Multi-Hous. Tax Credit Partners XXX v. Alexander Dairy Assocs., Civil Action No. 3:20cv612

MULTI-HOUSING TAX CREDIT PARTNERS XXX, Plaintiff, v. ALEXANDER DAIRY ASSOCIATES, LLC, Defendant.

Civil Action No. 3:20cv612

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA Richmond Division

July 1, 2021

OPINION

The plaintiff, Multi-Housing Tax Credit Partners XXX ("Multi-Housing" or "Multi-Housing Partners"), sued the defendant, Alexander Dairy Associates, LLC ("Alexander Dairy"), for improperly exercising its option to buy Multi-Housing's interest in the limited partnership they operate (the "Purchase Option").¹

Multi-Housing claims that Alexander Dairy did not comply with a provision in the parties' partnership agreement that requires them to agree on an appraiser whose appraisal sets the purchase price for Multi-Housing's interest in the partnership. Multi-Housing contends that, because it failed to comply with this provision, Alexander Dairy improperly claimed ownership of Multi-Housing's interest in the limited partnership. Alexander Dairy thinks that Multi-Housing approved the appraiser who appraised Multi-Housing's interest in the partnership, which allowed AlexanderDairy to exercise the Purchase Option and become the owner of Multi-Housing's interest in the limited partnership.

For the reasons set forth below, the Court finds that the parties did not agree on an appraiser to set the purchase price for Multi-Housing's interest in the partnership. Thus, Alexander Dairy improperly claimed ownership of that interest. But Multi-Housing did not establish any damages caused by Alexander Dairy's improper exercise of the Purchase Option. Accordingly, the Court will enter judgment for Multi-Housing and against Alexander Dairy and award nominal damages to Multi-Housing. The Court will also enter a declaratory judgment stating that (1) Multi-Housing remains a limited partner in the parties' limited partnership and (2) the deadline for Alexander Dairy to exercise the Purchase Option has passed.

I. FACTUAL FINDINGS²

A. The Partnership

Alexander Dairy and Multi-Housing operate a limited partnership, Richmond Dairy Associates, L.P. (the "Limited Partnership"), according to the terms of the Amended and Restated Agreement of Limited Partnership of Richmond Dairy Associates, L.P., a Virginia Limited Liability Partnership (the "Limited Partnership Agreement").³ The Limited PartnershipAgreement establishes Alexander Dairy as the general partner and Multi-Housing as a limited partner. The Limited Partnership operates the apartment complex known as the Richmond Dairy.

B. The Purchase Option

Article XVI of the Limited Partnership Agreement details the Purchase Option. Paragraph 16.1(C) of the Limited Partnership Agreement gives Alexander Dairy the option to buy Multi-Housing's interest in the Limited Partnership for a purchase price "equal to the greater of":

(i) The fair market value of the Limited Partner's Interest as determined by appraisal conducted by a member of the Appraisal Institute with note [sic] less than ten years [of] experience appraising low income housing projects and agreed upon by the Partners (the appraiser will be instructed to value the Limited Partner's Interest assuming continued use of the Property for low income housing, and to assume that the monthly rental income from the Property will be equal to the lesser of (1) the average monthly rental income of the twelve complete calendar months immediately preceding the month in which the General Partner gives notice of its election to exercise the Option, or (2) the maximum monthly rental income that the Property would produce based on the gross rents chargeable for rent-restricted units pursuant to Section 42(g)(2) of the Code as of the date on which the General Partner gives notice of its election to exercise the Option); or

(ii) A price equal to the sum of: (1) all taxes ("Tax Liability") which shall be due and owing by the Limited Partner to any taxing authority, including but not limited to, the Internal Revenue Service, or its equivalent, and the State of Virginia, arising out of the Limited Partner's sale of its Interest in the Partnership to the General Partner, (2) the present value of all anticipated Tax Credits the Limited Partner has not yet received, and (3) $100.

(Pl.'s Ex. 1 ¶ 16.1(C).) The valuation method delineated in Paragraph 16(C)(i) applies here.

Paragraph 16.1(E) sets forth the procedure for closing on the sale of Multi-Housing's interest in the Limited Partnership. Among other things, at closing, Multi-Housing must deliver to Alexander Dairy a duly executed assignment of its rights, title, and interest in the Limited Partnership, and Alexander Dairy must deliver to Multi-Housing the purchase price in immediately available funds.

C. Alexander Dairy Seeks to Exercise the Purchase Option

On November 8, 2019, Alexander Dairy, believing that it "[was its] time to get paid," (Trial Tr. 329:19), notified Multi-Housing that it intended to exercise the Purchase Option.⁴ Alexander Dairy proposed that Knight Dorin & Rountrey ("Knight") appraise the value of Multi-Housing's interest in the Richmond Dairy. Multi-Housing rejected that proposal and suggested three alternative appraisers: CBRE, CohnReznick, and Novogradac. Multi-Housing noted that "[t]he scope of work, special conditions, and definition of value listed in Knight's agreement . . . are fine and can be used by the selected appraiser." (Pl.'s Ex. 17.)

On January 6, 2020, a Novogradac representative told Alexander Dairy that it could conduct the appraisal required by the Purchase Option by "provid[ing] fair market value appraisals of the [Richmond Dairy] and then work[ing] with tax audit folks to review [the] partnership agreement and construct a waterfall based on the priority distributions per the" Limited Partnership Agreement. (Trial Tr. 416:9-13.) Steven Alexander, Alexander Dairy's managing partner, called that proposal "[p]erfect." (Trial Tr. 416:22.)

The next day, Alexander Dairy told Multi-Housing that it had hired Novogradac "to appraise The Dairy, as outlined in our partnership agreement." (Pl.'s Ex. 19.) Despite stating that it "engaged Novogradac" to perform the appraisal, (id.), both parties and Novogradac agreed that both Alexander Dairy and Multi-Housing—as Novogradac's clients—must sign the engagement letter for the Limited Partnership to formally retain Novogradac. Ultimately, the parties did not engage Novogradac, at least in part because they could not agree on the scope of Novogradac's appraisal.

With the parties unable to agree on Novogradac, Alexander Dairy set its sights on CohnReznick; and, on January 17, 2020, Alexander Dairy informed Multi-Housing that it had selected CohnReznick to perform the appraisal. Three days later, Alexander Dairy sent Multi-Housing a proposed engagement letter signed by two CohnReznick employees, Donald Nimey and Patricia M. McGarr. The proposed engagement letter called for an appraisal both of Multi-Housing's interest in the Limited Partnership (a "valuation analysis") and an appraisal of "the 'as-is' fair market value of the fee simple interest of the real property owned and operated" by the Limited Partnership. (Def.'s Ex. 24.) The engagement letter had signature blocks for both Richmond Dairy Associates, L.P., and Multi-Housing, reflecting the parties' understanding that both of them needed to endorse the engagement letter.

By letter dated January 28, 2020, Multi-Housing informed Alexander Dairy that it would not agree to this engagement letter because it included two appraisers, one of whom (Nimey) lacked the qualifications delineated in Paragraph 16.1(C)(i) of the Limited Partnership Agreement. Multi-Housing said it "[was] prepared to agree to an appraisal of the Partnership's improved real property [as opposed to a valuation analysis], in accordance with the Partnership Agreement, conducted solely by Andrew Lines, MAI, also of CohnReznick." (Def.'s Ex. 25.) Multi-Housing also offered "to come to agreement with [Alexander Dairy] on appropriate valuation instructions to be delivered to Mr. Lines." (Id.) Multi-Housing cautioned Alexander Dairy that moving "forward unilaterally with the" CohnReznick proposal would violate "the Partnership Agreement, which requires that the partners agree on the selected appraiser." (Id.)

Three days later, Alexander Dairy sent Multi-Housing a revised engagement letter signed by McGarr and Lines. Like the first engagement letter, the revised engagement letter called for a valuation analysis and an appraisal of "the 'as-is' fair market value of the fee simple interest of thereal property owned and operated" by the Limited Partnership. (Def.'s Ex. 26.) Like the original engagement letter, the revised engagement letter had signature blocks for both Richmond Dairy Associates, L.P., and Multi-Housing.

Multi-Housing refused to agree to the revised engagement letter because it "appear[ed] to be identical to" the first engagement letter, "containing the same terms and conditions [Multi-Housing] previously objected to, other than substituting Mr. Lines for Donald Nimey as one of the two CohnReznick appraisers." (Def.'s Ex. 27.) Multi-Housing complained that the revised engagement letter

identifies the same scope of services as the [first] engagement letter, despite our objections as most recently stated in [Multi-Housing's] letter of January 28, 2020—namely that the appraisal is to be an appraisal of real property only, conducted by one MAI appraiser, from which the partners can thereby determine the value of the limited partner interests in accordance with the Partnership Agreement.

(Id.) Multi-Housing also expressed concern that, based on a conversation with Lines, "Mr. Nimey and/or other non-members of the Appraisal Institute would continue to be involved in the appraisal process and CohnReznick would also complete an appraisal of the limited partner interests using techniques and methodology that is not utilized in a MAI appraisal." (Id.) Multi-Housing reiterated that it "previously agreed...