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Mullins v. Colonial Farms Ltd.

Superior Court of Massachusetts, Suffolk, Business Litigation Session

May 2, 2017

Joseph R. Mullins, On Behalf of Nominal Defendants CMJ Management Company et al.
Colonial Farms LTD. et al. [1]

          Filed May 3, 2017


          Mitchell H. Kaplan, Justice of the Superior Court.


         As reflected in the court's earlier Memorandum of Decision and Order on the Parties' Cross Motions for Summary Judgment (the Decision, capitalized terms shall have the same meaning in this memorandum as in the Decision), it is undisputed that, at Corcoran's direction, the Partnerships ceased making payment of the Incentive Management Fees to CMJ Management under the Supplemental Agreements in January 2010. Further, the termination of these payments would constitute a breach of each of the Supplemental Agreements, unless Corcoran (on behalf of the Partnerships) proved at trial that (i) Corcoran, Jennison and Mullins had all agreed that the Supplemental Agreements were to be cancelled as part of the transaction in which each of them repurchased their interests in the Partnerships from Paine Webber in 1999, and (ii) this cancellation was not reflected in the 1999 transaction documents as a consequence of a mutual mistake. Following a jury trial, on March 1, 2017, the jury answered the single question put to them in a special verdict slip concerning the existence of such a mutual mistake:[2] " NO." The parties had previously agreed that if the jury found that no mutual mistake had occurred, they would submit the question of how much should have been paid to CMJ Management by the Partnerships to the court for its decision, jury-waived.

         The court heard evidence on this issue on March 3, 2016 (as a supplement to the evidence presented during the jury trial). Three witnesses testified and an additional six exhibits were admitted in evidence. Thereafter, the parties submitted proposed findings of fact and conclusions of law.


          Findings and Conclusions Addressing the Manner in which the Incentive Management Fees are Calculated During Years in which there were no Regulatory/Loan Restrictions on Distributions

         The Supplemental Agreements for four of the Partnerships--Colonial, Marvin, Quaker, and Fawcett all provided that, " to the extent funds are available for [their] payment":

The Incentive Management Fee shall be an annual, non-cumulative fee payable out of cash available therefore . . . in an amount equal to, for each year, 40% of the amount, if any, by which Cash Flow for such year exceeds one-half of the maximum amount of distributable cash flow allowed by [the Federal and state regulator and the lender].[3]

         The limitations on the amount of cash that a Partnership could distribute existed as long as it had a loan backed by a state or federal agency for the purpose of fostering the development of affordable housing projects. Fawcett paid off its loan in 2003 and the other three partnerships paid off their loans in 2012. The first question to be decided is the method for calculating the amount of Incentive Management Fees due CMJ Management for years in which there was no lender limitation on the amount of cash that could be distributed to the Partnerships' owners. This question is principally a question of law because it requires the court to address the meaning of a provision in a contract. Where the court is basing its decision on any factual finding it will make this clear.

         Most of the background facts that provide the context for this question are undisputed and set out in the Decision. Briefly stated, in 1983, Paine Webber purchased a limited partnership interest in each of the Partnerships from Corcoran, Mullins, and Jennison and became the principal equitable owner of each. [4] As part of that transaction, each Partnership entered into a Supplemental Agreement with CMJ Management that provided for the payment of Incentive Management Fees. The court finds, as a matter of fact, that CMJ Management provided no additional services to the Partnerships under the Supplemental Agreements. Rather, these Supplemental Agreements were a means to achieve the financial terms of the deal that had been negotiated with Paine Webber. The Supplemental Agreements provided a mechanism for CMJ Management to receive supplemental cash distributions, i.e., supplements to the minimal cash that Corcoran, Mullins and Jennison would receive as deminimus owners of the Partnerships which were now principally owned by Paine Webber, if the cash available for and distributed each year exceeded certain base amounts. In 1999, Corcoran, Mullins and Jennison bought out Paine Webber's interests in the Partnerships, returning ownership of the Partnerships to that which it was before 1983. As noted above, in 2003 and 2012 the agency backed loans to the Partnerships were retired.

         While the agency backed loans were in place, a formula in the loan documents and related government regulations determined " the maximum amount of distributable cash flow" for each Partnership based upon the economic performance of the Partnership, as established in its annual audited financial statements. The term " Cash Flow" as used in the Supplemental Agreements is defined in the Partnership Agreements. According to the provision of the Supplemental Agreements quoted above, in any given year in which the economic performance of a Partnership permitted cash to be distributed under the loan documents, the Incentive Management Fee paid in that year could be no greater than 20% of cash distributed: " 40% of the amount, if any, by which Cash Flow for such year exceeds one-half of the maximum amount of distributable cash flow allowed" under the loan documents. In consequence, if for any reason " Cash Flow" was less than the maximum amount that could be distributed under the loan agreements, [5] the Incentive Management Fees would be less than 20% of the total cash distributed in that year.

         It is clear that once the agency backed loans were paid in full, there no longer was a " maximum amount of distributable cash flow allowed" by any lender. Mullins argues that this means that the Incentive Management Fee then simply became 40% of all Cash Flow, i.e., the incentive fee was due on the first dollar available for distribution by a Partnership. Clearly, that is not what the Supplemental Agreement says. It is also inconsistent with the premise underlying the purpose of the Supplemental Agreements, that is, that Incentive Management Fees would kick in only after Paine Webber, as the principal owner of the Partnerships, had first received some minimum return on its investment.[6]

         Mullins next argues that a fixed amount measured by what the " maximum amount of distributable cash flow allowed" by the lenders had been in years prior to the loans' repayment should be established for each Partnership. The court does not believe that those amounts have been entered in evidence. But more to the point, it is clear that no language that would support the creation of a fixed sum to be paid before the Incentive Management Fee is due is found in the Supplemental Agreements. The court would have to rewrite the Supplemental Agreements to reach that result, and it is not permitted " to suppose a meaning [to a contract] that the parties have not expressed." Rogaris v. Albert, 431 Mass. 833, 835, 730 N.E.2d 869 (2000).

         Corcoran argues that the Supplemental Agreement is unambiguous in providing that, when there are no loans outstanding that require a lender to set the " maximum amount of distributable cash flow allowed, " the " maximum amount of distributable cash flow allowed" is simply all the Cash Flow that a Partnership has available to distribute.[7] That is, however, not what the Supplemental Agreement actually says, but rather an interpretation of it. It is also generally the interpretation that the court adopts as reasonable and ...

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