Management Chapter 18 What legal or ethical obligations do partners

Chapter Eighteen

Real Property and Land Use

A MANAGER’S DILEMMA: PUTTING IT INTO PRACTICE

A Multiplicity of Interests

Issue Presented: What legal or ethical obligations do partners (or parent companies of

partners) have to one another when contemplating buying from another party additional

interests in a company they jointly own?

Before beginning negotiations to acquire any of Teachers’ interests, the company

controlled by the Simon family must address the fiduciary duties Si-Minn LP owes its partner

Triple Five. In the actual case, Si-Minn and the Simons bought 50 percent of Teachers’ interests

without first disclosing their intention to Triple Five. Triple Five then sued.

Under Minnesota law, a partnership is liable for the wrongful acts or omissions of a

partner. Thus, Minntertainment and MOAA can be liable for the alleged breaches of fiduciary

duties of Si-Minn LP. Similarly, MOAC LP can be liable for the wrongful acts of its partner,

MOAA.

Defendants make much of a clause in the MOAA partnership agreement that provides

that no partner shall be liable to any other partner except in the case of fraud or gross

negligence. Defendants contend that, unless the Court finds fraud or gross negligence,

Defendants are not liable to Triple Five even if the Court otherwise finds a breach of fiduciary

“Each partner has a duty to render to any partner on demand true and full information

as to all things affecting the partnership.” Moreover, a partner has a “broad common law duty

to disclose all material facts,” whether requested to do so or not. . . .

Triple Five argues that Defendants breached their fiduciary duties to Triple Five in part

by failing to disclose the fact that SPG was pursuing and negotiating a deal with Teachers. Both

parties were aware in March of 1998 that Teachers was considering a sale of all or part of its

interest in the Mall. Teachers wrote about its intentions to MOAA in early March 1998. Herbert

At the July 1998 MOAC partnership meeting, Teachers announced that it was actively

marketing the sale of its interest. After the meeting, an employee of Triple Five who had

attended the meeting, Shawn Samson, had a lengthy conversation with Randolph Foxworthy,

who had not attended the meeting. During this conversation Mr. Foxworthy assured Mr.

Defendants contend that their conduct did not breach their duty to disclose information

to Triple Five. Their argument is that SPG was the entity that negotiated and eventually

accomplished the deal with Teachers and SPG did not owe Triple Five any fiduciary duties.

Defendants cannot hide behind corporate formalities. As discussed above, most of the

individual Defendants, including Melvin and Herbert Simon and Randy Foxworthy, owed a

As a remedy, the court removed Si-Minn as managing partner of MOAA and as the

actual manager of the Mall, causing it to forfeit its right to 80% of the management fee paid to

MOAA

QUESTIONS AND CASE PROBLEMS

Question 1

Issue Presented: Can Arnholt establish a claim for adverse possession?

In order to establish a claim of adverse possession, “a party must prove, by clear and

convincing evidence, exclusive possession and open, notorious, continuous, and adverse use for

a period of twenty–one years.” Arnholt v. Carlisle, 2011 WL 2436590 (Ohio Ct. App. 2011).

In Arnholt, Carlisle first argued that because Arnholt did not occupy the residence and

property in question from 1993 to 1995, he did not meet the “continuousness” requirement of

Question 2

Issues Presented: (a) What are the legal rights and obligations of various parties under

several real estate and lending agreements, such as a ground lease, a letter of intent, and a

construction loan? (b) Is it lawful to preclude the sale or transfer of an interest in real

property to a class of individuals based upon their national origin?

(a) Ace. As the funds advanced by Construction Lender to Greenhorn for construction of

the apartment building were secured by a leasehold mortgage, the default of the construction

loan by Greenhorn does not affect Ace’s fee interest because Ace did not subordinate his fee

interest to the leasehold mortgage. If Construction Lender forecloses on the leasehold mortgage,

Although express conditions are generally strictly interpreted by the courts, such is not

the case where (i) the failure of the condition is technical in nature, (ii) the party seeking to

enforce the condition has substantially benefited from the other party’s performance, and (iii)

strict interpretation of the condition would amount to a forfeiture by the party failing to meet

(b) Greenhorn. Greenhorn executed the construction note and the leasehold mortgage

sought to be foreclosed by Construction Lender. Both Construction Lender and Greenhorn

expected that funding of the permanent loan would be used to pay off the construction note.

Funding of the permanent loan, however, was expressly conditioned by the standby

commitment requirements of the issuance of certificates of occupancy for 80 percent of the

Although the effectiveness of the letter of intent was expressly made subject to

preparation and approval of legal documentation thereof by counsel for both Construction

Lender and Permanent Lender, such language does not guarantee that the letter of intent is

unenforceable by the parties. Specifically, courts have increasingly found that such agreements

may constitute enforceable contracts even when express statements in the agreement provided

Despite the extension of the construction loan to December 31, 2011, the permanent loan

was not funded by December 31, 2011, and therefore an event of default under the construction

note, as amended by the letter of intent, occurred. As set forth below, in the event that

(c) Construction Lender. The construction note was not paid on or before December 31,

2011. As a result, an event of default of Greenhorn’s obligation to pay the construction note

occurred. Construction Lender’s remedies vis-à-vis Greenhorn for default of the construction

note would be dependent upon the existence of a one-form-of-action rule and/or prohibitions

Alternatively, many states have adopted anti-deficiency laws that can preclude the

ability of a lender to obtain a deficiency judgment against a borrower in the event that proceeds

from the foreclosure of the security interest are not sufficient to satisfy the underlying

obligation. In most states, however, such laws are designed to protect purchasers of personal

Alternatively, as set forth below, it may be possible for Construction Lender to bring an

action against Permanent Lender on the grounds that Construction Lender was a third-party

(d) Permanent Lender. It is clear that Permanent Lender was unable to fund the

permanent loan on December 31, 2011. The question of whether Permanent Lender’s inability to

fund the permanent loan constitutes a default of the standby commitment is dependent upon

The requirement that certificates of occupancy for 80 percent of the apartment building

be issued was met by Greenhorn. On the other hand, although Greenhorn submitted executed

leases to Permanent Lender sufficient to meet the 60 percent lease contingency, Permanent

(2) The refusal of Permanent Lender to approve several leases to individuals with

Chinese surnames, even though the financial condition of such individuals was equal to or

greater than the financial condition of tenants of leases previously approved by Permanent

Because Permanent Lender’s refusal to fund the standby commitment was the result of

its exercise of bad faith, Greenhorn would have an action against Permanent Lender for

damages suffered by Greenhorn as a result of Construction Lender’s foreclosure of the

leasehold mortgage, i.e., the amount of any deficiency judgment required to be paid by

Greenhorn and damage to his credit rating. It is also possible that Permanent Lender’s actions

may be deemed tortious and thereby subject it to punitive damages.

Additionally, Construction Lender may be able to bring an action against Permanent

Lender alleging that Construction Lender was a third-party beneficiary to the standby

commitment between Greenhorn and Permanent Lender. To qualify as a third-party beneficiary

Alternatively, Permanent Lender would have a potential malpractice action against its

attorneys based on its attorneys’ erroneous advice that restrictive covenants in deeds that

preclude the sale or transfer of an interest to classes of individuals based upon national origin

are enforceable.

Question 3

Issue Presented: What are the various ways in which ownership of property is legally

categorized when acquired in the context of a marriage? How are these determinations made?

What are the legal and financial implications of whether such property is categorized as

separate or community property?

(a) The Residence. The house was acquired prior to Patricia and Bobby’s marriage and

title was taken in joint tenancy. As a result, both Patricia’s and Bobby’s interest would be

characterized as separate property. Neither their subsequent marriage nor their use of

commingled funds for mortgage payments converted the ownership interest from that of joint

As a general rule, if separate property and community property funds have been

commingled in such a manner that it is impossible to ascertain and identify each source, the

commingled whole will be presumed to be community property. The commingling

presumption may be rebutted either through the use of the direct tracing method or the family

expense method. Under the direct tracing method, if it can be shown through a tracing of

If a written agreement to convert the ownership of the house to community property

were executed, a characterization of funds utilized to make house payments after Patricia and

Bobby’s separation would also have to be made. Generally, in California and most other states,

the earnings of each spouse after separation are separate property. Consequently, any payments

made by either Patricia or Bobby after separation would be characterized as separate property.

(b) Proceeds of sale of BioGene stock. At the outset, Patricia’s stock in BioGene Corporation

was her separate property because it was purchased with monies received by inheritance. As a

general rule, the rents, issues, and profits of separate property have the same character as their

In such instances, the courts will generally use one of two rules to characterize the

community property element of the increase in value of the separate property. A determination

of which method the court will utilize depends primarily upon whether the chief contributing

Alternatively, if the court finds that the spouse’s personal services were not the greater

factor in creating the profits, then the court will usually allocate the reasonable value of the

spouse’s services to community property, and allocate the balance to separate property.

In the present case, it would appear that the large increase in the value of BioGene

Corporation’s stock was primarily the result of Patricia’s skill and efforts, and therefore the first

Question 4

Issues Presented: May the buyers of parcels of real estate within the Newport Historic

District terminate the sales agreement in light of the seller’s failure to disclose that the

parcels in question were located within a historic district?

In American Capital Corp. v. Blixseth, 563 F. Supp. 2d 316 (D.R.I. 2008), the district court

determined that the parcel’s location in a historic district was material information that had to

be disclosed to the buyer. The court granted the Blixseths’ motion for summary judgment on

Question 5

Issues Presented: Was the easement and operating agreement enforceable after Kaufman-

Straus sold its store?

The discount store argued that its purchase of the store from Kaufman-Straus divested

the remaining tenants of any right to enforce the easement and operating agreement (EOA). In

rejecting the discount store’s argument, the court in Net Realty Holding Trust v. Franconia

Properties, Inc., 544 F. Supp. 759 (1982), explained:

Section 29.3 of the EOA provides that all covenants in the EOA “are intended to

be and shall be construed as covenants running with the land, binding upon,

inuring to the benefit of and enforceable by the parties hereto and their

Question 6

Issue Presented: Did Williams show that his suggested method of barrier removal was

“readily achievable” under the ADA?

The ADA defines “readily achievable” as “easily accomplishable and able to be carried

out without much difficulty or expense.” 42 U.S.C. Section 12182(a). The ADA further sets out

several factors to be considered in determining whether removal of architectural barriers is

readily achievable:

(1) nature and cost of the action; (2) overall financial resources of the facility or

facilities involved; (3) number of persons employed at such facility; (4) effect on

In Colorado Cross Disability Coalition v. Hermanson Family Limited Partnership, 264 F.3d 999

(10th Cir. 2001), the U.S. Court of Appeals for the Tenth Circuit, affirmed the lower court’s

decision dismissing Williams’s suit. The court agreed that Williams failed to meet the burden of

showing that his suggested method of barrier removal was readily achievable. Noting that it

was a “close case,” the court ultimately concluded that Williams introduced evidence regarding

only “speculative concepts of ramp installation, rather than evidence that a specific design was

readily achievable. The court explained further:

Question 7

Issue Presented: Was the conversion fee the San Remo Hotel was required to pay a

compensable taking?

In San Remo Hotel, LP v. San Francisco, 41 P.3d 87 (Cal. 2002), the Supreme Court of

California ruled that the conversion fee of $567,000 paid by the San Remo Hotel was not a

taking without just compensation. The hotel owners paid the “in lieu” fee under San

The California Supreme Court cited the U.S. Supreme Court’s analysis of what

constitutes a taking under the Fifth Amendment to the U.S. Constitution in Lucas v. South

Carolina Coastal Council, 505 U.S. 1003 (1992): “Property has been found to be taken when a

In San Remo Hotel, the California Supreme Court ruled that the fees were not arbitrary

and capricious but constituted a legitimate use of state power:

The federal and state takings clauses, to be sure, place a limit, imprecise as it may

be, on the regulatory burdens an individual property owner may be made to

bear for public purposes. The breadth or narrowness of the class burdened by the

regulation, the extent to which a regulation defeats the owner’s reasonable

appropriation of an automobile is inapposite. A law arbitrarily selecting a private automobile

owner to dedicate his or her car to public use or pay for the government to buy another one

would, as the dissent suggests, clearly require compensation. Less clear, but more like the

present case, would be a law requiring all common carriers to take certain mitigation measures

The California Supreme Court also considered the implications of Nollan and Dolan. In

Nollan v. California Coastal Commission, 483 U.S. 825 (1987), the U.S. Supreme Court ruled that the

public access route required on the Nollans’ private property was an unconstitutional taking

because it did not advance a legitimate government interest. The Supreme Court found no

Only “individualized development fees warrant a type of review akin to the

conditional conveyances at issue in Nollan and Dolan.” Under our precedents,

therefore, housing replacement fees assessed under the HCO are not subject to

Nollan/Dolan/Ehrlich scrutiny. . . .

We decline plaintiffs’ invitation to extend heightened takings scrutiny to all

development fees, adhering instead to the distinction we drew in Ehrlich, 12 Cal.

4th 854, Landgate, 17 Cal. 4th 1006, and Santa Monica Beach, 19 Cal. 4th 952,

The California Supreme Court noted another important difference between Nollan and

Dolan on the one hand and San Remo Hotel on the other—the HCO regime did not involve the

actual invasion of property:

Finally, we should not lose sight of the constitutional background. To put the

matter simply, the taking of money is different, under the Fifth Amendment,

The California Court then concluded that there was a reasonable relationship between

the fee and the housing lost:

Challenging the ordinance on its face, plaintiffs assert there is no connection between the

housing replacement fees assessed and the housing lost by conversion to tourist use. We

conclude, to the contrary, that the housing replacement fees bear a reasonable relationship to

loss of housing. Under the ordinance, the amount of the in lieu fee is based on the number of

rooms being converted from residential to tourist designation; the number of rooms designated

residential is, in turn, based on the self-reported use as of September 23, 1979, shortly before a

Question 8

Issue Presented: What is the proper takings analysis for an ordinance requiring enclosed

parking spaces for figure eight race cars?

The court in Iowa Assurance Corporation v. City of Indianola, Iowa, 650 F.3d 1094 (8th Cir.

2011), sided with the City of Indianola, after finding the Penn Central takings standard to be the

appropriate standard. In doing so, the court rejected Watson’s assertions that alternative

regulatory tests govern, namely physical invasion type regulatory takings (from Loretto v.

Teleprompter Manhattan CATV Corp., 458 U.S. 419 (1982)) and land-use exactions (from Nollan v.

California Coastal Commission, 483 U.S. 825 (1987); Dolan v. City of Tigard, 512 U.S. 374 (1994)).

The court rejected the application of Loretto to the case at hand. By its own terms,

explained the court, the ordinance in this case did not require Watson to permit either the City

or any third party to enter the property and install a fence. Thus, the ordinance did not “erode

Watson’s right to exclude others from the property, which is central to establishing a Loretto

claim.” In an attempt to circumvent this conclusion, Watson argued that he was compelled to