Donna F. Miller v. National Land Partners,LLC

• Court: Court of Chancery of Delaware
• Decided: June 11, 2014
• Docket: CA 7977-VCG
• Status: Published

Opinion

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

DONNA F. MILLER, ) ) Plaintiff, ) ) v. ) Civil Action No. 7977-VCG ) ) NATIONAL LAND PARTNERS, LLC, ) LEON HUNTER WILSON, and ) HUNTER COMPANY OF WEST ) VIRGINIA, ) ) Defendants. )

MEMORANDUM OPINION

Date Submitted: March 19, 2014 Date Decided: June 11, 2014

Michael P. Kelly and Daniel J. Brown, of MCCARTER & ENGLISH, LLP, Wilmington, Delaware; OF COUNSEL: James P. Campbell, of CAMPBELL FLANNERY, P.C., Leesburg, Virginia, Attorneys for the Plaintiff.

Daniel F. Wolcott, Jr., of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware, and Nicholas J. Brannick, of COLE, SCHOTZ, MEISEL, FORMAN & LEONARD, P.A., Wilmington, Delaware, Attorneys for Defendant National Land Partners, LLC.

Joanne P. Pinckney and Kevin M. Capuzzi, of PINCKNEY, WEIDINGER, URBAN & JOYCE LLC, Wilmington, Delaware; OF COUNSEL: Charles F. Printz, Jr., of BOWLES RICE LLP, Martinsburg, West Virginia, Attorneys for Defendants Leon Hunter Wilson and Hunter Company of West Virginia.

GLASSCOCK, Vice Chancellor In November 2008, Plaintiff Donna Miller and Defendant Leon Hunter

Wilson were engaged in divorce litigation in West Virginia. They were also each

50% owners of a West Virginia corporation, Defendant Hunter Company of West

Virginia. On November 21, 2008, a West Virginia state court, the Berkeley

County Family Court, entered an order directing the payment of approximately

$4.9 million from Wilson to Miller, in return for which Wilson would receive

Miller’s half interest in Hunter Company; this decision has since been reversed and

remanded. Hunter Company was the partner of Defendant National Land Partners,

a Delaware limited liability company, in several real estate development projects.

Shortly after the entry of the order directing him to pay approximately $4.9 million

to Miller, Wilson caused Hunter Company to pay roughly that amount to National

Land Partners. According to Wilson, this payment was owed under Wilson’s

agreements with National Land Partners. Miller disagrees, and considers the

payment a fraudulent conveyance to avoid satisfaction of the Berkeley County

Family Court’s order. She brought this action, seeking a declaratory judgment

confirming her theory, as well as imposition of a trust over the money paid to

National Land Partners. The parties agree that the operative agreements between

Hunter Company and National Land Partners did not, as written, require the

payment, but the Defendants contend that that is because the written agreements

inadvertently left out language making Hunter Company responsible for “negative

2 management fees,” which language represented the true agreement among the

Defendants.

This matter is presented on cross-motions for summary judgment, and the

issue before me is a narrow one: was the payment to National Land Partners

required by the agreements between Wilson, Hunter Company and National Land

Partners? In order for me to reach that conclusion, the burden is on the Defendants

to demonstrate, in effect, that the agreements should be reformed to include the

missing term regarding negative management fees. This is a high burden;

nonetheless, for the reasons that follow, I conclude that the agreements did contain

this term, and that the Defendants are entitled to judgment.

I. FACTS

While married, Plaintiff Donna Miller and Defendant Leon Hunter Wilson

each owned a 50% interest in Defendant Hunter Company of West Virginia

(“HCWV,” and together with Wilson, the “Hunter Defendants”), a real estate

development company incorporated in West Virginia.1 Wilson is HCWV’s

President, performs the functions of CEO and, since his separation from Miller, has

also become involved in the managerial aspects of HCWV.2 Prior to their divorce,

1 See, e.g., Trial Tr. 99:15-100:1, 100:13-101:10. 2 JX 41 (Wilson Aff.) ¶ 1. 3 Miller also served as an officer and director of HCWV.3 Together, Wilson and

Miller are the sole directors of HCWV.4

Early in their careers, both Miller and Wilson worked for Patten

Corporation, a real estate company owned by Harry S. Patten.5 Patten has since

sold his interest in that company and, in 1999, founded Land Partners, LLC (“Land

Partners”), a real estate development company that changed its name to National

Land Partners, LLC (“National Land Partners”) in September 2002.6 National

Land Partners is incorporated in Delaware and managed by American Land

Partners, Inc. (“American Land Partners”).7 Patten serves as an officer of both

National Land Partners and American Land Partners.8 Alan Murray is National

Land Partners’ CFO and American Land Partners’ Vice President.9 Murray is also

an officer of Inland Management Corporation, which manages various financial

and human resources functions for National Land Partners, such as its payroll,

3 See JX 39 at 4 (“Donna Miller has not resigned as an Officer or Director nor has she conveyed her stock to Hunter Wilson.”). 4 See July 31, 2013 Oral Arg. Tr. 34:1-2 (explaining that Wilson and Miller “are the sole officers, sole directors, sole shareholders” of HCWV). 5 See Trial Tr. 37:5-7, 98:8-9, 397:24-398:2. 6 Id. at 36:13-38:3; JX 7. 7 Trial Tr. 34:16-18; JX 7. 8 Trial Tr. 34:4-6, 35:3-6. 9 Id. at 247:16-23. The record makes clear that, while CFO is not Murray’s official title, he acts in that capacity for National Land Partners; as with other aspects of National Land Partners’ business, the operations of personnel was somewhat informal. 4 accounts payable, accounting, financial statement preparation, tax reporting, and

marketing.10

Wilson’s business relationship with Patten began in 1986.11 In the 1990s,

Wilson began managing real estate development projects for Patten in West

Virginia through HCWV.12 Wilson, who has approximately twenty-seven years of

experience in land development,13 also has an educational background in forestry.14

Consequently, many of the Defendants’ projects also include a timber sales

component.

To facilitate these joint projects, National Land Partners owns the properties

through a wholly-owned subsidiary, WV Hunter, LLC.15 National Land Partners,

moreover, is responsible for the accounting and financial aspects of these projects,

for which HCWV acts as an independent contractor.16 Generally,

[u]nder the parties’ arrangement, the role of [HCWV], through Wilson, includes identifying property that would qualify for development, completing due diligence and feasibility studies to determine if [National Land Partners] should purchase the property, conducting engineering and design work, obtaining all permits and 10 Id. at 245:13-247:3, 248:4-10; see also id. at 106:18 (Wilson) (noting that “Inland Management’s owned by [National Land Partners]”). 11 Id. at 103:24-104:3. 12 See, e.g., id. at 38:18-20, 99:7-101:10. 13 JX 41 (Wilson Aff.) ¶ 1. 14 Trial Tr. 97:14-19. 15 See, e.g., id. at 252:10-22 (Murray) (“WV Hunter, LLC is a single-member limited liability company owned by National Land Partners. When National Land Partners does projects, it forms a limited liability company in each of the states that we are doing projects as a way of segregating revenues and expenses really for income tax reporting. . . . WV Hunter, LLC . . . owns the real estate that is managed by [HCWV].”). 16 See, e.g., JX 9 at §§ 5.1-5.2; JX 11 at §§ 5.1-5.2; JX 17 §§ 5.1-5.2. 5 subdivision approval and overseeing the construction of infrastructure. Following completion of road and utility systems, [HCWV] oversee[s] [National Land Partners] employees serving as a sales force, conducting advertising, marketing and other promotions, selling the building lots and overseeing closings of properties.17

Wilson does not have any ownership interest in National Land Partners.18

A. The Management Agreements

At trial, Patten emphasized that he “like[s] doing business with people who

you can trust and shake their hand and a deal’s a deal.”19 In accordance with this

principle, Patten and Wilson traditionally negotiated the details of each project

orally, confirming their agreements with a handshake.20 As Wilson testified:

. . . most of our deals were done on handshakes. I will tell you that right now. I’ve shook hands with that man on more deals, and that’s the way we did business. And it always seemed to work. No one ever got hurt. . . . I can remember a lot of deals that were never anything more than a handshake.21

However, as National Land Partners continued to grow, the Defendants began to

convert their informal agreements into written contracts.22 Consequently, over the

years, the Defendants have entered into several management agreements, each

17 JX 40 (Murray Aff.) at ¶ 4; see also Trial Tr. 100:15-101:10. 18 Id. at 103:19-20. 19 Id. at 74:21-23; see also id. at 44:8-11 (“. . . I pride myself on keeping my agreements. My word is my word. And [Wilson’s] always been that way with me and I’ve always been that way with him.”). 20 See, e.g., id. at 35:24-36:12, 44:7-11, 74:21-75:2. 21 Id. at 105:14-24. 22 See, e.g., id.; see also id. at 74:21-75:2 (Patten) (“I like doing business with people who you can trust and shake their hand and a deal’s a deal. But I’ve been trained and harassed into documentation, doing contracts and all those things . . . that I hate to read.”). 6 drafted by Murray.23 Among other things, these management agreements governed

the profit allocation between HCWV and National Land Partners.

In addition to the management agreements, the Defendants also negotiated

schedules for each project, subsequently codified by Murray, which contained the

“budget-type numbers” for each project.24 Each schedule was associated with a

particular management agreement. Miller did not participate in negotiating the

terms of these management agreements or associated schedules, and was never a

signatory to any of these agreements, although Wilson kept her apprised of

HCWV’s relationship with National Land Partners throughout the years.25

Several agreements among the Defendants are pertinent to this litigation; for

ease of reference, these agreements are also outlined in Figure I. On July 17, 2000,

Wilson, HCWV, and Land Partners entered into a management agreement that

governed the Berkeley Glen and Meadows at Sleepy Creek Projects (the “2000

Management Agreement”). On January 15, 2002, Wilson, HCWV, and Land

23 See id. at 249:14-250:5. 24 Id. at 254:14; see also id. at 107:4-11 (Wilson) (“Alan Murray and I would work on management agreements and schedules to management agreements to make sure that we got the payback periods, the projected sales each month, the scheduling on when we thought construction money was going to be spent, so we were hoping sales would flow in, cash flow to project. But Alan Murray and I would work on the last parts of that together.”); id. at 254:7-14 (Murray) (“[Patten and Wilson] would work out the basic terms, I call it the terms from 50,000 feet. They would determine how the profits would be shared. They would discuss who was going to provide financing, where it would come from. And then they would turn that, the process of drafting the contract, over to me, and I would work with Hunter Wilson to plug in a lot of the budget-type numbers that fall into the schedule.”); id. at 432:9-14. 25 See, e.g., id. at 409:10-410:2; see also id. at 409:23-410:2 (Miller) (“[Wilson] was always emphatic about me knowing and understanding the highlights of our agreements, the ones that were most significant to he and I, borrowing money.”). 7 Partners entered into another management agreement, effective as of September

26, 2001, which governed the River Ridge Project (the “2002 Management

Agreement”). On October 15, 2002, Wilson, HCWV, and National Land Partners

entered into a project addendum, which governed the Ashton Woods Project; this

agreement was terminated on April 14, 2003 (the “Project Addendum”). On April

14, 2003, the Defendants entered into a management agreement, effective as of

October 15, 2002, which governed the Ashton Woods, Crossings on the Potomac,

and Westvaco Romney Tract (“Westvaco”) Projects (the “2003 Management

Agreement”). On December 3, 2004, the Defendants entered into another

agreement in order to adjust the allocation of timber sales, which was effective as

of November 3, 2004 (the “2004 Management Agreement”).26 The 2004

Management Agreement governs the following projects: Westvaco Greenbrier

Tract – Hart’s Run, the Pointe, and the Long Project. National Land Partners,

Wilson, and Wilson’s Virginia company, Hunter CO of VA, LLC, also entered into

a management agreement on August 18, 2006, effective as of August 8, 2006,

which governs the Black Diamond Ranch Project (the “2006 Management

Agreement”).

26 See, e.g., id. at 153:3-7, 296:9-19. 8 B. Profit Allocation for the Defendants’ Joint Projects

As reflected in the 2000 Management Agreement, National Land Partners

and HCWV initially divided profits and losses from each project evenly.

However, the parties aimed for a profit of 25% of gross sales and, by late 2001,

certain projects had failed to generate this expected return.27 Patten, at trial,

explained:

[W]e had a string of properties and projects that weren’t going well that we didn’t make money on. And it was my desire to at least, if I’m investing money, putting time into it—and we invested quite a bit of money in those projects—to have some kind of a minimal return, or a return.28

Consequently, Wilson and Patten agreed to modify their arrangement so that

National Land Partners was guaranteed a fixed rate of return.29 Pursuant to this

new arrangement, National Land Partners received a preferential profit of 12.5%

gross sales. As Murray noted:

The purpose of the Preferential Profit provision of the Management Agreements was to ensure that potential Projects identified by [HCWV] (through Wilson) were consistent with [National Land Partners’] profit expectations [of at least 25% of sales], and generated a return to [National Land Partners] of 12.5% of sales.30

27 See, e.g., id. at 39:1-23; JX 40 (Murray Aff.) ¶ 12. 28 Trial Tr. 39:10-16; see also id. at 115:24-116:5. 29 See, e.g., id. at 411:16-21 (Miller) (“[W]e were not doing well. We had personnel issues. We had at least two projects that were very weak, if not three. And so it was somewhat of a half-halt from [Patten] to [Wilson]. And as I said, [Wilson] wasn’t happy about it, but we understood.”). 30 JX 40 (Murray Aff.) at ¶ 12; see also Trial Tr. 263:10-19 (Murray) (noting that “this arrangement was Mr. Patten’s way of incentivizing Hunter Wilson to bring him projects that had at least a 25 percent operating profit, and in the event that he did not, it put all the risk on Mr. Wilson”). 9 This arrangement meant that after National Land Partners received its preferential

profit, HCWV would receive the balance. In the event that gross sales fell short of

the preferential profit, however, HCWV would be responsible for any shortfall.31

The 2002 Management Agreement between the Defendants, which governed

the River Ridge Project, was the first agreement to reflect this preferential profit

arrangement. Specifically, Section 6.2 of that Agreement provides, in relevant

part:

Profit participation by [Land Partners] and [HCWV] shall be as follows: [Land Partners] shall receive a profit participation equal to 10% of gross lot sales and 12.5% of gross timber proceeds. [HCWV] shall receive all remaining Net Profit. In the event that the amount of [Land Partners] profit participation calculated in accordance with the preceding formula exceeds the total Net Profit, then [HCWV] shall receive no profit participation and shall be liable to [Land Partners] for any shortfall amount.32

The language providing that HCWV would be liable for any shortfall amount—the

“shortfall language”—provided for what the Defendants refer to as “Negative

Manager Fees.” Negative Manager Fees, in other words, are those fees incurred by

HCWV when a project fails to generate sufficient gross sales to satisfy National

Land Partners’ preferential profit. For clarity’s sake, I adopt the Defendants’

31 JX 40 (Murray Aff.) at ¶ 12. 32 JX 5 at NLP000156; see also Trial Tr. 59:16-22 (Patten) (noting that National Land Partners received 10% of gross sales—as opposed to 12.5%—because it was absorbing “a 2 1/2 percent fee to a finance person, the person who loaned us money”); id. at 257:5-20, 264:21-265:4. 10 convention of referring to HCWV’s payment of such fees as “Negative Manager

Fees.”

Wilson explained at trial that the 2002 Management Agreement was “the

first agreement where we switched ourselves over to a fixed return, so that [Patten]

acted more like a bank and got a guaranteed rate of return on his investment.”33

Similar to a bank, Wilson explained, “if the project didn’t do good, [Patten] still

wanted his certain rate of return.”34 According to Wilson, therefore, this

arrangement “meant that if I did extremely good on the projects, I got it all [above

the preferential profit]. And if I didn’t, then I had to pay the shortfall.”35

C. Miller Contends that the Defendants Agreed to Eliminate Negative Manager Fees During a Trip to Bermuda in July 2002

Business negotiations between Wilson and Patten often took place

informally, including while the men were vacationing together. Although Miller

often accompanied Wilson on these trips, she testified that “[Wilson] and [Patten]

33 Id. at 116:20-23; see also id. at 107:14-18 (Wilson) (“There’s always been one or two deals with [Patten]. It’s either been a 50/50 deal, which is the way we all started, and then later on we went to a fixed return, so that they were more like a banker that knew what they were going to get.”); id. at 119:14-22 (Wilson) (“[Patten] gave me the opportunity to make a lot of money. But also, in the same sense on his fixed return, if the project didn’t do good, he still wanted his certain rate of return. Would be no different than going out here and borrowing $100,000 from the bank for one year at 10 percent. They want their $10,000 at the end of the year whether you did good or not. That’s the way our business has always been like that.”). 34 Id. at 119:16-17. 35 Id. at 117:22-24; see also id. at 108:5-9 (“[National Land Partners] wanted a guaranteed rate of return, and . . . [HCWV] got all the upside, or [HCWV] had all the downside, too. I mean [HCWV was] responsible for what happened if [a project] went south.”). 11 would never talk about business in front of anybody.”36 Nevertheless, Miller may

have been present during informal discussions regarding business, such as those

taking place over meals.37

In July 2002, Miller and Wilson vacationed with Patten in Bermuda.

According to Miller, it was during this trip—where the parties discussed the

Ashton Woods Project—that Wilson and Patten agreed to eliminate Negative

Manager Fees, such that the River Ridge Project—the only project governed by the

2002 Management Agreement—would be the only joint project where HCWV

could incur Negative Manager Fees.

By July 2002, Wilson had identified Ashton Woods as HCWV’s next

prospective project; according to Miller, “[h]e said it was our home run, it was the

Superbowl, it was the World Series all rolled into one.”38 Miller recalls that she

and Wilson discussed pursuing Ashton Woods without a partner but that, “[o]ut of

loyalty and [Wilson’s] relationship with [Patten], [Wilson] convinced me that if he

and [Patten] could make the deal right, get rid of the guarantee, that we should do

36 Id. at 419:6-7; see also id. at 53:3-5 (Patten) (noting that he “made it a practice never to discuss business—[he] always discussed it in private, with any of [his] associates”). 37 See, e.g., id. at 51:11-15 (Patten) (“I never had a business meeting with Hunter Wilson when his wife was there. We may have had talk over a dinner table or cocktails where she may have attended, but she was never, ever in a meeting.”); id. at 105:9-11, 118:8-13; id. at 124:17-20 (Wilson) (“[Miller] wouldn’t have participated [in negotiations] unless she heard something over dinners, drinks, or if she happened to go out on the boat with us for a day or so, or she heard me talking to her after the fact.”). 38 Id. at 416:1-3. 12 the [Ashton Woods] deal with [Patten].”39 Correspondingly, and based on her

conversations with and observations of Wilson, Miller contends that, while in

Bermuda, Wilson successfully negotiated to eliminate the preferential profit

guaranteed by HCWV to National Land Partners. This meant to Miller that “the

slap on the hand that we got from River Ridge [governed by the 2002 Management

Agreement and including Negative Manager Fees] would now be gone.”40

Although Miller testified at trial that Wilson and Patten reached an

agreement to eliminate Negative Manager Fees during this Bermuda trip, she

acknowledged:

I didn’t know the details. You know, I always waited for [Wilson] to tell me. I never butted in, especially when he spoke with [Patten]. But when we were in private, he said that he has got it worked out. It is going in the right direction. He needs to iron out with [Murray], as always, the new management agreement.41

Despite not being privy to the negotiations that took place between Wilson and

Patten in Bermuda, a few things stood out to Miller about this trip. First, she

remembered that “[Wilson] would talk to me when he would come back from

fishing with [Patten], tell me what was going on. He was worried about going to

39 Id. at 416:20-417:5; see also id. at 418:20-24 (Miller) (“[T]he goal was for [Wilson] to present [Patten] what the project had going for it, to agree to change the management agreement, to get a commitment so that [Wilson] could move on and know what we were going to do with the project.”). 40 Id. at 417:12-13; see also id. at 417:13-17 (explaining that “we had never had a guarantee before that. It was supposed to be for the [River Ridge] project; let’s see what happens after that. Let’s see if we even do any more deals together after that.”). 41 Id. at 420:23-421:5. 13 the trip, I remember. And when it was over, he was a lot happier.”42 Miller,

seemingly, believes that Wilson’s happiness was caused by the elimination of

Negative Manager Fees.43 Second, Miller emphasized that one evening during

dinner, Patten told her that “he would be making a little bit more profit on this

project, on Ashton Woods, but it was such a great deal that [Wilson] and I were

going to make it up in the end . . . .”44 National Land Partners contends that “the

reason [it] was going to make more on the Ashton Woods project is that Wilson

and Patten agreed that the 2.5% of sales payable to mezzanine lenders, which had

been absorbed by [National Land Partners] under the [2002 Management

Agreement], would be considered a cost of the Ashton Woods project, boosting

[National Land Partners’] return.”45

42 Transmittal Aff. of Nicholas Brannick to National Land Partners’ Pre-Trial Op. Br. Ex. 10 (Miller Dep. Vol. I) at 20:22-21:1. 43 Notably, the Ashton Woods Project was expected to generate large profits, and Miller was asked at trial how this expectation influenced Wilson’s mood: Q. And that knowledge, the fact that you were going to make millions off this project, that’s what Mr. Hunter Wilson was happy about when he went to Bermuda, isn’t it? A. Well, he did enjoy the money; that’s for sure. Q. But that’s what he was happy about, isn’t it? A. [Wilson] is not as shallow as that, I would like to say. I mean, it was not completely because of the money. This was—this project was putting him on a map on a lot of levels in his own head, and he deserved it. Q. Nobody was thinking about negative manager fees in this project, were they? A. Well, if you had asked that and River Ridge had not existed in between, who knows what would have happened? Trial Tr. 475:7-24. 44 Id. at 421:9-12. 45 National Land Partners’ Post-Trial Op. Br. at 10 n.10 (citation omitted); see also Trial Tr. 269:1-5 (Murray) (“Under this agreement, and because the previous project had been so 14 At trial, Patten testified that, although he and Wilson may have discussed the

upcoming Ashton Woods Project while in Bermuda, they did not reach any

agreement “to change the allocation of profits and losses.”46 Wilson also denied

negotiating with Patten to eliminate Negative Manager Fees while in Bermuda,

noting:

Basically what [Miller’s deposition] says, it says that I was over-the- moon happy about the deal, and she said I had negotiated away the negative number, or the guarantee of numbers. The guarantee to [Patten]. That’s just not true. I can tell you it’s not true, because I signed this addendum three months later—two, three months later when I signed this addendum. And one thing Harry Patten has done is stuck to his word and done what he was going to do, and I’ve done the same. So I did not—if I was happy and excited if I had a chance to make 10 or $11 million on a piece of ground and I’ve never done that before in my life, yeah, I’m going to be jumping up and down and dancing. I guarantee you I was happy. There’s no doubt about it. I knew the deal was a slam-dunk home run.47

Three months after the Bermuda trip, HCWV, Wilson, and National Land Partners

entered into a Project Addendum, which provided for the accrual of Negative

Manager Fees, as described in more detail below.

successful, Mr. Patten and Mr. Wilson agreed that the 2-1/2 percent override would not be segregated but it would be a project expense. . . .”). 46 Id. at 45:17-20; see also id. at 54:19-22. 47 Id. at 129:2-18. 15 D. Following the Bermuda Trip, the Defendants Enter into a Project Addendum that Provides for Negative Manager Fees

In October 2002—post-Bermuda—the Defendants entered into a Project

Addendum designed to facilitate National Land Partners’ goals of converting its

project managers into members, and of eventually taking the company public.48

Despite Miller’s testimony that Wilson and Patten agreed while in Bermuda

to eliminate National Land Partners’ guaranteed profit, the Project Addendum—

entered into after that trip—maintained the preferential profit arrangement first

reflected in the 2002 Management Agreement, including the associated Negative

Manager Fees. Specifically, Section 6.2 of the Project Addendum provides, in

relevant part:

[National Land Partners] shall receive a profit participation equal to 12.5% of gross lot sales, 12.5% of the first $3 million of gross timber proceeds and 42.5% of the gross timber proceeds in excess of $3 million. In the event that the amount of [National Land Partners] profit participation calculated in accordance with the preceding formula exceeds the total Net Profit, then [HCWV] shall receive no profit participation and shall be liable to [National Land Partners] for any shortfall amount. All profit participation of [National Land Partners] shall be allocated among the Class 1 Members of [National Land Partners] and [HCWV] shall have no interest in such amounts.49

48 See, e.g., id. at 122:7-10; id. at 268:4-13 (Murray) (“This document was created at a time when Mr. Patten envisioned a couple of things. He envisioned National Land Partners being able to go public, and he wanted to provide for Hunter Wilson and other managers to be equity owners of National Land Partners. This was the first step, although it never—we never went any further than this document, this would have been the first step to calling them project members. The next step would have been to actually grant them some equity in the project.”). 49 JX 9 at HUNTER000101-102 (emphasis added). 16 At trial, Wilson testified that “this project addendum is no different than the

agreement before [it]. Since it was [a] fixed rate of return and it wasn’t 50/50, if

the project did great, I did great. If the project didn’t do great, [National Land

Partners] still got [its preferential profit]. And it had the shortfall language in it,

but that was the deal. And that was the deal we all lived by.”50 Wilson also noted

that because this Project Addendum was a “brand new document,” he “would have

read it very closely.”51

E. The Project Addendum is Terminated as the Defendants Return to the Management Agreement Format

The Project Addendum proved to be unpopular among National Land

Partners’ various partners, the plan to eventually bring the partners in as members

was abandoned, and National Land Partners soon returned to the original

management agreement format.52 According to Murray, when the parties

transitioned from the project addendum form back to the management agreement

form, “[t]he terms were supposed to be identical.”53

50 Trial Tr. 126:5-11. 51 Id. at 130:14-16. 52 See, e.g., id. at 136:15-137:1; id. at 279:16-21 (Murray) (“We abolished that, the [project addendum] form, and terminated the agreement. It was a result of confusion that was being caused by our all of a sudden calling people project members and Mr. Patten’s decision that taking the company public was probably not something that was going to happen.”). 53 Transmittal Aff. of Nicholas Brannick to National Land Partners’ Pre-Trial Op. Br. Ex. 9 (Murray Dep.) at 73:15-16; see also Trial Tr. 279:21-280:1 (Murray) (“So we simply did away with the project addendum and the schedule to [the] project addendum and replaced them with what we thought were identical management agreements and schedule to management agreement.”); id. at 283:19-22. 17 In fact, the Ashton Woods Project, managed by HCWV, was governed first

by the Project Addendum, and then, after the Addendum’s termination in April

2003, by the 2003 Management Agreement.54 As Wilson testified at trial, “[a]ll we

did was change [the] form of documents. Any negotiation or anything that was

done with this deal was done with Harry in July of ’02, the year before. We

already had the deal running. We weren’t going to change horses in the middle of

the road.”55 He further said the deal was not changed because

[d]uring this time frame, [HCWV] was doing extremely well, and we were doing extremely well under this agreement. And there was no need to even discuss it. I mean it was—at that time it was full-bore down the road, you can go as hard as you can go. Because as fast as you can get it ready to go to market is as quick as somebody could buy it. So there was nothing about the agreement from October of ’02 that was causing us any heartache, so we just went on down the road with it.56

Later management agreements, including the 2003 Management Agreement,

however, lack the shortfall language providing that “[i]n the event that the amount

of [National Land Partners] profit participation . . . exceeds the total Net Profit,

then [HCWV] shall receive no profit participation and shall be liable to [National

54 Specifically, the Project Addendum and accompanying Schedule were terminated in April 2003. Miller emphasizes the termination language providing that these agreements “are and shall be deemed null and void and terminated ab initio, and shall have been of no force or effect whatsoever at any time.” JX 13. At trial, she asserted that the Project Addendum “was never binding to Ashton Woods” because this agreement was superseded by the 2003 Management Agreement. Trial Tr. 461:6-462:24 (contending, additionally, that the Project Addendum was “not properly executed” because “[t]he content was not correct”). 55 Id. at 138:22-139:3. 56 Id. at 140:11-20. 18 Land Partners] for any shortfall amount.”57 The Defendants argue that this

language, providing for Negative Manager Fees, was “mistakenly omitted” from

these agreements.58 Wilson, for one, did not read the 2003 Management

Agreement (or other management agreements) closely.59 At trial, he described his

approach as the Defendants transitioned from the Project Addendum to the 2003

Management Agreement:

This was a management agreement. I had seen these before. I was pretty comfortable with them. I looked at the percentages. I knew what a management agreement was. I had worked under it for years before. No. I didn’t pay close attention other than to look at my percentages matched up from one to the other. Plus the deal was already running. . . . Would have been the 12 1/2 percent, would have been the stuff over $3 million—the timber proceeds over $3 million. The schedule probably included something to do with financing and different things like that. I would have looked at the budget numbers to make sure all the budget numbers stayed correct with the deal.60

Similarly, Patten rarely read the agreements into which he entered closely.61

National Land Partners contends that this shortfall language was omitted as a

result of a scrivener’s error. National Land Partners emphasizes that this shortfall

language is reflected in the Project Addendum, which was used as a template for

the 2003 Management Agreement, and conjectures that, when eliminating the last

57 See JX 5 at NLP000156; JX 9 at HUNTER000101-102. 58 See, e.g., Hunter Defs.’ Pre-Trial Op. Br. at 11. 59 Conversely, Wilson testified that the Project Addendum “was brand new to me, and I would have read it very closely.” Trial Tr. 130:15-16. 60 Id. at 139:5-20. 61 Id. at 35:21-23, 41:8-10. Patten also “authorized others to sign [his] name to contracts between National Land Partners and [HCWV].” Id. at 42:21-24; see also id. at 79:7-80:9. 19 sentence in Section 6.2 of the Project Addendum—a sentence that was no longer

relevant—this shortfall language was inadvertently deleted. Murray, who drafted

the Project Addendum and the relevant management agreements among the

Defendants, testified that the shortfall language was removed because:

I made a mistake. I inadvertently deleted it. That’s the best I can determine as to how it happened. The project addendum had an additional sentence beyond this, and near as I can determine, when I was deleting the last sentence, I also overdeleted and didn’t catch myself.62

The 2003 Management Agreement was then used as a template for later

agreements, meaning that the alleged scrivener’s error was carried over into and

reflected in these later documents.63 Consequently, when the Defendants decided

to change the profit allocation of timber proceeds and thereby entered into the

2004 Management Agreement, “the mistake perpetuated itself.”64 Additionally,

the Defendants contend that their course of dealing over a protracted period

demonstrates that the parties intended to account for Negative Manager Fees in the

62 Id. at 287:8-13; see also id. at 293:16-18 (Murray) (noting that “[t]he information that I used to draft the [2003 Management Agreement] was the information that was in the project addendum”); JX 40 (Murray Aff.) ¶ 30. 63 See, e.g., Trial Tr. 297:1-4; id. at 297:12-16 (Murray) (“I use the previous agreement as a template and change what needs to be changed. And when I created this agreement, I didn’t notice that the phrase was missing; therefore, I didn’t add it at this point.”); see also id. at 254:23-255:2 (Murray) (describing how he would reduce agreements between Wilson and Patten into contract form: “I would start with a previous agreement, and it would be on my computer, and I would simply cut, paste, delete, and create the new agreement from the previous.”). 64 Id. at 297:4; see also id. at 153:3-11 (Wilson) (“The reason this [2004] [M]anagement [A]greement is here is because the—this is for a different project, and had different—a different amount of timber, so they changed the timber proceeds . . . . And this project didn’t have shortfall language. It got left out. Just got left out by accident. But the deal was the same as the deal had always been since October of ’02.”). 20 2003 and 2004 Management Agreements, as their arrangement since 2001 has

“provided for the accrual and/or offset of negative manager fees.”65

Conversely, Miller contends that this language was intentionally removed by

the Defendants and that the 2003 and 2004 Management Agreements as currently

written accurately reflect the profit allocation between HCWV and National Land

Partners. Miller, who remembers a protracted period of “negotiations” following

the Bermuda trip, testified that the 2003 Management Agreement was not initially

consistent with Wilson and Patten’s discussions in Bermuda. She emphasized

Wilson’s dissatisfaction with Murray as he drafted an agreement that did not

comport with Wilson’s understanding of the deal, explaining that

[Wilson] went back and forth with [Murray] for months about the terms of it. [Wilson] would get a fax. I would get the fax, put it in his office, bring it home to him, whatever the case may be. He would go through it. He was very upset through most of the negotiations of that agreement. . . . He was upset that [Murray] did not get the terms right, that it was not what [Wilson] had agreed to with [Patten].66

When asked by her attorney with which terms Wilson and Murray disagreed, she

responded: “The money.”67 She further clarified, “[t]he timber, the percentage of

profit to Mr. Patten, National Land Partners.”68

65 Hunter Defs.’ Pre-Trial Op. Br. at 2; see also Trial Tr. 148:4-7 (Wilson) (“The shortfall obligation, it does—it may not be in the main management agreement, but it’s the same deal him and I shook hands on and have done business with for all those years.”); id. at 295:9-11 (Murray) (“My understanding was that [the 2004 Management Agreement] was identical to all the previous agreements and that negative manager fees could happen.”). 66 Id. at 422:17-423:2. 67 Id. at 423:3-5. 21 When asked specifically about whether Wilson made changes to Section 6.2,

Miller replied: “Of course. That is what he had negotiated with Mr. Patten. It was

the most important part of our agreement.”69 However, she could not testify to

what specific changes were made to the 2003 Management Agreement, although

she noted “it was pretty significant,” as “he would cross out sentences and

paragraphs.”70 In fact, although Miller noted that she and Wilson discussed the

“guarantee” and “[t]hat he crossed it out actually, and he said it is not supposed to

be on there,”71 when her attorney asked, “You saw him cross it out?” she replied

vaguely: “I saw many of his contracts. But yes, that’s what he did. He would

cross it out . . . .”72 Miller, who testified that she did not know the terms of the

Defendants’ negotiations until their agreement was finalized,73 also “did not read

[the finalized agreement] word for word” because “[she] trusted [her] husband. He

was a wonderful negotiator, and . . . he showed [her] the highlights. He showed

[her] the important things to [them] that differed from the previous.”74

68 Id. at 423:7-8. 69 Id. at 488:24-489:2. 70 Id. at 488:15-16. 71 Id. at 423:9-13. 72 Id. at 423:14-16. 73 Id. at 421:15-22 (noting that she “didn’t know [the precise terms] until the final terms, until the agreement was completely finished . . .”); but see id. at 424:14-17 (affirming that she had seen earlier, inaccurate drafts of the 2003 Management Agreement). 74 Id. at 486:24-487:4; see also id. at 484:15-19 (noting that “[Wilson] spoke with [her] at length about a lot of his agreements as far as . . . what contract he was writing, rewriting, passing back and forth, finalized, and specifically the management agreements”). 22 Under Miller’s understanding of the alleged renegotiation, if a project did

not make a profit, or made a profit of less than 12.5%, HCWV was not obligated to

pay the difference to National Land Partners. According to Miller, that agreement

was reached during the Bermuda trip in July 2002, but the October 2002 Project

Addendum, which initially governed the Ashton Woods Project, did include

Negative Manager Fees. In fact, it was not until that agreement was restated in the

2003 Management Agreement, which also governed Ashton Woods, that the

Negative Manager Fee provision was dropped.

F. The Divorce

In June 2005, Miller filed for divorce in the Family Court of Berkeley

County, West Virginia.75 At that point, HCWV was managing six ongoing real

estate projects for National Land Partners, each governed by either the 2003 or

2004 Management Agreements.76 According to Miller, she and Wilson thereafter

agreed that, in exchange for Miller distributing her 50% interest in HCWV to

Wilson, she “would receive the value of her 50% interest at equitable

distribution.”77 However, the value of Wilson’s manager fees as of the date of

75 Wilson v. Wilson, 706 S.E.2d 354, 358 (W. Va. 2010). 76 The following projects were ongoing when Miller and Wilson separated: Ashton Woods, Crossings, Overlook at Greenbrier, Springs at Shepherdstown, Westvaco, and the Point. JX 41 (Wilson Aff.) ¶¶ 10-11 (noting that Negative Manager Fees were incurred for the Pointe and Westvaco Projects). 77 Am. Compl. ¶ 9. 23 separation, a valuation critical to equitable distribution, was uncertain.78 On

November 21, 2008, the Berkeley County Family Court entered a final order of

divorce, finding that the net value of HCWV was $8,927,957 and ordering Wilson

to pay over $4.9 million plus interest to Miller.79 Although that decision has been

reversed and remanded, it was this decision that precipitated the filing of the matter

pending before me.

Specifically, although the shortfall language is missing from the 2003 and

2004 Management Agreements, the Defendants accounted for Negative Manager

Fees when projects failed to generate sufficient gross sales to satisfy National Land

Partners’ preferential profit. In fact, in December 2008, following the initial

judgment of the Family Court, HCWV transferred approximately $5 million to

National Land Partners, most of which accounted for the payment of Negative

Manager Fees. Miller, in her Amended Complaint, contends that this payment was

not required under the terms of the Defendants’ agreement, and that Wilson paid

78 See, e.g., July 31, 2013 Oral Arg. Tr. 7:6-9 (“[T]he only issue that’s ever been contested in the State of West Virginia in this divorce is the marital interest in the Hunter Company of West Virginia.”); id. at 56:6-11 (“There was a stipulated equitable distribution amount that was determined between the parties and paid over by Mr. Wilson to the plaintiff. That included Hunter Company’s value. The only portion that remained was the value attributable to the pre- separation date management fees.”); see also Wilson, 706 S.E.2d at 358 (“By May 2008, the parties had divided their personal property and identified and stipulated to the value and distribution of all of their marital assets and debts, except for the calculation and valuation of Hunter’s manager fees.”); id. at 359 (noting that “the sole issue in contention that was litigated before the family court was the valuation of [Wilson’s] manager fees on the projects that existed at the date of separation for purposes of equitable distribution”). 79 JX 27 (noting, additionally, that Wilson had previously paid Miller over $4.3 million). 24 these fees, purportedly owed by HCWV, to impede her ability to collect at

equitable distribution.

However, as noted above, the Defendants contend that Negative Manager

Fees were very much a part of their arrangement, albeit inadvertently deleted from

the 2003 and 2004 Management Agreements, as well as the 2006 Management

Agreement between National Land Partners and Wilson’s Virginia company, an

agreement not implicated by equitable distribution.

In fact, Wilson testified that he first learned that this shortfall language was

absent on April 6, 2012, at a deposition during the pendency of his divorce

proceedings. As Wilson recounted at trial, during this deposition, he realized that

this language was missing “because I had to read the document while [Mr.

Campbell, Miller’s attorney] was there staring at me. And [the shortfall language]

wasn’t in there.”80 Although this language was missing, Wilson emphasized at

trial that “[the shortfall language] may not be in the main management agreement,

but it’s the same deal [Patten] and I shook hands on and have done business with

for all those years.”81

80 Trial Tr. 143:21-144:3. 81 Id. at 148:4-7. 25 Following his April deposition, Wilson contacted Murray, who was also

unaware that the shortfall language was missing.82 Murray’s state of mind is

reflected in an email from Murray to Wilson and others, on April 11, 2012, which

reads:

Please take a look at the Project Addendum which begins on Page 11 of the attached scan. As I have previously testified in Court [in West Virginia], the [2003] Managements Agreement was created to replace the Project Addendum and was intended to have identical terms. It appears that when I created the replacement Management Agreement I inadvertently omitted an important portion of section 6.2. At the top of page 12 of the Project Addendum are the words “. . . and shall be liable to Company for any shortfall amount.” These words explain the way we have accounted for the Negative Manager Fees all of these years.83

Importantly, Murray had previously testified, during Miller and Wilson’s divorce

proceeding in May 2008, that HCWV “bears all the risk of loss and enjoys all of

the potential profit that a project can receive after National Land Partners receives

a guaranteed percentage of sales as its compensation.”84

G. The Economy

Although Miller emphasizes the timing of HCWV’s payment of millions in

Negative Manager Fees so soon after the family court’s award concerning

82 See, e.g., id. at 303:14-22 (“My first reaction was you got to be kidding me. But when I went back and looked at those agreements and realized that it wasn’t there, I started trying to figure out what happened, and it caused me to keep looking back. I looked at the project addendum. I looked at the previous management agreement, saw the language there, put two and two together and said, ‘I can see what I did. I made a mistake.’”). 83 JX 35 at NLP000332. 84 JX 55 at 131:2-6. 26 equitable distribution as indicative of fraud, the timing of the real estate market

crash is also relevant here.

In the early to mid-2000s, the real estate business was booming. During this

period, HCWV was extremely profitable, as was National Land Partners, although

HCWV made more money—sometimes much more—from their joint projects. To

illustrate, the Ashton Woods Project generated over $11.5 million for the HCWV

and approximately $6 million for National Land Partners.85 Similarly, the

Crossings on the Potomac Project generated over $4.4 million for HCWV and only

$2.5 million for National Land Partners.86 This outcome was driven by the fact

that National Land Partners was subject to a capped preferential profit, while

HCWV earned all gross sales beyond National Land Partners’ 12.5%.

Both parties were aware that this arrangement was leading to outsized profits

for HCWV. However, when asked at trial why he did not change the deal back to

the original 50/50 arrangement, Patten explained his reasoning as follows:

“Because I had made an agreement with Mr. Wilson and I pride myself on keeping

my agreements. My word is my word. And he’s always been that way with me

and I’ve always been that way with him.”87 Wilson was also not unaware of this

disparity in profits, but noted that “[Patten] didn’t begrudge me when I was making

85 Trial Tr. 279:6-8. 86 Id. at 290:23-291:3. 87 Id. at 44:7-11. 27 a lot of money, and he never tried to change the deal when we were doing really

good.”88

Then, the real estate market came crashing down.89 Patten noted that, as a

result, “[Wilson’s] sales slowed way down and . . . it became more expensive to

sell, became more difficult to find prospects. And it became very difficult to make

a profit.”90 Wilson similarly recalled that “everything went down the tubes pretty

quick. . . . There’s no sales, bank stops lending money, it’s just a perfect storm.”91

As to their joint projects, Patten recalled that they “lost money, and the—what

[they] call the negative management fees increased.”92

The Defendants accounted for Negative Manager Fees on a monthly basis,93

and financial statements of National Land Partners that were presented during trial

reflect that the Defendants contemplated, and accounted for, Negative Manager

88 Id. at 141:11-13. 89 At trial, Patten recounted that “[i]t was like somebody shut the lights off in the room. I mean the whole real estate market collapsed. Sales collapsed. And it was a very, very difficult time for not only my company, but other companies.” Id. at 46:13-17. 90 Id. at 46:22-47:1. 91 Id. at 134:15-17. 92 Id. at 47:19-21. 93 See, e.g., id. at 336:13-20 (Murray) (“The purpose [of accruing negative manager fees] was for us to understand where we were in each of his projects. We owned the projects and we were preparing our financial statements, so every month when we did our financial statements, we needed to know did we make money, did we lose money, where do we stand. So the purpose of accruing them was to get our financial statements as accurate as possible.”). 28 Fees.94 In fact, Negative Manager Fees had previously been incurred by HCWV

during certain months of ongoing projects.95 As Wilson testified,

[t]here were months . . . like in December, when it’s hard to sell real estate in December, but you still—I still got secretaries to pay, I still got electric to pay, I’ve still got all these expenses to pay, where we didn’t have sales. There were months that we had negative—a negative number. The good news was the good months outweighed what few bad months we had.96

However, the recession had a noticeable impact on the Defendants’ joint projects,

leading to the accrual of Negative Manager Fees for completed projects.97 In fact,

Negative Manager Fees became so “unsustainable” that in October 2008, before

the West Virginia family court first ruled on his divorce, Wilson asked Patten to

change this profit allocation during a meeting in Atlanta, Georgia.98 Though the

94 See, e.g., JX 8; JX 21. The Plaintiff challenges the “probative value” of the manager fee schedules and financial statements presented by the Defendants. See Miller’s Pre-Trial Answering Br. at 7; see also Trial Tr. 27:6-11. I am cognizant of the fact that HCWV’s accrual of Negative Manager Fees accelerated post-separation, which, according to the Plaintiff, demonstrates the unnecessary and collusive nature of the payments made. 95 In fact, Murray testified that a manager fee schedule was “prepared every month, starting with the beginning of a project . . . when National Land Partners was receiving a . . . [p]referred percentage of sales and a preferred percentage of timber proceeds.” Id. at 306:21-307:5; see also id. at 307:9-13; id. at 317:10-14 (Murray) (“[Wilson] might not have received them regularly. If he asked about manager fees, they would have been sent to him, but I don’t believe we were routinely sending these every month, as we did the financials.”). 96 Id. at 206:13-22. 97 See, e.g., JX 40 (Murray Aff.) ¶ 17. 98 See, e.g., Trial Tr. 48:2-9 (Patten) (“Mr. Wilson came to me in October [2008] at a meeting in Atlanta . . . and said, ‘Look, I’m choking to death on this. I got to change the deal.’ And I—we sat, and I said, ‘Look. We’ll go back to the original 50/50 deal. We put a deal together and we make it, you get half, I get half. If not, it’s the same.’”); id. at 169:17-170:11; id. at 300:21- 301:4; id. at 301:22-302:9 (Murray) (“A couple things happened at that meeting. Mr. Patten agreed to go back to the old 50/50 arrangement and stop taking a preferred percentage of profits. He also agreed to give Mr. Wilson a reduction for what Mr. Wilson considered to be excessive marketing that we had incurred. And we also talked about Mr. Wilson’s commission should we 29 parties decided to return to their original 50/50 arrangement, this has not yet been

reflected in any written agreements.99

Further, although the parties changed their profit arrangement, HCWV

continued to pay the Negative Manager Fees incurred prior to this modification,

despite the fact that the shortfall language was missing from the 2003, 2004, and

2006 Management Agreements. Notably, pursuant to the 2006 Management

Agreement, Wilson has caused his Virginia company to pay Negative Manager

Fees to National Land Partners. Yet, this project was, in Wilson’s words, “all post-

marital and has nothing to do with anything in our divorce.”100

H. The December 2008 Transfer

According to the Defendants, as of November 2008, the Westvaco, Pointe

and Black Diamond Ranch Projects did not produce enough profit to satisfy

National Land Partners’ preferential payment, leading to the accumulation of over

$4.5 million in Negative Manager Fees.101 Additionally, HCWV also owed

National Land Partners for cancelled project costs, as well as certain overpayments

acquire the Hamer project, that it would be applied to the negative—to the liabilities that Hunter Wilson’s companies had to National Land Partners . . . as a result of operating losses and negative manager fees.”). 99 Id. at 302:20-21 (Murray) (“It was not [memorialized in writing]. It was a handshake, and I never got around to writing an amendment.”). 100 Id. at 165:13-14. 101 JX 40 (Murray Aff.) ¶ 17. 30 associated with the Ashton Woods and Shepherdstown Projects.102 As an offset,

however, HCWV was owed manager fees for the Overlook at Greenbrier and Long

Projects. Nevertheless, even after offsetting what HCWV owed National Land

Partners with what National Land Partners owed HCWV, HCWV owed National

Land Partners over $3.1 million.103

In December 2008, HCWV earned a $3.4 million acquisition commission

from a National Land Partners’ affiliate (the “Hamer Commission”). Because

HCWV owed National Land Partners over $3.1 million, the Defendants agreed that

this commission would be paid directly to National Land Partners to partially

offset the amount that HCWV owed.104 Murray notes that, at the time of this

Hamer Commission offset, a portion of HCWV’s profits from the Overlook at

Greenbrier and Long Project “were also applied to repay Negative Manager

Fees.”105 At trial, Wilson explained that these fees were paid to National Land

Partners through accounting transfers, noting that “I never got the money to give

the money back. They just moved the money from WV Hunter, LLC, to National

102 Id. at ¶¶ 16, 18; see also Trial Tr. 289:8-14; id. at 289:21-290:1 (Murray) (“Hunter Company of West Virginia, under the terms of our agreement, had responsibility for all operating losses, and our share was strictly a percentage of sales of timber and a percentage of sales of lots.”). 103 JX 40 (Murray Aff.) ¶¶ 19-21. 104 See, e.g., id. at ¶ 21. 105 Id.; see also JX 41 (Wilson Aff.) ¶ 6 (“The purpose of the assignment of the Hamer commission or fee was to offset negative manager fees created primarily by the downturn in the economy on several land development projects in which HCWV was the manager.”). 31 Land Partners, or whatever company they were moving it to.”106 According to the

Defendants, the timing of this December 2008 transfer was based not on the

issuance of the West Virginia family court’s order, but was instead “tied entirely to

the commission on the Hamer property becoming due and payable.”107

I. Summary of Management Agreements

Figure I illustrates in graph form the agreements under which HCWV

worked with National Land Partners. As represented, until September 26, 2001,

the profits were split 50/50; between late September 2001 and mid-April 2003,

including under the Project Addendum that initially governed the Ashton Woods

Project, National Land Partners was guaranteed a preferential profit, and HCWV

received everything above that amount. During that period, HCWV was also

responsible to National Land Partners for any shortfall, however, via the Negative

Manager Fees. After mid-April 2003, the management agreements maintained the

106 Trial Tr. 165:23-166:3; see also id. at 132:8-13 (Wilson) (explaining that National Land Partners did not “take money out [until] all the lots are sold and all the bills are paid, unless they’re paying some taxes or something if it’s a multi-year project. But normally they don’t take their money out until the tail end of the deal, like we do.”). 107 JX 40 (Murray Aff.) ¶ 22; see also Trial Tr. 224:10-19 (Wilson) (“That commission was used to offset negative manager fees, because we had this discussion—[Murray], [Patten], and myself—either last of September, first of October of ’08, on how I was going to repay the negative manager fees that were continuing to accumulate. And also because I had went to [Patten] because—I was losing my tail, and he was nice enough to go back to the 50/50 deal. But we discussed in October of ’08 how I was going to pay back the fees.”); id. at 224:23-24 (Wilson) (noting that the Hamer Commission “was the only way at the time I could get the bulk of the money paid back”); id. at 302:4-9; JX 41 (Wilson Aff.) ¶ 6 (“. . . the [Hamer] commission was assigned to WV Hunter LLC, NLP’s subsidiary, on December 1, 2008. The purpose of the assignment of the Hamer commission or fee was to offset negative manager fees created primarily by the downturn in the economy on several land development projects in which HCWV was the manager.”). 32 preferential profit provision for National Land Partners and left in place all the

upside potential, once the preferential profit was satisfied, to HCWV; however,

agreements during this period omitted the downside responsibility of HCWV.

II. PROCEDURAL HISTORY

On October 24, 2012, Miller filed a Verified Complaint, subsequently

amended, alleging that the Defendants have wrongly interpreted their management

agreements and that HCWV paid certain fees to National Land Partners for the sole

purpose of obstructing her ability to collect at equitable distribution. In Count I,

Miller requests a declaratory judgment that neither Section 4.3 nor Section 6.2 of

the parties’ management agreements authorized the sums paid by HCWV to

National Land Partners in December 2008, which included the payment of

Negative Manager Fees. In Count II, Miller requests an order voiding the

December 2008 transfer as fraudulent, pursuant to the Delaware Uniform

Fraudulent Transfer Act. In Count III, Miller requests the imposition of a

constructive trust over any funds fraudulently transferred from HCWV or Wilson

to National Land Partners.

On April 1 and 2, 2013, the parties filed Cross-Motions for Summary

Judgment. This matter was briefed, and at argument on July 31, 2013, I denied the

parties’ Cross-Motions as to Count I. At that time, I communicated the utility of

holding a brief evidentiary hearing on the limited issue of whether there exists a

33 basis for reforming the 2003 and 2004 Management Agreements.108 Further, I

stayed my decision as to Counts II and III.

A two-day trial was held on December 18, 2013 and February 4, 2014. The

parties completed post-trial briefing on March 19, 2014. This is my Post-Trial

Memorandum Opinion.

III. LEGAL STANDARD

The Defendants seek reformation of the 2003 and 2004 Management

Agreements, which they executed to govern their joint real estate development

projects. This Court may reform a contract when a “written instrument fails to

express the [parties’] real agreement or transaction.”109 To achieve reformation,

the movant must demonstrate either a mutual mistake of the contracting parties, or

a unilateral mistake by one contracting party and knowing silence by the other.110

In cases of mutual mistake, the movant must demonstrate, by clear and convincing

evidence, that “the parties’ actual (oral) agreement was not accurately reflected in

their executed written contract.”111 To satisfy this burden, the movant “must

108 Delaware is designated as the exclusive forum in which to litigate disputes arising from those agreements. See JX 11 at § 10.5; JX 17 at § 10.5. 109 Amstel Assocs., L.L.C. v. Brinsfield-Cavall Associates, 2002 WL 1009457, at *5 (Del. Ch. May 9, 2002) (internal quotation marks omitted). 110 Id. 111 Id. 34 persuade the Court of the precise, orally-agreed-to terms that it seeks to have

judicially inserted into the contract.”112

IV. ANALYSIS

Here, the Defendants contend that they mutually agreed that HCWV would

be responsible for Negative Manager Fees, but that this term was inadvertently left

out of the management agreements at issue due to a scrivener’s error.

Alternatively, the Defendants contend that their course of conduct demonstrates

that Negative Manager Fees were included in their arrangement.

I find the evidence clear and convincing that the 2003 and 2004

Management Agreements as written do not reflect the Defendants’ arrangement. A

prior management agreement and a project addendum, entered into before the

agreements at issue, clearly accounted for Negative Manager Fees. However, after

the contracting parties transitioned from a “project addendum” form back to the

management agreement form, this language went missing. I find that it was

inadvertently removed when Murray intentionally deleted a sentence that appeared

in the Project Addendum—following the shortfall language—from the 2003

Management Agreement, which was then used as a template for the 2004

Management Agreement. In other words, I find that in removing the surplus

language from the Project Addendum to form the 2003 Management Agreement,

112 Id. 35 Murray also, inadvertently, removed the language making HCWV liable for

Negative Manager Fees.

This explanation is strengthened by the fact that the Project Addendum—

which provided for Negative Manager Fees—governed the Ashton Woods Project,

which was already underway when that Addendum was terminated and the 2003

Management Agreement was executed, suggesting that the parties did not intend to

change their arrangement during this transition.113 In fact, Wilson’s testimony

confirms this; he testified: “[a]ll we did was change [the] form of documents. Any

negotiation or anything that was done with this deal was done with Harry in July of

’02, the year before. We already had the deal running. We weren’t going to

change horses in the middle of the road.”114

Moreover, the Defendants credibly and clearly demonstrated at trial that they

did not intend to change the terms of their arrangement between the Project

Addendum and the later management agreements. Rather, the parties continued to

account for Negative Manager Fees while pursuing their joint projects.115 Further,

113 Although other provisions were changed when the parties transitioned from the Project Addendum to the 2003 Management Agreement, including the language of Section 4.3, it is clear from the Defendants’ testimony that their arrangement contemplated Negative Manager Fees, and that they believed that accrual of these Fees was provided for in Section 6.2 of the 2003 and 2004 Management Agreements. 114 Trial Tr. 138:22-139:3. 115 See, e.g., id. at 326:14-17 (Murray) (being asked, “[o]n how many occasions did Mr. Wilson object to the accrual of negative manager fees on these [financial] statements,” and responding “[n]one that I know of”); see also id. at 148:4-7 (Wilson) (“The shortfall obligation, it does—it may not be in the main management agreement, but it’s the same deal him and I shook hands on 36 Wilson’s Virginia company paid Negative Manager Fees to National Land Partners

although the shortfall language is absent from the governing 2006 Management

Agreement, and the project for which these fees were incurred is not related to the

West Virginia divorce proceedings.116

Although Miller tries to impute a nefarious purpose to HCWV’s decision to

pay certain Negative Manager Fees in December 2008, shortly after a West

Virginia family court first ruled on her equitable distribution, I find that this timing

does not demonstrate that these fees were not owed under the Defendants’

arrangement. Miller, in effect, wants me to conclude that Wilson caused HCWV

to pay millions of dollars in Negative Manager Fees to National Land Partners that

it did not actually owe, and that Wilson knew it did not actually owe, in order to

spite her or obstruct her ability to collect at equitable distribution. I find this

conclusion to be an unreasonable one, and not supported by the parties’ testimony

at trial, nor the record before me. In fact, at trial, Wilson emphasized: “Why would

I pay a company 5 or $6 million that I didn’t have to on the whim that I may or

may not owe my ex-wife some money? It just doesn’t make sense. You wouldn’t

spend $10 to save $1, would you?”117 Wilson also testified that he planned on

and have done business with for all those years.”); id. at 163:11-16 (Wilson) (“My understanding was the same as my understanding has been since the project addendum in ’02; was that if the projects did good, I made money. If they fell on their face, as they did with the economy here that destroyed everything, now I owe money because the projects didn’t do as good.”). 116 See id. at 165:6-14. 117 Id. at 170:12-16. 37 appealing the West Virginia court’s decision, which he did; that decision has since

been reversed and remanded. While I realize that spiteful and self-destructive

behavior is not unheard of in the divorce context, as neither is collusive behavior to

shield funds from ex-spouses, nothing in the record or in the demeanor of the

defense witnesses suggests that such is the case here.

Further, although Negative Manager Fees rarely accrued before 2006, the

market crash had a noticeable impact on the Defendants’ joint projects, and these

Fees understandably began to accrue rapidly. As the Defendants testified, they

discussed, prior to the West Virginia family court making any decision on

equitable distribution, a return to their original 50/50 arrangement, as Wilson was

facing “unsustainable” levels of Negative Manager Fees.

Miller points out that the accounting statement laying out the fees paid by

HCWV to National Land Partners in December 2008 appears to have been created

on a Sunday; she suggests that this indicates the Defendants were working together

for some fraudulent, or at least extraordinary, purpose. Murray, however,

explained that this accounting statement was not actually prepared on a Sunday.

Rather, as he explained, National Land Partners’ accounting adheres to a “4-4-5

month” schedule, meaning that

rather than having our year and our individual months end on calendar days, they end on a Sunday. So in the first quarter of the year, January has four weeks ending on a Sunday, February has four weeks

38 ending on a Sunday, and March has five weeks ending on a Sunday. . . . [T]hey rarely coincide with the month-end.118

Accordingly, Murray explained, Sunday was not the day that this accounting

statement was prepared, but rather, corresponds to “the month-end date on which

we are doing the journal entry that will distribute [the Hamer] commission.”119

Further, it is clear from the record that the Defendants were unaware that the

shortfall language had been omitted until Wilson’s deposition in April 2012. The

email later sent by Murray—who testified at the West Virginia divorce proceeding

that HCWV “bears all the risk of loss and enjoys all of the potential profit that a

project can receive after National Land Partners receives a guaranteed percentage

of sales as its compensation”120—confirms this.

Furthermore, Miller’s testimony does not rebut the clear and convincing

evidence presented by the Defendants at trial. Although Miller testified that

Wilson and Patten, during their trip to Bermuda in July 2002, agreed to eliminate

Negative Manager Fees, she was not a party to the agreements at issue, and was

not privy to the negotiations between Wilson and Patten. Miller, furthermore,

offers no convincing explanation as to why the Defendants included Negative

Manager Fees in the October 2002 Project Addendum, which was entered into

mere months after the Bermuda trip. Miller, instead, focuses on her observations

118 Id. at 321:9-20. 119 Id. at 330:1-4. 120 JX 55 at 131:2-6. 39 of and discussions with Wilson as he negotiated the 2003 Management Agreement.

Specifically, Miller remembers that Wilson crossed out the “guarantee” and “said

it is not supposed to be on there.”121 However, when her attorney followed up by

asking: “You saw him cross it out?” Miller, instead of confirming that she saw

Wilson cross out the shortfall language, replied indirectly: “I saw many of his

contracts. But yes, that’s what he did. He would cross it out . . . .”122 Miller,

however, neither credibly nor consistently testified that Wilson told her that the

Negative Manager Fees were taken out of the Agreement, or that she saw him

crossing out the shortfall language in particular.123 In other words, Miller’s

testimony is entirely consistent with an attempt by a fundamentally honest and

moral person to testify in support of a position she sincerely believes in but cannot

directly confirm without uttering a lie. Thus, from Miller’s testimony, it is clear

that, during the negotiations involving the Ashton Woods Project and the 2003

Management Agreement, Wilson was initially anxious, subsequently happy, and

121 Trial Tr. 423:11-13. 122 Id. at 423:14-16. 123 See, e.g., id. at 488:17-21 (answering the question “What specific changes did Mr. Wilson make to Section 6.2 of this agreement and fax back to National Land Partners?” with the following response: “I will not tell you the specific. I can’t tell you the specific.”) (emphasis added); id. at 488:4-16 (“Q. You have no knowledge as to the changes he made to that agreement and faxed back, do you? A. I watched my husband for many days, weeks, and then into months go back and forth, correcting, changing, updating his management agreement. Q. But you have no idea what those changes were? . . . A. No, but it was pretty significant. I mean, he would cross out sentences and paragraphs.”); id. at 493:21-494:4 (“Q. What did he tell you? That he no longer guaranteed a profit to [National Land Partners]. That’s what you said he told you when he finalized this in April of 2003; correct? A. He told me that it was over. He was—as I said, he was very happy. The final management agreement was done, and we could move on and do business.”). 40 then later frustrated with Murray as they negotiated unspecified deal points. That

is insufficient to rebut the clear and convincing evidence presented by the

Defendants demonstrating that a scrivener’s error in fact occurred, and that Section

6.2 as written does not accurately reflect their arrangement.124 To be clear, to the

extent I must resolve discrepancies between Miller’s testimony, on one hand, and

that of Wilson, Murray and Patten, on the other, I find the latter three to be

credible.125

V. CONCLUSION

Because I find that the Defendants have carried their burden of

demonstrating, by clear and convincing evidence, that Negative Manager Fees

should have been accounted for in Section 6.2 but were left out due to a scrivener’s

error, I find it appropriate to dismiss Count I of Miller’s Amended Complaint, and

to reform Section 6.2 of the 2003 and 2004 Management Agreements to reflect the

parties’ true agreement. The parties should confer and inform me what, if any,

124 Because I find that Section 6.2 must be reformed, I need not address the parties’ arguments as to Section 4.3 of the Management Agreements at issue. 125 This is despite, and in light of, the Berkeley County Family Court’s March 2, 2012 Order, JX 34, and Miller’s testimony that Wilson was fired from the Patten Corporation in the early 1990s for misappropriating funds, Trial Tr. 400:5-16; see also id. at 401:23-402:23 (explaining that, following their termination from Patten Corporation, Patten contacted Wilson and Miller to discuss a potential partnership; Miller recounted that Patten told them: “‘I am interested in backing you. I would like to be your partner. You know what happened at Patten Corporation was wrong, I know it was wrong, and we are going to move on from it. We are going to do business together.’”). 41 issues remain in this matter, and should submit an appropriate form of Order

consistent with this Memorandum Opinion.

42 Figure I Agreement Parties Dated Effective Profit Distribution Shortfall Projects Language 2000 Management HCWV; July 17, July 17, 50/50 N/A Berkeley Glen; Agreement NLP; Wilson 2000 2000 Meadows at Sleepy Creek NLP Preferential Profit: 2002 Management HCWV; January September - 10% gross lot sales Yes River Ridge Agreement NLP; Wilson 15, 2002 26, 2001 - 12.5% gross timber proceeds July 2002: Bermuda Trip NLP Preferential Profit: Project Addendum HCWV; October October - 12.5% gross lot sales Yes Ashton Woods NLP; Wilson 15, 2002 15, 2002 - 12.5% first $3 million of gross timber proceeds - 42.5% gross timber proceeds over $3 million April 14, 2003: Project Addendum Terminated NLP Preferential Profit: 2003 Management HCWV; April 14, October - 12.5% gross lot sales No Ashton Woods; Agreement NLP; Wilson 2003 15, 2002 - 12.5% first $3 million of Crossings on the Potomac; gross timber proceeds Westvaco Romney Tract - 42.5% gross timber proceeds over of $3 million NLP Preferential Profit: 2004 Management HCWV; December November - 12.5% gross lot sales No Westvaco Greenbrier Tract Agreement NLP; Wilson 3, 2004 3, 2004 - 12.5% first $700,000 of – Hart’s Run; gross timber proceeds The Pointe; - 42.5% gross timber Long Project proceeds over $700,000 June 2005: Miller Files for Divorce Hunter CO of NLP Preferential Profit: 2006 Management VA, LLC; August 18, August 8, - 12.5% gross lot sales No Black Diamond Ranch Agreement NLP; Wilson; 2006 2006 - Timber proceeds as outlined in Schedule October 2008: Defendants Agree to Return to 50/50 Arrangement