RS-ANB Fund, LP v. KMS SPE LLC et al

Filing 151

MEMORANDUM DECISION AND ORDER denying 84 Motion for Partial Summary Judgment; denying 91 Motion for Partial Summary Judgment; granting 95 Motion for Discovery; granting 106 Motion for Discovery; granting in part and denying in part 111 Moti on for Prejudgment Writ of Attachment andTemporary Restraining Order. Signed by Judge B. Lynn Winmill. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by cjm)(Emailed this Order to bf and jd in Finance regarding Court's registry fund by cjm.)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO

RS-ANB FUND, LP,

Lead Case No. 4:11-cv-00175-BLW

Plaintiff/Counterdefendant,
v.
KMS SPE LLC, LIZ AIR 6 L.L.C.,
JERALD M. SPILSBURY, KINGSTON
PROPERTIES L.P., MIKE KINGSTON,
PAUL E. AVERY, BERT BOECKMANN
AND JANE BOECKMANN, TRUSTEES
OF THE BOECKMANN FAMILY
REVOCABLE TRUST, ANDARY
INVESTMENTS 2 LLC and RGRCM LLC,

MEMORANDUM DECISION AND
ORDER

Defendants/Counterclaimants.

KMS SPE, LLC
Plaintiff/Counterdefendant,
v.
RS-ANB Funds, LP,
Defendant/Counterclaimant.

MEMORANDUM DECISION AND ORDER - 1

Consolidated Case No. 4:11-cv-00179BLW

RS-ANB Funds, LP,

Consolidated Case No. 4:11-cv-00179BLW

Plaintiff,
v.
DAVID ORVILLE KINGSTON,
Defendant.

INTRODUCTION
The Court has before it two motions for partial summary judgment (Dkts. 84 &
91) and a motion for a prejudgment writ of attachment and restraining order (Dkt. 111)
filed by RS-ANB Fund, LP. Also before the Court are two motions for discovery (Dkts.
95 & 106). The Court has reviewed the parties’ submissions and determined that oral
argument will not significantly assist the decisional process. For the reasons set forth
below, the Court will deny RS-ANB’s motions for partial summary judgment without
prejudice, grant in part and deny in part RS-ANB’s application for writ of attachment and
TRO, and grant the motions for discovery.

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BACKGROUND1
In January 2009, ANB Ventures, LLC acquired the assets of a distressed bank
seized by the Federal Deposit Insurance Corporation (FDIC). The loan portfolio cost $24
million, and to accomplish its acquisition several parties contributed to the purchase in
exchange for a profit participation interest. A managing company, KMS SPE, LLC, was
formed simultaneously to administer, service, and liquidate the assets of the portfolio – it
receives distributions from ANB Ventures, which it then distributes to the investors.
In early 2009, RS-ANB Fund, LP approached the original investors about
becoming an investor in the portfolio. The original investors agreed to sell 25% of their
participation interest to RS-ANB for $12 million. Participation Agreement at §§ 2-4,
Dkt. 11-1. The original investors, KMS SPE, and RS-ANB executed a Participation
Agreement outlining the terms of the sale and distribution of the profit proceeds to RSANB. Id.. Under the Agreement, RS-ANB paid $12 million to the original investors
(deemed the “Current Investors”) in exchange for a portion of the Current Investors’
“right, title and interest” to participate in the distributions. Id. § 4.1.
A dispute between the original investors and RS-ANB about the effect of Section
4.5 of the Agreement – the “Payments” section – arose not long after the parties executed

1

The background is derived from the Amended Complaint unless otherwise noted.

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the agreement. Section 4.5 entitles RS-ANB to receive monthly payments when KMS
SPE has earnings available for distribution. It provides:
Payments shall be paid monthly from the proceeds of the Net Company’s
Share less 15% (the “Gross Proceeds”) to the extent they are available.
Each monthly payment [to RS-ANB] shall be as follows (Participant’s
Monthly Payment):
 50% of the Gross Proceeds until [RS-ANB] receives $12,000,000;
 thereafter, 25% of the Gross Proceeds (Participant’s Monthly
Payment).
Id. § 4.5.
In accordance with this section, KMS SPE initially distributed 50% of the Gross
Proceeds to the original investors and 50% to RS-ANB. KMS SPE continued this
distribution allotment until RS-ANB had received $11.25 million from the Gross
Proceeds and $750,000 from its share of a $3,000,000 “Special Distribution” by KMS
SPE. Analysis of Payment to Date, Ex. to Townsend Decl., Dkt. 84-3. The “Special
Distribution” was a return-of-capital distribution made in September 2009. Reece Decl.
¶ 10, Dkt. 94-2. KMS SPE counted the $750,000 disbursement in determining when RSANB had “receive[d] $12,000,000” for purposes of the 50% provision. Id. ¶ 11.
Once KMS SPE determined that RS-ANB had received $12 million, however,
KMS SPE did not distribute 25% of the Gross Proceeds as RS-ANB contends it should
have. Id. ¶¶ 14-15. Instead, KMS SPE and the original investors took the position that
that Section 4.5 was intended to accelerate RS-ANB’s return of its $12 million
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investment by providing for the 50% phase, but not to both accelerate RS-ANB’s return
of its investment and grant RS-ANB more than 25% of the Current Investors’ rights to
receive distributions from KMS SPE. Id. In accordance with interpretation, KMS SPE
began distributing less than 25% of the earnings to offset the phase when RS-ANB
received 50% of the earnings, pending resolution of this dispute about the Participation
Agreement’s meaning. Id.
In an earlier decision granting RS-ANB’s motion for judgment on the pleadings,
the Court found that the Participation Agreement unambiguously entitled RS-ANB to
25% of the Gross Proceeds once it received $12 million – with no period when RS-ANB
would receive less than 25% to offset the phase when RS-ANB received 50% of the
earnings. Kingston Properties, joined by the other original investors, moved to
reconsider this decision (Dkt. 80), but the Court denied this motion (Dkt. 112). KMS
SPE has not yet distributed to RS-ANB Fund the Gross Proceeds it withheld to offset the
50% phase. Reece Decl. ¶ 15. Instead, those withholdings continue to be deposited in
KMS SPE’s IOLTA account. Id.
Now RS-ANB has filed two motions for partial summary judgment. In its first
motion for summary judgment, RS-ANB argues that it is entitled to approximately $1.2
million in breach-of-contract damages and prejudgment interest. RS-ANB predicates this
motion on its claim that it is entitled to $12 million in Gross Proceeds, and the $750,000

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“Special Distribution” should not count towards calculating when RS-ANB “receive[d]
12,000,000.” It claims a $375,000 shortfall from this dispute. RS-ANB asks the Court to
award the alleged $375,000 shortfall, as well as all of the withheld Gross Proceed
distributions following the 50% phase, plus prejudgment interest on all these amounts.
With its second motion for partial summary judgment, RS-ANB asks for “future
damages.” It seeks almost $4 million damages based on alleged breaches of Section 4.5
that RS-ANB anticipates will occur between now and the end of 2015. RS-ANB
estimates these future damages based on projections of future performance KMS SPE
prepared. Using KMS SPE’s projections and the federal mid-term interest rate of 4.18%,
RS-ANB’s expert, Brad Townsend, reduced RS-ANB’s portion of the estimated future
stream on income to present value. Townsend Decl. ¶¶ 7-8, Dkt. 9-2. RS-ANB also filed
an application for prejudgment writ of attachment and temporary restraining order to
ensure that the funds it seeks through its partial motions for summary judgment go to it
now.
KMS SPE, the original investors, and Kingston Properties oppose both motions
for partial summary judgment. They argue that RS-ANB Fund cannot be awarded past
damages because Kingston Properties filed cross-claims for reformation, rescission, or
invalidation of the Participation Agreement, and the Court has not yet adjudicated these
claims. For the same reason, they argue that RS-ANB Fund cannot be awarded future

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damages. In this vein, Kingston Properties and the Original Investors each filed a motion
for discovery under Rule 56(d), asking the Court, at the very least, to defer ruling on
summary judgment to allow time for discovery on these claims.
LEGAL STANDARD
One of the principal purposes of the summary judgment “is to isolate and dispose
of factually unsupported claims . . . .” Celotex Corp. v. Catrett, 477 U.S. 317, 323-24
(1986). It is “not a disfavored procedural shortcut,” but is instead the “principal tool[ ] by
which factually insufficient claims or defenses [can] be isolated and prevented from
going to trial with the attendant unwarranted consumption of public and private
resources.” Id. at 327. “[T]he mere existence of some alleged factual dispute between
the parties will not defeat an otherwise properly supported motion for summary
judgment; the requirement is that there be no genuine issue of material fact.” Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986).
The evidence must be viewed in the light most favorable to the non-moving party,
and the Court must not make credibility findings. Id. at 255. Direct testimony of the
non-movant must be believed, however implausible. Leslie v. Grupo ICA, 198 F.3d
1152, 1159 (9th Cir. 1999). On the other hand, the Court is not required to adopt
unreasonable inferences from circumstantial evidence. McLaughlin v. Liu, 849 F.2d
1205, 1208 (9th Cir. 1988).

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The moving party bears the initial burden of demonstrating the absence of a
genuine issue of material fact. Devereaux v. Abbey, 263 F.3d 1070, 1076 (9th Cir.
2001)(en banc). To carry this burden, the moving party need not introduce any
affirmative evidence (such as affidavits or deposition excerpts) but may simply point out
the absence of evidence to support the nonmoving party’s case. Fairbank v. Wunderman
Cato Johnson, 212 F.3d 528, 532 (9th Cir.2000).
This shifts the burden to the non-moving party to produce evidence sufficient to
support a jury verdict in her favor. Id. at 256-57. The non-moving party must go beyond
the pleadings and show “by her affidavits, or by the depositions, answers to
interrogatories, or admissions on file” that a genuine issue of material fact exists.
Celotex, 477 U.S. at 324.
ANALYSIS
1.

First Motion for Partial Summary Judgment – Past Damages
A.

Withheld Payments

RS-ANB contends that it is entitled to past damages for the payments KMS SPE
withheld to offset the phase when RS-ANB received 50% of Gross Proceeds. But
Kingston Properties has filed cross-claims for reformation, rescission, or invalidation of
the Participation Agreement, and the Court has not yet adjudicated these claims. Indeed,
discovery has not yet begun on these claims. If Kingston Properties prevails on these

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claims, it would nullify the damages RS-ANB now seeks. Kingston Properties should be
allowed to delve deeper into discovery on its counterclaims before the Court will grant
summary judgment in favor of RS-ANB for past damages. The Court will therefore deny
RS-ANB’s first motion for partial summary judgment without prejudice.
B.

Return on Investment

RS-ANB also argues that the Participation Agreement unambiguously entitles it to
50% of the Gross Proceeds until it receives $12 million from Gross Proceeds
distributions. The Court disagrees.
“The initial inquiry into whether a ... legal instrument is ambiguous presents a
legal question, over which this court exercises free review.” Chubbuck v. City of
Pocatello, 899 P.2d 411, 414 (1995). “An instrument which is reasonably subject to
conflicting interpretation is ambiguous.” Latham v. Garner, 673 P.2d 1048, 1052 (1983).
“The legal effect of an unambiguous written document must be decided by the trial court
as a question of law.” Id. at 1051. “If, however, the instrument of conveyance is
ambiguous, interpretation of the instrument is a matter of fact for the trier of fact.” Id.
The Participation Agreement states that RS-ANB shall be paid “50% of the Gross
Proceeds until [RS-ANB] receives $12,000,000.” Participation Agreement ¶ 4.5. It says
nothing about how or from what funds RS-ANB should be paid the $12 million before its
percentage of the Gross Proceed distributions drops from 50% to 25%. This language

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could easily mean that RS-ANB is entitled to 50% of the Gross Proceeds until it
recovered its $12 million investment – whether that be exclusively through Gross
Proceeds distributions, or partly through Gross Proceeds distributions and partly through
the other types of distributions that Section 4.5 provides.
Given that the Participation Agreement does not specify how RS-ANB should
have been paid the $12 million, KMS SPE, the original investors, and Kingston
Properties’ position that the 50% level distributions should have stopped when RS-ANB
received $12 million – even though $750,000 of that amount came from RS-ANB’s share
of the “Special Distribution” – is perfectly reasonable. On the other hand, it is possible
that the parties intended that RS-ANB be paid $12 million in Gross Proceeds before its
50% distributions stopped. Until this ambiguity in Section 4.5 is resolved, the Court will
deny RS-ANB summary judgment on this alleged $375,000 shortfall.
2.

Second Motion for Partial Summary Judgment – Future Damages
For the same reason that the Court found that RS-ANB should not yet be awarded

past damages, it finds that it should not be awarded future damages. Kingston Properties’
cross-claims for reformation, rescission, and invalidation of the Participation Agreement
must first be adjudicated before the Court can award damages for either past or future
breaches of contract. The Court will therefore deny RS-ANB’s motion for summary
judgment as to future damages without prejudice.

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3.

Motions for Discovery
KMS SPE and the Original Investors ask the Court to grant them the opportunity

to conduct discovery and more fully respond to the pending motions for summary
judgment. Under Ninth Circuit precedent, it is generally the rule that where a summary
judgment motion is filed so early in the litigation that a party has not had any realistic
opportunity to pursue discovery relating to its theory of the case, district courts should
freely grant a motion for discovery. Burlington Northern & Santa Fe Ry. Co. v. The
Assiniboine, 323 F.3d 767, 773 (9th Cir.2003). District courts are expected to generously
grant such motions as a matter of course when dealing with litigants who have not had
sufficient time to develop affirmative evidence. Id.
In this case, Kingston Properties has only recently filed counterclaims against RSANB Fund that directly bear on the issues raised in RS-ANB’s motions for summary
judgment. The parties have not had an opportunity to conduct discovery on these claims.
The Court will therefore grant the parties’ request for further discovery and, as noted
above, deny without prejudice RS-ANB Fund’s motions for summary judgment. RSANB Fund may move for summary judgment at a later date if it so chooses. The Court,
however, expects that the motions will not be renewed until the parties have undertaken
sufficient discovery to make such a motion meaningful. The Court also notes that it
prefers all issues for summary judgment to be included in only one motion.

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4.

Motion for Writ of Attachment
In addition to its two motions for summary judgment, RS-ANB filed an

application for a prejudgment writ of attachment by which it seeks to require KMS SPE
to pay $6 million into the Court in order to secure payment of the damages it claims
through those motions.
KMS SPE responds that it has deposited the disputed 25% distributions into
counsel’s trust account, and therefore a prejudgment writ of attachment and TRO are not
necessary. KMS SPE’s Opp’n to App. for Writ of Attachment at 4, Dkt. 121. As an
alternate proposal, Kingston Properties suggests that KMS SPE deposit into the Court:
(1) now, the disputed 25% of past Gross Proceeds distributions that is on
deposit in KMS’s counsel’s trust account; and (2) each month as the
litigation proceeds, the disputed 25% of the additional Gross Proceeds that
KMS SPE may accumulate. KMS is willing to do so, and all parties’
interests are served if it does so.
Kingston Properties Opp’n to App. for Writ of Attachment at 1, Dkt. 120.
Because the Court has denied RS-ANB Fund’s motions for summary judgment
and its entitlement to the funds it seeks remains disputed, the Court believes what
Kingston Properties suggests is the best course of action. This will prevent KMS SPE
from becoming the “empty shell” RS-ANB fears without tying up amounts that the other
investors are entitled to receive. The Court will therefore grant in part and deny in part
RS-ANB’s application and instead order KMS SPE to deposit the disputed 25% of past

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Gross Proceeds distributions, as well as any disputed future Gross Proceed distributions,
into the Court, into an interest bearing account controlled by the Court.
ORDER
IT IS ORDERED that
1. RS-ANB Fund, LP’s First Motion for Partial Summary Judgment (Dkt. 84) is
DENIED without prejudice.
2. RS-ANB Fund, LP’s Secon Motion for Partial Summary Judgment (Dkt. 91) is
DENIED without prejudice.
3. KMS SPE, LLC’s Motion for Discovery (Dkt. 95) is GRANTED.
4. The Original Investors’ Motion for Discovery (Dkt. 106) is GRANTED.
5. RS-ANB Fund LP’s Application for Prejudgment Writ of Attachment and
Temporary Restraining Order (Dkt. 111) is GRANTED in part and DENIED in
part as follows:
a. the Clerk shall accept and record KMS SPE’s deposit of the disputed 25%
of past Gross Proceeds distributions, which is on deposit in KMS SPE’s
counsel’s trust account;
b. as the litigation proceeds, the Clerk shall accept and record KMS SPE’s
deposit of the disputed 25% of the additional Gross Proceeds that KMS
SPE may accumulate each month;

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c. the Clerk shall invest the deposited funds, plus any applicable interest, in an
automatically renewable account, in the name of the Clerk of the Court,
U.S. District Court, at an institution chosen by the Clerk’s office, said funds
to remain invested pending further order of the Court;
d. the Clerk shall be authorized to deduct a fee from the income earned on the
investment equal to 10 percent of the income earned while the funds are
held in the Court’s registry fund, regardless of the nature of the case
underlying the investment and without further order of the Court. The
interest payable to the U.S. Courts shall be paid prior to any other
distribution of the account. Investments having a maturity date will be
assessed the fee at the time the investment instrument matures.

DATED: February 1, 2012

_________________________
B. Lynn Winmill
Chief Judge
United States District Court

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