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Mountain Dudes, LLC v. Split Rock Holdings

United States District Court, D. Utah

March 14, 2018

MOUNTAIN DUDES, LLC, Plaintiff,
v.
SPLIT ROCK HOLDINGS et al., Defendants.

          MEMORANDUM DECISION AND ORDER

          Clark Waddoups, United States District Judge.

         Introduction

         Before the court are Plaintiff Mountain Dudes's and Defendants' multiple motions for judgment as a matter of law. (ECF Nos. 189-93.) The parties moved the court pursuant to Federal Rule of Civil Procedure 50(b) after a five-day jury trial in October 2016 in which the jury was unable to resolve the majority of the issues before it. (Jury Verdict, ECF No. 180.) The court held a hearing on the motions on March 23, 2017, during which the court ordered supplemental briefing on the effect of Rupp v. Moffo, 358 P.3d 1060 (Utah 2015), on the fraudulent transfer claims. (Minute Entry, ECF No. 210.) Mountain Dudes filed its brief on April 13, 2017 (ECF No. 211), and Defendants responded on April 20, 2017 (ECF No. 212). The motions are now ripe for decision. After careful consideration of the arguments set forth in the briefs, oral argument, and the supplemental briefs, the court now GRANTS judgment as a matter of law in favor of Defendants on their fraudulent transfer motion (ECF No. 193) and unjust enrichment motion (ECF No. 192), DENIES Mountain Dudes's fraudulent transfer motion (ECF No. 189), and DISMISSES the remaining motions as moot (ECF Nos. 190-91).

         Background[1]

         I. History of Split Rock, Inc.

         Defendants Joseph Platt and Kent Bylund formed Split Rock, Inc. (SRI) in the late 1980s in St. George, Utah. (October 6, 2016 Trial Transcript (Day 3), at 474, ECF No. 186.) Eventually each of the individual Defendants, other than Patrick Manning, became partners in SRI, and SRI grew to employ some 200 individuals. (Id. at 485.) SRI was a real estate development company that conducted master planning of multi-subdivision communities. (Id. at 474-75.) It also built homes that were considered the gold standard for construction in the region. (October 5, 2016 Trial Transcript (Day 2), at 425, ECF No. 207.) In fact, many of SRI's homes were featured in the local Parade of Homes. (Id. at 424-25.) Entrada is a development in St. George where SRI held certified builder status and had deed restrictions on the Warranty Deeds for some of the undeveloped lots. (October 4, 2016 Trial Transcript (Day 1), at 91-94, ECF No. 185.) If enforceable, the deed restrictions would have allowed SRI to require the property owner to use SRI for any construction on the property. (Id. at 93.)

         Despite its prior success, SRI struggled to pay its debts in 2008 and 2009 as the Great Recession began affecting the St. George real estate market. (Id. at 50, 77-78; Day 3, at 485, ECF No. 186.) By 2009, the employees had left and banks were foreclosing on SRI's properties. (Day 3, at 485, ECF No. 186.) SRI amassed as much as $50 million in debt, including $8 million owed to Zions Bank, at least $6 million owed to Barnes Bank, and $3.8 million owed to Far West Bank; though it never entered bankruptcy. (Day 1, at 78-79, 110, ECF No. 185.) Mountain Dudes, who held a judgment for $1, 175, 507.98, was among SRI's creditors. (Id.; No. 2:08-cv-940, Clerk's Judgment, ECF No. 166.)

         II. Mountain Dudes's First Suit

         On December 5, 2008, Mountain Dudes sued SRI related to an Entrada real estate contract. (No. 2:08-cv-940, ECF No. 2.) Mountain Dudes moved the court for summary judgment on June 17, 2009. (Id., ECF No. 45.) On November 19, 2009, this court granted summary judgment on Mountain Dudes's breach of contract claim against SRI, but it denied summary judgment on the value of the damages for that breach. (Id., ECF No. 60.) The parties then filed a second set of summary judgment motions, which the court resolved in April 2011, leaving only the issue of damages to be decided by jury trial. (Id., ECF Nos. 62, 69, 88, 136.) The case stalled, however, and on March 23, 2012, the court issued an order to show cause requiring SRI to demonstrate why default judgment should not be entered against it in light of its failure to respond to a pending motion. (Id., ECF No. 149.) SRI again failed to respond, and on August 31, 2012, Mountain Dudes moved the court for default judgment. (Id., ECF No. 152.) SRI opposed that motion, but ultimately the court granted it and entered default judgment in Mountain Dudes's favor and against SRI for $1, 175, 507.98 on November 9, 2012. (Id., ECF Nos. 164-66.) On August 25, 2014, Mountain Dudes sought a writ of execution on the judgment against SRI to the assets of Split Rock Holdings, LLC; Joseph Platt; Stone Puma, LLC; Kent Bylund; Mountain Meadow Farms, LLC; Patrick Manning; and Patrick Manning LLC. (Id., ECF No. 247.) None of whom were named in the judgment. Those assets totaled $3, 687, 234. (Id.) On January 21, 2015, this court denied Mountain Dudes's efforts to execute on the judgment. (Id., ECF No. 264.)

         III. Formation of Split Rock Holdings

         Meanwhile, SRI and its members were struggling to survive the Great Recession. According to the testimony of Defendants Joseph Platt and Robert Manning, some members believed that SRI could survive if it avoided bankruptcy and paid at least its smaller creditors. (Day 1, at 56, ECF No. 185; Day 2, at 401, ECF No. 207.) Collectively the members of SRI determined SRI had two remaining assets: (1) the “Split Rock” name and (2) the Entrada deed restrictions, which would have required lot purchasers to give SRI any contract to build on those lots within a certain time, or alternatively, to grant SRI the opportunity to purchase the property. (Day 1, at 56, 79, 93-94, ECF No. 185.) Some of the members believed that, if SRI sold these assets to a new company, the new company could capitalize on them without being impeded by debt, as SRI would be. (Id. at 80, 87-88, 98.) Thus, on June 24, 2009, Platt, Ren Boyce, Kent Bylund, and Bart Smith-four of the five then-existing members of SRI-formed a new entity called Split Rock Holdings, LLC (Holdings). (Id. at 54-55; Mountain Dudes's Exhibit 5.) In short, Holdings' stated purpose was to acquire properties to use, develop, and otherwise profit from. (Mountain Dudes's Exhibit 5.) Hence, it entered the Sale of Assets Agreement (the Agreement) with SRI in which SRI agreed to transfer the “Split Rock” name and the deed restrictions to Holdings in exchange for a $2.7 million promissory note. (Day 1, at 80-82, ECF No. 185; Mountain Dudes's Exhibit 6.) The $2.7 million price was assessed based on SRI's members' belief about the value of the two assets, not on any separate evaluation of the assets' fair market value. (See Day 1, at 107, ECF No. 185.)

         The Agreement provided that a promissory note would be signed and delivered upon closing and that interest payments would be made on an annual basis with a final balloon payment due in June 2015. (Mountain Dudes's Exhibit 6, Section 5.1.) Whether the promissory note was ever returned signed was disputed during trial. Platt's testimony assumed the note was returned sign, but Manning called into question whether that was the case, saying he did not “believe” it was ever “executed or signed.” (Compare Day 1, at 85-87, ECF No. 185, with Day 2, at 401, ECF No. 207.) No. signed copy or original of the note was ever produced or received in evidence at the trial. Mountain Dudes's expert witness admitted that he never saw a signed promissory note while conducting his partial audit. (Day 2, at 312, ECF No. 207.) On July 30, 2009, SRI changed its name to Old SPI.[2] (Day 1, 95-100, ECF No. 185; Mountain Dudes's Exhibit 10.)

         Sometime shortly after its creation, Defendants Smith and Boyce left Holdings to form Split Rock Construction (Construction), which exclusively builds homes. (Day 2, at 382, 443, ECF No. 207.) After the split, Holdings entered a commission agreement with Construction by which Holdings would generate leads and refer them to Construction. (Id. at 413.) Holdings referred the jobs to Construction, which provided a competitive bid, and assuming it won, would then pay a referral fee to Holdings. (Id. at 228.) According to Smith's testimony, Construction built two homes pursuant to its agreement with Holdings in 2009 and forty-six between 2010 and 2013. (Id. at 226.) Only some of those homes were built on lots with deed restrictions. (Id. at 226-27.) Manning testified that while Construction paid some funds to Holdings based on profits from deed restrictions, that Construction also paid Holdings a portion of profits that were entirely unrelated to the deed restrictions and, therefore, not required to be paid to SRI under the Modification. (Day 1, at 191, 193, ECF No. 185.) During trial, Smith testified that Construction was not a subsidiary of either SRI or Holdings and that a portion of Construction's business is separate from, and does not involve, Holdings and the deed restrictions. (Day 2, at 382-83, ECF No. 207.) He further testified that when Construction does work unrelated to Holdings or the deed restrictions, it does not pay a percentage to Holdings or its members. (Id. at 383-84.) According to Manning's testimony, the relationship between Construction and Holdings is not exclusive, and Holdings aims to have similar agreements with other builders. (Id. at 413.)

         IV. Enforceability of Deed Restrictions

         While SRI and its members were forming Holdings and working to transfer the assets to Holdings, Patrick Manning became involved. (Id. at 399.) He initially viewed the deed restrictions as a valuable source of revenue for Holdings, and at trial he testified to formerly believing the restrictions “might be a good launchpad” for Holdings because they represented a “guarantee of 200 builds.” (Id. at 400.) He acknowledged, however, that some of Holdings' members disagreed. (Id. at 401.) He testified that “there were a couple of Split Rock, Inc. members that felt that they were absolute bulletproof” but “there were other members that thought . . . they were not enforceable and thought that there was actually some liability associated with it as it relates to people not liking being told who they have to use to build.” (Id. at 401.)

         Eventually, before Manning formally joined Holdings as a member, Manning notified his attorney of the $2.7 million Agreement and of the deed restrictions. (Id. at 402, 429, 433.) His attorney advised that the deed restrictions may not be enforceable and “chastised” Manning “for letting” the Agreement documents be signed. (Id.) Manning's attorney also notified him that Holdings could be sued for slander of title if it attempted to enforce the restrictions. (Id. at 403.) And Manning acknowledged at trial that he could have talked to his attorney before the Agreement was signed and that information about the potential problems with enforcing the deed restrictions was available to him and the members of SRI and Holdings before they signed the Agreement. (Id. at 429-30.) Despite his involvement, Manning was not a party to the Agreement. (Mountain Dudes's Exhibit 6.)

         Around this same time, as Manning testified, the Entrada Property Owners Association (EPOA) notified Holdings that it would revoke the preferred builder status of any builder that attempted to require a landowner to employee their services pursuant to one of Holdings' deed restriction. (Id. at 403, 430-32; Day 3, at 496-97, ECF No. 186.) It made such warnings in committee meetings that Platt attended, before the full board, and in a public town meeting of all the Entrada property owners in November 2009. (Day 3, at 496-99, 502, ECF No. 186.) In the wake of EPOA's threats, and upon the advice of Manning's attorney, the partners as a group determined ...


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