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

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

July 23, 2019

HIDDEN HILLS MANAGEMENT, LLC, and 334TH PLACE 2001, LLC, Plaintiffs,
v.
AMTAX HOLDINGS 114, LLC, and AMTAX HOLDINGS 169, LLC, Defendants. AMTAX HOLDINGS 114, LLC, AMTAX HOLDINGS 169, LLC, and PARKWAY APARTMENTS, LP Counter-Plaintiffs,
v.
HIDDEN HILLS MANAGEMENT, LLC, and 334TH PLACE 2001, LLC, Counter-Defendants.

          Stoel Rives LLP David R. Goodnight, Rita V. Latsinova, J. Scott Pritchard, Attorneys for Plaintiffs and Counter-Defendants Hidden Hills Management LLC and 334th Place 2001, LLC

          FINDINGS OF FACT AND CONCLUSIONS OF LAW

          THE HONORABLE RONALD B. LEIGHTON JUDGE.

         THIS MATTER came before the Court for a five-day bench trial beginning on June 3, 2019. The parties called five witnesses for live testimony and three witnesses by video deposition. The witnesses who were called and testified at the trial and the exhibits that were offered, admitted into evidence, and considered by the Court are identified in the witness and exhibit lists entered by the Court on June 11, 2019. See Dkt. ##106-07.

         David Goodnight, Rita Latsinova, and Scott Pritchard of Stoel Rives LLP appeared on behalf of Plaintiffs and Counter-Defendants Hidden Hills Management, LLC (“HHM”) and 334th Place 2001, LLC (“334th Place”) (collectively, the “GPs”). Eric Pettit, Craig Bessinger, Grayce Zelphin, and Steven Merriman appeared on behalf of Defendants and Counter-Plaintiffs AMTAX Holdings 114, LLC (“AMTAX 114”) and AMTAX Holdings 169, LLC (“AMTAX 169”) (collectively, the “LPs” or “AMTAX”).

         Based on the evidence and testimony presented at trial, the Court makes the following findings of fact and conclusions of law.

         I. FINDINGS OF FACT

         A. Background

         1. This case involves two related Washington limited partnerships that own and operate low-income apartment complexes: Hidden Hills 2001, LP (“Hidden Hills”) and Parkway Apartments LP (“Parkway”). Hidden Hills owns the Hidden Hills apartment complex located at 3313 72nd Ct. W, University Place, WA. Parkway owns the Parkway apartment complex located at 2206 SW 334th Place, Federal Way, WA.

         2. Plaintiffs HHM and 334th Place are the general partners of Hidden Hills and Parkway, respectively. Catherine Tamaro is the principal of each GP and has managed the partnerships for 17 years. Ms. Tamaro first purchased a low-income housing property in 1996, the Westside Estates Apartments, a 448-unit property located on N. Pearl Street in Tacoma. 6/3/19 Trial Tr. at 71 (Tamaro). She currently owns and manages nine complexes totaling over 1, 300 affordable housing units in south King County and in Pierce County. Id. at 72. Ms. Tamaro has served as a general partner with limited partner investors in 15 properties since 1996 and has worked in the low-income housing tax credit (“LIHTC”) industry for 23 years. Id. at 71.

         3. As LIHTC properties, Hidden Hills and Parkway are regulated by a number of federal and state agencies. Id. at 75. Ms. Tamaro has never been accused of a breach of any duties by any regulatory agency in connection with her work as a general partner in the LIHTC industry. Id. at 88.

         4. Defendants AMTAX 114 and AMTAX 169 are the LPs of Hidden Hills and Parkway. AMTAX's principal is Alden Torch Financial LLC (“Alden Torch”), a manager of limited partner investments in LIHTC funds. The firm is based in Denver, and it is the largest affordable housing asset management firm in the industry, with between 800 and 900 partnership interests under management. 6/5/19 Trial Tr. at 134 (Blake). Alden Torch purchased the right to manage the interests of the LPs of Parkway and Hidden Hills in the secondary market in 2011 and was not involved in the original structuring or financing of these projects. 6/3/19 Trial Tr. at 100-01 (Tamaro). AMTAX's management changed frequently throughout the years. 6/6/19 Trial Tr. at 29 (Blake).

         5. Ms. Tamaro had a good working relationship with the pre-Alden Torch managers of AMTAX's interests in the partnerships. 6/3/19 Trial Tr. at 101 (Tamaro). She has worked as a general partner with a number of limited partners during her 23 years in the LIHTC industry, and this litigation is the first time a limited partner has ever sought her removal as general partner or accused her of breaching any contract or duty to the partnership or limited partner. Id. at 88-89. The Court finds that Ms. Tamaro was a credible witness in her testimony during trial regarding the GPs' actions in both Hidden Hills and Parkway and the other matters to which she testified.

         6. AMTAX invested in these partnerships in 2002 to harvest tax credits provided by the federal government to encourage private investment in low-income housing programs. 6/3/19 Trial Tr. at 73 (Tamaro) (“They are all structured so the investor has a large ownership share in order to maximize the amount of tax credits and depreciation that flow to that investor.”). Each partnership has what is known as a 15-year “Compliance Period, ” during which the tax credits are earned and retained. Trial Exs. 2 and 3 § 7.4.J; 6/3/19 Trial Tr. at 74 (Tamaro). For Hidden Hills, the Compliance Period ended on December 31, 2016. 6/5/19 Trial Tr. at 138 (Blake). For Parkway, the Compliance Period ended on December 31, 2017. 6/4/19 Trial Tr. at 4 (Tamaro).

         7. A central responsibility of the GPs under Hidden Hills and Parkway's limited partnership agreements (“LPAs”) is to ensure that the underlying properties remained in compliance with the federal tax code so that AMTAX could continue to reap the tax benefits during the Compliance Period. 6/3/19 Trial Tr. at 74 (Tamaro). Ms. Tamaro has always kept of all her projects in compliance such that the tax credits were fully delivered and were never subject to recapture. Id. at 81. There is no dispute that the GPs delivered all of the tax credits to which the LPs were entitled. Id. at 89 (“The amount that was promised and the schedule that was promised were delivered.”).

         8. In Hidden Hills, over the 15-year Compliance Period, AMTAX 114 received over $8.1 million in federal tax credits and write-offs, in exchange for an upfront investment of $3.6 million. Id. at 90-93. In Parkway, AMTAX 169 contributed $2.8 million in equity and received over $7.2 million in federal tax credits and write-offs over during the 15-year Compliance Period. Id. Ms. Tamaro calculated these credit deliveries and write-offs based on the partnerships' tax returns, and the contributions provided by the LPs are set forth in the respective LPAs. 6/4/19 Trial Tr. at 52-53 (Tamaro).

         B. The Options

         9. For a two-year period after the Compliance Period ends, the GPs have a right to purchase the LPs' interest in the partnerships pursuant to Section 7.4.J. of each LPA. Trial Exs. 2, 3 § 7.4.J. The LPs have no such right to purchase the GPs' interest. 6/5/19 Trial Tr. at 143 (Blake). The provision in each LPA states:

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.

         Trial Exs. 2 and 3.

         10. These options are common in LIHTC partnerships. 6/3/19 Trial Tr. at 93-94 (Tamaro). Ms. Tamaro has exercised similar options as the general partner in three Washington partnerships and five Nevada partnerships, without incident. Id. at 94 (Tamaro). Two of her Nevada LIHTC partnerships had AMTAX entities as limited partners. The AMTAX limited partners there did not resist the option exercise. Id. at 79-80. The purchase option in Hidden Hills and Parkway was a key component of each deal, and for Ms. Tamaro, “one of the reasons [she] did business with AMTAX.” Id. at 94-95. Ms. Tamaro wants to continue owning the Hidden Hills and Parkway apartment complexes and continue running them as low-income housing properties after AMTAX's exit. Id.

         11. According to Chris Blake, Alden Torch's Director of Capital Transactions and AMTAX's designated representative, AMTAX had no interest in owning the properties, and instead wanted to sell the properties on the market. 6/5/19 Trial Tr. at 151 (Blake). Under Section 7.4.K of the LPAs, AMTAX has a right to sell its interest in the partnerships on the market, but it has no right to sell the properties. Trial Exs. 2 and 3 § 7.4.K. The only method by which AMTAX could sell the properties would be to remove the GP under Section 4.5 of the LPAs. 6/3/19 Trial Tr. at 116 (Tamaro). The record contains multiple examples of AMTAX's efforts to force the GP to sell the Hidden Hills property on the market prior to AMTAX's purported removal of the GP. See, e.g., Trial Exs. 176, A-110, and A-212. Ms. Tamaro resisted these efforts, and instead exercised her contractual option right to purchase the LPs interest in both Hidden Hills and Parkway.

         12. The Option Price under the LPAs is calculated pursuant to an appraisal process used to determine the underlying properties' fair market value (“FMV”). First, under Section 7.4.J of the LPAs, “Fair Market Value shall be determined by two independent MAI appraisers: one selected by the Managing General Partner and one by the Investor Limited Partner. If such appraisers are unable to agree on the value, they shall jointly appoint a third independent MAI appraiser whose determination shall be final and binding.” Trial Exs. 2-3 § 7.4.J.

         13. Second, after FMV has been determined, the parties utilize a formula they call a distribution “waterfall” under Section 6.2.B of the LPAs to determine the Option Price. Trial Exs. 2 and 3 § 6.2.B. The waterfall models a hypothetical sale, starting with FMV and then proceeding to subtract outstanding bills, debts, and liabilities of the partnerships; asset management fees to the LP; a priority distribution to the LP; any outstanding deferred developer fee; subordinated loans to the GP; a capital account adjustment; another priority distribution to the LP, and lastly the parties split any outstanding balance. 6/3/19 Trial Tr. at 96-97 (Tamaro).

         C. 2018 Audited Financial Statements

         14. Another role of the general partners in LIHTC partnerships is to provide information regarding the partnerships and the projects to the limited partners. The general partners keep the partnerships' books and records, arrange for audits of the partnership's financial statements on a yearly basis, and comply with any reporting requirements by HUD or other regulatory agencies. Id. at 86. Ms. Tamaro provided audited financial statements to AMTAX for both Hidden Hills and Parkway every year from the partnerships' inception in 2002 until 2019, when testimony by AMTAX's expert in this case caused the auditor for Hidden Hills and Parkway, Laura Lindal, to disengage. Trial Exs. 153 and 154; Trial Tr. 6/3/19 at 86-87 (Tamaro); 6/5/19 Trial Tr. at 103-04 (Lindal).

         15. Ms. Lindal is a sole proprietor CPA who served as the independent auditor for Parkway and Hidden Hills since 2016. 6/5/19 Trial Tr. at 64 (Lindal). She has written and taught courses on a variety of audit-related subjects, including audits of HUD programs, and has been auditing LIHTC properties since 2001. Id. at 65-66. She testified as to the partnerships' audit process and her opinion that the audited financial statements fairly and accurately present the financial picture of the partnerships in all respects. Id. at 68.

         16. According to Ms. Lindal, none of the fees or expenses incurred by the GP in Parkway were improper. Id. at 84-87. She also testified that Ms. Tamaro helped gather all the information needed to conduct the audits, was cooperative in all respects, and never refused to provide her with information; Ms. Lindal never had a feeling that Ms. Tamaro was withholding any information from her. Id. at 78-79. Ms. Lindal never had any prior relationship with Ms. Tamaro before being retained as the auditor for both Parkway and Hidden Hills. Id. at 79-80.

         17. In 2019, for the first time, Ms. Tamaro was unable to deliver timely finalized audited financial statements to AMTAX. AMTAX contends that because the audited financial statements were overdue under Section 12.1 of each LPA, it was entitled to remove Ms. Tamaro from each partnership, and provided notice to that effect during trial. Trial Exs. A-311 and A-312. After an amendment to Parkway's LPA in 2007, the audited financial statements were due to AMTAX on February 15 of each year. See Trial Ex. 31. Hidden Hills' audited financial statements were due on March 15 of each year. Trial Ex. 2 § 12.1. AMTAX never previously enforced either deadline, until seeking the GPs' removal after the option was exercised. See, e.g., Trial Ex. 166 (stating that Parkway's audited financial statements were due on March 17, 2019); 6/5/19 Trial Tr. at 131 (Blake testifying that he could not point to a single document or instance over the 15-year Compliance Period in which the LP complained about the timeliness of the audited financial statements).

         18. Ms. Lindal disengaged as the partnerships' auditor in May 2019, shortly before trial in this case. See Trial Exs. 153 and 154. She disengaged because AMTAX's expert, Jon Krabbenschmidt, testified during his deposition that he believed Parkway's audited financial statements were “materially misstated.” 6/5/19 Trial Tr. at 80 (Lindal). Ms. Lindal believed that Mr. Krabbenschmidt's allegations impaired the appearance of her independence under AICPA rules because she may reasonably be perceived as defending her work in prior years through the 2018 audits. Id. at 103-04; see also Trial Ex. A-307. Ms. Tamaro never asked Ms. Lindal to withdraw. See 6/5/19 Trial Tr. at 81 (Lindal); 6/3/19 Trial Tr. at 117-18 (Tamaro).

         19. In all of the years Ms. Lindal has been an auditor, she has never had her independence questioned or had reason to disengage as the auditor for a partnership. 6/5/19 Trial Tr. at 70 (Lindal). She stands by her audits of both partnerships and would not have disengaged if Mr. Krabbenschmidt had not testified as he did in his deposition. Id. at 87-88.

         20. Although the 2018 audited financial statements were not finalized at the time of trial, Ms. Lindal had prepared drafts that Ms. Tamaro shared with AMTAX. AMTAX had all of the pertinent financial information for each partnership as of May 2019. See, e.g., Trial Exs. 140-43, 147, 148, 151, 152; see also 6/3/19 Trial Tr. at 118 (Tamaro). The required HUD submission for Parkway was also completed before Ms. Lindal's disengagement and provided to AMTAX. Trial Exs. 151 and 152; 6/5/19 Trial Tr. at 106-08 (Lindal).

         D. Hidden Hills

         21. The Hidden Hills property is located in University Place. It was built in 1984 and has 216 units. It was in the plume of the ASARCO smelter. In 1998, Tacoma Water Utility selected the property as one of its test sites, and the soil tested for high levels of arsenic and lead. 6/3/19 Trial Tr. at 97 (Tamaro). Shortly thereafter, the Washington Department of Ecology listed the property on its “Confirmed and Suspected Contaminated Sites List, ” where it remains to date. Trial Ex. A-241-0007 (RFA 10).

         22. Ms. Tamaro put the Hidden Hills deal together beginning in 1999 and learned of the contamination at that time. 6/3/19 Trial Tr. at 97 (Tamaro); 6/5/19 Trial Tr. at 49 (Tamaro). She found the property and placed it under contract, but had a difficult time closing the deal. 6/3/19 Trial Tr. at 97 (Tamaro). According to Ms. Tamaro, the contamination on the property site made lenders uncertain as to how to finance the purchase. Id. at 97-98. Two lenders dropped out, and the seller ultimately cut the price by approximately 9%. Id. The final lender agreed to finance the property on the condition that an approximately $1.25 million escrow account was established to handle any potential remediation costs. Id. at 99. Ms. Tamaro loaned the partnership approximately $700, 000 to fund the escrow, which has yet to be repaid. Id.

         23. Based on this history, Ms. Tamaro believed that the environmental contamination should be taken into account by the appraisers in valuing the property under Section 7.4.J of the Hidden Hills LPA. Id. at 104 (“I based this on my experience in closing the original loan. And I recognize that the world may have changed, but I had had a certain experience when I purchased that property, with the lenders. And so based on that experience, I had thought that the property needed to be -- the value needed to be offset by the remediation cost.”). Ms. Tamaro obtained during the appraisal process updated remediation cost estimates from EPI, the environmental firm that had worked with the seller in 2001. 6/4/19 Trial Tr. at 73-74 (Tamaro).

         24. HHM exercised its option pursuant to Section 7.4.J of the Hidden Hills LPA on March 14, 2017, and selected CBRE as its appraiser to determine the FMV of the Hidden Hills apartment complex. Trial Ex. 120. After taking into account the estimated costs of remediating the environmental contamination, CBRE valued the property at $14, 050, 000. Trial Ex. A-132.

         25. AMTAX 114 selected Cushman & Wakefield (“C&W”) as its appraiser to determine the FMV. 6/5/19 Trial Tr. at 145 (Blake). C&W did not discount the value of the property based on any costs associated with the environmental contamination on the property site. Id. It valued the property at $19.7 million. Id.

         26. A third appraisal was issued by Colliers International Valuation & Advisory Services (“Colliers”) on October 23, 2017. Trial Ex. A-210. After taking into account the estimated costs of remediating the environmental contamination, Colliers valued the property at $13.5 million. Id.

         27. HHM brought suit in state court in November 2017 seeking a declaration that Colliers appraisal was “final and binding” under the LPA and that AMTAX must proceed with a buyout based on the fair market value from the Colliers appraisal report. AMTAX removed the case to this Court and counterclaimed, seeking, among other things, a declaration that HHM was validly removed from the partnership and the third appraisal is not “final and binding” under the LPA.

         28. Prior to trial, this Court granted AMTAX's motion for summary judgment on Hidden Hills to the extent the Colliers appraisal could not be considered “final and binding” under the LPA, and that HHM was required to bear the risk of any environmental contamination pursuant to a separate indemnity agreement entered into by the parties. Dkt. #89 (“MSJ Order”). The Court concluded that the appraisal process had been “tainted” by HHM in connection with the contamination issues, but the issue of HHM's removal as GP was left for trial. Id.

         29. After review and consideration of the Court's summary judgment order, HHM sent a letter to AMTAX dated May 7, 2019, accepting in writing the C&W appraisal as the basis for calculating the FMV of AMTAX's interest. 6/3/19 Trial Tr. at 106-09 (Tamaro); Trial Ex. 155. AMTAX proceeded to trial on the issue of whether HHM should be removed. See, e.g., 6/3/19 Trial Tr. at 110-13; Trial Exs. 158, 159, A-293, 165.

         30. AMTAX's only claims of wrongdoing against the GP in Hidden Hills pertain to actions by Ms. Tamaro during the appraisal process after the option had been exercised. 6/5/19 Trial Tr. at 150-51 (Blake). AMTAX has never asserted derivative claims on behalf of the partnership and dropped the LP's damage claims for breach of contract and breach of fiduciary duty before trial. Dkt. #89 (Joint Pretrial Order); Trial Ex. A-241 (Interrogatory Ans. No. 4).

         E. Parkway

         1) Parkway's Background and Management

          31. Parkway Apartments is located in Federal Way. Built in 1975, it is a 208-unit multifamily community consisting of 19 two-story buildings, one community building, and one maintenance/laundry building. 6/3/19 Trial Tr. at 121-22 (Tamaro).

         32. In 2002, the property was acquired by Parkway and after renovation was placed in the LIHTC program, which requires that the units be rented to individuals and families below a certain income level. Id. at 141. Ms. Tamaro participated in the acquisition and conversion of Parkway to the LIHTC program and has served as the principal of 334th Place, Parkway's GP, since the partnership's inception. Id. at 123. Parkway is an older property with significant deferred maintenance and a high need for repairs. The partnership spent $1.6 million on the initial repairs and renovations upon entry into the LIHTC program, but this did not address all of the repairs that needed to be done. Id. at 124.

         33. Under Section 7.3 of LPA, the GP has sole responsibility and the “exclusive right” to manage Parkway's business. Trial Ex. 3 § 7.3. The GP's primary duties include maintaining the partnership's regulatory compliance and delivering tax credits to the LP. There is no dispute that 334th Place has maintained compliance and delivered full tax credits to AMTAX 169 during the 15-year Compliance Period.

         34. The GP's other duties are enumerated at length in Section 7.4.A of the LPA, and require the GP to exercise its “best efforts” in carrying out those duties. Trial Ex. 3.[1] Under Section 7.7.A of the LPA, the GPs are insulated from any liability to Parkway or the LP for any loss suffered by Parkway that “arises out of any action or inaction of such General Partner . . . if that General Partner . . . in good faith, determined that such course of conduct was in the best interests of the Partnership and such course of conduct did not constitute negligence or misconduct.” With respect to the setting of rents, the GP must use “reasonable efforts consistent with sound management practice” to maximize income by “implementing[] appropriate adjustments in the rent schedule of the Property.” Trial Ex. 3 § 7.4.B.

         35. Under the LPA, the LP's oversight role is limited to specified consent rights not relevant here, as well as the review and acceptance of the annual audited financial statements that the partnership provides to AMTAX. The GP caused the partnership's audited financial statements to be submitted to the ...


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