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RSEP Holding, LLC v. Zurich Meadows Apartments

September 11, 2009

RSEP HOLDING, LLC, PLAINTIFF,
v.
ZURICH MEADOWS APARTMENTS, L.P., CAREFREE DEVELOPMENT, LLC, AND PHIL MOELLER, DEFENDANTS.



The opinion of the court was delivered by: James B. Zagel United States District Judge

SENIOR Judge James B. Zagel

MEMORANDUM OPINION AND ORDER

I. Introduction and Factual Background

This dispute arises out of a real estate development that has been slowed due to economic conditions impacting the capital markets in general and Low Income Housing Tax Credit syndication in particular. Plaintiff RSEP Holding, LLC ("RSEP") and Zurich Meadows Apartments, LLC are the limited and general partners, respectively, in Defendant Zurich Meadows Senior Apartments, L.P. ("Zurich"), a limited partnership formed for the purpose of developing, building, and operating a senior living facility for low to moderate income senior citizens. Zurich was awarded an allocation of federal tax credits from the Illinois Housing Development Authority ("IHDA") as well as other state and local government loans to fund the project.

On or about December 14, 2007, RSEP lent the principal sum of $660,000.00 to Zurich pursuant to the terms of a Promissory Note (the "Note"). At the same time, repayment of the indebtedness, as evidenced by the Note, was unconditionally guaranteed by Defendants Carefree Development, LLC and Phil Moeller pursuant to a Guarantee Agreement. RSEP claims that the Note matured on August 1, 2008. Having performed its part of the terms and provisions of the Note, RSEP demanded payment from Zurich, including the principal sum plus accrued interest in the amount of $125,825.47 for a total of $785,825.47, as well as continuing interest at the per diem rate of $389.99 from May 15, 2009 until the date of final judgment. It is undisputed that Defendants have not paid these sums to RSEP. RSEP filed a three-count complaint for breach of the Note and of the agreements with Carefree and Moeller guaranteeing the Note. RSEP also seeks $10,615.75 in attorneys' fees and $1,076.00 in expenses, bringing the aggregate sum to $797,517.22. RSEP now moves for summary judgment.

Defendants dispute that any sums are now due and owing on the Note and provide a bit more by way of undisputed background in support of their view.*fn1 On or around September 8, 2007, Red Stone Equity Partners, LLC entered into a letter agreement ("Commitment Letter") dated August 29, 2007 (on the cover) and June 25, 2007 (on each subsequent page) with Moeller and Zurich for the development and construction of Zurich Meadows Senior Apartments, a proposed affordable senior housing project in Lake Zurich, Illinois (the "Project"). The Project had received an allocation of federal low-income tax credits from the IHDA. The Commitment Letter provided the terms under which Red Stone (through its affiliate, RSEP) would become a limited partner in Zurich in exchange for providing funding to the Project in the form of a $9,066,598.00 capital contribution. In essence, RSEP would purchase from Zurich, at a discount, $9,750,000.00 in federal tax credits (hoping to sell them later at a profit). RSEP would pay Zurich for the tax credits through a series of capital contributions upon being admitted as a limited partner.

Pending completion of a Partnership Agreement, which would be executed upon the closing of the purchase of the land to be used as the development site, RSEP advanced part of its capital contribution as a "pre-development loan" in the amount of $660,000.00 to be used in the purchase of the land. Defendants maintain that this transaction was to be treated as a loan until RSEP was admitted to the partnership, at which time the loan would convert to equity. (RSEP cites to separate portions of the Partnership Agreement, paragraph 6(h) and 7(a), which it says indicate that the transaction between the parties was intended to be that of a loan).

On December 14, 2007, Zurich purchased the land for the site of the Project using, in part, the pre-development loan. On that same date, RSEP executed the Partnership Agreement, which requires that the terms of the Commitment Letter be incorporated into the final agreement between the parties. According to Zurich, the parties intended that RSEP would be credited for the $660,000.00 as a capital contribution at closing on the construction loan, at which time RSEP would fund its first scheduled capital contribution pursuant to paragraph four of the Commitment Letter. The amount of that contribution would therefore be reduced by the $660,000.00 credit, bringing the first capital contribution payment down to $1,606,650.00 (from $2,266,650.00). Defendants also mention that the principals of the parties in this case have followed the same methodology in other, similar transactions. In each case, the pre-development loan was converted to equity at the time of construction closing.

On June 27, 2008 RSEP wrote to Moeller stating that its "June 25, 2007" letter of interest had "expired" and that the downturn in the capital markets had adversely affected the profitability of the sale of tax credits.

II. Standard of Review

Summary judgment should be granted when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). A genuine issue of triable fact exists only if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Pugh v. City of Attica, Ind., 259 F.3d 619, 625 (7th Cir. 2001) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

Once the moving party has set forth the basis for summary judgment, the burden shifts to the nonmoving party who must go beyond mere allegations and offer specific facts showing that there is a genuine issue for trial. Fed. R. Civ. P. 56(e); see Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986). A party will be successful in opposing summary judgment only if it presents "definite, competent evidence to rebut the motion." EEOC v. Sears, Roebuck & Co., 233 F.3d 432, 437 (7th Cir. 2000). I consider the record in the light most favorable to the nonmoving party, drawing all reasonable inferences in the non-movant's favor. Lesch v. Crown Cork & Seal Co., 282 F.3d 467, 471 (7th Cir. 2002).

III. Discussion

The thrust of the inquiry here revolves around a single, central determination: is the relationship between the parties that of ...


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