Fifth Third Bank v. Gulf Coast Farms, LLC

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 14a0546n.06
No. 13-6184
FILED
UNITED STATES COURT OF APPEALS Jul 23, 2014
FOR THE SIXTH CIRCUIT DEBORAH S. HUNT, Clerk
FIFTH THIRD BANK, )
)
Plaintiff-Appellee, )
)
v. ) ON APPEAL FROM THE UNITED
) STATES DISTRICT COURT FOR
GULF COAST FARMS, LLC, and GULF ) THE EASTERN DISTRICT OF
COAST FARMS BLOODSTOCK, LP, ) KENTUCKY
)
Defendants-Appellants. )
)
)
)
)
)
BEFORE: BOGGS and CLAY, Circuit Judges; and COHN, Senior District Judge.*
AVERN COHN, Senior District Judge. This is a case about a horse; more specifically
about the right to a share in a horse. Plaintiff Fifth Third Bank (“Fifth Third”) filed a declaratory
judgment action seeking the right to $220,000 currently deposited with the district court as the
proceeds from the sale of a share of a thoroughbred stallion, Distorted Humor. As will be
explained, a limited liability company and a partnership dispute the ownership of the share.
*
The Honorable Avern Cohn, Senior United States District Judge for the Eastern District of
Michigan, sitting by designation.
In 2011, a state court ordered Defendant Gulf Coast Farms, LLC (“the LLC”) to sell all
of the horses and shares in horse syndicates that it owned and give to Fifth Third all of the net
proceeds
from the sales. The essential issue before the district court was whether Fractional Interest No.
49 in Distorted Humor (“the Share”) was owned by the LLC or by Defendant Gulf Coast Farms
Bloodstock, LP (“the Partnership”). If the LLC owned the Share, Fifth Third was entitled to the
proceeds.
After a thorough review of the evidence, the district court concluded that the LLC owned
the Share and granted summary judgment to Fifth Third. We agree and AFFIRM.
I.
A.
It is first important to note that the principals of the LLC and the Partnership overlap.
The members of the LLC are: Lance K. Robinson, Gerald F. Bailey, Jefferson T. Dunford,
Jeffrey Collett, Gary W. Millet, and Cypress General Partners, Inc. (“Cypress”). Cypress is
owned by Robinson, Bailey, Dunford, and Collett. The partners in the Partnership are: Cypress,
Robinson, and Bailey.
In 2003, the Partnership purchased the Share from WinStar Farms (“WinStar”), the
syndicate manager of the Distorted Humor syndicate. At the time, the stallion at was located at
WinStar’s farm in Woodford County, Kentucky. The purchase agreement gave WinStar a right
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of first refusal upon a subsequent sale of the Share. The Partnership dissolved in 2004 when one
partner withdrew. At that time, the remaining partners formed the LLC.
The events leading to this dispute began in 2009 and 2010 when Fifth Third loaned the
LLC approximately $15 million dollars in two loans. The LLC pledged the Share and other
assets as collateral for these loans. In a 2009 Loan and Security Agreement, the LLC granted
Fifth Third a security interest in its rights and interests in “stallions . . . stallion syndicate
agreements, fractional interests in stallions and stallion shares . . . .” In a 2010 Loan and
Security Agreement, the LLC similarly granted a security interest in “stallions . . . stallion
syndicate agreements . . . stallion shares and/or fractional interest(s) in any of the
foregoing . . . . ” At the time of the loans, the Share was the most valuable asset included on the
collateral provided by the LLC, valued at $2,750,000.
In 2011, the LLC defaulted on the loans. Following default, Fifth Third sued the LLC in
state court for breach of contract. Fifth Third Bank v. Gulf Coast Farms, L.L.C., et al., No. 11-
CI-88 (Fayette Cir. Ct.). Fifth Third also sued the individual members of the LLC—Robinson,
Bailey, Dunford, Collett, and Millet— claiming that they were guarantors of the loans and in turn
breached their obligations. As noted above, the state court granted Fifth Third relief and ordered
that the proceeds from the sale of each stallion share owned by the LLC be paid directly to Fifth
Third. The state court order was entered on August 24, 2011.
Also in 2011, the Partnership attempted to sell the Share to a third party. WinStar
exercised its right of first refusal and purchased the Share. The proceeds from the sale were
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$220,000. As the sale to Winstar was nearing completion, it was discovered that WinStar’s
records showed that the Partnership, not the LLC, owned the Share.
B.
After the sale to WinStar, Fifth Third filed this declaratory judgment action in state court,
seeking a declaration as to whether the LLC or the Partnership owned the Share in 2009 and
2010 when the loan transactions took place. Fifth Third alleged that the LLC and its agents
represented to it on multiple occasions that the LLC owned the Share and that Fifth Third relied
on these representations in extending the loans to the LLC. Fifth Third also sued WinStar,
seeking an order requiring that WinStar1 turn over the proceeds from the sale. The defendants
removed the case to federal court on the grounds of diversity jurisdiction.
The Partnership filed a counterclaim against Fifth Third, claiming that Fifth Third
tortiously interfered in the Partnership’s contractual relationship with WinStar regarding the sale
of the Share. The Partnership also alleged a claim for conversion.
Eventually, the LLC filed a motion for summary judgment on the grounds that there was
no genuine issue of material fact that the Partnership, not the LLC, owned the Share. The district
court denied the motion, finding that Fifth Third had carried its burden to produce evidence
which, at that point, demonstrated a genuine issue of fact as to the ownership of the Share.
1
WinStar was later dismissed upon depositing the proceeds of the sale with the Clerk of the
Court.
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After additional discovery, the Partnership and Fifth Third filed cross motions for
summary judgment on the issue of ownership. The district court concluded that the record
displayed no genuine issue of material fact that the LLC, not the Partnership, owned the Share.
Accordingly, the district court granted Fifth Third’s motion and denied the Partnership’s motion.
The district court also dismissed Fifth Third’s claims against the individual defendants and
Cypress as well as the Partnership’s counterclaim.
II.
The grant of a motion for summary judgment is reviewed de novo. Chapman v. UAW
Local 1005, 670 F.3d 677, 680 (6th Cir. 2012) (en banc). Summary judgment is appropriate
when “the movant shows that there is no genuine dispute as to any material fact and the movant
is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). We must consider “whether
the evidence presents a sufficient disagreement to require submission to a jury or whether it is so
one-sided that one party must prevail as a matter of law.” Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 251–52, (1986). In determining whether there is a “genuine issue for trial,” we
interpret the facts and draw all reasonable inferences therefrom in favor of the nonmoving party.
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
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III.
A.
The parties agree that the issue of ownership of the Share is governed by Kentucky law.
United States v. 5854 N. Kenmore, 762 F. Supp. 204, 209 (N.D. Ill. 1991) (citing United States v.
Certain Real Prop., 910 F.2d 343 (6th Cir. 1990)) (holding that, with respect to civil forfeiture
actions, “property issues concerning ownership are governed by the laws of the state in which the
property is located.”). Under Kentucky law, ownership of property is determined from “all the
factors involved” including “the intent of the parties to a particular transaction.” McKenzie v.
Oliver, 571 S.W.2d 102, 105 (Ky. Ct. App. 1978).
B.
The district court conducted a complete review of the record and concluded that the
evidence pointed to only one conclusion over which reasonable minds would not disagree—that
the LLC owned the Share. We agree. What follows is some, but not all, of the evidence of
ownership that undisputedly shows that the LLC owned the Share.
First, the deposition testimony of Jefferson T. Dunford (“Dunford”), a principal in both
the LLC and the Partnership, provides significant evidence of the LLC’s ownership. Dunford, a
certified public accountant, testified that in 2004, the partners agreed to transfer their assets to
the newly formed LLC. Dunford testified that this was the partners’ “understanding when we
moved everything from [the Partnership] out and made the distributions to the partners. Then
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capital and everything to recapitalize LLC came in with . . . the percentages the way they are
shown.” In addition, Dunford stated, “[w]e did a distribution out of [the Partnership] to
individuals . . . . [T]he individuals got a distribution of their ownership out of there and then . . .
contributed capital to the new entities. . . . I am not aware of any . . . document that shows any
kind of transfer of ownership because that is not what we did. We did—we did a transfer of
ownership there.”
Dunford’s testimony is consistent with actions he took in 2004 when he prepared and
filed a tax return on behalf of the Partnership. He marked the return as “Final Return.” The
Form 1065 indicates that the Partnership did not hold any stallion shares at the end of 2004, nor
did it hold any assets. The Partnership did not file any tax return after 2004 even though the
Share generated income. Dunford testified that, at the time he filed the return, he “thought
everything was distributed out of the company and that it was a final return and that there was
nothing left in [the Partnership]. It wasn’t until later that I came to understand that we had kept
one stallion share in there.” Dunford testified, “I just was under the assumption . . . we had
started a new entity and everything was moving over and everything was out of the other entity.”
Dunford also prepared the LLC’s tax returns for the years 2005 to 2012. He further testified that
for these years, all income produced from ownership in the Share was reported on the LLC’s tax
returns. Finally, Dunford testified that from 2004 on, checks representing income from the Share
would have been deposited into the LLC’s account. Moreover, the LLC, not the Partnership,
purchased insurance policies covering the Share and was the named insured on the policies.
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On the subject of insurance, Dunford’s testimony is confirmed by representations made
in a 2010 lawsuit filed against the Partnership, the LLC, and others by Fortuna Insurance
Services seeking unpaid insurance premiums. Fortuna Ins. Servs., LLC v. Gulf Coast Farms,
LLC, et al., No. 10-CI-7222 (Fayette Cir. Ct.). Fortuna was pending at the same time as this
case. In the Fortuna action, the LLC and the Partnership consistently maintained that the
Partnership could not be liable for the unpaid premiums because it was “the defunct predecessor
entity” to the LLC and had been dissolved and “inactive since 2004.” The Partnership and the
LLC owners admitted that the LLC purchased certain policies from Fortuna between May 2008
and November 2010 but denied that the Partnership was ever obligated to pay any premiums
because it was “out of business when each of the listed policies was issued.” The LLC and
Partnership owners asserted an affirmative defense that Fortuna was “precluded from recovery
against [the Partnership] because that entity ceased operation in 2004 and is a dissolved, defunct
entity.” Indeed, the Partnership and the LLC moved to dismiss the Fortuna case, stating that the
Partnership is “a defunct limited partnership, which was succeeded” by the LLC and that, at the
time of the Partnership’s dissolution, all of its business “was taken over by the LLC, and [the
LLC] is the only active entity that has done business with [Fortuna]. . . [the Partnership] could
not have done business with Fortuna from May 2008 through November 2010 . . . because [the
Partnership] ceased to exist in 2004.” Counsel for the Partnership and the LLC in the Fortuna
matter, also counsel in this case, went so far as to caution Fortuna’s counsel that Fortuna did not
even have “a good faith basis for joining” the Partnership in the matter because it “is a
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predecessor entity which was replaced in 2004 by the formation of [the LLC]. It has been
dissolved and no longer exists.”2
Further, during the negotiation process for the Fifth Third loans, Dunford consistently
represented that the LLC owned the Share and that the Share would serve as collateral for the
loans. For example, on October 2, 2009, via e-mail, Chad Lashbrook (“Lashbrook”) of Fifth
Third asked Dunford for a “current horse collateral list.” Dunford responded on October 15,
2009 with various lists all of which are captioned “GULF COAST FARMS, LLC, Taylor Made
Farm Appraisals September 2009.” The first list provides the names and values for each of the
LLC’s stallion shares. The first share on that list is the Share in Distorted Humor. The list states
that the Share was acquired in January 2003 and has a fair market value of $2,750,000. Dunford
testified that, at this time, he believed that the LLC owned the Share.
On April 18, 2010, Dunford e-mailed Lashbrook a list of entities related to the LLC and
an “Updated Horse Listing – broken out by entity.” The Partnership is not included on the
related-entity list. The attached horse lists are again captioned “GULF COAST FARMS LLC
Taylor Made Farm Appraisals December 2009.” The Share appears first on the list. Dunford
2
In an attempt to overcome these telling statements, the Partnership filed an amended answer in
Fortuna after Fifth Third filed its motion for summary judgment in this case. In the amended
answer, the Partnership asserted that it was dissolved but had been “revived.” It further asserted
that while the Partnership continued to own some assets after its dissolution and the creation of
the LLC, it still was not liable in that action. As the district court correctly concluded, the
amended answer is not evidence of what the Partnership and the LLC intended in 2004 when the
Partnership was dissolved or in 2009 and 2010 when the loan agreements were executed.
Moreover, the Partnership and the LLC cannot avoid summary judgment by submitting evidence
that contradicts their prior assertions. See Penny v. United Parcel Post, 128 F.3d 408, 415 (6th
Cir. 1997).
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testified that at the time of this e-mail, he believed that the LLC owned the Share. Months later,
on October 6, 2010, Dunford sent another set of horse lists to David Verville and Joseph Escola
of Fifth Third. Each list is captioned, “GULF COAST FARMS, LLC Horse List September
2010.” Again, the Share is listed as the first of such shares. This time, however, Dunford stated
in an e-mail to Fifth Third, “I have tried hard to make this accurate . . . , but I go off of lists
available to me since I’m not around the horses – so we’ll hope it’s accurate.” Nevertheless,
despite any perceived uncertainty in his statement, Dunford testified that at the time he
forwarded this list, he believed that the LLC owned the Share.
Additional evidence that the LLC owned the Share is found in the record of the state
court case in which Fifth Third sued the LLC for defaulting on the loans. In a response to Fifth
Third’s motion to appoint a receiver in the case, the LLC and the Partnership owners stated that
the LLC currently owns “all or part of five thoroughbred horses and eleven stallion shares.” The
LLC and Partnership owners also asserted that the stallion shares owned by the LLC were
accurately depicted in a chart attached to the pleading. That chart is captioned “GULF COAST
FARMS LLC Thoroughbred Stallion Shares.” It sets forth the eleven stallion shares owned by
the LLC. The first share listed is the Share.
Communications between counsel for the Partnership and the LLC and counsel for Fifth
Third regarding the state court case also support a finding that the LLC owns the Share. One
example is seen in a January 5, 2011 letter to Fifth Third’s counsel that he was enclosing
“another copy of the Gulf Coast Farms, LLC Horse List September 2010.” The list is captioned
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“GULF COAST FARMS LLC Horse List September 2010.” The Share is the first share on the
list. Counsel for the Partnership and the LLC also informed Fifth Third that two stallion shares
had been sold. These two shares – Northern Afleet and Afleet Alex – are marked “gone” on the
list. There is no such indication for the Share.3
C.
1.
Neither the LLC nor the Partnership disputes the evidence detailed above. Rather, the
LLC and the Partnership dispute the conclusions that can be drawn from the evidence and they
put forth other facts that they say call into question the district court’s finding. Neither tactic
carries the day.
As they did before the district court, the LLC and the Partnership point to statements in
Dunford’s testimony that they believe shows a genuine dispute of fact as to whether Dunford
actually told Fifth Third that the LLC owned the Share. They note that Fifth Third requested
only a list of horse interests owned by “Gulf Coast entities,” which they say could mean both the
LLC and the Partnership. This argument is unavailing. In an October 2, 2009 email, Lashbrook
at Fifth Third clearly requested a “current horse collateral list.” Fifth Third’s request cannot
reasonably be interpreted as requesting information regarding shares owned by anyone other than
3
Fifth Third argues that these statements in the state court action and communications between
counsel implicate the doctrine of equitable estoppel and are binding as judicial admissions. The
district court did not address this argument. We likewise decline to address the argument
because it is not necessary for resolution of the appeal.
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the LLC. Moreover, to establish ownership, the focus is not on what Fifth Third knew; it is what
the LLC and the Partnership intended as to ownership.
In addition, the LLC and the Partnership make much of excerpts from Dunford’s
deposition testimony in which he appeared to indicate that the Share was still owned by the
Partnership. Dunford’s statements relate to the fact that WinStar’s records still showed that the
Partnership owned the Share. The sum and substance of Dunford’s testimony is that he believed,
and the documentary evidence supports, that the LLC owned the Share upon the dissolution of
the Partnership in 2004.
The LLC and the Partnership relatedly argue that the record contains evidence that Fifth
Third did not believe that the LLC owned the Share or that the Share would serve as collateral.
This argument lacks merit. Even assuming that the LLC and the Partnership are correct, and
putting aside the district court’s conclusion that the cited evidence does not indicate that Fifth
Third knew that the LLC did not own the Share, it is irrelevant. As the district court aptly
stated: “The question is what the Partnership and the LLC believed. There can be no question
that the principals of both understood and intended that the LLC owned the Share.” Moreover,
the LLC’s and the Partnership’s argument that Fifth Third should have further investigated
ownership is not well taken. Again, it is not relevant what Fifth Third did or should have done;
the question of ownership is between the LLC and the Partnership and is established through
their many representations of ownership.
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Finally, the LLC and the Partnership note that WinStar’s records show that the
Partnership owned the Share, not the LLC. This fact is neither material to nor dispositive of the
issue of ownership. Instead, ownership is dependent upon what the LLC and the Partnership
intended as to ownership, not what WinStar’s records may show.
2.
The Partnership and the LLC further argue that the district court erred in rejecting their
argument that any transfer of the Share to the LLC was invalid because it violated the right of
first refusal provision in the Distorted Humor Syndicate Agreement found under section 11(b) of
the Syndicate Agreement. Section (b)(1) provides in pertinent part:
Fractional Interests . . . may be sold, transferred, assigned, alienated, or disposed of
privately . . . only as follows:
(1) The [Syndicate] Members shall have the right of first refusal for the purchase
of any Fractional Interest(s) . . . which any Member . . . may at any time desire to
sell, subject to the provisions of subsection 11(e) and 11(f). Accordingly, any
Member . . . who desires to sell or dispose of one or more Fractional Interest(s) . .
. shall, upon receipt of a bona fide offer for such Fractional Interest(s) . . . which
he desires to accept, notify the Syndicate Manager in writing of the price, terms
and conditions at which he will sell such Fractional Interest(s) . . . and the name
of the offeror.
The Syndicate Agreement goes on to state that Winstar must notify all the other members of the
“name of the individual wishing to sell his Fractional Interest(s) . . . the name of the offeror, the
amount of such offer and the terms and conditions thereof.” Each of the syndicate members then
has seven days “to notify [WinStar] whether he elects to purchase such Fractional
Interest(s) . . . . Such election to purchase shall be at the price and subject to the same terms and
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conditions as the bona fide offer received by the selling Member.” If no member “elects to
purchase the available Fractional Interest(s) . . . [WinStar] shall have the exclusive right and
option . . . to purchase, at the specified price and upon the specified terms, any or all of such
available unpurchased Fractional Interests .” “If neither [WinStar] nor any [Syndicate] Members
elects to purchase” the share from the member “who desires to sell the same,” then the share is
“freely alienable.”
From the above, the right of first refusal ripens when (1) the owner has a desire to sell an
interest, (2) there is a bona fide offer to purchase that interest, (3) the owner of the interest wants
to accept the offer, and (4) either a syndicate member or the syndicate manager wants to
purchase the interest on the same terms as the offer.
Fifth Third argues that the district court correctly found that the Partnership’s transfer of
the share to the LLC did not trigger the right of first refusal provisions because the entities have
common ownership. We agree. The district court, relying on Evans v. SC Southfield Twelve
Assoc., LLC, 208 F. App’x 403 (6th Cir. 2006), concluded that a right of first refusal was not
triggered. In Evans, a panel of this court held that a right of first refusal provision in a lease was
not triggered when the landlords transferred their interest in the property to an LLC owned by the
landlords. The panel found that the right of first refusal was triggered only on two conditions.
First, the landlord must “desire to sell” the property and, second, the landlord must have received
a “bona fide written offer” to purchase the property. Id. at 406. The panel agreed with the
district court that the landlord had no “desire to sell” the property under Michigan law because
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the transfer was not supported by valuable consideration. Id. at 407. The panel concluded that it
was “beyond dispute that the proposed transfer of interest from the Evans to Talrae [(the LLC0]
was not the result of arms’ length dealing and would not result in any real change in control of
the property. Under these circumstances, we agree that the right of first refusal was not
triggered.” Id. at 408.
The same is true of the transfer of the Share from the Partnership to the LLC. There was
no meaningful change in control of the property. There was no desire to sell, no bona fide offer
or purchase, nor were there any terms of sale of any kind. Simply put, the transfer did not invoke
the right of first refusal provision. This conclusion is consistent with decisions from other
jurisdictions. See, e.g., Creque v. Texaco Antilles Ltd., 409 F.3d 150, 155 (3d Cir. 2005)
(“A right of first refusal to purchase real property is not triggered by the mere conveyance of that
property. Only when the conveyance is marked by arms’ length dealing and a change in control
of the property may that right be exercised.”); McGuire v. Lowery, 2 P.3d 527, 532 (Wyo. 2000)
(holding that “for a transaction to constitute a ‘sale’ and trigger a first right of refusal, it must
involve an arms-length transaction resulting in an actual change in control of the burdened
property rather than simply moving it from the individual owners to an entity controlled by
them.”); Wallasey Tenants Ass’n v. Varner, 892 A.2d 1135, 1141-42 (D.C. 2006) (holding that
transfer of property from an individual to a corporation wholly owned by the same individual
was not a sale triggering a right of first refusal); Kroehnke v. Zimmerman, 467 P.2d 265, 267
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(Colo. 1970) (transfer of interest in real property from individual owners to corporation in which
they owned all the stock did not trigger right of first refusal).
3.
Overall, we are satisfied from a de novo review of the record that there is no genuine
issue of material fact as to whether the LLC or the Partnership owned the Share. The record
evidence leads to only one reasonable conclusion—the LLC owned the Share. It owned the
Share as of 2004 when the Partnership dissolved and its assets, which included the Share, were
transferred to the LLC. The LLC owned the Share at the time it obtained loans from Fifth Third
and made representations of that ownership. In accordance with the state court order, Fifth Third
is entitled to the proceeds from the sale of the Share.
The district court correctly granted summary judgment to Fifth Third because the LLC
owned the Share at all times relevant to this case. Additionally, the Partnership’s state law
claims for conversion and tortious interference were properly dismissed as the claims were
premised on the Partnership owning the Share.
IV.
For the reasons stated above, the district court is AFFIRMED.
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