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WSB Investments, LLC v. Pronghorn Dev. Co., LLC

Court of Appeals of Oregon

February 25, 2015

WSB INVESTMENTS, LLC, an Oregon limited liability company, Plaintiff-Appellant,
v.
PRONGHORN DEVELOPMENT COMPANY, LLC, a Delaware limited liability company; and Pronghorn Golf Club, LLC, a Delaware limited liability company, Defendants, and Thomas C. HIX, an individual; Scott Denney, an individual; Scott Walley, an individual; Tiffany Clark, an individual; and Reece Fulgham, an individual, Defendants-Respondents, and RESIDENCE CLUB AT PRONGHORN VILLAS CONDOMINIUMS OWNERS ASSOCIATION, Nominal Defendant-Respondent

Argued and submitted March 13, 2014.

Page 549

[Copyrighted Material Omitted]

Page 550

Deschutes County Circuit Court 11CV0180ST. Alta Jean Brady, Judge.

Thomas A. Larkin argued the cause for appellant. With him on the briefs were John Spencer Stewart, Tyler J. Storti, and Stewart Sokol & Gray, LLC.

Stephen F. Deatherage argued the cause for respondent Scott Denney. With him on the brief was Bullivant Houser Bailey PC.

W. Michael Gillette argued the cause for respondents Thomas C. Hix, Scott Walley, Reece Fulgham, Tiffany Clark, and Residence Club at Pronghorn Villas Condominiums Owners Association. With him on the brief were David A. Anderson, William J. Ohle, and Schwabe, Williamson & Wyatt, P.C.

Before Duncan, Presiding Judge, and Lagesen, Judge, and Wollheim, Senior Judge.

OPINION

Page 551

[269 Or.App. 344] LAGESEN, J.

Plaintiff owns an interest in a timeshare unit at the Residence Club at Pronghorn Villas Condominiums and, as a result, is a member of the associated nonprofit homeowners association, the Res Club. When the management of the timeshare development fell short of plaintiff's expectations, plaintiff sued, among others, the members of the Res Club's uncompensated board of directors, alleging claims for breach of contract, breach of fiduciary duty, negligent misrepresentation, unjust enrichment, and declaratory relief. The trial court granted summary judgment to defendants on all claims. Plaintiff appeals. Held: The trial court erred in granting summary judgment to defendants on some of plaintiff's allegations of breach of fiduciary duty. Plaintiff presented sufficient evidence regarding some of those allegations to permit a reasonable factfinder to find that certain defendants were grossly negligent in failing to discharge their duties in accordance with ORS 65.357, so as to render those defendants subject to liability under ORS 65.369.

Plaintiff WSB Investments, LLC owns an interest in a timeshare unit at the Residence Club at Pronghorn Villas Condominiums and, as a consequence of that ownership, is a member of the associated nonprofit homeowners association, the Residence Club at Pronghorn Villas Condominiums Owners Association (the Res Club). When the timeshare development, and the management of it by its uncompensated board of directors--Thomas Hix, Scott Denney, Scott Walley, Tiffany Clark, and Reece Fulgham (defendants)--fell short of plaintiff's expectations, plaintiff sued defendants, alleging claims for breach of contract, breach of fiduciary duty, negligent misrepresentation, unjust enrichment, and declaratory relief. The trial court granted summary judgment to defendants on all claims.

We reverse in part, concluding that the trial court erred in granting summary judgment to defendants on some of plaintiff's allegations of breach of fiduciary duty.[1] Specifically, we conclude that plaintiff presented sufficient evidence regarding some of those allegations to permit a reasonable factfinder to find that some of the directors were grossly negligent in failing to discharge their duties " [w]ith the care an ordinarily prudent person in a like position would exercise under similar circumstances" or " [i]n a manner the director reasonably believes to be in the best interests of the corporation," in violation of ORS 65.357,[2] [269 Or.App. 345] so as to render defendants

Page 552

subject to liability under ORS 65.369.[3]

I. BACKGROUND

A. Substantive Facts[4]

1. Defendant Hix develops a new resort, defendants are appointed to the board of directors of the homeowners association for the resort's timeshare complex, and plaintiff purchases a timeshare.

Defendant Hix is a real-estate developer. Hix decided to develop a destination resort in Central Oregon and, to that end, he and others formed High Desert Development Partners, LLC (High Desert Development)[5] to purchase land in Deschutes County. In 2004, a subsidiary of High Desert Development, Pronghorn Development Company, LLC [269 Or.App. 346] (Pronghorn Development),[6] broke ground on the 640-acre Pronghorn Resort (the resort). Hix envisioned the resort as a community of luxury timeshare units, condominiums, and custom villas, all situated along three premier golf courses and served by the Pronghorn Golf Club, LLC (the golf club).

As originally contemplated, the resort would have 16 buildings of timeshare units, among other types of accommodations. Each of the contemplated 16 buildings would contain four units, with each unit divided into 12 fractional interests, for a total of 768 fractional interests (16 buildings x 4 units/building x 12 fractional interests/unit). Each timeshare owner--that is, each owner of at least one fractional interest--would be a member of the homeowners association, the Res Club. The Res Club would be governed by a five-member board of directors and two documents: (1) the Declaration of Ownership and Fractional Plan for the Residence Club at Pronghorn Villas Condominiums (the Declaration), for which Pronghorn Development served as declarant; and (2) the Bylaws of the Residence Club at Pronghorn Villas Condominiums Owners' Association (the bylaws). Under the Declaration and bylaws, Pronghorn Development was to appoint the members of the initial five-member board of directors, but, at the first annual meeting of the Res Club, the Res Club members (including Pronghorn Development, as declarant) were to elect a new board.

In accordance with the Declaration and bylaws, Pronghorn Development appointed the members of the initial board of directors of the Res Club. Those members included Hix; Denney, an independent real-estate broker who had encouraged Hix to finance the development of the resort; Clark, vice president of sales and operations for High Desert Development; and Walley, who worked for Pronghorn Development in various roles, including as the company's director of finance.[7] At all times relevant to this case, Hix served as president of the Res Club.

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[269 Or.App. 347] By 2005, Pronghorn Development had completed four of the 16 anticipated timeshare buildings, for a total of 192 fractional interests. The same year, plaintiff purchased a 12/12 interest in Res Club Unit No. 208 for $1,626,000, and became a member of the Res Club as a result.

Around the time of plaintiff's purchase, Pronghorn Development began facing financial difficulties in connection with the resort. Those financial difficulties resulted in a number of different acts and omissions by Pronghorn Development and defendants over the next several years that affected the Res Club and its members and, ultimately, resulted in this legal action.

2. Hix and defendants, in contravention of the Declaration and without full disclosure to all Res Club members, agree to lease, rather than own, the common furnishings for the Res Club after Pronghorn Development is unable to purchase them.

Shortly before plaintiff's purchase of its timeshare, Hix and Pronghorn Development confronted the task of furnishing the timeshare buildings. The Declaration provided that the " common furnishings" of each unit, including all furniture, appliances, electronics, and other personal property, would be owned by the Res Club. At that point in time, however, defendants did not have the money available to purchase the requisite furnishings. As a result, common furnishings were not purchased for the timeshare units and conveyed to the Res Club as the Declaration contemplated. Instead, in order to obtain the money to purchase the furnishings, Hix, acting on behalf of a subsidiary of Pronghorn Development known as Pronghorn Investors, LLC (Pronghorn Investors), arranged to finance the purchase of the common furnishings for the Res Club through a capital lease arrangement with a third-party leasing company, Pacific Financial Company (Pacific). Under that arrangement, Pacific purchased the common furnishings from the vendors, and Pronghorn Investors agreed to lease the furnishings back from Pacific for a monthly fee. Rather than documenting the financing transaction as a loan from [269 Or.App. 348] Pacific to Pronghorn Investors, however, the parties documented it as a sale-leaseback agreement; that is, as the purchase of the common furnishings by Pacific from Pronghorn Investors, and Pronghorn Investors' subsequent agreement to lease back those furnishings.

Recognizing that the Declaration required that the common furnishings be owned by the Res Club and would not accommodate any kind of lease arrangement, Hix and Denney authorized an amendment to the Declaration in early 2006. The amendment stated that the common furnishings " will be owned or leased " by the Res Club. (Emphasis added.) Although the amendment recited that it was adopted under the procedures spelled out in the Declaration, and had been approved by 75 percent of the membership of the Res Club, defendants did not, in fact, submit the amendment to the members for their approval as required by the plain terms of the Declaration.[8]

After Hix and Denney purported to amend the Declaration to allow the Res Club to lease, rather than own, the common furnishings, Hix, Denney, Walley, and Clark, acting on behalf of the Res Club, authorized Hix to sublease the furniture from Pronghorn Investors on December 7, 2006. Defendants did not disclose the lease arrangement with Pacific or the sublease from Pronghorn Investors to the nondeclarant members of the Res Club. Those transactions did not come to light until several years later, after Pronghorn Investors failed to make lease payments to Pacific. At that point, Pacific sued to repossess the Res Club's common furnishings and obtained a judgment in its favor. Notwithstanding those problems with the common furnishings, defendants did not pursue any remedies that the Res Club might

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have against Hix, Pronghorn Investors, or Pronghorn Development.

[269 Or.App. 349] 3. Pronghorn Development completes the next phase of the planned Res Club buildings but elects to sell those units as traditional condominiums, rather than as timeshares, and therefore does not place those buildings into the Res Club.

After completing the first four buildings of the planned timeshare accommodations in 2005, Pronghorn Development constructed two more buildings that it had originally intended to place into the Res Club. After Pronghorn Development completed those two buildings, however, it decided that the units in those buildings would be more marketable as traditional condominiums than as timeshares. Based on that decision, Pronghorn Development capped the number of buildings in the Res Club at four and converted the two new buildings, buildings 5 and 6, into " the Residences" condominiums, establishing a separate homeowners association for those condominiums. Hix and defendants did not seek to compel Pronghorn Development to include buildings 5 and 6 in the Res Club, or otherwise object to the decision to treat buildings 5 and 6 in that manner.

4. Pronghorn Development fails to pay the assessments that it owes to the Res Club.

Pronghorn Development, as the owner of 26 unsold fractional interests in the Res Club, as well as seven unsold units in the Residences, retained the responsibility to pay each respective homeowners association the reserve and operating assessments for those unsold interests. On more than one occasion, however, Pronghorn Development failed to timely pay the assessments due the Res Club, because it did not have the funds available. As a result, the amount in arrears at one point exceeded $1 million, but defendants did not initiate a collection action against Pronghorn Development.

5. Hix and Walley load expenses disproportionately onto the Res Club; Denney acquiesces in their conduct.

One strategy that Hix and Walley adopted for addressing Pronghorn Development's financial difficulties, [269 Or.App. 350] and the consequences that those difficulties had for other parts of the resort, was to load expenses onto the Res Club. Specifically, Hix and Walley " tr[ied] to figure out how to load expenses" from the golf club, which provided services to both the Res Club and the Residences, onto the Res Club in order to minimize the operating deficits that Pronghorn Development bore responsibility for. To that end, defendants routinely permitted the Res Club to be billed for thousands of dollars of unidentified " services," designated simply as " labor" or " other," in addition to charges for a wide range of identifiable services--including front desk services, housekeeping, landscaping, security, and maintenance work orders. Although the charges for those unidentified services were among the more expensive line items billed to the Res Club--and represented between 82 percent and 100 percent of the total cost of those services delivered across the resort--defendants were not able to identify what particular amenities were included within the charges or otherwise explain why they should be attributable to Res Club activities. And, even where charges billed to the Res Club were attributed to an identifiable service, for example, maintenance and repairs, those charges included--on at least one occasion--the cost of such services performed on behalf of the Residences homeowners association, rather than the Res Club.

Denney was aware of what Hix and Walley were doing, and he asked Hix if it was permissible for them to load resort expenses onto the Res Club. Hix responded, " We can do whatever we want." Because Hix " controlled [Denney's] monthly income" through a consulting agreement, Denney refrained from disclosing Hix and Walley's ...


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