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Lombardi Corp. v. Urban Improvement Fund Ltd.

Superior Court of Massachusetts, Suffolk, Business Litigation Session

May 20, 2016

Lombardi Corporation, General Partner et al.
v.
Urban Improvement Fund Ltd. 1973 Other Parties Urban Improvement Fund Limited-1973
v.
Lombardi Corporation et al No. 134166

          AMENDED FINDINGS OF FACT, RULINGS OF LAW AND ORDER FOR JUDGMENT

          Mitchel H. Kaplan, Justice

         INTRODUCTION

         The parties to these cases were partners in the development and ownership of an apartment complex in Brighton, Massachusetts pursuant to a limited partnership agreement entitled the Brighton Gardens Apartments Amended & Restated Limited Partnership Agreement and dated December 31, 1973. (These apartments will hereafter be referred to as Brighton Gardens, the partnership agreement as the LP Agreement and the limited partnership as the Partnership.) They were also parties to a prior action filed in this court and session ( Urban Improvement Fund Limited--1973 v. Lombardi Corporation, CA No. 06-1331 BLS 1, hereafter BGA I ) which concluded just at the time that these consolidated actions commenced. That action resulted in a judgment in favor of Urban Improvement Fund Limited--1973 (Urban) which Lombardi Corporation satisfied with a cash payment of $2, 458, 216.69, the cash generated by the sale of Brighton Gardens. Lombardi Corporation brought the first of the instant consolidated actions ( BGA II ) seeking a declaration, among other things, that the sum paid to Urban was, in effect, a Partnership expense, and that Lombardi Corporation, as general partner of the Partnership, had properly accounted for the distribution of the net proceeds of the sale of Brighton Gardens according to the Partnership Agreement. Urban shortly thereafter filed its own action ( BGA III ) asserting that the sum it received from Lombardi Corporation in satisfaction of the judgment was a Lombardi Corporation obligation, and Lombardi Corporation was not entitled to any indemnification from the Partnership. Urban also alleged that Lombardi Corporation had paid related entities sums to which they were not entitled and not distributed the true net proceeds of the sale of Brighton Gardens in accordance with the LP Agreement. Urban pled BGA III in eleven counts: Breach of Contract; Breach of the Covenant of Good Faith and Fair Dealing; Breach of Fiduciary Duty; Fraudulent Conveyance against Lombardi Corporation; Aiding and Abetting Fraudulent Conveyance against Michael Lombardi; Aiding and Abetting Breach of Fiduciary Duty against Michael Lombardi; Fraudulent Conveyance Against Michael Lombardi as Partner of Lombardi & Stephenson; Unjust Enrichment Against Kendra Stephenson as Partner of Lombardi & Stephenson; Constructive Trust Against Michael Lombardi; Injunctive Relief and Declaratory Judgment.

         These consolidated cases were tried to the court, jury-waived, on January 26 through January 28, 2016. Four witnesses testified and 70 exhibits were admitted in evidence. The parties requested leave to file post-trial pleadings, which were docketed on March 8, March 17, and March 25, 2016. In consideration of the evidence and the pleadings, the court makes the following findings of fact, rulings of law, and order for the entry of final judgment.

         FINDINGS OF FACT

         Based upon the evidence presented at trial and reasonable inferences drawn from that evidence, the court makes the following findings of fact. Certain subsidiary findings are reserved for discussion in the rulings of law.

         Brighton Gardens is a 62-unit affordable housing apartment complex located at 109-111 Tremont Avenue in Brighton, Massachusetts. The development of Brighton Gardens began in 1971 and was managed by JBL Construction Company, Inc., (JBL) a business founded and owned by defendant Michael Lombardi's father, Joseph Lombardi. (The Lombardis will be referred to by their first names to avoid confusion.) In 1973, the current LP Agreement was executed. Joseph and JBL were the general partners of the Partnership and Urban became the sole limited partner.[1] Schedule A to the LP Agreement reflects Urban's investment of $370, 000 as a limited partner and records the general partners' capital as $500. Sums invested by Joseph and other individuals prior to the LP Agreement were converted to Partnership Advances and Residual Receipt notes. Under the terms of the Partnership Agreement, on sale of the Partnership's assets, after payment of expenses, these advances and notes, and return of capital, Urban and the general partners (collectively) would each receive 50% of the proceeds. The Massachusetts Housing Finance Agency (MHFA) provided the financing for the project.

         When completed, Brighton Gardens originally consisted of two 62-Unit apartment buildings; however, in 1979 a fire completely destroyed one of the buildings. The insurance proceeds were insufficient to cover the existing mortgage on that building and MHFA agreed to loan the Partnership the difference ($19, 000), with interest accruing at a compounded rate of 10% annually. Joseph loaned the Partnership $13, 000 on similar terms to construct a fence around the now vacant parcel (which was referred to as 99 Tremont).

         In 1992, JBL ceased its operations and was replaced as one of the two general partners by Lombardi Corporation, another Massachusetts corporation founded by Joseph. Joseph died in 1994, and Michael returned to Massachusetts from Illinois, where he was then employed, to run Lombardi Corporation. Michael had an undergraduate degree in civil engineering and a law degree from New England School of Law which he acquired by night study. At all times relevant to this action, Lombardi Corporation was the manager of Brighton Gardens under a management agreement with MHFA. Its shareholders were Michael (45%), Louis Lombardi (42.5%), Beradino Lombardi (7.5%), and Kendra Stephenson (2.5%). Stephenson is a lawyer employed in Michael's law firm and his cousin.

         During the 1990s, Michael had discussions with a representative of Security Properties about developing the vacant parcel, but Security Properties wanted to manage any development and nothing came of these discussions. In 2000, the MHFA refinanced Brighton Gardens. From the loan proceeds, after repayment of MHFA's post-fire loan and accrued interest, approximately $1.5 million was distributed to Lombardi Corporation, which it proceeded to use in an effort to develop the vacant parcel. Between that time and 2004, it appears that most of that sum was paid to architects, engineers and other professionals for work done in connection with that development effort. In 2004, the Boston Redevelopment Authority (BRA) issued a so-called Adequacy Determination for a 62-unit apartment/condominium complex to be built on the vacant parcel. Although preliminary plans and construction estimates were thereafter obtained, as a result of litigation filed by an abutter in 2004, development ceased and, presumably as a result of the economic recession, never recommenced.

         The application to the BRA was made by Tremont Redevelopment Corporation (TRC). TRC was a Massachusetts corporation; it was incorporated in 1998 and dissolved in 2011. Michael and Louis Lombardi each owned 50% of the shares of TRC, and Michael was its president. Upon dissolution, its receivables were assigned to Michael and Louis, individually. Admitted in evidence as Exhibit 23 is a document entitled: The 99 Tremont Street Residences Development Agreement (the Development Agreement), which recites that it is a contract between the Partnership and TRC. It is signed on behalf of the Partnership by Louis, as vice president of Lombardi Corporation, and on behalf of TRC by Michael, as its president. It is dated August 31, 1998. It was not provided to Urban until it was produced by Lombardi Corporation in connection with the BGA I litigation in 2007.

         Section 3 of the Development Agreement is entitled Compensation to Consultant. It provides, in relevant part, that TRC " shall commence work upon execution of the Agreement and shall defer billing the owner until completion of the Programming Phase . . . Owner shall pay [TRC] at the conclusion of the Programming Phase a fee of [$10, 000] per month, due on the first business day of the month following completion of the programming Phase. The Owner shall pay a finance charge of 1.0% per month on any and all unpaid or deferred invoices that are delinquent for more than thirty days." At some point, Michael caused a series of invoices to be generated reflecting payments purportedly due TRC from the Partnership for services rendered. According to a legend on the invoices, they were all for work done during the " Programmatic Phase." [2] Each invoice covers a period of six months and, collectively, cover the period August 31, 1998 through May 15, 2004. The last invoice includes a statement to the effect, among other things, that on May 15, 2004 a non-contiguous abutter filed an action challenging a zoning variance. The implication is that development efforts stopped at that point. The court finds that none of these invoices were prepared on the dates appearing on the invoices. Indeed, that court finds that Lombardi Corporation has failed to prove that they were prepared at any time prior to the sale of Brighton Gardens. The court further finds that neither the invoices nor the TRC Development Agreement were provided to the Partnership's accountant and auditor Gerard Mayer until, at the earliest, the time that the Partnership's audited Financial Statements for the year ended December 31, 2013 were prepared. Indeed, the first reference to this development fee liability in any financial report appears in the 2013 statements, and then only in its final footnote (j), where the following is written: " The partnership is responsible to establish reserves for the for the [sic] payment of its debts and obligations, including . . . development fee to Tremont Redevelopment Corp. of $967, 000." It is noteworthy that this footnote is in different typeface than the rest of the financial statements. The Partnership's 2013 financial statements were not delivered to Urban until May 2014.

         In 2006 Urban filed suit against Lombardi Corporation ( BGA I ). The complaint contained allegations describing the history of Brighton Gardens and the relationship between the parties. Among other claims, Urban asserted that (i) it was entitled to the appointment of its designee as the sole general partner of the Partnership and the removal of Lombardi Corporation, (ii) Lombardi Corporation had breached the LP Agreement and converted assets by not distributing to Urban 50% of the net proceed of the MHFA refinancing that closed in 2000, and (iii) Lombardi Corporation had also breached the LP Agreement (a) by failing to disclose the Development Agreement between the Partnership and TRC, including TRC's alleged right to be paid development fees in connection with the development of the vacant lot, (b) by failing to obtain Urban's prior approval of the Development Agreement, and (c) because the terms of the Development Agreement was not consistent with market standards.

         The parties settled BGA I in March 2010, which settlement was revised pursuant to a Revised Settlement Agreement dated October 22, 2010 (the Settlement Agreement). In the settlement agreement, Lombardi Corporation agreed to purchase Urban's limited partnership interest in the Partnership for $2.6 million, and Urban agreed to dismiss BGA I with prejudice. While the settlement agreement made reference to the fact that Lombardi Corporation had received an offer to purchase the vacant parcel, together with all related development permits and BRA approvals, from a third party for $2.3 million, the agreement was clear that it was not contingent on the sale of the vacant parcel and Lombardi Corporation was unconditionally obligated to purchase Urban's interest. The sale of the vacant parcel failed to close; Lombardi Corporation was not able to purchase Urban's limited partnership interest on the date designated in the settlement agreement; Urban's motion to vacate the dismissal of BGA I was allowed; and Urban proceeded to enforce the Settlement Agreement in further proceedings in BGA I .

         The court summarily held that Lombardi Corporation had breached the settlement agreement. Urban then opted not to set aside the Settlement Agreement and litigate BGA I or to seek specific enforcement of it. Rather, Urban elected to seek monetary damages for the breach. The case proceeded to a hearing on assessment of damages. Even though evidence was entered during that hearing that Lombardi had found a buyer prepared to pay $8.2 million for the developed lot, the court found that, apparently because of risks the MHFA would not approve the sale or that it would not close for other reasons, the fair market value of Urban's limited partnership interest in the Partnership (including both the developed and vacant lots) was only $1, 123, 000. Accordingly, applying a benefit of the bargain measure of damages, the court concluded that Urban suffered damage of $1, 452, 000 as a consequence of Lombardi Corporation's breach of the Settlement Agreement ($2, 600, 000 minus $1, 123, 000 minus a $25, 000 down payment paid to Urban when the settlement agreement was executed). The court further held that prejudgment interest on this sum was due from June 21, 2011 and Urban was also due its attorneys fees incurred in enforcing the Settlement Agreement. Lombardi Corporation pursued an unsuccessful appeal, and, when the dust settled, a final judgment entered after rescript in the amount of $2, 458, 216.69. Because Urban had only sought damages measured by the benefit of its bargain with Lombardi Corporation, Urban retained its limited partnership interest in the Partnership. Of course, Lombardi Corporation also benefitted because of the dismissal with prejudice of all the claims asserted against it by Urban in BGA I .

         Notwithstanding the testimony introduced during the assessment of damages hearing concerning Lombardi Corporation's probable inability to consummate the sale of the parcels, the sale of the developed lot closed on August 7, 2014 at a price of $8.2 million, and the sale of the vacant lot closed on September 10, 2014 at a price of $2 million. Prior to the closing, Urban obtained an order from the court directing the Lombardi Corporation and the Partnership to cause the settlement agent to wire the judgment amount to Urban from the proceeds of the first of these sales, and this was done.

         Also prior to the closing, Urban moved, in BGA I, for an order that an additional $3.6 million of the proceeds of the sale be placed in escrow and then distributed to it in six months. It based its request on an assertion that under the terms of the LP Agreement it would be due approximately $3.6 million in additional distributions following the sale of both the parcels. The court entered Urban's requested order, even though the amount that Urban would be due on the sale of the parcels had never been litigated; indeed, it was not even the subject of any allegations in the BGA I complaint or discussed in the Settlement Agreement, which contemplated the sale of all of Urban's interest in the partnerships for $2.6. After the sale of the parcels closed, Lombardi Corporation filed BGA II and, on its motion, this court vacated that part of the prior order entered in BGA I that required the $3.6 million to be distributed to Urban. The court, however, ordered that $3.6 million continue to be held in escrow and distributed in a manner consistent with a final judgment entered in BGA II and BGA III (which Urban filed with the court's permission shortly thereafter).

         On January 5, 2015, Lombardi Corporation, in its capacity as general partner of the Partnership, sent Urban its version of a final accounting of the distribution of the net proceeds of the sale of the parcels, other than the $3.6 million held in escrow. Urban objected to the accounting. It asserted that many of the Partnership's putative liabilities that Lombardi Corporation paid to itself and its affiliates were not legitimate Partnership obligations, and that the distribution tiers set out in Section 8 of the LP Agreement (sometimes referred to in the industry as the " waterfall") had not been followed. Urban's position in BGA III is that even if the entire $3.6 million escrow was released to it, Lombardi Corporation would still owe it approximately $788, 000. And, to the extent that Lombardi Corporation had distributed sale proceeds to its principals or other related parties, and therefore could not satisfy a judgment entered in Urban's favor, these distributions were fraudulent transfers.

         THE NET PROCEEDS OF THE SALES AND DISPUTED ITEMS

         Using the HUD-1 settlement statements for the sale of the parcels, Urban calculated the aggregate net sales proceeds, after subtracting the cost of sales and repayment of encumbrances, for both parcels as $8, 829, 016. To arrive at this sum, Urban subtracted the seller's portion of the broker's commission $301, 000, included in the HUD-1s. The other costs of the sales are not disputed. Therefore this net sales figure is a reasonable starting point for the court's calculation of the amounts due each of Urban and Lombardi Corporation from the sale of all of the Partnership's assets.

         There were additional Partnership liabilities, not associated with the sale itself, that were paid from the proceeds of the sale that are not in dispute. They total: $210, 235. Some of those funds went to Lombardi Corporation or to the law firm Lombardi & Stephenson, but Urban does not contest those payments.

         There are several Partnership liabilities apparently due to third parties and not yet paid, for which a reserve must be established. They total: $119, 898. These, too, are not subject to dispute.

         Lombardi Corporation has also set up a reserve for Partnership litigation expenses regarding an unresolved matter. The reserve is $155, 000. Urban does not dispute that amount.

         The following amounts are sums that Lombardi Corporation, or entities allegedly affiliated with it, claim they are due and which Urban disputes. Some were paid at the closing of the sales of the parcels, some later, and some perhaps not yet. For the purposes of the court's calculation of the amount due each partner from the net proceeds of the sales, that distinction is not material.

1. $2, 458, 217--the amount of the BGA I judgment.
2. $201, 094--the legal fees due from Lombardi Corporation to Lombardi & Stephenson for the defense of BGA I, up to the time of the settlement.
3. $167, 188--the legal fees due from Lombardi Corporation to Lombardi & Stephenson in connection with the enforcement of the Settlement Agreement.
4. $275, 000--the legal fees incurred by Lombardi Corporation in connection with the present litigation, including a reserve for fees not yet incurred as of January 7, 2015.
5. $126, 400--principal amount of GP Advances and Residual Receipt Notes as of date of sale.
6. $661, 525--interest accrued on these amounts at 12% per annum, compounded annually.
7. $805, 000--fees due TRC under the Development Agreement.
8. $826, 000--interest accrued on Development Agreement fees at 1% per month.
9. $63, 000--rent due MBC Realty Trust for space used by a consultant in the development effort.
10. $43, 470--interest accrued on that rent.
11. $301, 000--brokerage fee to Lombardi & Stephenson on sale of parcels.
12. $190, 000--legal fee to Lombardi & Stephenson for legal services rendered in sales transaction.
In the rulings of law that follow, the court will consider which, if any, of these sums is a payable expense of the Partnership or, conversely, properly contested by Urban.

         RULINGS OF LAW

         1--the BGA I Judgment

         Little time need be spent on Lombardi Corporation's contention that it was entitled to indemnification from the Partnership for the payment of the BGA I judgment. It is not uncommon for disputes between partners in a business enterprise to be settled by one partner agreeing to purchase all of the interests of the other partner. That is what Lombardi Corporation and the Partnership agreed to in the Settlement Agreement.

         Lombardi Corporation directs the court to the relatively standard provision in the LP Agreement (Section 5.7) providing indemnification to the General Partner for its conduct of the affairs of the Partnership:

Any General Partner shall be entitled to indemnity from the Partnership for any act performed by him within the scope of the authority conferred on it or him by this Agreement, except for acts of malfeasance or gross negligence or for damages arising from any misrepresentation or breach of covenant or warranty, provided that any indemnity under this Section shall be provided out of and to the extent of Partnership assets only, and no Limited Partner shall have any personal liability on account thereof.

         It then argues that because the complaint in BGA I was premised on acts of Lombardi Corporation, as general partner, or its predecessor general partners, Lombardi Corporation must be entitled to indemnification for the judgment entered in BGA I . Whether Lombardi Corporation would be entitled to indemnification if BGA I had been litigated to conclusion is debatable, but not a question that need be considered in the instant case, as Lombardi Corporation settled BGA I by agreeing to purchase Urban's interest in the Partnership. Lombardi Corporation's promise to purchase Urban's interest was not made in furtherance of any right or obligation of the general partner under the Partnership Agreement, it was a separate contractual undertaking of the Lombardi Corporation. Moreover, given the amount for which the Partnership later sold both of its assets, Lombardi Corporation would have enjoyed a substantial economic benefit if it had met its contractual obligation to purchase Urban's ...


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