United States District Court, W.D. Washington, Tacoma
HIDDEN HILLS MANAGEMENT, LLC, and 334TH PLACE 2001, LLC, Plaintiffs,
AMTAX HOLDINGS 114, LLC, and AMTAX HOLDINGS 169, LLC, Defendants. AMTAX HOLDINGS 114, LLC, AMTAX HOLDINGS 169, LLC, and PARKWAY APARTMENTS, LP Counter-Plaintiffs,
HIDDEN HILLS MANAGEMENT, LLC, and 334TH PLACE 2001, LLC, Counter-Defendants.
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
HONORABLE RONALD B. LEIGHTON JUDGE.
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.
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
on the evidence and testimony presented at trial, the Court
makes the following findings of fact and conclusions of law.
FINDINGS OF FACT
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.
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.
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.
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
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
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
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
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).
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)
Exs. 2 and 3.
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.
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.
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.
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).
2018 Audited Financial Statements
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).
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.
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.
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).
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
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.
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).
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).
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.
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).
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.
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
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.
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
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.
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,
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).
Parkway's Background and Management
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
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.
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
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. 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.
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 ...