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The Rightstone, Inc. v. Elfers Rrh, Inc.

United States District Court, D. Massachusetts

June 14, 2016

THE RIGHTSTONE, INC., Plaintiff,
v.
ELFERS RRH, INC., ELFERS R.R.H., LTD., C&M INVESTMENT LIMITED PARTNERSHIP, BOSTON CAPITAL PARTNERS, INC., Defendants.

          The Rightstone, Inc., Plaintiff, represented by Stephen W. Rider, Stephen W. Rider, PC.

          ELFERS RRH, LLC, Defendant, represented by Joseph E. Phelan, Phelan Law Offices, P.C..

          ELFERS R.R.H., LTD., Defendant, represented by Joseph E. Phelan, Phelan Law Offices, P.C..

          C&M INVESTMENT LIMITED PARTNERSHIP, Defendant, represented by Matthew T. McLaughlin, Nixon & Peabody, LLP, Jonathan Sablone, Nixon Peabody, LLP & Kacey Houston Walker, Nixon Peabody LLP.

          Boston Capital Partners, Inc., Defendant, represented by Matthew T. McLaughlin, Nixon & Peabody, LLP, Jonathan Sablone, Nixon Peabody, LLP & Kacey Houston Walker, Nixon Peabody LLP.

          REPORT AND RECOMMENDATION ON PLAINTIFF'S MOTION TO REMAND ACTION TO PLYMOUTH SUPERIOR COURT (#14).

          M. PAGE KELLEY, District Judge.

         I. INTRODUCTION.

         The original complaint in this action incorporated five claims: Count One, Breach of Fiduciary Duty; Count Two, Breach of Contract; Count Three, Declaratory Relief - Replacement of General Partner; Count Four, Declaratory Relief - Dissolution; and Count Five, Declaratory Relief - Replacement of Managing Agent. Plaintiff, The Rightstone, Inc. ("Rightstone"), instituted this action in the Plymouth County Superior Court on August 24, 2015; Defendants Elfers R.R.H., Ltd. ("Elfers Partnership") and Elfers RRH, LLC ("Elfers LLC") (collectively "Elfers Defendants") removed the case to the federal court on October 7, 2015. (#1.) Two weeks later on October 21, 2015, Elfers filed a motion to dismiss or, alternatively, to transfer action for forum non conveniens. (#8.)

         Rightstone amended the complaint on November 4, 2016 (##10-12) and two days later filed a motion to remand. (#14.) Defendants C&M Investment Limited Partnership ("C&M") and Boston Capital Partners, Inc. ("Boston Capital") filed a motion to dismiss (#19) the amended complaint on November 18, 2015. The Elfers Defendants followed suit a week later, filing a motion to dismiss the amended complaint. (#26.)

         All of the pending motions have been fully briefed. Presently before the Court for resolution is Plaintiff's motion to remand. (#14.)

         II. THE FACTS.

         According to the allegations set out in the complaint, [1] Rightstone, a Massachusetts corporation, is the Class A Limited Partner of the Elfers Partnership, a Florida limited partnership.[2] (#7-2 ¶¶ 1, 2.) Defendant Elfers LLC is a Florida limited partnership and the General Partner of the Elfers Partnership. (#7-2 ¶ 3.) Elfers LLC was owned and controlled by a developer named John M. Curtis until 2012 when the USDA Rural Development agency demanded his removal. (#7-2 ¶ 9.) Mr. Curtis was succeeded as the Managing Member of Elfers LLC by his wife, Gail W. Curtis. (#7-2 ¶ 9.) Defendant C&M is a Massachusetts limited partnership and the Class B Limited Partner of the Elfers Partnership. (#7-2 ¶ 4.) C&M is an affiliate of Boston Capital. (#7-2 ¶ 11.) Boston Capital is a Massachusetts corporation and the Special Limited Partner of the Elfers Partnership. (#7-2 ¶ 5.) The Special Limited Partner served as the liaison between the Elfers Partnership and the investor Limited Partners, and was granted certain rights and powers under the Limited Partnership Agreement for the Elfers Partnership ("Elfers LPA") to be exercised for the benefit and protection of the Limited Partners. (#7-2 ¶ 10.)

         The Elfers LPA was amended and restated on November 1, 1978 in order to raise capital to enable the Elfers Partnership to construct and operate a 74 unit low-income housing project known as "Orangewood Lakes Apartments" (the "Housing Project") in New Port Richey, Florida. (#7-2 ¶ 7.) Construction of the Housing Project was funded by the capital contributed by investors admitted pursuant to the 1978 amended and restated Elfers LPA together with a loan from the Farmers Home Administration ("FmHA") of the United States Department of Agriculture. (#7-2 ¶ 7.) The FmHA, which is now known as the "Rural Development" agency, continues to regulate the Housing Project.[3] (#7-2 ¶ 7.)

         As set forth in the Elfers LPA, a primary objective of the Elfers Partnership was the generation of a regular yearly cash distribution to its partners from the operations of the Housing Project. (#7-2 ¶ 13.) However, shortly after Rightstone purchased the Class A Limited Partner interest, the Housing Project started having financial problems. (#7-2 ¶ 15.) As a consequence, the Elfers Partnership did not make a cash flow distribution to Plaintiff for two or more consecutive years. (#7-2 ¶ 15.) The Elfers LPA provides, in part, that:

If... (ii) the Partnership shall not have distributed to the Partners Cash Flow of at least $1, 500 during each of any two consecutive years after the year in which the Initial Cash Flow Distribution Date occurs, then the Special Limited Partner, subject to FmHA approval if required, may forthwith terminate the management agreement with the Management Agent and appoint a new Management Agent.

         #7-2 ¶ 14 (quoting Elfers LPA Article XI at 33-4). Plaintiff's President, Neal M. Brown, questioned the General Partner, Mr. Curtis, about the default and suggested that he might request that the Limited Partner take action to replace the Management Agent. (#7-2 ¶¶ 1, 15.) Mr. Curtis dissuaded Mr. Brown from taking that proposed action, and the two began to discuss alternatives for Rightstone either to receive distributions or to sell its interest in the Elfers Partnership to a third party. (#7-2 ¶¶16, 17.) In 2011, Mr. Curtis was exploring the option of refinancing the FmHA mortgage loan at a higher amount, [4] with the plan being to distribute the anticipated additional mortgage proceeds to the partners. (#7-2 ¶ 19.) Based on representations made by Mr. Curtis, Rightstone agreed not to take any action either to sell its interest in the Elfers Partnership or to attempt removing Mr. Curtis or the Management Agent. (#7-2 ¶ 20.)

         In 2012, Mr. Curtis, through Elfers LLC on behalf of the Elfers Partnership, applied to Rural Development for permission to refinance the Housing Project. (#7-2 ¶ 21.) Upon inquiry, Rightstone was informed later in 2012 that the application to refinance had been tied up by a local Rural Development administrator and legal action had to be taken to force Rural Development to act on the application. (#7-2 ¶ 22.) Mr. Brown learned in late 2012 that Rural Development objected to Mr. Curtis continuing as a Managing Member of Elfers LLC and wanted him removed due to an outstanding judgment against him for breach of fiduciary duty with respect to a different housing project. (#7-2 ¶ 23.) Mr. Brown had grave concerns about removing Mr. Curtis, as Mr. Curtis was the only Elfers Partnership representative with whom Rightstone had had any substantial dealings. (#7-2 ¶ 24.) Before Rightstone would agree to the replacement of Mr. Curtis by his wife, Gail Curtis, Mr. Brown sought assurances through Boston Capital regarding the refinancing and the continuation of cash distributions. (#7-2 ¶ 25.) Upon receiving these assurances, Mr. Brown, on behalf of Rightstone, agreed that Gail Curtis could replace her husband as the Managing Member of Elfers LLC, and signed consent forms and documents to that effect as requested by Gail Curtis and Rural Development. (#7-2 ¶ 26.)

         Gail Curtis then took actions, and committed omissions, that delayed the refinancing and withheld cash distributions to Rightstone. (#7-2 ¶ 27.) These actions and omissions included: dismissing the Management Agent designated in the Elfers LPA without notice and replacing that entity with a Florida corporation controlled by Gail Curtis' daughter and son-in-law and, in addition, refusing to take steps to force Rural Development to take action on the Elfers Partnership refinancing in order to benefit another of Gail Curtis' projects. (#7-2 ¶¶ 28-29.) The refinancing of the Housing Project was ultimately approved and processed in December 2013. (#7-2 ¶ 32.)

         Rightstone did not receive the $16, 000 cash distribution to which it was entitled for the year 2014 due to the failure of Elfers LLC, its agents Gail Curtis as Managing Member and her daughter and son-in-law as Management Agent, to use best efforts timely to submit the necessary paperwork to Rural Development for approval. (#7-2 ¶¶ 35-37.) After these actions and omissions, Rightstone lost confidence in Elfers LLC and Gail Curtis, determined to remove Elfers LLC as General Partner in accordance with the provisions of the Elfers LPA, and seeks to dissolve the Elfers Partnership. According to the Elfers LPA, however, before Rightstone can act to remove the General Partner or dissolve the Elfers Partnership, it is incumbent on Plaintiff to obtain:

a prior determination of a court of competent jurisdiction in any action brought by or on behalf of the Limited Partners that neither the grant nor exercise of the rights afforded by the provisions sought to be exercised under the circumstances then in question will be deemed taking part in the control of the business so as to result in the loss of any Limited Partner's limited liability.

         #7-2 ¶ 39 (quoting Elfers LPA Section 4.6(A)). By means of the instant litigation, Plaintiff is requesting "that this Court make such prior determination so that Rightstone, as holder of the 94% interest of the Limited Partners, may remove Elfers LLC as General Partner and replace Elfers LLC with a competent and trustworthy general partner, may dissolve the Partnership and may proceed to the sale of its assets." (#7-2 ¶ 40.)

         III. DISCUSSION.

         The Elfers Defendants effected removal of this case on the grounds of both federal question jurisdiction and diversity jurisdiction. (#1.) It is axiomatic that "the removing party bears the burden of persuasion vis-a-vis the existence of federal jurisdiction.'" Lopez-Munoz v. Triple-S Salud, Inc.,754 F.3d 1, 9 (1st Cir. 2014) (quoting BIW Deceived v. Local S6, Indus. Union of Marine & Shipbldg. Workers,132 F.3d 824, 831 (1st Cir.1997)). Further, "removal statutes are strictly construed." Danca v. Private Health Care Sys., Inc.,185 F.3d 1, 4 (1st Cir. 1999) (citing Shamrock Oil & Gas Corp. v. ...


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