Defining “Projects” in a California Real Estate Partnership Agreement

San DiegoAuthor: Staff

In a recent unpublished California appellate decision, the plaintiff appealed after a bench trial was conducted on his complaint for breach of contract and breach of fiduciary duty. The case arose when one of the defendants, who’d worked as a real estate developer in Illinois for 21 years before moving to San Diego, needed seed money for a potential development. He contacted his childhood friend to see whether he’d be interested in creating a partnership to invest money to follow the opportunity.

The childhood friend agreed and formed Gimbel Corporation with another friend. Meanwhile, the defendant formed Kriozere Corporation, in which he was the sole shareholder. The two corporations formed a general partnership. Gimbel invested $250,000 in a development in downtown San Diego, and both partners enjoyed profits from this first project.

In 1993, the initial partnership agreement was changed to reallocate profits between the partners. Gimbel invested in some properties with Kriozere under the second agreement. In 2006, the partners restructured their partnership so that Gimbel was a limited partner, while Kriozere was a general partner. The childhood friend’s other friend replaced the childhood friend as director of Gimbel.

Later, Gimbel lost money on one of the projects. A lender notified the partnership that it planned to sell the property and the loans. The defendant sent a letter about its plans to sell the property and the Urban West loans. He sent a letter to the director of Gimbel, asking for an additional investment and letting him know about the possible foreclosure. Later, the defendant’s attorney told Gimbel’s director about the notices of default on project loans and then told him that foreclosure was imminent. He also offered Gimbel the opportunity to contribute in order to avoid foreclosure.

Gimbel declined all of these offers. The defendant reached an agreement with an individual who said he’d buy out the lender’s interest in the property by contributing up to $21 million. The defendant gave Gimbel the right of first refusal, and it declined, so the defendant signed a term sheet with the individual, who brought in a mortgage bank. The mortgage bank was willing to buy out the lender’s interest.

Meanwhile, the defendant created a new partnership. The individual didn’t give the $20 million that was required. There was an agreement to proceed if the individual and Kriozere were each willing to invest $5 million. The individual chose not to invest. The partnership, individual, and mortgage bank weren’t able to conclude a purchase agreement related to the property, so the lender foreclosed on the project.

After foreclosure, the mortgage bank continued to try to buy the property, offering the defendant a chance to be the development manager if he’d pay off a lien based on an earlier lawsuit. The bank created an LLC to develop the property in a new project and entered into a development management agreement with the partnership created by the defendant and his friend. But neither the defendant nor the corporation he created to serve as a partner in the partnership got any interest in the property or the LLC.

Gimbel, however, claimed it was entitled to 40% of the developer fee of the new project. The defendant’s attorney gave Gimbel the chance to participate if it would contribute some of the money paid to remove the lien. Gimbel said no.

In 2013, Gimbel sued various parties, including the defendant, claiming breach of the partnership agreement, breach of fiduciary duty, and fraud, among other things. The defendants counterclaimed. At a bench trial, the defendant characterized the new project as a project under the partnership agreement, claiming that since the defendant and his corporation had participated in it without including Gimbel, they had breached a provision of the agreement that required them to only conduct projects in the partnership. They could only conduct projects outside the partnership when Gimbel declined to give the required pre-construction financing. Otherwise, they had to conduct the project within the partnership and pay Gimbel 40%.

The defendants argued the new project didn’t count under the partnership agreement because it didn’t fall within the purpose of the agreement to acquire, own, operate, market, sell, or otherwise dispose of real estate investments. They also argued that Gimbel’s refusal to give money for the purpose of settling the lien was a refusal to provide pre-construction financing. The lower court found for the defendants, noting that upon the foreclosure sale, the original development ceased to be a project of the partnership, and the new project didn’t fall within the purpose of the partnership. The new project didn’t have to do with acquiring, owning, operating, or otherwise disposing of real estate.

The appellate court reasoned that the trial court had correctly determined the partnership agreement was ambiguous with regard to the scope of projects. It found the new project was not a project under the partnership agreement, since the agreement didn’t contemplate real estate activities that didn’t involve financial investment in real property. For these and other reasons, the judgment was affirmed.

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