Legal Case Summary

All right, Ms. Burton. Happy to hear from you. Thank you, Your Honours. Good morning, May please the Court. My name is Megan Burton. And I represent the appellants in this case, Stanley Kaiser, 1899 Holdings, LLC, and the affiliated entities identified in the briefs. The quick summary of the case, this case arises out of the major rehabilitation of a historic property involved to more city. The Kaiser entities, and I'm referring to the appellants as the Kaiser entities, spent eight years of their time, energy, and over $3 million to bring the redevelopment of this property, the Northern District Police Station, to fruition, only to have their right to recoup those funds, and to be paid for their efforts as both managing member and developer of the project stripped from them by the tax credit investor member. Just weeks before the project was certified as complete. And at that time, the investor member received millions of dollars in tax credits. The Kaiser entities sued to enforce those rights under the operating agreement and the amendment that are at issue today, and sufficiently alleged breach of contract claims based on holdings removal. The company's refusal to pay the developer fee and refusal to repay loans that the Kaiser entities had made to the company. Those are the claims in a nutshell. The district court granted the 1899 LLC's motion to 12 B6 motion to dismiss, and that's really the key here, is that we're here on a 12 B6 motion to dismiss for failure to state acclaim. We appealed from that ruling because the district court failed to adhere to this proper standards for considering such a motion

. To grant a 12 B6 motion based on a contract where there's a contract between the parties, the contract must clearly and unambiguously bar the claims. The relevant contracts in this case, namely the operating agreement and the amendment there too. And other project documents which are incorporated in the operating agreement, do not clearly and unambiguously bar the plaintiffs' claims in this case. In granting the 12 B6 motion, the district court misinterpreted and misapplied the contracts and made factual determinations which are completely inappropriate at the 12 B6 stage. Again, the four claims, which the four claims really had issue if you distill all the counts into four different issues, is the removal of the managing member, the payment of the developers fee, the loans and the claim for an accounting. I'll talk about the removal first. In order to hold that small deal, who's the investor member here, the tax credit investor member, federal tax credit member, properly removed holdings from its positionist managing member of the company, the district court made a factual determination that merely because certain lean judgment existed at the time of the removal that the removal was proper under the operating agreement. The factual determination simply could not be made at the stage. Moreover, the court's conclusion that the basis these leans was consistent with the terms of the operating agreement was not consistent. Ms. Burton, let me ask you about that. Just to understand if there's a distinction here. I thought the district court took the judicial notice, not just of leans, which is I understand and simply just claims, but actual judgments that have been entered with respect to the project. Is that right? That's correct, Johnner. There are two

. Well, if that's correct, then why isn't the latter with respect to judgments fairly substantial evidence that in fact, your client wasn't meeting its obligations to make the requisite fund payments? There's several reasons why that isn't enough under the operating agreement. The operating agreement requires to remove, for the investor member to remove the managing member, the managing member must violate a term of the operating agreement, must not cure that violation, and the violation must have a material adverse effect on the company. There's several factual determinations that had to be made in order for the district court to conclude. You keep saying that the factual determinations have to be made, but in reading the district court opinion, it seemed to me that she was adhering fairly scrupulously to the language of the contract itself, most specifically section 6.10a, which is not good for you. You're on our section 6.10a speaks to the violation of the obligation to provide funds. As we've argued in our briefs, the obligation to provide funds is not the same as the existence of a lien judgment. The reason that is is because there's other language in the operating agreement that contemplates that the project can be completed, which is really the managing member's ultimate obligation is to complete the project. But there's language that says that the project can be completed if in the existence of liens, so long as there are plans in place to satisfy those liens. And as a factual matter, and this is in the amendment, the liens could have been paid as soon as the investor members made that next installment payment, which would have been at project completion less than weeks, just weeks away. So, let's take the contract as a whole. What the contract did was set up a fairly common division in commercial dealings, which is that one party is an investor, and the other party is a manager. And your entire duty under the contract as a managing partner was to see that the project ran smoothly. The investor is removed

. The investor simply is not expected to and cannot adopt a hands-on view in dealing with suppliers and dealing with cash flow and all the rest. That's the whole reason the managing partner is hired to avoid having the project run into debt, to avoid having all sorts of outstanding mechanics leads. I'm to avoid having the thing crash with shortfalls and having cost overruns, overtake the whole thing. And your job as managing partner was to avoid the very things that happened. And if they happened, you had to make up for it on the managing partner's death. And that is what this contract says. The very things you were hired to avoid happened, which I suppose is okay, but then you've got to put in the money to make sure that those things are cured. And that's the point you're in our meeting. And at that point, they treated his capital contributions and not treated his loans. That's the whole point of the contract. Well, you're right. I mean, there's several different issues, but the point is here that isn't exactly what happened because there were plans made and arrangements made for the investor member to make additional funding. There was promise ory notes signed by Small Deal, which are in the record, which said that Small Deal was essentially stepping in in that obligation to provide funds. And the rally agreement, which is alleged in the complaint, the rally agreement is not in the record itself, but the allegations are there that states that the rally agreement, under that agreement, Small Deal took over some of those obligations to provide funds to the project. And again, that amendment gave an additional payment to the company at project completion, which would have paid all of those outstanding debts

. And again, those are all factual questions that have to be weighed. This isn't a 12-B6 situation where you can say, emphatically, that the language in the operating agreement clearly bars these claims simply because those are what the managing members' obligations were. There's enough facts to show that there were changes made in the case. You're saying that, but I don't know that you've isolated any of these factual questions in your briefs or wherever with any sort of precision. And one of the things is that you might or contract in ceaseless litigation like you wish to do. You deprive the parties of the benefit of their bargain so long as the contract itself is reasonably clear because a contract involves not only an effort by parties to set out mutual obligations and to put limits on risk, but also to have a doubt. The document which in the event that it's clear will save them the expensive litigation and to throw all this into litigation simply deprive one party of the benefit of a bargain. If as I think the district court found your obligations with respect to managing this actual project, we fairly set out in an integrated document. We run again in the key there is the document's not clear. And particularly I think that's evident in the developer's fee situation. In this case, the operating agreement and this is at Joint Appendix 200 specifically states with respect to the developer's fee that the developer fee shall be deemed earned in its entirety as of the date of construction completion, which in this case was in December of 2008. And it was on to say that the developer shall be paid such portion of the developer fee from available debt and equity proceeds of the company to the extent such proceeds are not required for other company purposes. So it obviously contemplates that there is a calculation that needs to be made and this is both part of our developer's fee claim and then also the accounting. But you don't affirmatively that legend you're complaint with respect to that claim that in fact there were funds available. You just say we earned it

. We don't know. Let's have an accounting. How does that state of plausible claim? We are on the complaint states as to the developer fee. It does we do realize that the defendant has acknowledged the plaintiffs entitlement to disagree upon fee but simply refused to identify an account for the debt and equity proceeds. So again, we're saying it's due and it has to be. It means it's earned, right? But then once earned and the next thing has to happen, there has to be sufficient funds in the till to pay that are not otherwise that the company can't otherwise and its discretion to use for other purposes. And that seems to me the problem is how is anyone a fact finder or jury supposed to sort that out when you have an email edged that in fact there were funds outside of normal operating expenses to pay that fee. You know what I mean? I think it's implicit in the allegations that if they're sponge then we're due to be paid and we don't know whether they're sponge there. So we couldn't affirmatively elect. I mean we could have said yeah they're sponge but we don't know. I guess I'm asking how does that alleged breach of contract? Because again it's that there's the debt that's due under the operating agreement. We've alleged the debt is due. We've referred to the operative contract that controls. But there's a condition precedent that has to be satisfied before the actual payment is made. And with respect to that there's no specific claim that the company had funds available that it was not using for other legitimate purposes and refused to pay

. Is there? I think we've alleged elsewhere that there's claims, well we have alleged claims of bad faith in terms of the company's refusal to pay some of these fees and to pay amounts that are otherwise due to the managing member and the developer. Now switch the subject for just a minute with respect to the developer fee. I didn't understand why you thought that was right given the fact that as I understand that the fee wasn't even due until any fee if there wasn't due until the last day of 2017. See and that's I don't think the operating agreement says that you're on. The operating agreement says that it's due at construction completion. It's just a question of how much is due. And then at the ultimate outside the December 2017 deadline is when at that point the managing member would actually have to borrow funds in order to pay the developer fee. But at construction completion which was December 2008 it was due. I mean the operating agreement says it shall be paid. And the district court made a determination that the company actually did not have enough funds to pay the developer's fee which the district court simply didn't have a basis to do that at a 12 B.C. So there's several you know there's several reasons why the developer's fee the district court's determination as the developer's fee was incorrect. What about the this independent action in an in accounting wise and accounting generally just a part of discovery. You know we very few jurisdictions that have a stand alone independent action in accounting. If the if the contractual provisions don't provide a breach

. Why isn't that the anti-seedant question as to whether the contractual provisions establish a breach. And if there's no establishment of a breach then there's no need for an independent action in an accounting. Now if there is a breach maybe you get to an accounting as part of a discovery. But what you do have to do is a threshold matter. It's to establish whether there's been any kind of breach in the first place but you just don't throw. On opposing party to a contract. Into an independent action for an accounting. As a matter of course you're on our see a run out of time may answer the question. You want to reserve it and feel a rebuttal. Would you like to answer it now. I can answer it quickly now and then I can answer for the questions on rebuttal. Essentially there's two reasons why the accounting claim is there. To some extent you know you're correct your honor and it is tied to for example developers fee. We don't know really how much money there is there to support our developers claim fee unless we have an accounting and know as your honor was stating previously what whether they owe that money. And that's the way there's one third of facts

. And when you come back on rebuttal I think you also need to address the fact that the agreement says that the developers fee shall be deemed earned in its entirety as of the date of construction completion. It doesn't say that it's due. It says that it's earned and I need to ask you to address that difference in your presentation on rebuttal. All right thank you. Thank you. All right well we thank you and Mr. Coyola. Good morning your honors may please the court. My name is Paul Coyola I represent a Pellies in this matter. A district court properly dismissed the amended complaint because the express language of the company's operating agreement four closes any possibility of liability at this time on the claims asserted in the amended complaint. I'm going to begin with the six oral loan counts as Judge Wilkinson pointed out during Ms. Burton's argument section six point one O A of the operating agreement required holdings to cause the completion of the rehabilitation of the project and if available sources of funds were not available holdings needed to advance any development funds necessary to complete the project and until the date of construction completion also. So cover any operating expenses that same section deems all such payments capital contributions and under the operating agreement capital contributions are not repable at all unless a removal occurs and or a sale and in the event of removal removal they're not repable for 15 years. What is the word in section six point ten A what is the word deficiencies it says the managing members shall be responsible for an obligated to pay such deficiencies how do you interpret the word deficiencies. I'm looking at the next the last line in section ten your honor six point I think the deficiencies refers back up to the beginning of sub two where it says

. Well at the beginning of the sentence if the available debt equity rental income or other proceeds are insufficient to and then it says acquiring complete the construction under one you interpret deficiencies to move to refer back see if the if the revenue from the project if the ongoing revenue from the from the project. Is in sufficient to keep the project going the deficiencies have to be paid by the managing member net you interpret deficiencies to encompass cash shortfalls potential cost overruns mechanics leans mean is it is it a kind of an omnibus word in your view. Yeah your honor if you look at that false sentence as a whole sub one said first there's a reference in the first clause to available debt equity rental income or other proceeds so there this was an operating commercial real estate project with tenants and it was also under development so there was not only income from the operations of the property there was also. Construction loan so loan proceeds and there were capital contributions that the investor member had made all of those that's what the equity refers that's right all of those sources of funds were available for it refers to the income. The income and proceeds the first line refers to the cash reserves and the all all that money right the first line refers to that and then sub one talks about rehabilitating that's the construction piece and sub two refers to provide for all other payments and expenses the importance of this second clause is that there's really a cut off that construction completion if operating if operating income is insufficient after construction is complete. The managing members permitted under 6.11 to make loans for operating deficits and those would be repayable. 120 day low no no this is after construction completion okay under 6.11 in applicable in this case but if the managing member had reached construction completion and there were deficits ongoing going forward loans were permissible under that circumstance before construction. No because construction completion had not occurred during this entire period so during the construction rehabilitation phase the managing member is required to advance funds for both operating as capital contribution for both operating deficits and to deal with any cost overruns. The section says on or prior to construction completion exactly but the point is that first sentence of of refers to the available income and you have a you have a revenue stream arising from from debt equity rentals all proceeds and the assumption is that's going to go a good way to funding the project but it might not and deficiencies. These might arise particularly in construction work where you know cost overruns and delays in supplies and I'm delays in paying subcontractors and contractors and others. So the whole question is you know who's going to be responsible for making up the difference and the parties allocated the risk the every contract involves a risk at the bottom and the question is who's going to cover the risk and the risk here is that things might not go is swimmingly is as one hopes. But the risk allocation is allocated through the managing member and that's not an implausible allocation because the managing member is in a better position than the investing member to avoid those things. And to make sure that they if they don't have these the one at ground level

. That's correct and that's what this contract seems to do. That's correct during the construction phase where this project was mired until the removal. The managing member was responsible for advancing any cost above what the funds available in those other sources. What is the phrase development advances mean development advances is a reference to this 6.10 a it's it what what it references. That term is never defied it's not a defined term but is that create a problem. I don't think so your honor because when you read 6.10 a it's clear that they're developing the rehabilitating a project and there as I mentioned earlier there's this cutoff at construction completion. So development advances have to do with any money put in by the managing member during the development phase. Then why why exclude development advances in this warranty clause there isn't an exclusion of what they're saying you're talking about 6.09 K your honor. Right what they're saying is this is a statement that no such advances have occurred excluding and for this purpose any loans pursuant to section 611 and development advances which is keen and pointed out isn't defined and the appellants say that that's exactly where they fit in. Yes accept your honor that development advances is I think clear from the context of the full agreement it's referring to money advanced by the managing member which is addressed in 6.10 a well if it was and why is that language. The reason it's there is because this is assertive this vision 6.09 K is a certification from the managing member that it hasn't made any advances any loans or advances it starts by saying the managing member has made no loans or advances and then it says of course except for development advances. It's not it's not it's not it's it's included because because if you took out development advances from that parenthetical there'd be a certification that no development advances had been made which is untrue. Okay so your view is that that language is then set to the extent its exclusion it simply defines doesn't define but states that there may be development advances and they are all supposed to be treated as capital contributions not loans. That's correct and if you look at the two the two provisions in 6.09 K one is loans it says no no loans or advances and then in parenthetical it says loans under 6.11 which again are these these operating deficit loans that only can occur after construction completion and development advances again a reference back to 6.10 a there is no confid it's not a defined term but it's a very clear I think from the context of of the full agreement. What's intended by development advances in that clause. The district court dismissed these loan counts based on the parole evidence rule because the supposed oral loans that are discussed occurred during the spring and summer of 2008 before the date of the first amendment where the parties ratified both 6.09 K and 6.10 a and another provision I haven't mentioned yet 14.05 which is the entire agreement provision it provides that that the operating agreement as amended by the first amendment is the entire agreement between the parties and there are no prior agreements so the the the appellants that below placed the supposed oral loans during a time period before the first amendment and therefore proof would be barred by the parole evidence rule and that was the basis for judge Blake's finding on the loan claims. Turning to the unjust enrichment count this these counts basically there are 6 counts for unjust enrichment that correlate to the 6 loan counts and the judge judge Blake found that the these claims were barred because they're on the same subject matter as the loan claims the subject matter of the unjust enrichment counts is the treatment of these advances that the managing member made the treatment of the advances is clearly addressed in 6.10 a and therefore it's the it's the identical subject matter as the express agreement and I guess they've got to come in under the bad faith exception under Maryland law don't say. Your honor the problem with all of the exceptions is that they all relate to a challenge to the enforceability of the express agreement so if you look at Severn marketing associates versus Dulin that case is a case where the

.09 K is a certification from the managing member that it hasn't made any advances any loans or advances it starts by saying the managing member has made no loans or advances and then it says of course except for development advances. It's not it's not it's not it's it's included because because if you took out development advances from that parenthetical there'd be a certification that no development advances had been made which is untrue. Okay so your view is that that language is then set to the extent its exclusion it simply defines doesn't define but states that there may be development advances and they are all supposed to be treated as capital contributions not loans. That's correct and if you look at the two the two provisions in 6.09 K one is loans it says no no loans or advances and then in parenthetical it says loans under 6.11 which again are these these operating deficit loans that only can occur after construction completion and development advances again a reference back to 6.10 a there is no confid it's not a defined term but it's a very clear I think from the context of of the full agreement. What's intended by development advances in that clause. The district court dismissed these loan counts based on the parole evidence rule because the supposed oral loans that are discussed occurred during the spring and summer of 2008 before the date of the first amendment where the parties ratified both 6.09 K and 6.10 a and another provision I haven't mentioned yet 14.05 which is the entire agreement provision it provides that that the operating agreement as amended by the first amendment is the entire agreement between the parties and there are no prior agreements so the the the appellants that below placed the supposed oral loans during a time period before the first amendment and therefore proof would be barred by the parole evidence rule and that was the basis for judge Blake's finding on the loan claims. Turning to the unjust enrichment count this these counts basically there are 6 counts for unjust enrichment that correlate to the 6 loan counts and the judge judge Blake found that the these claims were barred because they're on the same subject matter as the loan claims the subject matter of the unjust enrichment counts is the treatment of these advances that the managing member made the treatment of the advances is clearly addressed in 6.10 a and therefore it's the it's the identical subject matter as the express agreement and I guess they've got to come in under the bad faith exception under Maryland law don't say. Your honor the problem with all of the exceptions is that they all relate to a challenge to the enforceability of the express agreement so if you look at Severn marketing associates versus Dulin that case is a case where the. The unjust enrichment count was dismissed because the challenge to the agreement was not to the in the making of the contract the enforceability of the contract here appellants have acknowledged the enforceability of the operating agreement and the first amendment so we don't believe that they can take advantage of any of the exceptions that would apply. Turning to the developers fee that the developer's fee is was properly dismissed by the district court I agree with judge keenon that it was earned on construction completion but that provision does not does not discuss payment. There is another sentence though what is that next sentence read it says that it would be payable on December 31 2017 is an outside day. Following yes no I agree your honor and that addresses that it would be paid out of available debt and equity proceeds available proceeds and this is the key provision that shall be paid I'm assuming that Ms. Burton's argument when she comes back is going to be well it does say it's earned and not do that she was incorrect on that but it does say in the following sentence the developer shall be paid such portion to the extent that such proceeds are not required for other purposes. Your honor and that in judge Blake's view and in our view was the critical clause to the extent such proceeds are not required for other company purposes. Vests the new managing member with discretion to use funds how it wishes the managing member the removed managing member the developer in this case I am debos is the entity that entity is entitled to 6% interest from the date of construction completion until the developer's fee is paid. Do you think it's a discretionary determination that's that's correct are you saying that or no no we are saying it's discretionary based on the clause to the extent such proceeds are not required for other company purposes that that clause. Vests the managing member with discretion to use funds how it deems appropriate until the outside date of December 31 2017. Does any contracting party even with discretion have an obligation to act in good faith. Yes your honor any kind of but they're alleging that you're your client didn't act in good faith and making at least a part of that payment. Well the the that allegation is is set forth but it's there that we believe it's not plausible under the circumstances here because of this discretionary clause and in if they if they would. So you're saying that good faith bad faith it doesn't matter well I believe they would have to assert some allegation besides just a concluse re allegation of bad faith that there's been any. Uh uh miss you so the discretion that was vested in the in the in the company to pay this to to allocate a resources to other purposes until December 7 31 2017 now. There's another issue here and judge Blake also relied on the Bruce Diversis Brennan case where the case where the district of Maryland dismissed a claim because all of the

. The unjust enrichment count was dismissed because the challenge to the agreement was not to the in the making of the contract the enforceability of the contract here appellants have acknowledged the enforceability of the operating agreement and the first amendment so we don't believe that they can take advantage of any of the exceptions that would apply. Turning to the developers fee that the developer's fee is was properly dismissed by the district court I agree with judge keenon that it was earned on construction completion but that provision does not does not discuss payment. There is another sentence though what is that next sentence read it says that it would be payable on December 31 2017 is an outside day. Following yes no I agree your honor and that addresses that it would be paid out of available debt and equity proceeds available proceeds and this is the key provision that shall be paid I'm assuming that Ms. Burton's argument when she comes back is going to be well it does say it's earned and not do that she was incorrect on that but it does say in the following sentence the developer shall be paid such portion to the extent that such proceeds are not required for other purposes. Your honor and that in judge Blake's view and in our view was the critical clause to the extent such proceeds are not required for other company purposes. Vests the new managing member with discretion to use funds how it wishes the managing member the removed managing member the developer in this case I am debos is the entity that entity is entitled to 6% interest from the date of construction completion until the developer's fee is paid. Do you think it's a discretionary determination that's that's correct are you saying that or no no we are saying it's discretionary based on the clause to the extent such proceeds are not required for other company purposes that that clause. Vests the managing member with discretion to use funds how it deems appropriate until the outside date of December 31 2017. Does any contracting party even with discretion have an obligation to act in good faith. Yes your honor any kind of but they're alleging that you're your client didn't act in good faith and making at least a part of that payment. Well the the that allegation is is set forth but it's there that we believe it's not plausible under the circumstances here because of this discretionary clause and in if they if they would. So you're saying that good faith bad faith it doesn't matter well I believe they would have to assert some allegation besides just a concluse re allegation of bad faith that there's been any. Uh uh miss you so the discretion that was vested in the in the in the company to pay this to to allocate a resources to other purposes until December 7 31 2017 now. There's another issue here and judge Blake also relied on the Bruce Diversis Brennan case where the case where the district of Maryland dismissed a claim because all of the. Offsets and all of the accounting had not yet been performed here that the developer fee is subject to offsets for any harm caused by the developer or any affiliate and this this project is continuing to operate. And at some point by the December 31 2017 will either make a full payment of the developer fee or make less than the full payment based on offsets available to it and if there's a disagreement at that time then there will be will be a dispute judge Blake's finding didn't foreclose a claim on the developer fee it only found that it was unripe until the outside date given the discretion that the company was permitted to exercise under that clause. Turning to the removal count um miss Burton's argument was that there were fact finding by by the court below in in in holding that the judgments as as you point out. Judge Diaz that they were judgments not just mechanics leans not construction means they were judgments on the leans pointing out that those leans form to basis for removal as a matter of law she took judicial notice of the judgements. And she held that that demonstrated a failure to fund under 6.10a 6.10a specifically provides or I believe it's 8.04 the removal provisions specifically provides that any failure to fund under 6.10a is deemed under the contract to have a material adverse effect. So there is no factual finding necessary because this expressed terms of the contract. Deem any failure to fund under 6.10a as material. The court simply took judicial notice of the of the judgments and then found that that demonstrated a failure to fund. And this burden says that the contract also allows her kind of right to cure but you say that that's independent of this finding of material adverse effect once that finding is made that's that triggers the right to remove irrespective of any cure. No we would agree with with Ms

. Offsets and all of the accounting had not yet been performed here that the developer fee is subject to offsets for any harm caused by the developer or any affiliate and this this project is continuing to operate. And at some point by the December 31 2017 will either make a full payment of the developer fee or make less than the full payment based on offsets available to it and if there's a disagreement at that time then there will be will be a dispute judge Blake's finding didn't foreclose a claim on the developer fee it only found that it was unripe until the outside date given the discretion that the company was permitted to exercise under that clause. Turning to the removal count um miss Burton's argument was that there were fact finding by by the court below in in in holding that the judgments as as you point out. Judge Diaz that they were judgments not just mechanics leans not construction means they were judgments on the leans pointing out that those leans form to basis for removal as a matter of law she took judicial notice of the judgements. And she held that that demonstrated a failure to fund under 6.10a 6.10a specifically provides or I believe it's 8.04 the removal provisions specifically provides that any failure to fund under 6.10a is deemed under the contract to have a material adverse effect. So there is no factual finding necessary because this expressed terms of the contract. Deem any failure to fund under 6.10a as material. The court simply took judicial notice of the of the judgments and then found that that demonstrated a failure to fund. And this burden says that the contract also allows her kind of right to cure but you say that that's independent of this finding of material adverse effect once that finding is made that's that triggers the right to remove irrespective of any cure. No we would agree with with Ms. Burton that there's a right to cure and in fact in this case in the record there's a cure letter that was sent out mid November giving the managing member 30 days to cure the deficiencies release the leans and make payments. And the cure letter specifically which is attached and is in the record specifically says make your payments under 6.10 bring everything current you have 30 days they didn't do that. And in fact in response to the cure letter your honor they sent a letter and they attached that letter to the complaint so it's integral to the complaint and it can be considered by this court. And in that letter they not only agreed they didn't have any money to pay under 6.10a their obligations but then they added on that the lender was prepared to foreclose if payments were not made on the mortgage. So they they added and judge Blake had the benefit of their own letter they attached the complaint where they acknowledged an inability to pay the mortgage which would have led to a foreclosure on the project. And that all occurred before the removal this occurred between the notice and the removal date. Turning to the accounting Maryland courts do generally hold that an accounting claim cannot stand as an independent cause of action with limited exceptions not applicable here. This count judge Blake dismissed without prejudice and not so much because she believed that it could be reasserted as an independent cause of action but it could be part of a remedy relating to a payment for the return of the capital contribution in future years and or for the payment of a developer's fee when that claim becomes right. The accounting claim if you look at the paragraphs really relates to the return of capital contribution the paragraph that appellants the main substantive paragraph of that count says if these aren't loans then their capital contributions we have a right to know what the capital contributions are etc. But this is a this capital contribution return under the agreement express language of the agreement isn't due for 15 years after the date of removal and is again just like the developer's fee subject to offsets for any harm caused by the managing member. To pay lawyers to fight the many other construction leans that had been fought to complete the project to pay any unpaid bills that operating bills that existed at the time all of those are will be offsets to what ultimate payments are made when those claims are right. Finally your honor below we argued that there were two entities that were incorrectly included in this case one is small deal fund which was the investor member and the other is Raleigh consultants which was just a construction management firm engaged by holdings when it was managing member. These entities were included on several counts the and we believe that the obligations described here are the company's obligations and that they were improvitantly included appellants did not a brief that issue in their opening brief and under four circuit precedent a site United States versus all handy 356 F third five sixty four they've abandoned the issue by not addressing it in their brief now they do address it in their reply brief

. Burton that there's a right to cure and in fact in this case in the record there's a cure letter that was sent out mid November giving the managing member 30 days to cure the deficiencies release the leans and make payments. And the cure letter specifically which is attached and is in the record specifically says make your payments under 6.10 bring everything current you have 30 days they didn't do that. And in fact in response to the cure letter your honor they sent a letter and they attached that letter to the complaint so it's integral to the complaint and it can be considered by this court. And in that letter they not only agreed they didn't have any money to pay under 6.10a their obligations but then they added on that the lender was prepared to foreclose if payments were not made on the mortgage. So they they added and judge Blake had the benefit of their own letter they attached the complaint where they acknowledged an inability to pay the mortgage which would have led to a foreclosure on the project. And that all occurred before the removal this occurred between the notice and the removal date. Turning to the accounting Maryland courts do generally hold that an accounting claim cannot stand as an independent cause of action with limited exceptions not applicable here. This count judge Blake dismissed without prejudice and not so much because she believed that it could be reasserted as an independent cause of action but it could be part of a remedy relating to a payment for the return of the capital contribution in future years and or for the payment of a developer's fee when that claim becomes right. The accounting claim if you look at the paragraphs really relates to the return of capital contribution the paragraph that appellants the main substantive paragraph of that count says if these aren't loans then their capital contributions we have a right to know what the capital contributions are etc. But this is a this capital contribution return under the agreement express language of the agreement isn't due for 15 years after the date of removal and is again just like the developer's fee subject to offsets for any harm caused by the managing member. To pay lawyers to fight the many other construction leans that had been fought to complete the project to pay any unpaid bills that operating bills that existed at the time all of those are will be offsets to what ultimate payments are made when those claims are right. Finally your honor below we argued that there were two entities that were incorrectly included in this case one is small deal fund which was the investor member and the other is Raleigh consultants which was just a construction management firm engaged by holdings when it was managing member. These entities were included on several counts the and we believe that the obligations described here are the company's obligations and that they were improvitantly included appellants did not a brief that issue in their opening brief and under four circuit precedent a site United States versus all handy 356 F third five sixty four they've abandoned the issue by not addressing it in their brief now they do address it in their reply brief. But in our view it's too late if the court does a remand without affirming all of judge Blake's opinion we would ask that that small deal and Raleigh that any counts they've been included in be affirmed based on the abandonment thank you your honor there no further questions I see my time is up. Please to hear from you and rebuttal. First I'll address the accounting question that Judge Keenan had I believe essentially we've talked about the developers fee and why the accounting arises out of that I think it's all important to point out the capital contribution issue which the appellant the pelly touched upon. As the court said in Anderson the Watson which is cited on their reply in our reply brief a page 12 unless the claim is informed of the extent of his claim he cannot properly bring an action of law upon it law upon it and essentially in that ties into the fiduciary duty which we believe exists between the managing member and the LLC in this case and without knowing what that capital contribution is all about without some accounting we don't even know whether the distribution was correctly done I mean our client you know had to had to take care of that K one distribution statement in his tax returns where when he didn't receive any actual cash distribution whatsoever. So they've essentially addressed it away in the briefs but there's there's a real question here and the plaintiffs really cannot enforce their rights and cannot properly bring their whatever causes of action that they have without that accounting and that's again both based on that distribution statement and as well as the non payment of the developers fee and also as Judge Keenan pointed out section 701 the developer fee that next line the developer shall be paid such portions of the developer for the company from available debt equity proceeds of the company to the extent such proceeds are not required for other company purposes. It's not discretionary it doesn't say they can wait till 2017 and then figured out that it says it shall be paid you know if the money's there and we don't know if the money's there because we don't have an accounting and we don't have any access to the records of the company anymore. The other point I want to make in terms of the cure issue and also the risk it is absolutely true that the operating agreement places the risk and the obligations of running the company and finishing the project on the managing member no question but the managing member had a plan in place to pay these debts and satisfy the least to say well they had to the point was made that you were given a chance to cure. There's allegations in the complaint that that that obligation was was not provided in good faith that we didn't weren't given an opportunity to make those payments. When again we had arrangements in place namely that invest the next investor installment which was due at construction completion which was that same month. I mean this was a project that took eight years and they were removed just two weeks before they would have had the money to pay off those debts and finish this job in accordance with the operating agreement and the project documents. That's what's alleged in the complaint and that's a removal provision at this point. Correct, Johnner. You don't speak the existence of a mechanic lane. Correct, Johnner. And a letter gave you 30 day period of cure

. But in our view it's too late if the court does a remand without affirming all of judge Blake's opinion we would ask that that small deal and Raleigh that any counts they've been included in be affirmed based on the abandonment thank you your honor there no further questions I see my time is up. Please to hear from you and rebuttal. First I'll address the accounting question that Judge Keenan had I believe essentially we've talked about the developers fee and why the accounting arises out of that I think it's all important to point out the capital contribution issue which the appellant the pelly touched upon. As the court said in Anderson the Watson which is cited on their reply in our reply brief a page 12 unless the claim is informed of the extent of his claim he cannot properly bring an action of law upon it law upon it and essentially in that ties into the fiduciary duty which we believe exists between the managing member and the LLC in this case and without knowing what that capital contribution is all about without some accounting we don't even know whether the distribution was correctly done I mean our client you know had to had to take care of that K one distribution statement in his tax returns where when he didn't receive any actual cash distribution whatsoever. So they've essentially addressed it away in the briefs but there's there's a real question here and the plaintiffs really cannot enforce their rights and cannot properly bring their whatever causes of action that they have without that accounting and that's again both based on that distribution statement and as well as the non payment of the developers fee and also as Judge Keenan pointed out section 701 the developer fee that next line the developer shall be paid such portions of the developer for the company from available debt equity proceeds of the company to the extent such proceeds are not required for other company purposes. It's not discretionary it doesn't say they can wait till 2017 and then figured out that it says it shall be paid you know if the money's there and we don't know if the money's there because we don't have an accounting and we don't have any access to the records of the company anymore. The other point I want to make in terms of the cure issue and also the risk it is absolutely true that the operating agreement places the risk and the obligations of running the company and finishing the project on the managing member no question but the managing member had a plan in place to pay these debts and satisfy the least to say well they had to the point was made that you were given a chance to cure. There's allegations in the complaint that that that obligation was was not provided in good faith that we didn't weren't given an opportunity to make those payments. When again we had arrangements in place namely that invest the next investor installment which was due at construction completion which was that same month. I mean this was a project that took eight years and they were removed just two weeks before they would have had the money to pay off those debts and finish this job in accordance with the operating agreement and the project documents. That's what's alleged in the complaint and that's a removal provision at this point. Correct, Johnner. You don't speak the existence of a mechanic lane. Correct, Johnner. And a letter gave you 30 day period of cure. Johnner, the letter that's what the letter says but I think it's all important to know that the allegation. The letter says that. I mean, I guess. One of the difficulties I'm having is that I'm just not able to locate some of the specifics of your objections you say you're well behaved and they are paid. But it's struck me this was simply a normal contract dispute where parties are disagreeing over the implementation of a contract and over the terms of a contract. And I don't know how dispute over contract terms or contract implementation and everything can somehow amount to bad faith. It's nothing that just leaves off the page and part of it you negotiated a contract that in certain respects was unfavorable to you. But you don't really negotiate it in court. I mean, so you might regard some of the terms as tough but the terms are the terms. You're on the allegations of the complaint set forth particularly timing issues that right right at this last few months of the project. The managing member was asked to sign the rally agreement and bring in a third party to basically run the company for those last couple months and in that agreement we've alleged small deal agreed to provide funding. And then there is an allegation of any allegation of bad faith in this amended complaint. I really had a problem looking through it to see where there was an allegation that could amount to bad faith. The allegations are primarily timing for example that the new member the special. The weirdy say it in the complaint that they acted in bad faith

. Johnner, the letter that's what the letter says but I think it's all important to know that the allegation. The letter says that. I mean, I guess. One of the difficulties I'm having is that I'm just not able to locate some of the specifics of your objections you say you're well behaved and they are paid. But it's struck me this was simply a normal contract dispute where parties are disagreeing over the implementation of a contract and over the terms of a contract. And I don't know how dispute over contract terms or contract implementation and everything can somehow amount to bad faith. It's nothing that just leaves off the page and part of it you negotiated a contract that in certain respects was unfavorable to you. But you don't really negotiate it in court. I mean, so you might regard some of the terms as tough but the terms are the terms. You're on the allegations of the complaint set forth particularly timing issues that right right at this last few months of the project. The managing member was asked to sign the rally agreement and bring in a third party to basically run the company for those last couple months and in that agreement we've alleged small deal agreed to provide funding. And then there is an allegation of any allegation of bad faith in this amended complaint. I really had a problem looking through it to see where there was an allegation that could amount to bad faith. The allegations are primarily timing for example that the new member the special. The weirdy say it in the complaint that they acted in bad faith. The actual words that they are found in the paragraph addressing the removal. Small deal we have it paragraph 29 the small deals removal holdings is for the purpose of wrongfully. The private holdings of its interest and wrongfully securing benefits of the money time and effort that Stanley Kaiser and the other plan is to devote it to the project. And then we said further. I know there's language. But wrongfully. I mean, you're saying that that supports your allegation of of a breach of contract right. Yes, but again, there's right. That's a bad faith in any formation of special member to replace. Right. I don't see anything that says that there's a bad faith allegation here that they were setting this up in bad faith that they acted in bad faith in carrying out the contract term strictly. And then we really even though the result to you was devastating. Really, when you read this complaint, I just don't see bad faith as opposed to not cutting you any breaks whatsoever under the contract. We've argued in our opening brief of page 51 that the medical plates have sport allegations that the 1899 LLC entities breach the duty of implied good faith and fair dealing. Inbound faith and with improper motives

. The actual words that they are found in the paragraph addressing the removal. Small deal we have it paragraph 29 the small deals removal holdings is for the purpose of wrongfully. The private holdings of its interest and wrongfully securing benefits of the money time and effort that Stanley Kaiser and the other plan is to devote it to the project. And then we said further. I know there's language. But wrongfully. I mean, you're saying that that supports your allegation of of a breach of contract right. Yes, but again, there's right. That's a bad faith in any formation of special member to replace. Right. I don't see anything that says that there's a bad faith allegation here that they were setting this up in bad faith that they acted in bad faith in carrying out the contract term strictly. And then we really even though the result to you was devastating. Really, when you read this complaint, I just don't see bad faith as opposed to not cutting you any breaks whatsoever under the contract. We've argued in our opening brief of page 51 that the medical plates have sport allegations that the 1899 LLC entities breach the duty of implied good faith and fair dealing. Inbound faith and with improper motives. That gets back. That gets back to the point I was interested in the response to Judge Kenan's question. It seems to me that just because you disagree with them over the terms of the contract and what the contract requires. And you know, you have a dispute over the terms and you have a dispute over the implementation of the terms. You know, that occurs all the time, but you can't just slap a bad faith level on that as a conclusive matter that just it's the equivalent in tort of an automatic punitive damages claim every time there's. You know, a routine case of negligence and the contractual parallel to it is a bad faith allegation every time the parties disagree over the over a particular contract and a lot of the things that you to the extent that you do get specific on these allegations used to well. So the investing partner, small deal promise this or promise that a lot of that. I don't know if that's anything, but parole evidence here, which the district court declined to accept. Some of the some of the things that you've introduced in the arguments, you know, struck me as as not arguments over contractual terms, but you want to create disputed issues of fact by referring to various pieces of parole evidence. And you know, that seems to me to undermine the value of the written document. You say, well, small deal did this, small deal did that, but again, that goes, you know, behavior or promises this and that. But the argument wasn't framed sufficiently in terms of the contractual language. Your opponent was pretty careful in trying to address contractual language. And I think that's where the case has to bottom out, doesn't it? Yes, Your Honor. I think we tried to address the operating agreement and the amendment themselves

. That gets back. That gets back to the point I was interested in the response to Judge Kenan's question. It seems to me that just because you disagree with them over the terms of the contract and what the contract requires. And you know, you have a dispute over the terms and you have a dispute over the implementation of the terms. You know, that occurs all the time, but you can't just slap a bad faith level on that as a conclusive matter that just it's the equivalent in tort of an automatic punitive damages claim every time there's. You know, a routine case of negligence and the contractual parallel to it is a bad faith allegation every time the parties disagree over the over a particular contract and a lot of the things that you to the extent that you do get specific on these allegations used to well. So the investing partner, small deal promise this or promise that a lot of that. I don't know if that's anything, but parole evidence here, which the district court declined to accept. Some of the some of the things that you've introduced in the arguments, you know, struck me as as not arguments over contractual terms, but you want to create disputed issues of fact by referring to various pieces of parole evidence. And you know, that seems to me to undermine the value of the written document. You say, well, small deal did this, small deal did that, but again, that goes, you know, behavior or promises this and that. But the argument wasn't framed sufficiently in terms of the contractual language. Your opponent was pretty careful in trying to address contractual language. And I think that's where the case has to bottom out, doesn't it? Yes, Your Honor. I think we tried to address the operating agreement and the amendment themselves. And I think there's language in the operating agreement amendment that shows that the court went beyond the terms in deciding the motion. I think we've spelled that out in the briefs. And, you know, as far as parole evidence, I think again, you have to look at the contract documents and the contract documents contemplate things like the loans, the language is there. The construction loan, the short term loans, these are all things that are in the operating agreement. And we're not asking the court to look at evidence beyond that, right there in the language. And the court misinterpreted some of that language in finding that the language conclusively barred all the claims, which at a 12-6 motion you have to give the benefit of the doubt to the plaintiff and the allegations from the complaint. My time is up, but if you have anything further, I'd be pleased to answer your questions. I think we thank you very much. Thank you, Your Honor. And we'll come down and greet Council then. We'll take just a brief recess.

All right, Ms. Burton. Happy to hear from you. Thank you, Your Honours. Good morning, May please the Court. My name is Megan Burton. And I represent the appellants in this case, Stanley Kaiser, 1899 Holdings, LLC, and the affiliated entities identified in the briefs. The quick summary of the case, this case arises out of the major rehabilitation of a historic property involved to more city. The Kaiser entities, and I'm referring to the appellants as the Kaiser entities, spent eight years of their time, energy, and over $3 million to bring the redevelopment of this property, the Northern District Police Station, to fruition, only to have their right to recoup those funds, and to be paid for their efforts as both managing member and developer of the project stripped from them by the tax credit investor member. Just weeks before the project was certified as complete. And at that time, the investor member received millions of dollars in tax credits. The Kaiser entities sued to enforce those rights under the operating agreement and the amendment that are at issue today, and sufficiently alleged breach of contract claims based on holdings removal. The company's refusal to pay the developer fee and refusal to repay loans that the Kaiser entities had made to the company. Those are the claims in a nutshell. The district court granted the 1899 LLC's motion to 12 B6 motion to dismiss, and that's really the key here, is that we're here on a 12 B6 motion to dismiss for failure to state acclaim. We appealed from that ruling because the district court failed to adhere to this proper standards for considering such a motion. To grant a 12 B6 motion based on a contract where there's a contract between the parties, the contract must clearly and unambiguously bar the claims. The relevant contracts in this case, namely the operating agreement and the amendment there too. And other project documents which are incorporated in the operating agreement, do not clearly and unambiguously bar the plaintiffs' claims in this case. In granting the 12 B6 motion, the district court misinterpreted and misapplied the contracts and made factual determinations which are completely inappropriate at the 12 B6 stage. Again, the four claims, which the four claims really had issue if you distill all the counts into four different issues, is the removal of the managing member, the payment of the developers fee, the loans and the claim for an accounting. I'll talk about the removal first. In order to hold that small deal, who's the investor member here, the tax credit investor member, federal tax credit member, properly removed holdings from its positionist managing member of the company, the district court made a factual determination that merely because certain lean judgment existed at the time of the removal that the removal was proper under the operating agreement. The factual determination simply could not be made at the stage. Moreover, the court's conclusion that the basis these leans was consistent with the terms of the operating agreement was not consistent. Ms. Burton, let me ask you about that. Just to understand if there's a distinction here. I thought the district court took the judicial notice, not just of leans, which is I understand and simply just claims, but actual judgments that have been entered with respect to the project. Is that right? That's correct, Johnner. There are two. Well, if that's correct, then why isn't the latter with respect to judgments fairly substantial evidence that in fact, your client wasn't meeting its obligations to make the requisite fund payments? There's several reasons why that isn't enough under the operating agreement. The operating agreement requires to remove, for the investor member to remove the managing member, the managing member must violate a term of the operating agreement, must not cure that violation, and the violation must have a material adverse effect on the company. There's several factual determinations that had to be made in order for the district court to conclude. You keep saying that the factual determinations have to be made, but in reading the district court opinion, it seemed to me that she was adhering fairly scrupulously to the language of the contract itself, most specifically section 6.10a, which is not good for you. You're on our section 6.10a speaks to the violation of the obligation to provide funds. As we've argued in our briefs, the obligation to provide funds is not the same as the existence of a lien judgment. The reason that is is because there's other language in the operating agreement that contemplates that the project can be completed, which is really the managing member's ultimate obligation is to complete the project. But there's language that says that the project can be completed if in the existence of liens, so long as there are plans in place to satisfy those liens. And as a factual matter, and this is in the amendment, the liens could have been paid as soon as the investor members made that next installment payment, which would have been at project completion less than weeks, just weeks away. So, let's take the contract as a whole. What the contract did was set up a fairly common division in commercial dealings, which is that one party is an investor, and the other party is a manager. And your entire duty under the contract as a managing partner was to see that the project ran smoothly. The investor is removed. The investor simply is not expected to and cannot adopt a hands-on view in dealing with suppliers and dealing with cash flow and all the rest. That's the whole reason the managing partner is hired to avoid having the project run into debt, to avoid having all sorts of outstanding mechanics leads. I'm to avoid having the thing crash with shortfalls and having cost overruns, overtake the whole thing. And your job as managing partner was to avoid the very things that happened. And if they happened, you had to make up for it on the managing partner's death. And that is what this contract says. The very things you were hired to avoid happened, which I suppose is okay, but then you've got to put in the money to make sure that those things are cured. And that's the point you're in our meeting. And at that point, they treated his capital contributions and not treated his loans. That's the whole point of the contract. Well, you're right. I mean, there's several different issues, but the point is here that isn't exactly what happened because there were plans made and arrangements made for the investor member to make additional funding. There was promise ory notes signed by Small Deal, which are in the record, which said that Small Deal was essentially stepping in in that obligation to provide funds. And the rally agreement, which is alleged in the complaint, the rally agreement is not in the record itself, but the allegations are there that states that the rally agreement, under that agreement, Small Deal took over some of those obligations to provide funds to the project. And again, that amendment gave an additional payment to the company at project completion, which would have paid all of those outstanding debts. And again, those are all factual questions that have to be weighed. This isn't a 12-B6 situation where you can say, emphatically, that the language in the operating agreement clearly bars these claims simply because those are what the managing members' obligations were. There's enough facts to show that there were changes made in the case. You're saying that, but I don't know that you've isolated any of these factual questions in your briefs or wherever with any sort of precision. And one of the things is that you might or contract in ceaseless litigation like you wish to do. You deprive the parties of the benefit of their bargain so long as the contract itself is reasonably clear because a contract involves not only an effort by parties to set out mutual obligations and to put limits on risk, but also to have a doubt. The document which in the event that it's clear will save them the expensive litigation and to throw all this into litigation simply deprive one party of the benefit of a bargain. If as I think the district court found your obligations with respect to managing this actual project, we fairly set out in an integrated document. We run again in the key there is the document's not clear. And particularly I think that's evident in the developer's fee situation. In this case, the operating agreement and this is at Joint Appendix 200 specifically states with respect to the developer's fee that the developer fee shall be deemed earned in its entirety as of the date of construction completion, which in this case was in December of 2008. And it was on to say that the developer shall be paid such portion of the developer fee from available debt and equity proceeds of the company to the extent such proceeds are not required for other company purposes. So it obviously contemplates that there is a calculation that needs to be made and this is both part of our developer's fee claim and then also the accounting. But you don't affirmatively that legend you're complaint with respect to that claim that in fact there were funds available. You just say we earned it. We don't know. Let's have an accounting. How does that state of plausible claim? We are on the complaint states as to the developer fee. It does we do realize that the defendant has acknowledged the plaintiffs entitlement to disagree upon fee but simply refused to identify an account for the debt and equity proceeds. So again, we're saying it's due and it has to be. It means it's earned, right? But then once earned and the next thing has to happen, there has to be sufficient funds in the till to pay that are not otherwise that the company can't otherwise and its discretion to use for other purposes. And that seems to me the problem is how is anyone a fact finder or jury supposed to sort that out when you have an email edged that in fact there were funds outside of normal operating expenses to pay that fee. You know what I mean? I think it's implicit in the allegations that if they're sponge then we're due to be paid and we don't know whether they're sponge there. So we couldn't affirmatively elect. I mean we could have said yeah they're sponge but we don't know. I guess I'm asking how does that alleged breach of contract? Because again it's that there's the debt that's due under the operating agreement. We've alleged the debt is due. We've referred to the operative contract that controls. But there's a condition precedent that has to be satisfied before the actual payment is made. And with respect to that there's no specific claim that the company had funds available that it was not using for other legitimate purposes and refused to pay. Is there? I think we've alleged elsewhere that there's claims, well we have alleged claims of bad faith in terms of the company's refusal to pay some of these fees and to pay amounts that are otherwise due to the managing member and the developer. Now switch the subject for just a minute with respect to the developer fee. I didn't understand why you thought that was right given the fact that as I understand that the fee wasn't even due until any fee if there wasn't due until the last day of 2017. See and that's I don't think the operating agreement says that you're on. The operating agreement says that it's due at construction completion. It's just a question of how much is due. And then at the ultimate outside the December 2017 deadline is when at that point the managing member would actually have to borrow funds in order to pay the developer fee. But at construction completion which was December 2008 it was due. I mean the operating agreement says it shall be paid. And the district court made a determination that the company actually did not have enough funds to pay the developer's fee which the district court simply didn't have a basis to do that at a 12 B.C. So there's several you know there's several reasons why the developer's fee the district court's determination as the developer's fee was incorrect. What about the this independent action in an in accounting wise and accounting generally just a part of discovery. You know we very few jurisdictions that have a stand alone independent action in accounting. If the if the contractual provisions don't provide a breach. Why isn't that the anti-seedant question as to whether the contractual provisions establish a breach. And if there's no establishment of a breach then there's no need for an independent action in an accounting. Now if there is a breach maybe you get to an accounting as part of a discovery. But what you do have to do is a threshold matter. It's to establish whether there's been any kind of breach in the first place but you just don't throw. On opposing party to a contract. Into an independent action for an accounting. As a matter of course you're on our see a run out of time may answer the question. You want to reserve it and feel a rebuttal. Would you like to answer it now. I can answer it quickly now and then I can answer for the questions on rebuttal. Essentially there's two reasons why the accounting claim is there. To some extent you know you're correct your honor and it is tied to for example developers fee. We don't know really how much money there is there to support our developers claim fee unless we have an accounting and know as your honor was stating previously what whether they owe that money. And that's the way there's one third of facts. And when you come back on rebuttal I think you also need to address the fact that the agreement says that the developers fee shall be deemed earned in its entirety as of the date of construction completion. It doesn't say that it's due. It says that it's earned and I need to ask you to address that difference in your presentation on rebuttal. All right thank you. Thank you. All right well we thank you and Mr. Coyola. Good morning your honors may please the court. My name is Paul Coyola I represent a Pellies in this matter. A district court properly dismissed the amended complaint because the express language of the company's operating agreement four closes any possibility of liability at this time on the claims asserted in the amended complaint. I'm going to begin with the six oral loan counts as Judge Wilkinson pointed out during Ms. Burton's argument section six point one O A of the operating agreement required holdings to cause the completion of the rehabilitation of the project and if available sources of funds were not available holdings needed to advance any development funds necessary to complete the project and until the date of construction completion also. So cover any operating expenses that same section deems all such payments capital contributions and under the operating agreement capital contributions are not repable at all unless a removal occurs and or a sale and in the event of removal removal they're not repable for 15 years. What is the word in section six point ten A what is the word deficiencies it says the managing members shall be responsible for an obligated to pay such deficiencies how do you interpret the word deficiencies. I'm looking at the next the last line in section ten your honor six point I think the deficiencies refers back up to the beginning of sub two where it says. Well at the beginning of the sentence if the available debt equity rental income or other proceeds are insufficient to and then it says acquiring complete the construction under one you interpret deficiencies to move to refer back see if the if the revenue from the project if the ongoing revenue from the from the project. Is in sufficient to keep the project going the deficiencies have to be paid by the managing member net you interpret deficiencies to encompass cash shortfalls potential cost overruns mechanics leans mean is it is it a kind of an omnibus word in your view. Yeah your honor if you look at that false sentence as a whole sub one said first there's a reference in the first clause to available debt equity rental income or other proceeds so there this was an operating commercial real estate project with tenants and it was also under development so there was not only income from the operations of the property there was also. Construction loan so loan proceeds and there were capital contributions that the investor member had made all of those that's what the equity refers that's right all of those sources of funds were available for it refers to the income. The income and proceeds the first line refers to the cash reserves and the all all that money right the first line refers to that and then sub one talks about rehabilitating that's the construction piece and sub two refers to provide for all other payments and expenses the importance of this second clause is that there's really a cut off that construction completion if operating if operating income is insufficient after construction is complete. The managing members permitted under 6.11 to make loans for operating deficits and those would be repayable. 120 day low no no this is after construction completion okay under 6.11 in applicable in this case but if the managing member had reached construction completion and there were deficits ongoing going forward loans were permissible under that circumstance before construction. No because construction completion had not occurred during this entire period so during the construction rehabilitation phase the managing member is required to advance funds for both operating as capital contribution for both operating deficits and to deal with any cost overruns. The section says on or prior to construction completion exactly but the point is that first sentence of of refers to the available income and you have a you have a revenue stream arising from from debt equity rentals all proceeds and the assumption is that's going to go a good way to funding the project but it might not and deficiencies. These might arise particularly in construction work where you know cost overruns and delays in supplies and I'm delays in paying subcontractors and contractors and others. So the whole question is you know who's going to be responsible for making up the difference and the parties allocated the risk the every contract involves a risk at the bottom and the question is who's going to cover the risk and the risk here is that things might not go is swimmingly is as one hopes. But the risk allocation is allocated through the managing member and that's not an implausible allocation because the managing member is in a better position than the investing member to avoid those things. And to make sure that they if they don't have these the one at ground level. That's correct and that's what this contract seems to do. That's correct during the construction phase where this project was mired until the removal. The managing member was responsible for advancing any cost above what the funds available in those other sources. What is the phrase development advances mean development advances is a reference to this 6.10 a it's it what what it references. That term is never defied it's not a defined term but is that create a problem. I don't think so your honor because when you read 6.10 a it's clear that they're developing the rehabilitating a project and there as I mentioned earlier there's this cutoff at construction completion. So development advances have to do with any money put in by the managing member during the development phase. Then why why exclude development advances in this warranty clause there isn't an exclusion of what they're saying you're talking about 6.09 K your honor. Right what they're saying is this is a statement that no such advances have occurred excluding and for this purpose any loans pursuant to section 611 and development advances which is keen and pointed out isn't defined and the appellants say that that's exactly where they fit in. Yes accept your honor that development advances is I think clear from the context of the full agreement it's referring to money advanced by the managing member which is addressed in 6.10 a well if it was and why is that language. The reason it's there is because this is assertive this vision 6.09 K is a certification from the managing member that it hasn't made any advances any loans or advances it starts by saying the managing member has made no loans or advances and then it says of course except for development advances. It's not it's not it's not it's it's included because because if you took out development advances from that parenthetical there'd be a certification that no development advances had been made which is untrue. Okay so your view is that that language is then set to the extent its exclusion it simply defines doesn't define but states that there may be development advances and they are all supposed to be treated as capital contributions not loans. That's correct and if you look at the two the two provisions in 6.09 K one is loans it says no no loans or advances and then in parenthetical it says loans under 6.11 which again are these these operating deficit loans that only can occur after construction completion and development advances again a reference back to 6.10 a there is no confid it's not a defined term but it's a very clear I think from the context of of the full agreement. What's intended by development advances in that clause. The district court dismissed these loan counts based on the parole evidence rule because the supposed oral loans that are discussed occurred during the spring and summer of 2008 before the date of the first amendment where the parties ratified both 6.09 K and 6.10 a and another provision I haven't mentioned yet 14.05 which is the entire agreement provision it provides that that the operating agreement as amended by the first amendment is the entire agreement between the parties and there are no prior agreements so the the the appellants that below placed the supposed oral loans during a time period before the first amendment and therefore proof would be barred by the parole evidence rule and that was the basis for judge Blake's finding on the loan claims. Turning to the unjust enrichment count this these counts basically there are 6 counts for unjust enrichment that correlate to the 6 loan counts and the judge judge Blake found that the these claims were barred because they're on the same subject matter as the loan claims the subject matter of the unjust enrichment counts is the treatment of these advances that the managing member made the treatment of the advances is clearly addressed in 6.10 a and therefore it's the it's the identical subject matter as the express agreement and I guess they've got to come in under the bad faith exception under Maryland law don't say. Your honor the problem with all of the exceptions is that they all relate to a challenge to the enforceability of the express agreement so if you look at Severn marketing associates versus Dulin that case is a case where the. The unjust enrichment count was dismissed because the challenge to the agreement was not to the in the making of the contract the enforceability of the contract here appellants have acknowledged the enforceability of the operating agreement and the first amendment so we don't believe that they can take advantage of any of the exceptions that would apply. Turning to the developers fee that the developer's fee is was properly dismissed by the district court I agree with judge keenon that it was earned on construction completion but that provision does not does not discuss payment. There is another sentence though what is that next sentence read it says that it would be payable on December 31 2017 is an outside day. Following yes no I agree your honor and that addresses that it would be paid out of available debt and equity proceeds available proceeds and this is the key provision that shall be paid I'm assuming that Ms. Burton's argument when she comes back is going to be well it does say it's earned and not do that she was incorrect on that but it does say in the following sentence the developer shall be paid such portion to the extent that such proceeds are not required for other purposes. Your honor and that in judge Blake's view and in our view was the critical clause to the extent such proceeds are not required for other company purposes. Vests the new managing member with discretion to use funds how it wishes the managing member the removed managing member the developer in this case I am debos is the entity that entity is entitled to 6% interest from the date of construction completion until the developer's fee is paid. Do you think it's a discretionary determination that's that's correct are you saying that or no no we are saying it's discretionary based on the clause to the extent such proceeds are not required for other company purposes that that clause. Vests the managing member with discretion to use funds how it deems appropriate until the outside date of December 31 2017. Does any contracting party even with discretion have an obligation to act in good faith. Yes your honor any kind of but they're alleging that you're your client didn't act in good faith and making at least a part of that payment. Well the the that allegation is is set forth but it's there that we believe it's not plausible under the circumstances here because of this discretionary clause and in if they if they would. So you're saying that good faith bad faith it doesn't matter well I believe they would have to assert some allegation besides just a concluse re allegation of bad faith that there's been any. Uh uh miss you so the discretion that was vested in the in the in the company to pay this to to allocate a resources to other purposes until December 7 31 2017 now. There's another issue here and judge Blake also relied on the Bruce Diversis Brennan case where the case where the district of Maryland dismissed a claim because all of the. Offsets and all of the accounting had not yet been performed here that the developer fee is subject to offsets for any harm caused by the developer or any affiliate and this this project is continuing to operate. And at some point by the December 31 2017 will either make a full payment of the developer fee or make less than the full payment based on offsets available to it and if there's a disagreement at that time then there will be will be a dispute judge Blake's finding didn't foreclose a claim on the developer fee it only found that it was unripe until the outside date given the discretion that the company was permitted to exercise under that clause. Turning to the removal count um miss Burton's argument was that there were fact finding by by the court below in in in holding that the judgments as as you point out. Judge Diaz that they were judgments not just mechanics leans not construction means they were judgments on the leans pointing out that those leans form to basis for removal as a matter of law she took judicial notice of the judgements. And she held that that demonstrated a failure to fund under 6.10a 6.10a specifically provides or I believe it's 8.04 the removal provisions specifically provides that any failure to fund under 6.10a is deemed under the contract to have a material adverse effect. So there is no factual finding necessary because this expressed terms of the contract. Deem any failure to fund under 6.10a as material. The court simply took judicial notice of the of the judgments and then found that that demonstrated a failure to fund. And this burden says that the contract also allows her kind of right to cure but you say that that's independent of this finding of material adverse effect once that finding is made that's that triggers the right to remove irrespective of any cure. No we would agree with with Ms. Burton that there's a right to cure and in fact in this case in the record there's a cure letter that was sent out mid November giving the managing member 30 days to cure the deficiencies release the leans and make payments. And the cure letter specifically which is attached and is in the record specifically says make your payments under 6.10 bring everything current you have 30 days they didn't do that. And in fact in response to the cure letter your honor they sent a letter and they attached that letter to the complaint so it's integral to the complaint and it can be considered by this court. And in that letter they not only agreed they didn't have any money to pay under 6.10a their obligations but then they added on that the lender was prepared to foreclose if payments were not made on the mortgage. So they they added and judge Blake had the benefit of their own letter they attached the complaint where they acknowledged an inability to pay the mortgage which would have led to a foreclosure on the project. And that all occurred before the removal this occurred between the notice and the removal date. Turning to the accounting Maryland courts do generally hold that an accounting claim cannot stand as an independent cause of action with limited exceptions not applicable here. This count judge Blake dismissed without prejudice and not so much because she believed that it could be reasserted as an independent cause of action but it could be part of a remedy relating to a payment for the return of the capital contribution in future years and or for the payment of a developer's fee when that claim becomes right. The accounting claim if you look at the paragraphs really relates to the return of capital contribution the paragraph that appellants the main substantive paragraph of that count says if these aren't loans then their capital contributions we have a right to know what the capital contributions are etc. But this is a this capital contribution return under the agreement express language of the agreement isn't due for 15 years after the date of removal and is again just like the developer's fee subject to offsets for any harm caused by the managing member. To pay lawyers to fight the many other construction leans that had been fought to complete the project to pay any unpaid bills that operating bills that existed at the time all of those are will be offsets to what ultimate payments are made when those claims are right. Finally your honor below we argued that there were two entities that were incorrectly included in this case one is small deal fund which was the investor member and the other is Raleigh consultants which was just a construction management firm engaged by holdings when it was managing member. These entities were included on several counts the and we believe that the obligations described here are the company's obligations and that they were improvitantly included appellants did not a brief that issue in their opening brief and under four circuit precedent a site United States versus all handy 356 F third five sixty four they've abandoned the issue by not addressing it in their brief now they do address it in their reply brief. But in our view it's too late if the court does a remand without affirming all of judge Blake's opinion we would ask that that small deal and Raleigh that any counts they've been included in be affirmed based on the abandonment thank you your honor there no further questions I see my time is up. Please to hear from you and rebuttal. First I'll address the accounting question that Judge Keenan had I believe essentially we've talked about the developers fee and why the accounting arises out of that I think it's all important to point out the capital contribution issue which the appellant the pelly touched upon. As the court said in Anderson the Watson which is cited on their reply in our reply brief a page 12 unless the claim is informed of the extent of his claim he cannot properly bring an action of law upon it law upon it and essentially in that ties into the fiduciary duty which we believe exists between the managing member and the LLC in this case and without knowing what that capital contribution is all about without some accounting we don't even know whether the distribution was correctly done I mean our client you know had to had to take care of that K one distribution statement in his tax returns where when he didn't receive any actual cash distribution whatsoever. So they've essentially addressed it away in the briefs but there's there's a real question here and the plaintiffs really cannot enforce their rights and cannot properly bring their whatever causes of action that they have without that accounting and that's again both based on that distribution statement and as well as the non payment of the developers fee and also as Judge Keenan pointed out section 701 the developer fee that next line the developer shall be paid such portions of the developer for the company from available debt equity proceeds of the company to the extent such proceeds are not required for other company purposes. It's not discretionary it doesn't say they can wait till 2017 and then figured out that it says it shall be paid you know if the money's there and we don't know if the money's there because we don't have an accounting and we don't have any access to the records of the company anymore. The other point I want to make in terms of the cure issue and also the risk it is absolutely true that the operating agreement places the risk and the obligations of running the company and finishing the project on the managing member no question but the managing member had a plan in place to pay these debts and satisfy the least to say well they had to the point was made that you were given a chance to cure. There's allegations in the complaint that that that obligation was was not provided in good faith that we didn't weren't given an opportunity to make those payments. When again we had arrangements in place namely that invest the next investor installment which was due at construction completion which was that same month. I mean this was a project that took eight years and they were removed just two weeks before they would have had the money to pay off those debts and finish this job in accordance with the operating agreement and the project documents. That's what's alleged in the complaint and that's a removal provision at this point. Correct, Johnner. You don't speak the existence of a mechanic lane. Correct, Johnner. And a letter gave you 30 day period of cure. Johnner, the letter that's what the letter says but I think it's all important to know that the allegation. The letter says that. I mean, I guess. One of the difficulties I'm having is that I'm just not able to locate some of the specifics of your objections you say you're well behaved and they are paid. But it's struck me this was simply a normal contract dispute where parties are disagreeing over the implementation of a contract and over the terms of a contract. And I don't know how dispute over contract terms or contract implementation and everything can somehow amount to bad faith. It's nothing that just leaves off the page and part of it you negotiated a contract that in certain respects was unfavorable to you. But you don't really negotiate it in court. I mean, so you might regard some of the terms as tough but the terms are the terms. You're on the allegations of the complaint set forth particularly timing issues that right right at this last few months of the project. The managing member was asked to sign the rally agreement and bring in a third party to basically run the company for those last couple months and in that agreement we've alleged small deal agreed to provide funding. And then there is an allegation of any allegation of bad faith in this amended complaint. I really had a problem looking through it to see where there was an allegation that could amount to bad faith. The allegations are primarily timing for example that the new member the special. The weirdy say it in the complaint that they acted in bad faith. The actual words that they are found in the paragraph addressing the removal. Small deal we have it paragraph 29 the small deals removal holdings is for the purpose of wrongfully. The private holdings of its interest and wrongfully securing benefits of the money time and effort that Stanley Kaiser and the other plan is to devote it to the project. And then we said further. I know there's language. But wrongfully. I mean, you're saying that that supports your allegation of of a breach of contract right. Yes, but again, there's right. That's a bad faith in any formation of special member to replace. Right. I don't see anything that says that there's a bad faith allegation here that they were setting this up in bad faith that they acted in bad faith in carrying out the contract term strictly. And then we really even though the result to you was devastating. Really, when you read this complaint, I just don't see bad faith as opposed to not cutting you any breaks whatsoever under the contract. We've argued in our opening brief of page 51 that the medical plates have sport allegations that the 1899 LLC entities breach the duty of implied good faith and fair dealing. Inbound faith and with improper motives. That gets back. That gets back to the point I was interested in the response to Judge Kenan's question. It seems to me that just because you disagree with them over the terms of the contract and what the contract requires. And you know, you have a dispute over the terms and you have a dispute over the implementation of the terms. You know, that occurs all the time, but you can't just slap a bad faith level on that as a conclusive matter that just it's the equivalent in tort of an automatic punitive damages claim every time there's. You know, a routine case of negligence and the contractual parallel to it is a bad faith allegation every time the parties disagree over the over a particular contract and a lot of the things that you to the extent that you do get specific on these allegations used to well. So the investing partner, small deal promise this or promise that a lot of that. I don't know if that's anything, but parole evidence here, which the district court declined to accept. Some of the some of the things that you've introduced in the arguments, you know, struck me as as not arguments over contractual terms, but you want to create disputed issues of fact by referring to various pieces of parole evidence. And you know, that seems to me to undermine the value of the written document. You say, well, small deal did this, small deal did that, but again, that goes, you know, behavior or promises this and that. But the argument wasn't framed sufficiently in terms of the contractual language. Your opponent was pretty careful in trying to address contractual language. And I think that's where the case has to bottom out, doesn't it? Yes, Your Honor. I think we tried to address the operating agreement and the amendment themselves. And I think there's language in the operating agreement amendment that shows that the court went beyond the terms in deciding the motion. I think we've spelled that out in the briefs. And, you know, as far as parole evidence, I think again, you have to look at the contract documents and the contract documents contemplate things like the loans, the language is there. The construction loan, the short term loans, these are all things that are in the operating agreement. And we're not asking the court to look at evidence beyond that, right there in the language. And the court misinterpreted some of that language in finding that the language conclusively barred all the claims, which at a 12-6 motion you have to give the benefit of the doubt to the plaintiff and the allegations from the complaint. My time is up, but if you have anything further, I'd be pleased to answer your questions. I think we thank you very much. Thank you, Your Honor. And we'll come down and greet Council then. We'll take just a brief recess