investments, including loans and equity participations, and Plaintiffs began to work for Hall full time. The Funding Agreement also required the formation of other limited liability companies, or Lending Entities, formed to serve as the lender and to hold any assets for each real estate investment project. In total, six individual Lending Entities — each owned 100% by Hall — were formed: Bentley Investments of Nevada, LLC ("Bentley"), Bentley Investments of Nevada II, LLC ("Bentley II"), Bentley Investments of Nevada III, LLC ("Bentley III"), Bentley Investments of Nevada IV, LLC ("Bentley IV"), Bentley Investments of Nevada V, LLC ("Bentley V"), and Bentley Investments of Nevada VI, LLC ("Bentley VI"). Hall formed Bentley for the purpose of providing funding and receiving payments for the real estate investment projects. Lending Entities Bentley II through Bentley VI simply held assets acquired in the course of the real estate investments. The Trust is the sole member of Bentley and the Bentley II through VI entities. Hall is the trustee of the Trust.
As Hall was performing this obligation under the Funding Agreement by advancing funds, Plaintiffs performed their obligation under the Funding Agreement by finding real estate investment opportunities. Hall invested in several real estate projects over a period of five years. Six of those projects — Terra Bentley I, Terra Bentley II, Stonewall Springs, Morley Bentley, Morley Cottonwood, and Morley FLP — have either failed to turn a profit or will not be profitable for many years and are thus not in dispute in this lawsuit. Other projects have generated cash revenues that were distributed under the Funding Agreement. Those projects are Weibel-RBND, Morley SWAT, Shorefox, Grand Elk, Morley Companies Family Development ("MCFD"), SWAT 15, and Porchlight. The parties dispute whether the final project, Grand Lodge, has generated cash revenues and profits that are distributable under the Funding Agreement.
Under the Funding Agreement, the cash revenues from these projects would be distributed by each Lending Entity in a certain order listed in sections 5(a)-(f) of the Funding Agreement:
Beginning on the date of the Funding Agreement and continuously after, Hall, Hall's accountant Keith Noe, and Bentley, together with NRC kept track of all funds advanced and received by Hall in connection with the Lending Entities and real estate investment projects. One or more times per year beginning in 2005, NRC provided to Hall and Bentley a bound summary of investment activity that they created and titled the "Bentley Portfolio Summary" ("Bentley Books"). The parties met regularly to discuss the investment activities and the financial records contained in the Bentley Books. In all of the Bentley Books, Plaintiffs allocated Overhead Costs on a pro-rata basis to each of the Lending Entities based on the project's capital investment.
The Bentley Books not only accounted for the costs of the real estate investments, but also detailed the cash generated by those projects. Section 3 of the June 2009 Bentley Books shows the profits and cash revenues of Weibel-RBND, Morley SWAT, Shorefox, Grand Elk, MCFD, SWAT 15, Grand Lodge, and Porchlight. This section shows the gross income distributable under paragraph 5 of the Funding Agreement and the amount of debt of other income that needed to be repaid under section 5(a). Weibel-RBND generated $107,167 in gross income with no payments necessary for debt or other expenses, leaving $107,167 distributable under sections 5(b)-(e) of the Funding Agreement. Morley SWAT generated $605,028 in gross income with $186,449 paid to debt and other expenses, leaving $418,579 distributable under sections 5(b)-(e). Shorefox generated $1,146,743 in gross income with $79,418 paid to debt and other expenses, leaving $1,067,325 distributable under sections 5(b)-(e).
The Bentley Books also detailed how Plaintiffs accounted for the distribution of the gross income from each project, showing payments due to Overhead Costs, to Hall for profits, and to NRC for profits. On the Morley SWAT, Shorefox, Grand Elk, MCFD, SWAT 15, Grand Lodge, and Porchlight projects, the Bentley Books show that NRC was entitled to profits. With the exception of Grand Lodge, however, all cash revenues from each project were paid to Hall or Bentley and no payments were received by NRC. The Bentley Books show that NRC used the amounts listed as their profits to reduce Overhead Costs. But NRC states that it received $182,046.80 from the Grand Lodge project, which was not used to reduce Overhead Costs, though Defendants claim that all money generated by Grand Lodge was paid to Hall under the Funding Agreement.
In 2009, Hall, disappointed with the overall results obtained by the individual plaintiffs, advised Comeau, Bettis, and Seat that he was going to stop providing funds under the Funding Agreement. On November 11, 2009, Comeau sent an e-mail to Hall advising Hall that NRC had $450,350 of profit allocation under section 5(e) "left in the deals" and that "[i]t was always our understanding that at some point these monies would be dispersed when profits are available."
Defendants move for summary judgment, arguing that, as a matter of law, Plaintiffs have failed to show any entitlement to profits under the Funding Agreement and thus Plaintiffs cannot succeed on their breach of contract claim. Defendants further argue that because Defendants Bentley and the Trust received no benefit from Plaintiffs, Plaintiffs cannot succeed on their quantum meruit claim. Defendants also add that many of Plaintiffs' claims are barred by the statute of limitations or waiver and equitable estoppel. Plaintiffs, on the other hand, seek summary judgment on the proper interpretation of the Funding Agreement. Both Plaintiffs' and Defendants' motions for summary judgment rely on different interpretations of the Funding Agreement. And so resolution of both motions necessarily turns on the proper interpretation of the Funding Agreement between Plaintiffs and Defendant Hall. The Court will first discuss Defendants' motion for summary judgment on the breach of contract claim, which will also resolve Plaintiffs' motion for summary judgment. The Court will then discuss Defendants' motion for summary judgment on the quantum meruit claims.
Plaintiffs claim that Defendant Hall breached his duties under the Funding Agreement by failing to pay them profits from various real estate investment projects. All parties agree that the Funding Agreement is a valid contract and governs the dispute in this case. Both sides also argue that the contract is clear and unambiguous, but the parties disagree on the clear and unambiguous interpretation of the contract. Thus, the Court must determine the proper interpretation of the Funding Agreement.
"[A] federal court sitting in diversity must apply the substantive law of the state in which it sits, including the forum state's choice-of-law rules."
Generally, under Kansas law, if the language in a written contract "is clear and can be carried out as written, there is no room for rules of construction. To be ambiguous, a contract must contain provisions or language of doubtful or conflicting meaning, as gleaned from a natural and reasonable interpretation of its language."
Both parties agree that under the Funding Agreement, Plaintiffs are not entitled to payment of profits until sections 5(a)-(d) are satisfied. Where the parties differ in their interpretation of the contract is the proper application of section 5(b) — "Return to Hall the aggregate Overhead Costs advanced by him plus the associated 7% annualized return." Plaintiffs contend that section 5(b) requires the repayment of the Overhead Costs that they allocated to each real estate investment. But they argue that section 5(b) does not require the repayment of all Overhead Costs advanced by Hall throughout the entire Funding Agreement relationship. Thus, under Plaintiffs' interpretation of section 5(b), paragraph 5 contemplates the payment of profits under sections 5(c)-(f) while some Overhead Costs remain unpaid.
Defendants interpret section 5(b) differently. Defendants state that because section 5(b) requires the repayment of "aggregate Overhead Costs," the total amount of the Overhead Costs advanced by Hall must be repaid before any revenues are distributed under sections 5(c)-(f). Defendants argue that the contract does not allow parties to allocate Overhead Costs to each project. Under Defendant's interpretation, the contract does not contemplate any payment of profits to NRC until all Overhead Costs are repaid.
By applying the principles used to interpret contracts under Kansas law, the Court finds that Defendants' interpretation is correct because the contract clearly and unambiguously requires a return of all Overhead Costs advanced by Hall (plus the 7% annualized return) before any remaining revenues may be distributed under sections 5(c)-(f). This interpretation is clearly and unambiguously demonstrated in section 5(b), the entirety of paragraph 5, and the entirety of the Funding Agreement.
The Court first focuses on the language in section 5(b): "Return to Hall the aggregate Overhead Costs advanced by him plus the associated 7% annualized return." Plaintiffs' argument that only those Overhead Costs allocated to a specific project needed to be repaid under section 5(b) directly contradicts the plain language of that section. Section 5(b) does not mention any allocated Overhead Costs. On the contrary, it specifies that aggregate Overhead Costs must be repaid. Aggregate in its plain, common meaning is a collection, sum, or total. For the Court to interpret section 5(b) in the manner that Plaintiff suggests, it would have to interpret the term aggregate to have a meaning completely antonymous to its common usage. Instead, the Court will interpret the contract so that "aggregate" retains its common meaning, requiring the repayment of the total Overhead Costs under section 5(b).
The entirety of paragraph 5 also supports the interpretation that all Overhead Costs must be repaid under section 5(b) because when the parties intended to allocate costs, they did so explicitly. Plaintiffs argue for the opposite conclusion by pointing to all of the instances in paragraph 5 that reference each Lending Entity or each transaction. Plaintiffs state that
Further, Plaintiffs' argument that the language in section 5(e) supports their interpretation of the contract is similarly unavailing. Section 5(e) states that the cash revenues and profits remaining after payment of sections 5(a)-(d) should be allocated and distributed 70% to Hall and 30% to NRC. But it states that NRC must pay its portion of profits received under section 5(e), after Hall receives his Overhead Costs and 7% return, to fund the Working Capital Reserve until it is fully funded. Plaintiffs suggest that because section 5(e) states that they should use their portion of the profits to fund the Working Capital Reserve after Hall receives his Overhead Costs, they must have been able to receive profits, without funding the Working Capital Reserve, before Hall receives all of his Overhead Costs. Reading section 5(e) in isolation, Plaintiffs interpretation is possible. But it is equally, if not more, likely that section 5(e) simply reiterates the fact that Hall must receive a return of all Overhead Costs and the 7% annualized return before Plaintiffs can share in profits, adding that those profits must then be used to fund the Working Capital Reserve until it is fully funded. And the Court must not consider a provision of a contract in isolation, "but must instead construe the term in light of the contract as a whole, such that if construction of the contract in its entirety removes any perceived ambiguity, no ambiguity exists."
Defendants' interpretation of the contract is also supported by the entire Funding Agreement. In paragraph 1, Overhead Costs are defined as all funds provided on a monthly basis to cover "salaries, health insurance expenses, travel expenses and phone and facsimile expenses of Bettis, Seat and Comeau and other miscellaneous supplies and start up expenses that NRC will incur."
Other provisions of the agreement not dealing with Overhead Costs demonstrate that the parties knew how to allocate costs when they intended that result. An example of such allocation is paragraph 2, which deals with the Debt Portion and Equity Investment. Paragraph 2 states in relevant part: "On projects approved by Hall, Hall agrees to advance funds to each of the Lending Entities as follows...."
By interpreting section 5(b), the entirety of paragraph 5, and the entirety of the Funding Agreement, it is clear that the parties intended all Overhead Costs to be repaid before any distribution of cash revenues was made under section 5(c)-(f) of the Funding Agreement. This interpretation precludes payments of profits to Bettis, Seat, Comeau, or NRC before all Overhead Costs are returned. And thus, the Court must deny Plaintiffs' motion for summary on the interpretation of the Funding Agreement.
This denial, however, is not dispositive of Plaintiffs claims and does not automatically require the Court to grant Defendants summary judgment on the breach of contract claim. Plaintiffs may still have been owed profits for some of the projects because the aggregate Overhead Costs may have been repaid in full by some of the projects' cash revenues. In fact, contrary to Defendants' assertions, the Court finds that for some projects, the aggregate Overhead Costs were repaid in full, allowing for distribution under section 5(c) and possibly sections 5(d)-(f) of the Funding Agreement.
Defendants claim that the aggregate Overhead Costs were never repaid. Indeed, Defendants claim that over $3.4 million is still outstanding for Overhead Costs. Although Plaintiffs did not dispute Defendants' calculation of outstanding aggregate Overhead Costs, the Court finds that Defendants, as a matter of law, incorrectly applied the cash revenues from each project to paragraph 5 of the Funding Agreement. As a result, their calculation of outstanding aggregate Overhead Costs is incorrect. Defendants' calculation assumes that Defendant Hall could receive profits and payments under sections 5(c)-(f) before the aggregate Overhead Costs were repaid under section 5(b). But as described above, the Funding Agreement clearly and unambiguously states that until all Overhead Costs are repaid under section 5(b), no revenue will be distributed to anyone under sections 5(c)-(f), which means that until all Overhead Costs are repaid, Defendant Hall was not entitled to payment for the Equity Portion under section 5(c), preferred rate of return under section 5(d), or profits under sections 5(e) and (f). And so, Defendants' calculation of outstanding aggregate Overhead Costs is greatly inflated because it does not account for large payments that should have been made to the Overhead Costs but were instead designated as profits paid to Defendant Hall.
Defendants made the same mistake for the Morley SWAT project, stating that $178,172 were paid to Hall as repayment of Overhead Costs and $240,407 as profits. At the time Morley SWAT distributions were made, the outstanding balance of aggregate Overhead Costs was $459,333.
The same, however, cannot be said for the remaining projects. The Court cannot determine on the summary judgment record whether Plaintiffs are entitled to profits for the remaining projects. In Shorefox, for example, Plaintiffs may have been entitled to profits. Shorefox generated $1,146,743 in gross income. From that amount, debt and other expenses of $79,418 were paid under 5(a), which means that $1,067,325 were available to repay Overhead Costs.
The Court runs into the same problem with the remaining projects, such that the Court cannot determine whether Plaintiffs were entitled to profits — and if so, in what amount. The Court, therefore, directs the parties to meet and confer to determine the correct calculations of profits using the interpretation of the Funding Agreement as described by the Court above, where all Overhead Costs and the 7% annualized return under section 5(b) must be repaid before any distribution are made under sections 5(c)-(f). The Court notes that both parties relied on the calculations provided in the Bentley Books to determine the gross income and Debt Portion. The parties merely need to apply these numbers to the Funding Agreement in the manner described above and provide the Court with a clear and concise explanation of amounts that were repaid under sections 5(a)-(f) of the Funding Agreement for projects Shorefox, Grand Elk, MCFD, SWAT 15, and Porchlight, which all survive summary judgment. As stated above, Plaintiffs were not entitled to profits on Weibel-RBND and Morley SWAT. Plaintiffs did not claim profits on Weibel-RBND, and thus Defendants' motion for summary judgment on the Weibel-RBND project is moot. But Defendants' motion for summary judgment on the Morley SWAT project is granted.
This leaves one project for the Court to discuss — Grand Lodge. The Court finds that there is a genuine issue of material fact as to whether the Grand Lodge project has generated cash revenues that are distributable under the Funding Agreement. Plaintiffs argue that cash revenues from Grand Lodge are distributable and have been distributed to both NRC and Hall. Defendants argue that it is undisputed that the project has not yet closed and therefore any distribution under the Funding Agreement is premature and speculative. At the same time, however, Defendants list as an undisputed fact that "[w]hen the Grand Lodge money was received, all money was paid to Hall pursuant to the Funding Agreement."
Defendants also argue that Plaintiffs' claims for breach of contract are barred by waiver and equitable estoppel. Defendants state that because Plaintiffs allowed Defendants to retain all of the funds from the projects, Plaintiffs have waived their rights to those profits. For similar reasons, Defendants argue the Court should estop Plaintiffs from claiming those profits.
Beyond waiver, Defendants argue that equitable estoppel bars Plaintiffs from bringing their claim for breach of contract against Defendant Hall. "A party seeking to invoke equitable estoppel must show that the acts ... or silence of another party (when it has a duty to speak) induced the first party to believe certain facts exited. There must also be a showing that the first party rightfully relied and acted upon such belief and would now be prejudiced if the other party were permitted to deny the existence of such facts."
Defendants further argue that Hall is entitled to summary judgment on the breach of contract claim for the Weibel-RBND and Morley SWAT projects because they fall outside of the five-year statute of limitations. As discussed above, however, Plaintiffs would not have earned any profits on the Weibel-RBND and Morley SWAT projects. As such, Defendants' assertion that those claims are time-barred is moot.
Defendants also move for summary judgment as to Defendants Bentley and the Trust on Plaintiffs' quantum meruit claim. Quantum meruit, or unjust enrichment, "lies in a promise implied in law that one will restore to the person entitled thereto that which in equity and good conscience belongs to him."
The Court will first examine whether Bentley is entitled to summary judgment on the quantum meruit claim, such that no genuine issue of material fact exists as to any of the required elements and Bentley is entitled to judgment as a matter of law. Defendants raise a number of arguments against the quantum meruit claim. Defendants claim that Bentley received no benefit and Plaintiffs are only using this claim to collect their damages from Hall's breach of contract. Further, Defendants argue that if they did receive any benefit, third parties conferred the benefit and not Plaintiffs. Defendants final assertion claims that Bentley did not know of or appreciate any benefit.
Defendants first argue that Bentley received no benefit from Plaintiffs, analogizing this case to Venture Commercial Mortgage, LLC v. FDIC,
Here, Defendants argue that Bentley is just like the purchaser of the loan agreement in Venture because it was not a party to the Funding Agreement and cannot be sued for damages arising under
Not only have Plaintiffs presented evidence of this ongoing relationship, but they have presented evidence to show that the relationship directly benefitted Bentley. Plaintiffs worked to find real estate investments that would become profitable; all cash generated from these projects went to Bentley before they were distributed under the Funding Agreement. Because Bentley received the cash revenues as a result of Plaintiffs' services — even though the cash revenues came from the projects and not directly from Plaintiffs — Plaintiffs conferred a benefit on Bentley.
Defendants' final argument asserts that Plaintiffs have produced no evidence to show that Bentley knew of or appreciated the benefit conferred by Plaintiffs. The Court finds a genuine issue of material fact on this element of the quantum meruit claim. Plaintiffs have presented evidence that the parties had regular meetings to discuss investment opportunities and the records contained in the Bentley books. In the Bentley Books, Plaintiffs show that they were entitled to profits. When Plaintiffs requested the payment of those profits, Bentley did not pay them. This evidence is sufficient to create a genuine issue of material fact as to whether Bentley knew of or appreciated the benefit conferred by Plaintiffs. Thus, Bentley is not entitled to judgment as a matter of law on the quantum meruit claim.
The Court next examines whether the Trust is entitled to summary judgment on the quantum meruit claim. Unlike the evidence Plaintiffs presented for Bentley, Plaintiffs have not shown that they conferred any benefit on the Trust. While Plaintiffs have shown that the cash revenues from each project were received by Bentley for distribution under the Funding Agreement, the same is not true for the Trust. Defendants have pointed to the lack of evidence showing that the Trust received any payments from the projects. And indeed, although Plaintiffs have stated that the Trust was the only member of
Defendants also argue that Plaintiffs' quantum meruit claim against Bentley is time barred. Defendants argue that Plaintiffs' quantum meruit claim began accruing when the cash revenues for each project were distributed under the Funding Agreement. As a result, Defendants assert that Plaintiffs' quantum meruit claim for profits under Weibel-RBND, Morley SWAT, Shorefox, Grand Elk, MCFD, and SWAT 15 are barred by the statute of limitations because they closed more than three years before Plaintiffs filed this action on August 17, 2010. Plaintiffs respond, arguing that the cause of action did not begin to accrue until much later, when they demanded profits from Defendants.
Under Kansas law, quantum meruit claims are subject to a three-year statute of limitations.
Here, Plaintiffs have presented evidence to show that Bentley agreed to hold Plaintiffs' profits for future Overhead Costs. The Bentley Books, which were sent to Defendants, showed that Plaintiffs were receiving profits on each of the projects in dispute and that those amounts were allocated to reduce Overhead Cost. Plaintiffs have further shown that the Parties met to discuss the finances on several occasions and e-mails were exchanged that discussed the amount of Plaintiffs' profit that Defendants held for Plaintiffs. While Defendants dispute these facts, Plaintiffs' evidence is sufficient to create a genuine issue of material fact as to whether an agreement to hold funds existed. If the agreement existed, Bentley's retention of the benefits did not become unjust until Plaintiffs requested the return of their profits. Plaintiffs made their request in November 2009. Plaintiff filed this action less than three years after that date. Thus, the Court cannot find that as a matter of law Plaintiffs' quantum meruit claim against Bentley is barred by the statute of limitations.
The Court grants Defendants summary judgment on some of Plaintiffs' claims.
