Larken, Inc. v. Dirk Wray, - Appellant., Al Yip

Citations: 189 F.3d 729; 1999 U.S. App. LEXIS 18893; 1999 WL 615525Docket: 97-3892

Court: Court of Appeals for the Eighth Circuit; August 16, 1999; Federal Appellate Court

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Larken, Inc. initiated legal action in Iowa state court to recover its capital contributions to two limited partnerships following their dissolution. Larken sought both the return of its invested capital and its share of the general asset distribution. The case was removed to the U.S. District Court for the Northern District of Iowa on diversity grounds. After a bench trial, the court awarded Larken $2,036,876 from Dirk Wray and $311,174 from Al Yip. Wray and Yip appealed, claiming that Larken's capital recovery was barred by res judicata due to prior litigation in Minnesota and contested the awarded sums.

The partnerships were formed to acquire and operate hotels in Minneapolis and Iowa City, with Wray and Yip transitioning from employees of Larken to limited partners after securing financing from the "Pine Hill interests." Despite the hotels' profitability, tensions arose among the partners. Both partnership agreements contained a "deadlock" provision allowing the highest bidder to buy out the other partners in case of a deadlock on major decisions. The Pine Hill interests initiated a lawsuit in California to enforce this provision, while Wray, Yip, and the Pine Hill interests filed a lawsuit in Minnesota against Larken for alleged breaches of fiduciary duty, leading to various counterclaims from Larken, including attempts to rescind Wray and Yip's partnership interests. The consolidated litigation was overseen by Judge Paul A. Magnuson in Minnesota.

Judge Magnuson granted partial summary judgment favoring Pine Hill, allowing them to invoke the "deadlock" provisions of the partnership agreements and buy out the other partners. A sealed bid process was initiated, with Larken submitting the highest bid but failing to secure financing within 120 days, resulting in Pine Hill's bid prevailing. Before a jury trial commenced, the parties reached an oral settlement, dismissing the breach of fiduciary duty claims against Larken and Larken's counterclaims in exchange for $600,000 to the Pine Hill interests and $100,000 to Wray and Yip. The settlement explicitly reserved four items: (i) Larken's right to appeal the deadlock provision ruling, (ii) unresolved disputes regarding management contracts to be addressed in state courts, (iii) Larken's right to pay the settlement amounts from its share of hotel sale proceeds, and (iv) Wray and Yip's rights under their agreements and to seek damages related to tax form preparation issues.

The settlement was acknowledged orally on the record, with Judge Magnuson treating it as if a jury verdict had been reached. Although the court instructed the parties to formalize the agreement in writing, they could not agree on its scope, leading Larken to file a lawsuit in Iowa state court after Pine Hill's acquisition of the hotels. Wray and Yip removed the case to district court, where Larken sought a declaratory judgment for a priority return of its capital contributions before Wray and Yip received any proceeds from the hotel sales. The court dismissed Wray and Yip's res judicata defense based on a prior Minnesota lawsuit and ultimately ruled in favor of Larken, awarding $2,036,876 against Wray and $311,174 against Yip, prompting this appeal.

Wray and Yip acknowledge Larken's right to a priority return of its capital contribution to the partnerships but invoke res judicata, claiming that a prior Minnesota lawsuit resolved Larken's current claim. Res judicata applies if the previous court had jurisdiction, rendered a final judgment on the merits, and involved the same parties and cause of action. A dismissal with prejudice constitutes a final judgment on the merits. The interpretation of whether a claim was dismissed with prejudice relies on the parties' intent as expressed in their settlement agreement, which is governed by state law—in this case, Iowa law. The court must apply Iowa's "most significant relationship" test to determine the applicable law for contract interpretation, leaning towards Minnesota law based on the circumstances of contracting and the parties' connections.

The court finds no clear intent from the settlement agreement to preclude Larken's claim for a priority return of capital. The agreement lacks explicit language preventing this claim, prompting the court to consider the context of the settlement. Wray and Yip argue that Larken’s prior counterclaim for equitable rescission, which sought capital return before any distributions to Wray and Yip, was resolved in the Minnesota settlement. They assert that since the Minnesota court addressed Larken's priority capital distribution and the settlement resolved all matters not explicitly excluded, the current claim is barred. However, the court remains unconvinced by this argument.

Larken's counterclaim is interpreted to seek a return of capital before Wray and Yip receive funds from ongoing hotel cash flow, not from sales proceeds. The language of the counterclaim does not support Wray and Yip's interpretation, and the context of the Minnesota litigation supports Larken's view. Larken reserved the right to appeal a ruling allowing the "deadlock" provision, which led to the hotels' sale, indicating that the distribution of sales proceeds was not within the scope of the Minnesota district court's resolution. 

Wray and Yip's challenges to the damages awarded to Larken are not persuasive. The appellate review of damages in court-tried cases is deferential, only intervening in cases of "plain injustice" or shocking results. Wray and Yip argue that the damages awarded were excessive due to errors in an exhibit prepared by Larken’s accountant. They claim the judgment is flawed because it requires them to repay certain debts twice. Specifically, Larken's loans to Wray and Yip, derived from Larken's capital contribution and third-party financing, were not credited against the amount they owed after the sale of the Iowa hotel. Wray and Yip assert this results in an overcompensation of approximately $485,000.

However, the accountant's testimony suggests the final sum owed was adjusted to account for the payment made from partnership assets. The clarity of the accountant's analysis is questioned, but the district court found no factual error in rejecting Wray and Yip's double-dipping argument. The assertion of substantial overcompensation effectively claims the award is excessive, which must meet the stringent standard of "plain injustice." The court concludes that the evidence does not warrant a reversal of the damages awarded.

Wray and Yip challenge the damages award on several grounds, claiming the district court improperly awarded interest on Larken's capital contribution to the Minnesota partnership, incorrectly included interest on portions of Larken's capital contribution to the Iowa partnership attributed to them, and wrongly denied credit for management fees owed by Larken. However, the review of the record indicates that Wray and Yip did not present these arguments with sufficient detail at the trial court level, which precludes them from raising these issues on appeal. Consequently, the court affirms the district court's judgment.

The Honorable John A. Jarvey, a United States Magistrate Judge, presided over a case involving parties who consented to magistrate jurisdiction. Wray, under his employment agreement, was entitled to a 30 percent equity interest linked to financing for which he was the "producing cause" and became a limited partner in two hotel partnerships upon securing financing. Yip, although lacking an employment contract, was also made a limited partner for his role in financing. The Pine Hill interests involved several entities and individuals, including Taiwanese investor Jeffrey Koo and his sister, Lenora Chen. An appeal by Larken was affirmed by the court.

According to the Minnesota partnership agreement, partners were entitled to their "Capital Account" balance upon dissolution before any distributions based on percentage interest. The Iowa partnership had a similar structure. Wray claimed that Larry Cahill, a principal at Larken, orally agreed to forgo capital repayment in exchange for sharing a transaction fee, but this assertion was rejected by the district court without challenge on appeal. 

While a declaratory judgment addressed one claim regarding Pine Hill's "deadlock" provision, the dismissal of other claims was treated as a "consent judgment." Wray and Yip highlighted Judge Magnuson's assertion that the settlement equated to a jury verdict, though the specifics of the resolved claims were not detailed. They contended that issues related to the division of hotel sales proceeds were not reserved, raising questions about the original claims before the district court.

Wray and Yip argued that res judicata barred not only previously adjudicated claims but also those that could have been raised. Even if Larken could have claimed priority on sales proceeds during the Minnesota litigation, there was no indication of an intention to settle any unpleaded claims. Larken’s entitlements included its share of cash flow, sales proceeds, return of capital with interest, and repayment of debts owed by Wray and Yip, adjusted for prior payments received from the partnerships.