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Larson Manufacturing Co. of South Dakota, Inc. v. Western Show Homes, Inc.

United States District Court, D. South Dakota, Southern Division

December 11, 2018

LARSON MANUFACTURING COMPANY OF SOUTH DAKOTA, INC., SUPERIOR HOMES, LLC, Plaintiffs,
v.
WESTERN SHOW HOMES, INC., AMERICAN MODULAR HOUSING GROUP, LLC, AMERICAN MODULAR HOUSING GROUP, INC., PAUL THOMAS, Defendants.

          MEMORANDUM OPINION AND ORDER [CROSS MOTIONS FOR PARTIAL SUMMARY JUDGMENT, DOCKET NOS. 82 AND 111] [FOR RULE 56(D) RELIEF, DOCKET NO. 100] [TO ALLOW SUPPLEMENTAL BRIEFS, DOCKET NO. 133]

          VERONICA L. DUFFY UNITED STATES MAGISTRATE JUDGE.

         INTRODUCTION

         This matter is before the court based on diversity jurisdiction, 28 U.S.C. § 1332, after defendants removed the matter from South Dakota state court. The parties have consented to this magistrate judge handling their case pursuant to 28 U.S.C. § 636(c).

         Plaintiff Larson Manufacturing Company of South Dakota, Inc. (Larson) is the parent company of plaintiff Superior Homes, LLC (Superior). Superior is in the business of manufacturing and selling modular homes.

         Defendant Western Showcase Homes, Inc. (Western) is in the business of purchasing, reselling, and financing modular homes. Defendants American Modular Housing Group, LLC (AMHG, LLC), and American Modular Housing Group, Inc. (AMHG, Inc.), buy and resell modular homes. Paul Thomas is the principal agent and owner of both AMHG entities and Western.

         The defendant entities purchased modular homes from Superior and then re-sold those homes to customers, sometimes arranging for delivery, set and completion of the home at the customer's location. Larson and Superior extended credit to the defendant entities for these purchases; AMHG would then repay the loans when its customer paid the defendant entities.

         The second amended complaint recites that defendant entities placed orders for fourteen modular homes with plaintiffs. Plaintiffs constructed the homes. Of the homes that were delivered to defendants, full payment was never made even though the complaint alleges the ultimate customers who received these homes paid defendants. Other modular homes ordered by defendants were custom-built and never delivered because defendants never paid for the homes. As to the homes plaintiffs retain possession of, plaintiffs allege the custom nature of the homes makes resale of the homes at a reasonable value impracticable.

         In addition, Larson entered into a loan agreement with Western which was guaranteed by AMHG, Inc. This loan agreement ultimately encompassed $14 million in funds. Larson alleges Western defaulted on the loan and AMHG, Inc. refused to pay pursuant to its guarantee. For all these matters, plaintiffs assert three counts of breach of contract, two counts of fraud, two counts of conversion, one count each of debt and guarantee, and one count of piercing the corporate veil.[1] Plaintiffs also allege defendant Thomas converted money which was received from third parties and intended for plaintiffs but was instead used by Mr. Thomas for his own personal use.

         In their answer to the second amended complaint, defendants generally deny nearly all of plaintiffs' allegations. Defendants Western and AMHG, Inc., assert five counterclaims against Larson and Superior.[2] Those counterclaims include breach of contract (failure to pay rebates, failure to repay personal loans from Thomas and failure to provide future promised business); unjust enrichment (rebates, warranty and service fees); tortious interference with business expectancy (Aspen Links Country Club and Aspen Village Properties); breach of contract (manufacturing defects in modular homes); and fraud and deceit (fraudulent inducement to sign a mortgage in connection Aspen Village and McKenzie Lane, assignment of mortgage interest in Moose Ridge, fraudulent building practices). Defendants/counterclaim plaintiffs Western and AMHG, Inc. seek compensatory and punitive damages on their counterclaims, pre-and post-judgment interest, attorney's fees, and other remedies.

         Now pending are the parties' cross-motions for partial summary judgment, Docket Nos. 86 and 111. Also pending is defendants' motion for Rule 56(d) relief (Docket No. 100), and defendants' motion to allow supplemental briefs (Docket No. 133). During the pendency of these motions, the parties moved the court to extend the second amended scheduling order (Docket 135), which the court granted in part and denied in part (Docket 137).

         FACTS

         These facts are gleaned from the parties' statements of undisputed material facts (Docket Nos. 84 and 113) and their objections to the same (Docket Nos. 101 and 123), along with the affidavits and supporting documents submitted by the parties. Properly supported facts and objections have been incorporated, but improperly supported facts and objections have not. See Fed. R. Civ. P. 56(c)(1).

         In addition to their own statement of undisputed facts in support of their motion for partial summary judgment (Docket 113) and their objection to the plaintiffs' statement of undisputed facts (Docket 101), the defendants submitted a statement of additional material facts (Docket 102) in response to the plaintiffs' motion for partial summary judgment.

         Docket 102 consists of the same facts submitted in support of the defendants' motion for summary judgment, in addition to an almost verbatim reiteration of Thomas's affidavit (Docket 104). Mr. Thomas's affidavit is his version of the relationship--beginning to present--between parties and non-parties Larson, Superior, Western, AMHG, and Aspen. Many of the facts recited in Mr. Thomas's affidavit pertain to the relationship between Aspen and Western and whether those entities fulfilled their obligations pursuant to the Modular Home Sales Agreement. For the reasons explained in this court's Memorandum Opinion and Order denying defendants' motion (Docket 109) to join Aspen as a party, the court views very few of the facts pertaining to the relationship between Aspen and Western as material to this litigation.

         A. Parties

         Plaintiff Larson is a South Dakota corporation with its principal place of business in Brookings, South Dakota. Plaintiff Superior is a South Dakota limited liability company, the members of which are residents of South Dakota. Superior's majority owner is Larson, but Superior conducts its own business separate and apart from Larson, with its own employees and accounts.

         Defendant Western is a corporation formed under the laws of Nevada with its principal place of business in Las Vegas, Nevada. Defendant AMHG, LLC is a limited liability company formed under the laws of Nevada. Defendant AMHG, Inc. is a corporation formed under the laws of Saskatchewan, Canada, with its principal place of business located in Las Vegas, Nevada. Defendant Paul Thomas is a resident of Las Vegas, Nevada, and is the sole owner of Western and both AMHG entities.

         B. Greg Jahnke and the Aspen Village Project

         Defendants and Greg Jahnke, the president of Aspen Village Properties, had a business relationship involving the Aspen Village project in Emerald Park, Saskatchewan, Canada. Superior manufactured modular homes for the Aspen Village project.

         The Aspen Village project was a significant project. It first contemplated the development of numerous residential living units, including high density multi-family, and single-family residences. It also included the McKenzie Lane project, which involved the construction of nineteen condominium units. Finally, it included the Emerald Park project, which consisted of Aspen Links Country Club, including the associated golf course and clubhouse; Block XX and twenty-four other separately parceled lots near the Aspen Links Country Club ready for residential development; Blocks VV, WW, YY and ZZ; and other real property suitable for residential and/or commercial development.

         Near the end of 2011, the defendants entered into an agreement with Aspen Village that provided the defendants the opportunity to acquire a 25% ownership interest in a new entity (Aspen Village Developments). Also in 2011, Western agreed to purchase two modular homes from Superior.

         C. Larson's Loans to The Aspen Entities

         Plaintiffs, Western, and the Aspen entities negotiated a series of agreements to formalize their commercial relationship. In 2011, Larson entered into a loan agreement with Aspen Village Properties, Ltd. (hereinafter “Aspen”) through which Larson loaned Aspen 2.3 million (Canadian) dollars. The loan agreement included a series of documents (a promissory note, a collateral mortgage, and an assignment of leases and rents) to secure Aspen's debt to Larson. At that time, Greg Jahnke, the president of Aspen, also signed a personal guarantee for the loan. Although the original mortgage agreement encumbered many of the lands to be developed for the Aspen project, it did not encumber the parcels on which the McKenzie Lane project condominium units were to be situated.

         D. The Credit Agreement and Amendments to the Credit Agreement

         Subsequently, on April 24, 2012, Western and Larson entered into a credit agreement through which Western assumed Aspen's obligations under the loan agreement, the principal balance of which was $2, 247, 191.30 (US dollars) at the time, plus accrued interest of $71, 060.50 (US dollars). The term note related to Aspen's debt on the Aspen Village project lands. These funds were also used to settle external bills and liens against the Aspen Village project properties and to pay for the two homes that Superior had manufactured in 2011.

         Western and Larson agreed to form a revolving credit facility (“revolving note”) in the amount of $2.7 million to fund further progress on the Aspen Village project. The credit agreement, and particularly the revolving loan, was intended to finance the residential development of the Aspen Village project. A portion of the money advanced by Larson to Western under the amended credit agreement was used to purchase modular housing units from Superior.

         Pursuant to the credit agreement, Western executed a term note in the amount of $2, 247, 191.30 (US dollars) and a revolving note in the amount of $2.7 million (US dollars). Interest accrued on the amounts loaned pursuant to the notes and credit agreement at the rate of 9.95% per annum.

         In exchange for Western's assumption of its debt, Aspen agreed that its prior collateral mortgage and assignment of leases and rents would continue to secure the amounts and obligations Western assumed or owed Larson under the credit agreement.

         Through these transactions, therefore, Western was indebted to Larson for $5 million, with $2.3 million related to the term note for debt related to the Aspen Village project lands and $2.7 million related to the revolving note to fund further progress on the Aspen Village project.

         The credit agreement expressly states:

Section 4.2 Payment of Revolving Note: The revolving note shall be due and payable as follows: (i) the minimum required revolving note payment shall be due and payable immediately upon the sale of any residential unit, and (ii) the remaining principal balance of the revolving note and all accrued but unpaid interest on the revolving note shall be due and payable on the revolving credit expiration date. Without limiting the generality of the foregoing, no interest on any note shall be payable until the sale of a residential unit, provided that all accrued and unpaid interest on the notes shall be due and payable in full on the term note maturity date or the revolving credit expiration date, as applicable, whether or not any residential units have been sold.

         The credit agreement does not specify that Western was to repay its obligation with the exact funds paid by purchasers; it only provides that a minimum payment must be made on the revolving note when a sale of a modular home unit to an end customer occurs. The parties disagree about whether Larson was required to obtain a South Dakota lending license to lawfully enter into the credit agreement(s).

         As early as July, 2012, the maximum amount of the initial revolving note was reached. Larson and Western subsequently amended the credit agreement three times, though Western disputes the validity of the third amendment. The first amendment was made on August 9, 2012, and temporarily increased the revolving note to $4.7 million (US dollars). The second amendment to the credit agreement was made on December 10, 2012, and increased the amount of the note to $7 million (US dollars). The second amendment set a date of June 30, 2014, for payment of the $7 million, which represented the total amount of both the term and revolving notes. As consideration for the increase in the limit for the note to $7 million, Western was required to pay Larson an additional $500, 000.00.

         Simultaneously with the first and second amendments to the credit agreements, other documents were signed to secure the debt. These documents were signed by Greg Jahnke-the president of Aspen Village-who still retained an ownership interest in the Aspen Village land. Specifically, in August, 2012, Aspen amended the collateral mortgage and assignment of leases and rents to substitute new collateral land for a parcel that had been previously sold, and to revise the amount of Western's debt that was collateralized by Aspen's property to $7 million.[3]

         But when the time came to sign the third amendment to the credit agreement, seeking to again increase the amount of Larson's loan to the defendants, Aspen/Greg Jahnke withdrew cooperation and refused to sign the third amended credit agreement or the counterpart documents which would have secured Western's debt to Larson up to an amount of $17 million.

         The final amendment to the credit agreement (the third amendment) was entered into on May 20, 2015, between Western and Larson. There are a signature lines for Western, Larson, and Aspen Village Properties on the third amended credit agreement. Signatures appear on the signatures lines for Western and Larson, but not on the signature line for Aspen. Likewise, neither Greg Jahnke nor anyone else on behalf of Aspen signed the (1) collateral mortgage agreement on behalf of Aspen Village Properties; (2) the acknowledgment and agreement between the lender, borrower, and Aspen; or (3) the assignment of leases and rents on behalf of Aspen Village Properties, all three of which are referred to in the third amendment as “conditions” in § 4 of the third amended credit agreement.

         The defendants assert the absence of Greg Jahnke's signature on the third amended credit agreement along with his refusal to execute the counterpart documents (the amendment to the collateral mortgage by Aspen in favor of Larson and the amendment to the Aspen's assignment of leases and rents in favor of Larson, both of which are referred to in the third amended credit agreement as “conditions, ”) renders the third amended credit agreement invalid and unenforceable.

         In § 3 of the third amended credit agreement, the distinction between the debt assumed by Western and the line of credit was eliminated and replaced with a principal balance of previously advanced money, totaling $8, 633, 038.69 (US dollars) plus accrued interest of $1, 141, 833.66 (US dollars), both as of March 31, 2015. Western also acknowledged its liability to Larson for an additional $1, 854, 767.00, which obligation Western had assumed from AMHG, Inc. under a separate agreement.

         Section 3 of the third amended credit agreement revised the previous §§ 4.1 and 4.2 of the second amended agreement, and contained the following language:

The borrower shall use its best commercial efforts to complete and market the properties that are mortgaged to the lender for the obligations of the borrower to the lender. The borrower shall pay all net sales proceeds for any disposition of such properties to the lender until all obligations to the lender have been fulfilled. Net sales proceeds shall me (sic) the total sales proceeds less reasonable adjustments and selling costs (including but not limited to legal fees in respect to such sale). Notwithstanding the foregoing and regardless of whether there are sufficient sales to achieve the payments referred to below, all amounts owing by the borrower to the lender as set forth above and any additional amounts owing by the borrower for matters occurring and additional advances made, if any, after March 21, 2015, including for greater certainty, all principal, interests, costs, and other amounts due and payable by the borrower to the lender, are due and payable by minimum payments as follows:

         Section 3 also revised the former § 4.2 and extended the time for Western to repay the loan. The third amended agreement established a set payment schedule, which required Western to repay the principal and interest in four payments: (1) $660, 000 by June 30, 2015; (2) $2, 640, 000 by September 1, 2015; (3) at least half the remaining principal and interest on or before December 15, 2015; and (4) the remaining balance by March 31, 2016 (all in U.S. dollars). Larson could, but was not required, to make additional advances up to $600, 000 (US dollars) prior to September 1, 2015.

         Though the first amendment to the credit agreement contains a provision indicating it is governed by the law of South Dakota, the third amended credit agreement contains a provision (§ 15) indicating it is governed by the law of Saskatchewan, Canada. Each amendment to the credit agreement contains a paragraph allowing Larson to recover its reasonable attorney's fees and expenses incurred in the enforcement of the credit agreement.

         The defendants now dispute the accuracy of the way the dollar amounts in the third amended credit agreement were computed. For example, the defendants now claim the amounts included in the third amended credit agreement (1) improperly included significant interest, even interest that accrued during delays caused by the plaintiffs; (2) a 25% add-on to account for the exchange rate between U.S. dollars and Canadian dollars between 2011 and 2015; (3) numerous costs and expenses to remedy manufacturing and construction defects caused by Superior, including costs and expenses for work that was not performed; (4) amounts for the purchase of modular homes that should have been charged to Aspen; (5) funds that Larson paid on Aspen's behalf; and (6) the increased cost of each modular home by 4%.

         Despite defendants' current disagreement with the computations in the third amended credit agreement, Paul Thomas explained in his affidavit that at the time he signed the third amended credit agreement in which he agreed to this amount, in order “to be a good soldier.” See Thomas affidavit, Docket 104, ¶¶ 115-116.

         On the same day he signed the third amendment to the credit agreement on behalf of Western, Paul Thomas signed a guarantee on behalf of AMHG, Inc. The guarantee document obligated AMHG, Inc. to be liable for the obligations of Western under the third amended credit agreement for an initial total up to $14 million (US dollars), which limit increased over time as follows:

The liability of the guarantor pursuant to the terms of this guarantee shall be limited to the total amount of $14, 000, 000.00 USD, plus interest at the rate equivalent to 5% above the CIBC floating prime rate of interest established from time to time by Canadian Imperial Bank of Commerce (CIBC)as its base rate used to determine rates of interest on Canadian dollar loans to customers in Canada and designated as the “prime rate.”

At the time the guarantee was executed, the CIBC's prime rate was 2.85%. CIBC has changed the prime rate four times since the guarantee was executed as follows:

July 15, 2015:

2.70%

July 13, 2017:

2.95%

September 2, 2017:

3.20%

January 18, 2018:

3.45%

         The defendants do not dispute that Mr. Thomas signed the guarantee on behalf of AMHG, Inc. nor do they dispute the content of the guarantee. The defendants contend, however, that because the third amended credit agreement is invalid and unenforceable, likewise AMHG, Inc.'s guarantee agreeing to be liable for Western's obligations pursuant to the third amended credit agreement is also invalid and unenforceable.

         Contained within the third amended credit agreement is the following paragraph:

9. Release: The borrower hereby releases, acquits, and forever discharges each of the Lender and each and every past and present subsidiary, affiliate, stockholder, officer, director, agent, servant, employee, representative, and attorney of any of them from any and all claims, causes of action, suits, debts, liens, obligations, liabilities, demands, losses, costs and expenses (including attorney's fees) of any kind, character or nature whatsoever, known or unknown, fixed or contingent, which the Borrower may have or claim to have now or which may hereafter arise out of or be connected with any act of commission or omission of the ender (sic) existing or occurring prior to the date of this Amendment or any instrument executed prior to the date of this Amendment including, without limitation, any claims, liabilities, or obligations arising with respect to the indebtedness evidences (sic) by the Credit Agreement or any agreement related thereto. The provisions of this Section shall survive payment of all Obligations and shall be binding upon the Borrower and shall inure to the benefit of the Lender and its successors and assigns.

         Western did not make the payments as outlined in the third amended credit agreement, and AMHG, Inc. did not make the payments pursuant to its guarantee. Following Western and AMHG, Inc.'s failure to pay pursuant to the third amended credit agreement, plaintiffs commenced this lawsuit.

         E. The Collateral for the Credit Agreement

         In December, 2011, Aspen Village Properties executed a collateral mortgage of some of its specified property (up to an amount of $5 million dollars) in favor of Larson. When Western assumed Aspen's debt pursuant to the credit agreement dated April 24, 2012, Aspen Village Properties and Larson executed an amendment to the December, 2011, collateral mortgage between Aspen Village and Larson. The amended collateral mortgage acknowledged Larson's mortgage upon the properties that the Aspen entities previously pledged and that Aspen Village properties still owned, resulting in these properties continuing to serve as collateral for the term and revolving notes that were now owed by Western to Larson (see Docket 107-33).

         Similarly, on April 24, 2012, Larson, Western, and Aspen Village properties executed an amendment to the prior assignment of leases and rents acknowledging that the leases and rents continued to serve as collateral for the term and revolving notes, now owed by Western to Larson.

         The parties disagree about whether these amended collateral mortgages and amended assignments of leases and rents were conditions precedent to, integral to, or affected the validity of the amended credit agreement(s). And, as explained above, there were no such accompanying documents signed to serve as collateral for the third amended credit agreement between Larson and Western.

         F. Attempts to Save the Project

         In 2014, Bill Retterath, Jeff Reif, and Craig Johnson, members of Larson's management team, worked with Western to make further progress on the Aspen Village project. Mr. Retterath proposed that Western accept delivery of two condominium units (the “Aspen condo units”) Superior had constructed and that had been stored at Superior's manufacturing facility for over eighteen months.

         To facilitate this proposal, Larson requested a separate individual mortgage for the Aspen condo units to complete the construction and spur sales toward completion of the Aspen Village project. At that time (as of December 21, 2014) AMHG, Inc. owed Superior $1, 761, 904.67 pursuant to their November 5, 2014, purchase agreement (for two five-plexes-see Docket 124-5), as well as the advances to cover allowances made to that date. Superior assigned the collectability of the $1, 761, 904.67 debt to Larson, and AMHG, Inc. assigned its responsibility for that debt to Western. AMHG, Inc. pledged its interest in the McKenzie Lane project condominium parcels as collateral for the debt owed to Larson, and Larson therefore prepared and presented a mortgage agreement, which AMHG, Inc. accepted and signed.

         The parties disagree about why construction halted. The plaintiffs contend it was because Larson had advanced more than the amount provided for in the purchase agreement between the parties dated November 5, 2014. The defendants assert plaintiffs caused delays in the funding of the Aspen Village construction throughout the project “to review invoices and requisitions.” Larson continued to hold a mortgage on the Aspen condominium units.

         In January, 2015, plaintiffs proposed amending the credit agreement a third time to consolidate Western and AMHG, Inc.'s debts. In May, 2015, Paul Thomas signed the third amended credit agreement. Greg Jahnke refused to sign the third amended credit agreement or the counterpart amended collateral mortgage and amended assignment of leases and rents.

         G. Current Ownership/Status of the Properties

         On November 23, 2016, to facilitate completion and sale, AMHG, Inc. transferred its interest in the development property to Larson. This was memorialized by a document entitled “transfer agreement, ” which was signed by Jeff Reif on behalf of Larson and Paul Thomas on behalf of AMHG, Inc. See Docket 107-110.

         The parties disagree about whether this transfer immediately impacted the amount Western owes Larson under the third amended credit agreement, but they do agree proceeds from the future sale of the development property could affect the amount due and owing under the third amended credit agreement.

         An introductory paragraph within the November, 2016 transfer agreement states as follows:

AND WHEREAS AMHG is indebted to Larson pursuant to a credit agreement between Western Showcase Homes, Inc. as borrower and Larson as Lender dated as of April 24, 2012 as amended by Amendment No. 1 to the Credit Agreement dated August 9, 2016 (sic) and as further amended by Amendment 2 to the Credit Agreement dated as of December 10, 2012 and as further amended by Amendment 3 to the Credit ...

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