LEE PACIFIC PROPERTIES, INC.; Howard Liebreich, an individual; ND Manor, LLC; Greenwood Manor Oregon, LTD.; Surfwood Manor Oregon, LTD.; and Rockwood-Caldwell Oregon, LTD., Plaintiffs-Appellants Cross-Respondents,
CENTURY PACIFIC EQUITY CORPORATION; Greenwood Housing Limited Partnership; Surfwood Limited Partnership, aka Surfwood Housing Limited Partnership; Firwood Housing Properties, LTD., aka Firwood Limited Partnership; Pinewood Investments, LTD.; Clearwater Limited Partnership; Burnwood Housing Limited Partnership, aka Burnwood Limited Partnership; Ochoco Housing Limited Partnership; Indiana Housing, LTD., aka Indiana Manor Limited Partnership, Defendants-Respondents Cross-Appellants, and Irwin J. DEUTCH, an individual; Michaels Development Company; Oregon Housing Fund-I, LTD.; Northwestern Housing Fund-I, LTD.; Wilshire Investments Corporation; Western Housing Associates, LTD.; Louis A. Cicalese; Jasper Corporation; Rolling West Housing Partners; CP Investment Fund 85-I, LTD.; AFC Corporation; American Pacific Housing Corporation, fka Century Pacific Housing Corporation; and Managements Assistance Group, Inc., Defendants-Respondents, and AFC CAPITAL FUND and AFC Capital Corporation, Defendants
Argued and Submitted June 5, 2014
090202097. Multnomah County Circuit Court. Stephen K. Bushong, Judge.
On appeal, judgment on plaintiffs' fifth claim for relief reversed and remanded, with instructions to enter judgment in favor of plaintiffs on that claim consistent with this opinion; otherwise affirmed. On cross-appeal, award of attorney fees remanded; otherwise affirmed.
Richard S. Yugler argued the cause for appellants-cross-respondents. With him on the opening brief was Landye Bennett Blumstein LLP. With him on the cross-respondents' answering brief and appellants' reply brief were Christine N. Moore and Landye Bennett Blumstein LLP.
George W. Kelly argued the cause and filed the briefs for respondents-cross-appellants.
George W. Kelly waived appearance for defendants-respondents.
Before Ortega, Presiding Judge, and DeVore, Judge, and Garrett, Judge.
[272 Or.App. 610] GARRETT, J.
This appeal pertains to the interpretation of a settlement agreement. The subject of the agreement was the parties' interests and obligations in certain limited partnerships that owned low-income housing projects insured by the Department of Housing and Urban Development (HUD), as well as their interests and obligations in the housing projects themselves. Plaintiffs brought suit, claiming that defendants had breached certain terms of the settlement agreement; defendants counterclaimed that plaintiffs had also breached the settlement agreement. The main issue in both the claims and counterclaims is whether plaintiffs, who held security interests in the limited partnerships that owned the properties, were required under the settlement agreement to submit " Transfer of Physical Assets" (TPA) documents to HUD in order to manage and control the housing projects.
The trial court, after bifurcating the legal claims from the equitable claims and trying the equitable claims and counterclaims for
declaratory relief and specific performance, declared that the settlement agreement did not unconditionally require plaintiffs to submit TPAs. The trial court further declared that defendants did not breach the settlement agreement when they revoked plaintiffs' management and control of the properties. Based on its conclusions, the trial court entered judgment granting two of plaintiffs' three claims, and denying all three of defendants' counterclaims. We affirm in part and reverse in part.
Because this is an equitable case, the Court of Appeals, " acting in its sole discretion, may try the cause anew upon the record or make one or more factual findings anew upon the record." ORS 19.415(3)(b). No party has requested that we exercise our discretion to review de novo. Nevertheless, as explained below, 272 Or.App. at 635, the trial court's interpretation of the parties' settlement agreement was partially erroneous, and, as a result, the court did not expressly resolve a necessary factual dispute. That dispute concerns the position that HUD took regarding the [272 Or.App. 611] requirement (or not) that TPAs be submitted. As explained below, 272 Or.App. at 635, because that factual dispute can be resolved only one way on the existing record, rather than remand, we exercise our discretion to engage in de novo review and make the necessary finding. Except for the finding that we have made de novo, see 272 Or.App. at 635, we state the remaining facts--which are supported by evidence in the record--consistently with the trial court's explicit and implicit findings and review the court's legal conclusions for legal error. Neff v. Sandtrax, Inc., 243 Or.App. 485, 487, 259 P.3d 985, rev den, 350 Or. 716, 260 P.3d 493 (2011).
A. History of transactions pertaining to the eight housing projects
The eight housing projects that are at the core of the disputed settlement agreement were developed in the 1970s by Jack Miller. For each project, Miller created a limited partnership to hold title in the project. HUD either financed or insured the financing of each project. Consequently, each project was subject to a promissory note (HUD note), each was subject to a mortgage (HUD mortgage), and each was subject to a regulatory agreement between HUD and the property-owning partnership.
The regulatory agreement gave HUD extensive regulatory authority over the operation and maintenance of the project. Significant to the issues in this action was the following provision in the regulatory agreement:
" The sponsor [property owner] may perform * * * the following acts only with the prior written approval of [ HUD :]
" Convey, transfer or encumber any of the development property;
" Assign, transfer * * * or encumber any personal property of the [d]evelopment, including rents;
" Convey, assign * * * or permit the surrender of * * * any right to manage or receive the rents and profits of the [d]evelopment[.]"
In 1984, the original property-owning partnerships sold each of the properties to other limited partnerships, each [272 Or.App. 612] of which was controlled by Century Pacific Equity Corporation (Century Pacific). Each buying partnership financed part of the purchase of its housing project through a loan from the selling partnership. Because the properties were subject to existing HUD notes, HUD mortgages, and HUD regulatory agreements, each selling partnership (seller/creditor) was prohibited from securing its loan to the buying partnership (buyer/debtor) with a lien on the property. Instead, each buyer/debtor executed an " All-Inclusive Residual Note and Agreement" (wrap note), in which each agreed to grant the seller/creditor " collateral" that the wrap note defined as " all the right, title and interest of the [buyers/debtors] as either general or limited partners of [the buying partnership]." Each sale also
included an agreement of sale and a security agreement that granted the seller/creditor a security interest " in and of the collateral," and allowed the seller/creditor to foreclose on the partnership interests upon failure of the buyer/ debtor to pay its loan debt to the seller/creditor. Thus, the seller/creditor partnership secured its loan not in the property, but in the respective partners' interests in the buyer/ debtor partnership that owned the property.
The wrap note also contained a unique provision, in that it reserved, in each seller/creditor, " the sole and exclusive right to select, from time to time, the managing agent or agents for the Project subject only to the prior approval of [HUD] of such agent or agents, if required." (Emphasis added.) The evidence does not indicate whether HUD was aware of this provision in the wrap note, let alone whether it approved of its effect. Nevertheless, this provision would become a key provision in the wrap note, would eventually affect HUD's dealings with the property-owning partnerships and wrap note-holding partnerships, and would lead to the current dispute.
[272 Or.App. 613] Plaintiff Lee Pacific Properties, Inc. (Lee Pacific) acquired its interests in the properties a few years after the sale of the housing projects, when Jack Miller, the general partner for the selling partnerships, filed for bankruptcy. Howard Liebreich, the managing partner of Lee Pacific, purchased Miller's general and limited partner rights from the 1984 sale of the eight projects, including all of the partner rights in the agreements of sale, the wrap notes, and the security agreements. Lee Pacific thus became the general managing partner of all of the limited partnerships holding notes on the property-owning partnerships that were and are controlled by Century Pacific. Consequently, we hereafter refer to the note-holding and property-owning partnerships, respectively, as Lee Pacific and Century Pacific.
Initially, the relationship between Lee Pacific and Century Pacific appeared to run smoothly. Lee Pacific, acting through Liebreich and exercising its right under the wrap note provision, directed the management of the properties. Among other things, Liebreich contracted with a company called Guardian Management to be the property manager for all eight properties.
In 1992, Irwin Deutch, the managing partner and director of Century Pacific, contacted Liebreich about the possibility of extending the wrap notes, which were to mature in 1994. The trial court found that for the next few years, Deutch and Liebreich discussed extending the maturity dates on the wrap notes, although no formal agreement extending the notes was ever executed. The parties knew that any extension past 1999 would lead to unfavorable tax consequences to Lee Pacific. Consequently, in 2000, Lee Pacific notified Century Pacific that the notes were in default, and when payment on the notes was not forthcoming, Lee Pacific brought suit against Century Pacific.
B. The 2000 lawsuit
In the amended complaint filed in the 2000 litigation, Lee Pacific alleged that it had notified Century Pacific that, as to each property, " in exercise of the authority provided in the Security Agreement, and based on default in the payment of the [wrap note,] [Lee Pacific] assumed [272 Or.App. 614] exclusive control of the right and privileges * * * in the Collateral, and * * * effective immediately, [Lee Pacific] assumed exclusive power to control [Century Pacific] and its property." Lee Pacific sought a declaratory judgment, requesting the court to declare that, as to each property, Lee Pacific was " entitled to take control of the partnership rights in [Century Pacific] * * *, and that [Lee Pacific's] rights are superior to any rights or interests of [any partner] in the collateral and assets of [Century Pacific], to the extent of the unpaid balance of the [wrap notes]." Lee Pacific also sought a preliminary and permanent injunction prohibiting Century Pacific " from interfering with [Lee Pacific's] control of the Collateral and specifically from taking any action purporting to be an action of [Century Pacific] or authorized by [Century Pacific] or
affecting the rights or assets of [Century Pacific], without express authorization by [Lee Pacific], until full payment of the [wrap notes]."
The record indicates that, initially, the parties continued to act as they always had in relation to the properties, with Lee Pacific continuing to oversee Guardian Management's management of the properties. Eventually, though, a dispute arose between Century Pacific and Lee Pacific about Lee Pacific's continued oversight of Guardian Management, and Century Pacific attempted to terminate Guardian Management's contracts with the properties. Lee Pacific moved for a temporary restraining order against Century Pacific and a preliminary injunction, and on March 28, 2001, the court entered an order indicating that, by agreement of the parties, Guardian Management would remain the property manager of the projects pending further order of the court, and that no party would interfere with Guardian Management's day-to-day management of the projects.
On June 27, 2002, Deutch wrote to Liebreich offering to transfer and assign all of the partnership interests in each of the properties to Lee Pacific, confirm with HUD that Lee Pacific had control of the partnerships, and that Lee Pacific was the owner in fact, for tax purposes. Not long thereafter, the parties began settlement negotiations.
[272 Or.App. 615] C. Century Pacific and Lee Pacific negotiate the settlement agreement and discuss the issue of filing TPAs with HUD
Early settlement drafts between the parties indicated that Century Pacific would immediately transfer all partnership interests in the property-owning partnerships to Lee Pacific. One area of discussion between former counsel for Century Pacific and former counsel for Lee Pacific pertained to the approval by HUD of a document entitled " Transfer of Physical Assets" (TPA). HUD regulations required that any transfer of a HUD-insured property to a new owner included the new owner's application and HUD's approval of a TPA. Consequently, discussions between counsel for Century Pacific and Lee Pacific included whether Century Pacific should immediately transfer the partnership interests or whether Century Pacific should wait to transfer the interests until HUD approved the TPAs that the parties anticipated would need to be submitted. Lee Pacific's counsel insisted that the agreement effect an immediate transfer of partnership interests, and that, in order to ensure that HUD would work with Lee Pacific during the pendency of a TPA approval, the agreement needed to designate Lee Pacific as Century Pacific's agent during the approval period. Lee Pacific's counsel suggested including a provision in the agreement that the parties could rescind the agreement should HUD disapprove of the TPA.
About a year after the parties first began settlement discussions, a new draft of the settlement agreement was circulated that did not provide for the transfer of partnership interests. Instead, the draft agreement provided that, in lieu of Lee Pacific foreclosing on the partnership interests, Lee Pacific would gain immediate ownership to each of the housing projects once the HUD mortgage on each property was satisfied. The new draft also included several new provisions pertaining to Lee Pacific's authority to manage and control the projects during the time between the execution of the agreement and the transfer of ownership in each property after its mortgage was satisfied.
[272 Or.App. 616] The final settlement agreement, as executed on or about February 14, 2004, by Century Pacific and Lee Pacific, provided the following:
" 2. Agency for Property-Owning Partnerships
" a. Effective upon the execution of this Agreement by [Century Pacific], [Lee Pacific] is designated and shall act as attorney in fact for [Century Pacific] for the purposes of management and control of the Projects (subject to the provisions of this Agreement) pending a decision by HUD on whether to approve a Transfer of Physical Assets or modified Transfer of Physical Assets ('TPA') as may be required by HUD. The purpose and effect of this designation shall be to give [ Lee Pacific ] full management and control of each Project pending any approval deemed necessary by HUD. If approval is granted, full and exclusive management and control by [Lee Pacific] shall continue as to each Project until the earlier of the sale of the Project, or the transfer of the Project to the ownership of [Lee Pacific]. Pursuant to the authority granted in this Agreement (subject to any limitation expressly stated in the Agreement), [Lee Pacific] shall be authorized to act for purposes including but not limited to the following:
" (1) for the purpose of applying for and advancing approval of Transfer of Physical Assets or modified Transfer of Physical Asset, if required by HUD to put into effect the provisions of this Agreement;
" (2) for the purpose of full and exclusive management and control of the Project and exclusive authority to deal with HUD regarding the Projects;
" * * * * *
" (4) for the purpose of taking actions and executing documents required by HUD to avoid violation of the [272 Or.App. 617] regulatory agreements governing the operation of the Projects, and to comply with HUD regulations[.] * * *
" * * * * *
" The final disapproval by HUD of a TPA or modified TPA for the transfer of management and control of a Project to [Lee Pacific] will be grounds for any Party to this Agreement to declare the termination of this Settlement Agreement and the releases contained in it as to that Project, subject to the exception below regarding attorney fees.
" * * * *
" c. [Century Pacific] will cooperate with [Lee Pacific], as necessary, in completion of appropriate HUD filings to renew previous governmental contracts and maintain the projects in compliance with HUD regulations * * *. [Century Pacific will not] take any action to assert management, control, or exercise any power to elect participation or non-participation in federal or state programs without specific written approval by [Lee Pacific] at any time after the effective date of this Agreement, other than to take measures which are necessary to protect its own participation with HUD in the period before HUD's approval of the TPA to [Lee Pacific].
" d. Notwithstanding anything stated herein to the contrary, in the event of a default on any of the Project mortgages insured by HUD or the State of Oregon, * * * the right of [Lee Pacific] that is based on or originated in this Agreement to manage and control each of the Projects shall immediately terminate, and [Century Pacific] shall be entitled to apply for a TPA reversion to [Century Pacific]. In such instance, the parties hereto shall be entitled to re-file their claims * * * and nothing in this Agreement shall be construed by any party to compromise or modify or interpret any right under the Notes, Sales Agreements, or Security Agreements.
" 3. Cooperation in Transfer of Assets, Control, Notices, Compliance.
" [Century Pacific] will timely execute, within ten days of presentation to them, any documents HUD requests from [Century Pacific] to verify information related to the transfer of control of the Projects and interests as provided in this Agreement, and to confirm the authority of [272 Or.App. 618] [Lee Pacific] to take any action or prepare and execute any document required by HUD to maintain compliance of the Projects with HUD regulations and directives; and, if requested by [Lee Pacific], [Century Pacific] will timely execute, within ten days of presentation to them,
any reasonable notices allowed or required under HUD regulations and directives. If [Century Pacific] fails to execute within ten days of presentation to it, a document which under this paragraph [Century Pacific is] obligated to execute within that time frame, then [Lee Pacific] is appointed as attorney in fact for the party in default, for the purpose of executing the document in behalf of [Century Pacific].
" * * * *
" 11. Transfer of Title. Upon the dates * * * which are the current maturity of the HUD Mortgage Notes, [Century Pacific] * * * shall, without further demand, action or compensation by [Lee Pacific], convey all of that right, title and interest * * * in the Project (including any and all Project accounts, revenues, receivables, associated personal property and real property) to the holder of the Note related to that Project, as conveyance in lieu of foreclosure of the Note. The obligation to convey the Project shall not be subject to any condition precedent other than the arrival of the [date of maturity on the HUD note], and shall not require that [Lee Pacific] * * * make any demand, proof, compensation, or take any other action to require any other party to convey the Project. This conveyance shall be effective upon the satisfaction of the HUD Mortgage. * * *
" 12. Delay Damages; Enforcement in the event of Breach. In the event of material breach in the performance of the obligations of this Agreement, the non-breaching party will be injured, but the dollar amount of the injury will be difficult or impossible to determine; and therefore, any party injured by a material breach by another party shall be entitled to specific performance of the terms of the Agreement. Nothing stated herein shall act as a waiver of any other claims the non-breaching party may have.
" 13. Notification to HUD. The terms of this Agreement shall be disclosed to HUD, and the parties shall all verify, as required, the transfers provided in this Agreement, and confirm that, upon such transfer, responsibility for appropriate HUD related filings shall rest with [Lee Pacific] as agent for the Property-Owning [272 Or.App. 619] Partnerships. [ Lee Pacific ] shall make all efforts to vigorously pursue its application for TPA or modified TPA approval from HUD."
(Boldface in original; emphases added.)
D. Post-settlement discussions regarding the meaning of the settlement agreement and whether submission of TPAs was required
Liebreich contacted HUD officials about HUD's approval of the terms of the settlement agreement before the agreement was even signed. In September 2003, a HUD official initially indicated that Lee Pacific would need to submit to HUD a " full TPA,"  but, when Liebreich emphasized that there was no change of ownership in the projects until the HUD notes matured, the official suggested that Lee Pacific could " go the route of power of attorney." The official expressed concerns about this approach, though, noting that, if " the owner signs over all of their rights of ownership and, one would assume, authority and responsibility for ownership, the department would view that as a change of ownership. That would invoke full TPA requirements."
After the agreement was signed, Liebreich presented the agreement to HUD officials and continued to manage the properties. Liebreich also continued to have sporadic conversations with various HUD officials about the settlement agreement. In October 2005, HUD official Greenman spoke to Liebreich, and Liebreich again indicated that, based on the fact that the settlement agreement
did not transfer ownership of the properties to Lee Pacific, Liebreich did not believe that Lee Pacific needed to submit a TPA to HUD. Greenman did not indicate whether a TPA was [272 Or.App. 620] needed, but instead requested a detailed explanation of the various partnership interests in the properties. Greenman also explained that HUD's biggest concern was knowing which entity had legal responsibility to HUD:
" [W]e don't basically care that you're the owner's agent in many things because it's the owner we want it through[, because] * * * legally if we have to go to court, * * *, we don't take the owner's agent to court we take the owner. * * * So, that's where HUD always comes from. They're looking at well, who is ...