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Hidden Hills Management, LLC v. Amtax Holdings 114, LLC

United States District Court, W.D. Washington, Tacoma

May 2, 2019

HIDDEN HILLS MANAGEMENT, LLC, and 334th PLACE 2001, LLC Plaintiffs,
AMTAX HOLDINGS 114, LLC, et al., Defendants.



         THIS MATTER is before the Court on the following dispositive motions: Plaintiff 334thPlace 2001's Motion for Summary Judgment [Dkt. #52]; Defendant Amtax Holdings' Motion for Summary Judgment [Dkt. # 62] and Plaintiff Hidden Hills Management's (HHM's) Cross Motion for Summary Judgment [Dkt. # 71].

         The fact-intensive case involves two related limited partnerships which own two low income housing projects: Hidden Hills (an apartment complex in University Place, purchased in 2002) and Parkway (an apartment complex in Federal Way, purchased in 2003). HHM is the general partner of the Hidden Hills Limited Partnership. 334th Place is the general partner of the Parkway Apartments Limited Partnership. Catherine Tamaro owns and manages both general partners, and manages both apartment complexes.

         Defendant AMTAX[1] is the limited partner in each partnership. Alden Torch LLC[2] owns and manages AMTAX. AMTAX invested in the partnerships to harvest the Low-Income Housing Tax Credits (LIHTIC) associated with operating such projects. The two LPAs are functionally identical. Each grants to the general partner an option to purchase the limited partner's interest subject project at the end of the IRS “compliance[3] period”:

Subject to compliance with Section 42 of the Code and the rules of the agency, upon completion of the Compliance Period, the Managing General Partner shall have the option (the "Option") to purchase the interest of the Investor Limited Partner in the real estate, fixtures and personal property of the Partnership (the "Interest") for a period of twenty-four (24) months. The Managing General Partner may exercise the Option upon written notice to the Investor Limited Partner at any time after the end of the Compliance Period (the "Option Period"). In the event the Managing General Partner exercises the Option, it must pay to the Investor Limited Partner the Option Price (as defined herein) in cash.

[Paragraph 7.4.J (Parkway agreement), Pritchard Decl. Dkt. # 53, Ex. A at 11(emphasis added)].

         Under the LPAs, Tamaro operated each complex for the full compliance period, and AMTAX passively benefitted from the tax credits and other tax benefits. Tamaro provided annual audited financial statements to her limited partner. The general partners' efforts to force a purchase of the limited partners' interests (at a favorable, low price), and the limited partners' resistance to selling (and alternative effort to sell at a higher price) is the genesis of these parallel disputes.

         I. BACKGROUND.

         HHM's option to purchase Hidden Hills from AMTAX matured in January 2017, a year before 334th's option to purchase Parkway matured. As those dates approached, the parties began discussing a voluntary sale of each project to the general partner. The Parkway negotiations began earlier, in 2013, but ended (relatively amicably) without an agreement. The partners cooperated on a successful re-finance of Parkway in 2015.

         The partners' informal negotiations for the voluntary sale of AMTAX's interest in Hidden Hills began in 2015. Hidden Hills was and is a more complicated project. It is in the Tacoma Smelter Plume, [4] and its topsoil was confirmed to be contaminated with “elevated” levels of arsenic and lead[5] from the Tacoma Asarco Smelter as early as 1998.

         This topsoil contamination at the heart of the Hidden Hills dispute is not new news to the partners or anyone else. HHM had engaged Environmental Partners (EPI) to perform Phase I Environmental Site Assessment on Hidden Hills in connection with the general partnership's initial purchase of Hidden Hills in 1999-2000, and EPI estimated then that the cost to clean up the contamination would be about $1 million. Because of the contamination, the partnership had difficulty obtaining financing for its purchase. Its lender ultimately required it to place $1.05 million into an interest-bearing environmental escrow account, under an agreement with the “credit enhancer, ” Fannie Mae. [Environmental Escrow Agreement, Pettit Decl. Dkt. # 64-1, Ex. 3 at p. 4]. The parties agreed to use these funds to remediate the property once Ecology determined the required[6] clean-up level. The partnership purchased Hidden Hills for $8.9 million in 2002. HHM claims that price was discounted due to the environmental contamination.

         HHM also agreed to broadly indemnify its limited partner for the presence of hazardous substances on the property:

4. Indemnity, The Indemnitor agrees to indemnify, hold harmless and defend the Company from and against any and all claims, costs, litigation, proceedings, investigations, loss, damage, liability, fine, penalty, assessment or expense, and/or loss, or determent or delay of distributions from Hidden Hills to the Company (collectively referred to as "Environmental Liability") arising from, or as a result of, or relating to, any Hazardous Substance, Hazardous Substance Activity or violation of Environmental Laws or ADA Laws, on the, or adversely affecting the, Property. Defense of the Company by Indemnitor shall be provided by competent counsel of Indemnitor's choice, and the Company shall reasonably cooperate in such defense.

[Environmental Indemnity & ADA Compliance Agreement, Pettit Decl. Dkt. # 64-1, Ex. 2 at p. 3].

         HHM's attorney during the partnership's initial purchase of Hidden Hills, Robert Sullivan, testifies that this provision “had nothing to do with any diminution of the property value, as that issue was addressed at the time of acquisition by the seller's reduction of the price paid by the partnership. The Indemnity Agreement applies if Ecology requires Amtax to clean-up the property[.]” [Sullivan[7] Dec. Dkt. # 72].

         But Sullivan also concedes that the indemnity's purpose was to shift the risk and cost of any future environmental remediation from the limited to the general partner:

[T]he intent of the Indemnity Agreement was to allocate the financial risk for environmental issues between the general and limited partners. Of specific concern was whether Ecology would require a cleanup, and that the cost of the cleanup might exceed the amount of escrowed funds[.] By requiring the general partner to “indemnify hold harmless and defend” the limited partner against Environmental Liabilities, the Indemnity Agreement shifted this financial risk to the general partner for future clean-up.


         In late 2015, HHM engaged CBRE to appraise Hidden Hills, apparently in preparation for exercising its option. CBRE's February 3, 2016 appraisal acknowledged the contamination but did not it alter its valuation of the project based on it, because it made the “extraordinary assumption” that the Environmental Escrow Account (then about $1.5 million) would cover the cost of any required remediation. [Feb. 3, 2016 CBRE Appraisal, Blake Decl. Dkt. # 63-1, Ex. 6 at p. vii]. CBRE's 2016 appraisal valued Hidden Hills at $13, 800, 000.

         AMTAX claims it did not know HHM had commissioned the 2016 CBRE appraisal, or that it had been completed, until Tamaro sent it a copy in July 2016, five months before the end of the compliance period. [Blake Decl. Dkt. # 63]. Prior to exercising her option (but after receiving and sharing the first CBRE appraisal), Tamaro also engaged EPI to perform an updated Phase I ESA on Hidden Hills. It did so on November 3, 2016 [November 3, 2016 EPI Phase I ESA, Pettit Decl. Dkt. # 64-1, Ex. 8]. EPI's report reflected that it was done in connection with “a re-finance” of the property, acknowledged that the site was “in the plume, ” and recited that it had “elevated” levels of lead and arsenic. It did not quantify those levels and it did not claim that a cleanup was or would be required.

         Around the same time, Tamaro asked CBRE (Todd Henderson) to appraise the property a second time.

         The compliance period ended, and HHM's option matured, on January 1, 2017. Two days later, EPI sent HHM a “Technical Memorandum” as a follow-on to its November 3 Phase I ESA. EPI estimated the cost of a cleanup of the Hidden Hills lead and arsenic contamination at $1.5 -$2.5 million-assuming that remediation was required or desired. [January 3, 2017 EPI Technical Memorandum, Pettit Decl. Dkt. # 64-2, Ex. 10]. HHM provided this document to CBRE for consideration in its second appraisal.

         The same day, AMTAX exercised its own contractual right (subject to the general partner's purchase option) to force the partners to sell Hidden Hills on the open market. [Hidden Hills Partnership Agreement section 7.4.K, Pettit Decl. Dkt. # 64-1, Ex. 1 at 46]. HHM declined, pointing to its option. AMTAX participated in the ensuing appraisal process, but continued to push for such a sale even as the partnership devolved into litigation. It argues that Tamaro falsely claimed to be interested in such a sale.

         CBRE's second, January 30, 2017 appraisal valued the property at $13.0 million. Its value included a reduction of $2.5 million (the high end of the EPI cost estimate), and it did not offset that hypothetical cost by the $1.5 million escrow account balance, because it “understood” that the account “was not transferrable in the event of a sale.” [CBRE January 30, 2017 Appraisal, Pettit Decl. Dkt. # 64-1, Ex. 12 at p. 1-2]. AMTAX claims the Escrow Agreement expressly contemplates a sale.

         HHM formally exercised its option in March 2017. Consistent with the partnership agreement's provisions for determining the Hidden Hills option price, each party chose an appraiser.

         AMTAX selected Andy Noble of Cushman and Wakefield. C&W's April 2017 appraisal of Hidden Hills acknowledged that the property was in the plume, and that it had reviewed EPI's initial Phase I ESA (2001), but it concluded[8] that “the sales of multifamily properties in the subject's general vicinity are not being adversely impacted by the Tacoma Smelter Plume.” Its valuation therefore did not include any deduction for potential environmental remediation costs. C&W appraised the Hidden Hills project at $19.7 million. [April 27, 2017 C&W Appraisal, Blake Decl. Dkt. # 63-1, Ex. 15].

         HHM nominated CBRE's Todd Henderson, who was obviously familiar with the property. Tamaro again provided Henderson EPI's recent Phase I ESA, and its Technical Memorandum. CBRE's June 7, 2017 appraisal valued the property at $14.05 million. [June 7, 2017 CBRE Appraisal, Blake Decl. Dkt. # 63-1, Ex. 19]. Like its January appraisal, CBRE's appraisal reduced the bottom line value by the assumed cost of the hypothetically-required remediation of the property.

         In May, Tamaro had also asked a different CBRE Broker, Tim Flint, to provide a “Broker's Opinion of Value (BOV), ” in connection with her contemplated sale (as opposed to, and presumably after, her forced purchase) of Hidden Hills. [See Pettit Decl. Dkt. # 64-2 at Ex. 18]. One day after CBRE provided HHM its $14.05 million appraisal of Hidden Hills, CBRE provided HHM a BOV opining that Hidden Hills was worth $20.8 - 21.8 million [CBRE's June 8, 2017 BOV, Pettit Decl. Dkt. # 65 at Ex. 21]. The BOV did not address any environmental contamination or remediation.

         On June 19, Tamaro sent AMTAX CBRE's June 7 appraisal, but not CBRE's June 8 BOV, CBRE's January 30, 2017 appraisal, or EPI's January 3, 2017 Technical Memorandum. She explained she was attempting to obtain a new loan for her purchase, and that her “lender will require the owner to implement a remediation plan under Ecology's Voluntary Cleanup Program as a condition of obtaining a new loan.” [Blake Dec. Dkt. # 63 at Ex. 20]. Tamaro also claimed that the C&W appraisal was flawed because it did not factor in the cost of the remediation she claimed her lender would require.

         The partnership agreement provided that if the two appraisers could not agree on the value, they together would nominate a third appraiser to perform a third, independent, final and binding appraisal:

Fair Market Value shall be determined by two independent MAI appraisers: one selected by the Managing General Partner and on by the Investor Limited Partner. If such appraiser are unable to agree on the value, they shall jointly appoint a third independent MAI appraiser whose determination shall be final and binding[.]

[Hidden Hills Partnership Agreement, Pettit Decl. Dkt. # 64-1, Ex. 1 at para. 7.4.J (emphasis added)].

         The first two appraisers did not agree[9] on a value, and they jointly nominated two potential third appraisers, John Campbell of Colliers, and Jeremy Streufert of Kidder Mathews. For reasons that remain unclear, these names were provided to HHM, but not to AMTAX. Tamaro then selected Colliers/Campbell (“first on the list”) to be the third appraiser.

         AMTAX claims Colliers was not aware that its role was to be the third, independent, final appraiser. It is undisputed that Tamaro was Colliers' “point person” on the appraisal- Colliers referred to her as “the client”-and she alone had contact with Colliers. HHM claims AMTAX was free to similarly contact Colliers but did not do so.

         In the summer of 2017, Tamaro again contacted EPI, this time to provide a “more detailed remediation cost estimate” for Hidden Hills. EPI's August 8, 2017 Technical Memorandum estimated the cost to remediate Hidden Hills at roughly $3.75 million, which was apparently calculated by adding a $1.2 million (50%) “contingency” for “unknown or changed conditions” on top of the high end of its prior estimate of $1.5 - 2.5 million. [EPI's August 8, 2017 Technical Memorandum, Pettit Decl. Dkt. # 64-4, Ex. 35, at p. 6]. As with EPI's prior estimates, this new estimate implicitly assumed that the remediation was required, or desired. Tamaro provided this Technical Memorandum to Colliers, but not to AMTAX.

         AMTAX claims it did not know Colliers/Campbell had been selected, or that Tamaro “secretly” appointed the “independent” third appraiser. It claims Tamaro's conduct violated the LPA, which required the two appointed appraisers (not HHM) to select the third, and that she improperly interfered with the appraisal process, particularly by providing EPI's August Technical Memorandum. AMTAX claims and demonstrates ...

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