SUNAMERICA HOUSING FUND 1050, Plaintiff-Appellee, v. PATHWAY OF PONTIAC, INC.; PV NORTH LLC; PRESBYTERIAN VILLAGE NORTH, Defendants-Appellants.
No. 21-1243
UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT
May 10, 2022
RECOMMENDED FOR PUBLICATION Pursuant to Sixth Circuit I.O.P. 32.1(b). File Name: 22a0100p.06. Argued: January 28, 2022. Decided and Filed: May 10, 2022. Before: CLAY, GRIFFIN, and STRANCH, Circuit Judges.
Appeal from the United States District Court for the Eastern District of Michigan at Detroit. No. 2:19-cv-11783—Arthur J. Tarnow, District Judge.
COUNSEL
ARGUED: David A. Davenport, BC DAVENPORT, LLC, Minneapolis, Minnesota, for Appellants. Louis E. Dolan, Jr., NIXON PEABODY LLP, Washington, D.C., for Appellee. ON BRIEF: David A. Davenport, Alexander M. Hagstrom, BC DAVENPORT, LLC, Minneapolis, Minnesota, Kevin J. Roragen, LOOMIS EWERT PARSLEY DAVIS & GOTTING, P.C., Lansing, Michigan, for Appellants. Louis E. Dolan, Jr., NIXON PEABODY LLP, Washington, D.C., Seth A. Horvath, Keith E. Edeus, Jr., NIXON PEABODY LLP, Chicago, Illinois, Larry J. Obhof, Jr., Mark D. Wagoner, Jr., SHUMAKER, LOOP & KENDRICK LLP, Toledo, Ohio, for Appellee.
JANE B. STRANCH, Circuit Judge. This case arises from a contractual dispute among partners of a limited partnership formed to operate a low-income housing complex pursuant to the Low-Income Housing Tax Credit (LIHTC) program,
I. BACKGROUND
A. The Low-Income Housing Tax Credit Program
Because the parties’ claims are intertwined with LIHTC—a highly complex,
A typical arrangement under LIHTC proceeds as follows. See generally Off. of the Comptroller of the Currency, Low-Income Housing Tax Credits: Affordable Housing Investment Opportunities for Banks 6-9 (Mar. 2014), https://www.occ.gov/publications-and-resources/publications/community-affairs/community-developments-insights/pub-insights-mar-2014.pdf (providing general overview of the mechanics of LIHTC). A low-income housing developer first applies to a state housing credit agency for an award of federal tax credits. If the state agency grants the application, the developer then enters into a limited partnership as a general partner with a private investor as a limited partner. Often, the investor is a bank or another financial entity that has ample annual tax liability of its own that makes acquiring the nonrefundable tax credits a worthwhile investment. The limited partner investor then provides the capital needed to build and develop the low-income housing development. In return, the partnership allocates the vast majority (usually 99.99%) of tax credits and other tax benefits to the investor. These benefits alone provide the investor with a significant return on investment that makes the arrangement attractive and worthwhile to the investor. See, e.g., Ernst & Young, Low-Income Housing Tax Credit Assessment Survey 6 (2009), https://www.nahma.org/wp-content/uploads/files/member/Tax%20Credit/Legislative%20Study_FINAL%20092509.pdf (finding average annual post-tax rate of return on investment to be approximately 10%).
LIHTC allows investors to claim the tax credits through the arrangement annually over a ten-year period.
When Congress enacted LIHTC, it was especially concerned about the long-term preservation of the low-income housing developments. Recognizing that nonprofits are generally more likely than for-profit developers to maintain rents at below-market levels beyond the initial compliance period, LIHTC requires that state agencies administering the program award at least 10% of their tax credits to projects that involve nonprofit developers. See
Facilitation of the investor exit after the expiration of the fifteen-year compliance period is, therefore, crucial to the efficacy of the LIHTC program. The mechanism creates an incentive, as discussed, for nonprofits to participate in the program; nonprofits will be less likely to enter a partnership that includes an investor, if doing so entails a serious risk of an ownership battle after the fifteenth year. Unsurprisingly, industry participants in LIHTC programs have long acted in accordance with that understanding. For example, a study commissioned by the United States Department of Housing and Urban Development found that the vast majority of LIHTC properties remain affordable at the end of the tax credit period, noting that “[b]y far the most common pattern of ownership around Year 15 is for the investor partners to sell their interests in the property to the general partner” or the affiliated nonprofit. Office of Pol‘y Dev. & Research, U.S. Dep‘t of Hous. & Urban Dev., What Happens to Low Income Housing Tax Credit Properties at Year 15 and Beyond? (Aug. 2012), at 15, available at https://www.huduser.gov/publications/pdf/what_happens_lihtc_v2.pdf.
B. Factual Background
In 2001, Presbyterian Village North (Presbyterian), a nonprofit provider of subsidized housing, organized a partnership under the Michigan Revised Uniform Limited Partnership Act (the Partnership) to rehabilitate and operate an affordable housing community, consisting of 150-unit apartments, for the elderly (the Property).
The Partnership followed the same general structure discussed earlier. It originally consisted of Presbyterian and Pathway Senior Living of Michigan (PSL) as General Partners that managed the Property. They applied to the Michigan State Housing Development Authority for housing credits under LIHTC. On June 1, 2002, the Housing Authority granted housing credits to the Partnership. At that point, SunAmerica, a large institutional investor, joined the Partnership as a Limited Partner, owning 99.99% of the Partnership. To facilitate SunAmerica‘s receipt of its expected tax-related benefits, Presbyterian and PSL withdrew from the Partnership, and Pathway of Pontiac, Inc., and PV North—an affiliate of Presbyterian—entered as General Partners, collectively owning 0.01% of the Partnership.
The General Partner shall not, without the Consent of [SunAmerica] which Consent may be withheld in its sole and absolute discretion, have any authority to[,] except as provided in Article 17 hereof, sell or otherwise dispose of, at any time, all or any material portion of the assets of the Partnership.
(LPA, R. 1-1, § 8.02(b)(i), PageID 74). The LPA is to be read according to Michigan law.
Under the exception provided in Article 17, Presbyterian retained a ROFR to purchase the Property for an amount less than the fair market value and a unilateral option to purchase the Property for the fair market value (the Option). The ROFR provisions in the LPA are, in relevant parts, as follows:
17.01. Grant of Right of First Refusal. Partnership hereby grants to Presbyterian a right of first refusal to purchase the [Property] on the terms and conditions set forth in Sections 17.02, 17.03, 17.04 and 17.05 hereof. Presbyterian‘s right to exercise the right of first refusal is subject to Presbyterian providing the Partnership with an opinion of counsel reasonably acceptable to [the General Partners] and [SunAmerica] that the exercise of the right of first refusal will not cause any recapture of tax credits to any Partner of Partnership allowable under [LIHTC], that there is no existing Event of Default of General Partner under this Agreement, and that Presbyterian is a qualified nonprofit organization or government agency as required by Section 42(i)(7)(A) of [LIHTC].
17.02. Term. The term of this right of first refusal shall commence one day after the Compliance Period and shall terminate one year thereafter.
17.03. Manner of Exercising Right of First Refusal. Upon receipt of a bona fide offer, Partnership shall notify Presbyterian in writing of the offer, and Presbyterian shall thereupon exercise its right of first refusal within thirty (30) days, or Partnership may sell the [Property] on the terms as it may determine.
17.04. Purchase Price.
(a) The purchase price shall be the sum of (i) the principal amount of outstanding indebtedness secured by the [Property] (other than indebtedness incurred within the five-year period ending on the date of the sale), (ii) the IP Loan, the unpaid amount of any Tax Credit Shortfall, and all federal, state, and local taxes projected to be attributable to the sale and the receipt of the above amounts by the Limited Partner, and (iii) all GP Loans, Operating Deficit Loans, and Excess Development Cost payments made by Pathway or Pathway Senior Living of Michigan, LLC or their Affiliates. Notwithstanding any other provision of this Agreement, the proceeds from the purchase described hereunder, shall be distributed to Pathway with respect to proceeds received under clause (iii) hereunder, and to the Investment Partnership with respect to proceeds received under clause (ii) hereunder.
(LPA, R. 1-1, PageID 114) (emphasis added). Both the ROFR and the Option are available for one year following the end of the Compliance period.
On March 27, 2019, a third-party entity called The Michaels Organization sent the General Partners a letter of intent (LOI), indicating its desire to purchase the Property and stating the terms of its intended offer. On May 2, PV North reached out to another third-party entity called Lockwood Development Company LLC (Lockwood). PV North sent an email to Lockwood indicating that The Michaels Organization had offered to buy the Property. The e-mail stated, among other things, that PV North intended to submit The Michaels Organization‘s offer to SunAmerica, let them know that another offer was forthcoming (presumably from Lockwood), and that after presenting the offers to SunAmerica, the General Partners intended to “put the ROFR to” SunAmerica.
A few days later, PV North reached out to Lockwood again. This time, PV North‘s counsel expressed concerns regarding whether the LOI from The Michaels Organization satisfied the ROFR conditions. Specifically, there was concern that the LOI was not sufficiently binding and would not trigger the ROFR. PV North then instructed Lockwood to “consider” this advice when drafting its own LOI.
On May 21, Lockwood submitted its offer to purchase the Property. Among other things, the Proposal contained a clause providing for a 60-day “Investigation Period,” during which Lockwood could terminate the agreement “for any reason or no reason.” Ten days later, the General Partners told SunAmerica that they had received a bona fide offer, and thus Presbyterian could exercise its rights under the ROFR pursuant to Article 17.
On June 3, Presbyterian wrote to the General Partners, indicating that it was planned to exercise its ROFR. In response, SunAmerica filed this lawsuit against the General Partners and Presbyterian.
C. Procedural History
On June 14, SunAmerica filed its complaint, seeking declaratory relief as to its rights under
The district court granted summary judgment to SunAmerica on February 4, 2021, reasoning that to exercise the ROFR, two conditions had to be met: (1) the Partnership needed to receive a bona fide offer, and (2) the General Partners needed to manifest a true intention to sell. Based on the record before it, the district court held that the Lockwood offer did not constitute a bona fide offer because it was undisputed that the offer was solicited for the purpose of triggering the ROFR, and because the offer was not legally enforceable. It found that the General Partners lacked any intention to sell the property and merely wanted Presbyterian to be able to exercise the ROFR. It held that neither condition was met, the General Partners breached the contract by exercising the ROFR, and, as a result, the General Partners also breached their fiduciary duties to SunAmerica. The General Partners and Presbyterian timely appealed.
II. ANALYSIS
The main issues on appeal are whether the district court correctly granted summary judgment to SunAmerica when it concluded that: (1) the Lockwood proposal did not constitute a bona fide offer; and (2) the General Partners did not manifest an intent to sell the Property. The parties do not dispute the existence of these two conditions—they disagree over how the conditions should be interpreted under the provisions of the LPA and thus whether they triggered the ROFR.
A. Standard of Review
We review de novo the court‘s grant of summary judgment. Wilson v. Gregory, 3 F.4th 844, 855 (6th Cir. 2021). In reviewing the district court‘s grant of summary judgment, we draw reasonable inferences in favor of the nonmoving party. See id. The moving party is entitled to summary judgment if it “show[s] the absence of a genuine dispute of material fact as to at least one essential element” of each claim for which it seeks judgment, Troutman v. Louisville Metro Dep‘t of Corr., 979 F.3d 472, 481 (6th Cir. 2020) (quoting Romans v. Mich. Dep‘t of Hum. Servs., 668 F.3d 826, 835 (6th Cir. 2012)), with a “genuine dispute” existing when the nonmoving party presents “sufficient evidence from which a jury can reasonably find” in its favor, id. (quoting Romans, 668 F.3d at 835). In our review, we are careful not “to weigh the evidence and determine the truth of the matter,” but only “determine whether there is a genuine issue for trial.” Jackson v. VHS Detroit Receiving Hosp., Inc., 814 F.3d 769, 775 (6th Cir. 2016) (quoting Anderson v. Liberty Lobby, 477 U.S. 242, 249 (1978)). Review of summary judgment is, therefore, “limited to ascertaining whether any factual issue pertinent to the controversy exists; it does not extend to resolution of any such issue.” Tygrett v. Washington, 543 F.2d 840, 844 n.17 (D.C. Cir. 1974) (quoting Nyhus v. Travel Mgmt. Corp., 466 F.2d 440, 442 (1972)). As a result, any findings of fact in relation to a motion for summary judgment “are not truly findings of fact,” id., and “are entitled to no deference.” Garter-Bare Co. v. Munsingwear, Inc., 650 F.2d 975, 983 (9th Cir. 1980) (Wallace, J., concurring).
B. Bona Fide Offer
The LPA explicitly states that the ROFR is triggered upon receipt of a “bona
To begin, the term “bona fide offer” has a very specific meaning in the typical ROFR context—i.e., the general “common law” interpretation. In Imperial Refineries Corp. v. Morrissey, 119 N.W.2d 872, 874 (Iowa 1963), for example, a lessee was granted a right of first refusal to purchase “at the same price and terms as any bona fide offer for [the] property.” At some point, the defendant sought to sell the property, and she initially received a bona fide offer of $45,000 from a third-party. Id. at 874, 877. Once the plaintiff indicated that he would exercise his ROFR and match the offer, the defendant received an offer to buy the property from her son for $60,000. Id. The Iowa Supreme Court concluded that the son‘s offer to buy the property was not bona fide because the evidence showed that the son could not meet the onerous payments, and because an “impartial and unbiased purchaser would be unlikely to increase the highest bid by $15,000 or 1/3rd of the amount bid.” Id. at 878. The court concluded that “[h]olding this to be a bona fide offer would provide a device by which an optioner could render ineffective any first refusal option that he might wish to escape.” Id. Accordingly:
For an offer to be considered a bona fide offer, it must be shown with reasonable certainty that [the] offeror possessed the financial ability to comply with the terms of the contract. Proof which indicates that the offeror is operating on a shoestring speculation or attractive probabilities falls short of reasonable certainty.
Id. Other courts have assessed whether an offer constituted a bona fide offer to trigger a ROFR on similar grounds. See Brownies Creek Collieries, Inc. v. Asher Coal Min. Co., 417 S.W.2d 249, 252 (Ky. 1967); David A. Bramble, Inc. v. Thomas, 914 A.2d 136, 146-49 (Md. 2007).
The “bona fide offer” requirement in the ROFR context, thus, operates to protect the holder from being forced to match an outlandish offer, effectively forfeiting the ability to exercise the contractual ROFR. Serious offerors—those willing to put forth an honest offer that the ROFR-holder cannot match—however, can acquire the property despite the rights of the ROFR holder. Under this general “common law” definition of ROFR, the focus of the analysis is on the offeror, and whether its intentions and capabilities establish a serious intention to make an offer to purchase the property.
This understanding of the ROFR varies materially from the one employed by the district court. Both the district court and the “common law” definitions require that a third-party put forth an enforceable offer. The district court, however, focused mainly on whether the offer was solicited (assuming that such action automatically defeated the bona fide element), whereas under the “common law” definition, courts focus on whether the offeror actually intended to comply and was, in fact, capable of following through with a purchase.
In any case, neither definition controls the meaning of the language of the LPA
As discussed earlier, Congress enacted
As the Massachusetts Supreme Court explained,
Section 42(i)(7) therefore represents a compromise, facilitating the inexpensive transfer of property to nonprofit organizations, but in a way that does the least violence to the traditional rules of tax law. The right of first refusal described in § 42(i)(7) is not a typical right of first refusal, for the obvious reason that it favors the nonprofit organization with a statutorily prescribed, often below-market price. At common law, a right of first refusal allows the holder to purchase the property only by matching the price offered by a third party. In contrast, a right of first refusal under § 42(i)(7) allows the holder to purchase the property at the § 42 price, even if it is far below the third-party offer. Yet, a right of first refusal under § 42(i)(7) is not completely unanchored from its common-law meaning. In enacting § 42(i)(7), Congress relied on the common-law distinction between an option to purchase, which can be unilaterally exercised, and a right of first refusal, which cannot. Congress specifically chose to allow one but not the other, recognizing that a right of first refusal—which cannot be exercised until the owner decides to sell—is for that very reason a less serious curtailment on ownership rights.
Homeowner‘s Rehab, Inc. v. Related Corporate V SLP, LP, 99 N.E.3d 744, 757-58 (Mass. 2018) (internal citations omitted).
The ROFR contemplated by
We cannot impress the general common law meaning of bona fide offer on the term as it is used in the LPA that was created to accord with the LIHTC program. To do so would, in essence, contravene the purpose of
Not only would it contravene Congress‘s intentions, but it also would contravene the Partners’ bargained-for exchange under the LIHTC arrangement. The purpose of the Partnership arrangement was for SunAmerica to reap the benefits from the housing tax credits, not from the Property‘s long-term appreciation gains. See, e.g., LPA §§ 4.02(a)-(c), (j), 8.02(a) (requiring “best efforts” to produce for SunAmerica‘s benefit “maximum allowable” Housing Credits). That purpose is further evinced by the fact that SunAmerica‘s role in the Partnership was meant to be entirely passive. Id. at § 10.01 (stating that “No Limited Partner shall take part in the management or control of the business of the Partnership.“). By gaining the tax credit, SunAmerica received its benefit of the bargain.
SunAmerica argues that because the LIHTC program does not mandate that the Property be conveyed to a nonprofit or even require that a ROFR be granted in LIHTC transactions, Congress had no intention to “transfer” the property back to a nonprofit. In addition, SunAmerica contends that the General Partners and Presbyterian‘s understanding treats the ROFR as a transfer provision, which would also render the Option provision meaningless. Thus, they argue, the common law understanding is appropriate here. But the fact that Congress did not require the LIHTC program to transfer the property makes no difference here because
To SunAmerica‘s second point, the bona fide offer requirement operates as a condition precedent that works to distinguish it from the Option in the LPA. The Option could become relevant if none of the General Partners, manifested an intent to sell the Property and if they never received a bona fide offer to satisfy that condition precedent. In that circumstance, Presbyterian could still acquire the property via the Option mechanism in the LPA. Recognizing the nature of the statutory ROFR does not transform the ROFR provision into an Option; unlike the Option, the ROFR has additional condition precedents, including the “bona fide offer” requirement.
In light of the foregoing, this court cannot impress the general common law meaning of “bona fide offer” on an ROFR and LPA that expressly incorporated the LIHTC program and thus was created to accord with the LIHTC program. Nevertheless, the undisputed facts in the record do not clearly resolve the meaning of the term “bona fide offer“—as it is to be construed under the LIHTC. We, therefore, find that the term as it is used in the LPA is ambiguous. Accordingly, there are disputed issues of material fact concerning the meaning of the term in the LPA—specifically, how the term “bona fide offer” in the LPA is to be formulated to accord with the Congressional expressions of intent in the LIHTC-promulgated ROFR—and whether that condition has been satisfied. These are matters that are better developed at trial and decided by a jury. See Klapp, 663 N.W.2d at 454-55 (“[T]he meaning of an ambiguous contract is a question of fact that must be decided by the jury.“).
C. Intent to Sell
To trigger the ROFR, the General Partners must manifest an intent to sell the property, in addition to the existence of a bona fide offer. The parties do not challenge the district court‘s conclusion that only the General Partners, and not SunAmerica, needed to manifest such intent. They contest whether that intent to sell must be directed toward a third-party offer.
The General Partners and Presbyterian contend that the district court erred in requiring that the intent to sell be directed at a “third party.” Pointing to the legislative history of
The arguments of both parties are correct, in some respects. Based on Congress‘s intent for the LIHTC program,
But the General Partners and Presbyterian are also correct. It cannot be the case that knowledge of the ROFR holder‘s intention to exercise that right if a third party makes an offer would defeat the willingness to sell. That conclusion would render the ROFR provision meaningless because the General Partners’ knowledge that the ROFR holder wants to exercise the provision would mean that the General Partners could never manifest a true intention of selling to a third party.
Based on the record and the plain language of the provision, then, the General Partners must have a general intent to sell the property; indeed, they need an offer on the table from a third-party. But the intent to sell to the nonprofit if the ROFR procedure is invoked—the willingness to comply with the ROFR provision—does not defeat the LPA-required intent to sell the property.
Applying that definition here, the district court erred in concluding that the evidence “overwhelming[ly]” showed that the General Partners did not intend to sell. The district court relied on e-mails indicating the General Partners “intend[ed] to proceed in accordance with Article 17,” but pointed to no evidence showing that the General Partners never had an intent to sell or entertain third-party offers. In some sense, the two offers that they did receive—and the fact that they solicited at least one of those would seem to suggest the opposite: they did intend to sell or entertain third-party offers. In any case, summary judgment is generally not appropriate when resolving a dispositive issue requires a determination of intent or state of mind. See Mahcronic v. Walker, 800 F.2d 613, 617 (6th Cir. 1986). The record contains a genuine dispute of material fact—whether the General Partners had the requisite intent to trigger the ROFR. Accordingly, we reverse the district court‘s grant of summary judgment on the issue and remand for resolution of this factual issue at trial.
D. Breach of Fiduciary Duty
The district court also concluded that because the General Partner Defendants breached the LPA, they also breached their fiduciary duty to SunAmerica. Because this claim is intertwined with the breach of contract claim—as to which we reverse the district court—we also reverse and remand the breach of fiduciary duty claim.
III. CONCLUSION
For the foregoing reasons, we REVERSE the district court‘s grant of summary judgment to SunAmerica and REMAND the case to the district court for further proceedings consistent with this opinion.