Richard L Wendt Revocable Trust v. Churchill & Company2 LLC

Filing 55

ORDER. The court GRANTS in part and DENIES in part the Trust's motion for partial summary judgment and declaratory judgment, Dkt. 32 . The court GRANTS summary judgment with respect to the Trust's loss misallocation claim (infra § III .B.1), the 2023 transferred assets claim (infra § III.B.3), the net cash distribution claim (infra § III.B.4), and the declaratory judgment claim (infra § III.C). The court DENIES summary judgment with respect to the Trust's interest redemption claim (infra § III.B.2). Signed by Judge Benjamin H. Settle.(CJS)

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UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF WASHINGTON
AT TACOMA

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RICHARD L. WENDT
REVOCABLE LIVING TRUST,

ORDER

Plaintiff / Counter-Defendant,

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v.

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CASE NO. C23-5359

CHURCHILL & COMPANY2 LLC,
Defendant / Counter-Claimant.

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I. INTRODUCTION

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Before the court is Plaintiff / Counter-Defendant Richard L. Wendt Revocable

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Living Trust’s motion for partial summary judgment and declaratory judgment. Dkt. 32,

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MSJ; Dkt. 43, Reply. Defendant / Counter-Claimant Churchill & Company2 LLC

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opposes the Trust’s motion. Dkt. 36. The court GRANTS in part and DENIES in part

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the Trust’s motion for partial summary judgment and declaratory judgment.

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ORDER - 1

II. BACKGROUND

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Friends do not always make the best business partners. The present dispute arises

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out of a friendship-turned-business-venture gone awry. In February 2015, longtime

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friends Roderick Wendt, the Trustee for the Trust, 1 and Craig Churchill formed Pelican

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Capital, LLC (Pelican) to invest in residential construction loans in partnership with

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Churchill & Company2, LLC (Churchill), a company Mr. Churchill had formed in 2013.

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Dkt. 34, Wendt Decl. ¶ 4; Dkt. 37, Churchill Decl. ¶¶ 4, 9, 14.

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The parties retained attorney Daniel Vaughn to prepare Pelican’s corporate

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formation and operating documents. Churchill Decl. ¶ 14; Dkt. 40, Vaughn Decl. ¶¶ 5-6.

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On February 13, 2015, the parties executed the Limited Liability Company Agreement of

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Pelican Capital, LLC (Operating Agreement). Wendt Decl. ¶ 4, Ex. A, Op. Ag. 2

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Churchill served as manager of Pelican. Wendt Decl. ¶ 3. Because the Trust was the

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largest investor in Pelican, the Operating Agreement granted the Trust management

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rights, including the right to review and approve certain Pelican transactions and the right

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to remove the Manager for cause. Id. ¶ 5; Dkt. 34-1, Op. Ag. §§ 4.1, 4.3.

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Mr. Wendt serves as co-Trustee of the Trust with his brother, Mark Wendt. Dkt. 39,
Selby Decl. ¶ 3, Ex. B, Wendt Dep., at 21:22-23. Mr. Wendt’s son, Matt Wendt, served as “the
Trust’s primary point of contact with Churchill regarding Pelican.” Dkt. 34, Wendt Decl. ¶ 2.
Matt Wendt “never had final decision making authority for the Trust.” Wendt Dep. at 28:19-22.
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The parties prepared an amended version of the Operating Agreement later in 2015. See
Wendt Decl. ¶ 4 n.1, Ex. C. However, the amended version was not executed, and the parties
have indicated that the court should rely on the February 13, 2015, Operating Agreement for
purposes of resolving this motion. See Wendt Decl. ¶ 4 n.1 (stating “the provisions at issue . . .
are substantively the same”).
ORDER - 2

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The Operating Agreement created two classes of investors—Class A Economic

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Interest Owners and Class B Economic Interest Owners. Dkt. 34-1, Op. Ag. § 3.1; see

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also Churchill Decl. ¶ 11. Class A Economic Interest Owners were “entitled to [a]

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Preferred Return payable quarterly to the extent of available Net Cash from Operations.”

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See Op. Ag. § 3.1(a). They were additionally entitled to a priority return of capital upon

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liquidation. Id., see also Wendt Decl. Ex. B at ii. Class B Economic Interest Owners—of

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which the Trust was the primary holder—were “entitled to a pro rata portion of Net Cash

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from Operations.” Id. § 3.1(b); Wendt Decl. ¶ 12. The Trust contributed approximately

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$6.2 million in capital to Pelican as a Class B Economic Interest Owner. Wendt Decl. ¶

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7; see also Churchill Decl. ¶ 13. Mr. Churchill asserts that the parties intended that the

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Class B Economic Interest Owners would bear the risk of any losses incurred by Pelican.

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Churchill Decl. ¶¶ 11, 12, 20; Wendt Dep. at 75:5-7 (stating that “everybody else other

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than” the Class A Economic Interest Owners bore the risk).

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According to Mr. Churchill, the parties were “rushed” to finalize the Operating

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Agreement. Churchill Decl. ¶ 14; see also Vaughn Decl. ¶ 8 (“I characterize the process

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in which I prepared documents for Pelican Capital as rushed.”). Mr. Churchill admits

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that he did not closely read the Operating Agreement before signing it because he

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“trusted [Mr.] Wendt to administer the Trust consistent with [the parties’] agreement.”

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Churchill Decl. ¶ 16. After executing the Operating Agreement, the parties continued to

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engage in discussions to prepare the Private Placement Memorandum (PPM). Dkt. 40,

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Vaughn Decl. ¶ 10. The PPM was “intended as an offering to invest in Pelican Capital.”

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Id. ¶ 13. According to Mr. Vaughn, the PPM was to “be read in conjunction with the
ORDER - 3

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Operating Agreement,” as it provided information to prospective investors about

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Pelican’s planned operations, investment structure, and the risk of investing in the

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company. Id. ¶¶ 10, 13.

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On March 18, 2015, Pelican agreed to fund real estate construction loans for

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homebuilders that were unable to obtain financing from banks through Construction Loan

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Services, LLC d/b/a Builders Capital (“Builders Capital”), an investment platform that

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originated, underwrote, and administered construction loans using funds invested by

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investors like Pelican. 3 Churchill Decl. ¶¶ 9, 11; Wendt Decl. ¶ 8. Mr. Churchill asserts

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that “[t]he Pelican structure was designed and agreed upon for [the] Builders Capital

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[venture], specifically.” Churchill Decl. ¶ 25.

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In 2020, Pelican initiated an arbitration action against certain Builders Capital’s

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affiliates seeking distribution of funds Pelican believed it was owed. Wendt Decl. ¶¶ 9-

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10. At the end of 2021, the arbitrator issued an award in favor of the Builders Capital

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affiliates. Id. ¶ 12; Churchill Decl. ¶ 20. Pelican paid the award in January 2022 and

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sustained losses as a result. Wendt Decl. ¶ 9; Resp. at 10.

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In February 2021, while the arbitration was pending, Churchill—through

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Pelican—invested $4 million in Sound Equity, a separate entity. Dkt. 34, Wendt Decl.

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¶ 13; Dkt. 33, Roller Decl. ¶ 9, Ex. H (Craig Churchill Dep.) at 135:4-6, 173:4-7,

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181:9-24. The Wendts declined to invest any Trust funds in Sound Equity, Churchill

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It is not clear from the record when the PPM was completed. Churchill’s Response,
however, indicates that the “parties were still working . . . to clarify the Operating Agreement
and PPM” as of March 10, 2015—the week before the parties entered into the transaction with
Builders Capital. Resp. at 10.
ORDER - 4

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Decl. ¶ 23, and according to Mr. Churchill, Builders Capital had not been investing

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Pelican’s funds “since before 2022,” Resp. at 12-13. Therefore, Mr. Churchill asserts,

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the parties’ business venture had effectively terminated around 2022. See Churchill Decl.

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¶¶ 23-24. The Trust disagrees. See generally Mot.; Reply.

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The Trust asserts that after the arbitration proceedings, Churchill materially

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breached the Operating Agreement by (1) improperly allocating all of the losses to the

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Class B Economic Interest Owners (the Trust); (2) improperly redeeming the Trust’s

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interests in Pelican without prior notice to the Trust; (3) transferring substantially all of

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Pelican’s assets to Sound Equity without obtaining prior approval from the Trust; and (4)

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failing to distribute 2022 profits to the Class B Economic Interest Owners. Mot. at 16.

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On December 16, 2022, the Trust sent a letter to Churchill asserting that Churchill had

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materially breached the Operating Agreement and invoking its right to remove Churchill

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as Manager of Pelican in accordance with § 4.3 of that Agreement. Wendt Decl. ¶ 16,

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Ex. E (citing Op. Ag. § 4.3). The Trust provided Churchill 60 days to cure the identified

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breaches by providing a detailed accounting for Pelican between 2019 and 2022. Id.

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Churchill responded in a letter dated February 27, 2023. Wendt Decl. ¶ 16, Ex. F.

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Churchill stated that it “disagree[d]” with the assertions the Trust made in its December

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2022 letter and enclosed financial documents, including Sound Equity statements, Pelican

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profit and loss summaries, and Pelican’s Schedule K-1. Id. According to the Trust,

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however, the enclosed documents “demonstrated Churchill’s ongoing breaches of the

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ORDER - 5

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Operating Agreement.” 4 Mot. at 12. Mr. Churchill testified that Churchill did not take

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any action to cure the identified breaches after receiving the Trust’s letter. Craig

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Churchill Dep. at 217:25-221:23.

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On March 29, 2023, counsel for the Trust sent another letter notifying Churchill

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that the Trust had removed Churchill as Manager of Pelican. Wendt Decl. ¶ 17, Ex. G.

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The Trust also sent an amendment to the Operating Agreement reflecting Churchill’s

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removal and electing Spruce Street Management, LLC as the new Manager of Pelican.

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Wendt Decl. ¶ 17. Churchill did not acknowledge or sign the amendment. Roller Decl. ¶

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On April 24, 2023, the Trust commenced this lawsuit. See Dkt. 1, Compl. In the

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weeks before the lawsuit, Churchill formed Raven Capital, LLC, transferred the

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remaining investment capital from Pelican to Raven, and reinvested those funds in Sound

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Equity. See Roller Decl. ¶ 8, Ex. G; Craig Churchill Dep. at 186:9-187:7.

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The Trust filed the pending motion on August 20, 2024. The Court first addresses

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the Trust’s motion for partial summary judgment on its breach of contract claim before

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turning to the Trust’s motion for summary judgment on its declaratory judgment claim.

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III. ANALYSIS

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The Trust’s Complaint pleads breach of contract. See generally Dkt. 1.

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Washington law governs these claims. See Op. Ag. § 11.2. Below, the Court sets forth

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Specifically, the Trust states that these documents “showed Churchill taking additional
profit shares (but providing nothing to the Trust and not accounting for legal expenses or loan
losses)” and “showed all losses from the Builders Capital debacle assigned to the Trust.” Mot. at
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ORDER - 6

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the summary judgment legal standard before turning to the merits of the Trust’s motion

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for partial summary judgment.

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A.

Summary Judgment Legal Standard

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Summary judgment is appropriate if the evidence shows “that there is no genuine

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dispute as to any material fact and the movant is entitled to judgment as a matter of law.”

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Fed. R. Civ. P. 56(a); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). A fact

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is “material” if it might affect the outcome of the case. Anderson v. Liberty Lobby, Inc.,

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477 U.S. 242, 248 (1986). A factual dispute is “‘genuine’ only if there is sufficient

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evidence for a reasonable fact finder to find for” the nonmoving party. Far Out Prods.,

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Inc. v. Oskar, 247 F.3d 986, 992 (9th Cir. 2001) (citing Anderson, 477 U.S. at 248-49).

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Courts must “view the facts and draw reasonable inferences in the light most favorable”

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to the nonmoving party. Scott v. Harris, 550 U.S. 372, 378 (2007) (internal quotations

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and citation omitted).

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The moving party bears the initial burden of showing there is no genuine dispute

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of material fact and that it is entitled to prevail as a matter of law. Celotex, 477 U.S. at

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323. The burden then shifts to the nonmoving party to identify specific facts from which

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a factfinder could reasonably find in the nonmoving party’s favor. Id. at 324; Anderson,

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477 U.S. at 250. To defeat a summary judgment motion, the nonmoving party “must

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present significant probative evidence tending to support its claim or defense.” Intel

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Corp. v. Hartford Accident & Indem. Co., 952 F.2d 1551, 1558 (9th Cir. 1991) (quoting

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Richards v. Neilsen Freight Lines, 810 F.2d 898, 902 (9th Cir. 1987)).

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ORDER - 7

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B.

Breach of Contract Claim

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To establish a claim for breach of contract, the plaintiff must show that a contract

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exists, that the contract imposes a duty, that the defendant breached that duty, and that the

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breach proximately caused damage to the plaintiff. Nw. Indep. Forest Mfrs. v. Dep’t of

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Lab. & Indus., 899 P.2d 6, 9 (Wash. Ct. App. 1995).

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In interpreting contracts, Washington courts “focus[] on the objective

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manifestations of the agreement, rather than on the unexpressed subjective intent of the

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parties.” Hearst Commc’ns, Inc. v. Seattle Times Co., 115 P.3d 262, 267 (Wash. 2005).

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The court assigns terms in the agreement “their ordinary, usual, and popular meaning

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unless the entirety of the agreement clearly demonstrates a contrary intent.” Id. (citing

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Universal/Land Constr. Co. v. City of Spokane, 745 P.2d 53, 55 (Wash. Ct. App. 1987)).

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If the terms of a contract are unambiguous, the court must “enforce [the contract] as

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written[.]” Radliff v. Schmidt, 532 P.3d 622, 625 (Wash. Ct. App. 2023). Extrinsic

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evidence may be used only “to determine the meaning of specific words and terms used”

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in the agreement and “not to ‘show an intention independent of the instrument’ or to

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‘vary, contradict, or modify the written word.’” Hearst, 115 P.3d at 267, 270 (citation

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omitted). In other words, the court “do[es] not interpret what was intended to be written

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but what was written.” Id. at 267.

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The parties do not dispute the validity of the Operating Agreement or the PPM.

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(Reply at 3; see generally Resp.) Instead, the Trust argues that the “undisputed facts”

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show that Churchill breached the Operating Agreement by:

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(1)
ORDER - 8

failing to allocate losses as called for in [the Operating Agreement];

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(2)
redeeming certain of the Trust’s interests in Pelican without giving
prior written notice [to the Trust];

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(3)
transferring substantially all of Pelican’s assets without obtaining
prior approval from the Trust; and

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(4)
paying itself a profit share in 2022, but paying no such share to the
Trust, despite [the Trust’s] entitlement to [68.15%] of post-Preferred Return
Net Cash from Operations.

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Mot. at 1-2. Churchill contends that “there is a genuine issue of material fact as to
whether” it committed the alleged breaches because the Operating Agreement, when
“read in conjunction with the [PPM],” shows that Churchill did not commit the alleged
breaches. Resp. at 2, 8. The Trust disputes that the language of the PPM supports
Churchill’s position. Reply at 7-8, 12. The court considers each of the asserted breaches
below.
1.

The Loss Misallocation Claim

The Trust first alleges Churchill misallocated the losses Pelican incurred in 2021
exclusively to the Class B Economic Interest Owners. Mot. at 16-17. The Trust directs
the court to § 6.1(c) of the Operating Agreement, which provides that the “net loss for
any fiscal year shall be allocated among the Economic Interest Owners pro rata in
accordance with their respective Percentage Interests.” Id. (quoting Op. Ag. § 6.1(c)).
The Trust posits that this term “explicitly call[ed]” for Churchill to allocate each fiscal
year’s losses, if any, “by the percentage interests of all Economic Interest Owners,”
rather than to Class B Economic Interest Owners only. Reply at 4. Churchill counters
that § 6.1(c) is “ambiguous in that [the term] ‘Economic Interest Owners’ could be

ORDER - 9

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interpreted as Class A Economic Interest Owners, Class B Economic Interest Owner[s],

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or both.” Resp. at 19.

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To resolve this dispute, the court begins and ends with the plain language of the

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Operating Agreement. See Hearst, 115 P.3d at 267. As stated, the Operating Agreement

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allocates net losses “among the Economic Interest Owners pro rata in accordance with

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their respective Percentage Interests.” Op. Ag. § 6.1(c). “Economic Interest Owner” is

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expressly defined in the Operating Agreement as “an owner of a Class A or Class B

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Economic Interest who is not a Member.” Op. Ag. art. 1, at 2. The court agrees with the

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Trust that “Economic Interest Owner,” as used in § 6.1(c), “do[es] not distinguish

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between the two classes of [E]conomic [I]nterest [O]wners.” Reply at 5.

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Churchill submits that its interpretation of § 6.1(c) stems from “the parties’

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statements and actions.” Resp. at 19. Such extrinsic evidence, however, can be used

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only to interpret specific terms—it cannot be used to “contradict” the plain meaning of

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the Operating Agreement. See Hearst, 115 P.3d at 267, 270. Churchill also states that its

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“negotiations” and “communications” with the Wendts related to the Operating

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Agreement and PPM “ma[k]e clear that . . . Class B Economic Interest Owners [i.e., the

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Trust] [would bear] the risk of loss.” Resp. at 20. But negotiations preceding the

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drafting of the Operating Agreement and after-the-fact emails are exactly the kind of

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extrinsic evidence that cannot be used to “vary, contradict, or modify” unambiguous

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terms in the agreement. Hearst, 115 P.3d at 267; see also id. at 270 (holding that

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extrinsic evidence about the parties’ intent was “irrelevant” when the language of the

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agreement was clear).
ORDER - 10

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The “representations in the PPM” also do not change the court’s analysis. See
Resp. at 19. Churchill relies on the following language in the PPM:
To ensure that the Class A Economic Interests have an equity cushion
beneath them, the Company intends to maintain an amount of Class B
Economic Interests that in the aggregate is no less than the initial capital
commitment of $6,000,000.
Resp. at 21 (quoting PPM at 40). Churchill contends that this language reflects the
“parties’ intention” that Class B Economic Interest Owners would shoulder the entire risk
of loss. See Resp. at 21; see also Churchill Decl. ¶ 19. The Court disagrees. That
Pelican represented that it “intend[ed]” to ensure that the Class A Economic Interests had
an “equity cushion” by “maintaining” sufficient Class B Economic Interests does not
indicate that potential future losses would be allocated exclusively to Class B. This
language does not render the Operating Agreement ambiguous. At best, Churchill’s
argument is an attempt to use the PPM to contradict the mercifully clear loss allocation
language in the PPM. That effort fails.
Churchill also asserts that allocating the risk of loss among both the Class A and
Class B Economic Interest Owners is “nonsensical.” See Churchill Decl. ¶ 19. He
elaborates that it would make no sense for “the Class A Economic Interest Owners agree
to cap their return if they would bear risk of loss on a pro rata basis with Class B[.]” Id.
This argument too fails to overcome the plain terms of the loss allocation in the
Operating Agreement. 5 The Court must “not interpret what was intended to be written but

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It additionally fails to account for the fact that Class A Interests were senior in priority
to the Class B interests in the event of liquidation. Op. Ag. §§ 3.1 (a), 7.1.2, 8.2.
ORDER - 11

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what was written” in the contract. Hearst, 115 P.3d at 267. It bears noting that both

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parties here are sophisticated. Indeed, Mr. Churchill has worked in financial services for

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39 years. Churchill Decl. ¶ 5. It should come as no surprise that he is bound by the

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unambiguous terms of the Operating Agreement that he signed. Accordingly, the Court

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concludes, as a matter of law, that Churchill breached the Operating Agreement by

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allocating a disproportionate amount of losses to the Class B Economic Interest Owners.

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A breach is “material” if it “‘substantially defeats’ a primary function of an

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agreement.” 224 Westlake, LLC v. Engstrom Props., LLC, 281 P.3d 693, 707 (Wash. Ct.

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App. 2012). The Trust asserts that Churchill’s misallocation of losses to the Class B

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Economic Interest Owners was a “material” breach because it “enabled Churchill’s

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improper redemption of the Class A Economic Interest Owners’ units at amounts higher

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than warranted,” because Class A did not sustain any losses from the Builders Capital

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arbitration award. Mot. at 19. Churchill disputes the materiality of this breach, asserting

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that “[b]ecause the contract, itself, is ambiguous, the question of materiality cannot yet be

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determined.” Resp. at 24. According to the parties’ briefing, the mechanism for

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allocating losses was a “primary function” of the contract that was vigorously negotiated.

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224 Westlake, LLC, 281 P.3d at 707; see Mot. at 16-17; Resp. at 19-21; Reply at 4-8.

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Accordingly, Churchill’s misallocation of losses constituted a material breach of the

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Operating Agreement as a matter of law. The Trust is therefore entitled to summary

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judgment on this claim.

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2.

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Second, the Trust alleges that Churchill breached the Operating Agreement by
ORDER - 12

The Interest Redemption Claim

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sending $178,000 to the Trust in July 2022 as “a redemption of the Trust’s remaining

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cash interest in Pelican.” Mot. at 17. The Trust argues this action was invalid because

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the Trust did not receive “thirty (30) days prior written notice” of the proposed

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redemption as required under § 3.4 of the Operating Agreement. Id. at 17-18. Churchill

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counters that the Operating Agreement granted it the “sole discretion” to “redeem any

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[E]conomic [I]nterest [O]wner’s capital investment.” Resp. at 13.

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Churchill’s position contravenes the plain text of the Operating Agreement.

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Section 3.4 of the Operating Agreement authorizes the Manager to “redeem the interests

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of any Economic Interest Owner after providing” written notice. Op. Ag. § 3.4

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(emphasis added). This language unambiguously requires the Manager to provide 30

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days’ written notice before redemption. Churchill does not dispute that it failed to

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provide such notice. See generally Resp. Therefore, the court concludes that Churchill

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breached the Operating Agreement by redeeming the Trust’s interests without providing

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written notice.

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Churchill asserts that the “parties’ [past] communications and conduct”

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demonstrate that Matt and Roderick Wendt had previously “orally requested [that]

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Churchill redeem the other Class B Economic Interests in the years preceding” the

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disputed redemption. Resp. at 22. Not only does this claim contradict the record, 6 such

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facts—even if true—would not provide a basis for Churchill to evade the clear noticing

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Churchill claims that it honored two “telephone” redemption requests for the Wendts in
2018 and 2020, “even though [the requests] were not made in writing.” Id. at 11-12, 22; see also
Churchill Decl. ¶ 21. With its Reply, however, the Trust produced two emails showing that both
requests were in fact made in writing. Dkt. 44, Wendt Reply Decl. ¶ 2, Exs. A-B.
ORDER - 13

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instructions directed to the Manager in § 3.4 of the Operating Agreement. Churchill

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breached the Operating Agreement by failing to provide written notice in accordance

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with § 3.4 before redeeming the Trust’s interests.

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Churchill also asserts that the notice procedures of § 3.4 were not necessary

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because the Trust “accepted” the $178,000 redemption over the telephone. Resp. at 21;

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see also Churchill Decl. ¶ 21 (“Upon wiring the funds, [Mr. Churchill] telephoned [Mr.

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Wendt] and told him that [Churchill] had returned the money. [Mr. Wendt] thanked [Mr.

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Churchill] for doing so[.]”). The Trust does not dispute that this telephone call occurred.

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See generally Mot., Reply. Thus, construing the evidence in the light most favorable to

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Churchill, the court cannot conclude that this breach is material as a matter of law. Scott,

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550 U.S. at 378. Accordingly, the Trust is not entitled to summary judgment on this

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claim.

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3.

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The Trust next alleges that Churchill breached the Operating Agreement by

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“withdraw[ing]” funds from Pelican, redeeming those funds to the Class A Economic

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Interest Owners, and reinvesting those funds into the newly formed Raven entity, all

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without the Trust’s approval. Mot. at 18; Reply at 9. The Trust directs the court to § 4.1

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of the Operating Agreement, which provides that

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The 2023 Transferred Assets Claim

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[n]otwithstanding any language to the contrary in this Agreement, including
authority expressly delegated to the Manager under Section 4.1 above, []
[the] below [actions] shall require the prior approval of [the Trust]:

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(a)

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ORDER - 14

The sale, transfer, conveyance, or other disposition of all or

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substantially all of [Pelican]’s assets[.]

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Mot. at 18 (citing Op. Ag. § 4.1). The Trust contends that Churchill’s withdrawal of

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Pelican’s funds and subsequent reinvestment of those funds into Raven constituted a

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“transfer” of “substantially all” of Pelican’s assets within the meaning of § 4.1. Id.

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Churchill counters that it did not breach the Operating Agreement when it

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transferred the funds because the term “assets,” as used in § 4.1, is ambiguous. Resp. at

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22-23. When interpreting undefined terms in a contract, courts apply the plain, ordinary

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meaning of the term unless the agreement clearly evidences a different intent. Hearst,

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115 P.3d at 267. As relevant here, Black’s Law Dictionary defines “assets” as “item[s]

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that [are] owned and ha[ve] value,” Asset, Black’s Law Dictionary (12th ed. 2024), and

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Merriam-Webster defines it as “the items on a balance sheet showing the book value of

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property owned,” Asset, Merriam-Webster, https://www.merriam-

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webster.com/dictionary/asset [https://perma.cc/U9RE-DJF5] (last visited Sept. 25, 2024).

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Applying these definitions to § 4.1, the Court agrees with the Trust that the term “assets”

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is unambiguous and that the funds “contributed to Pelican by Economic Interest Owners”

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and subsequently withdrawn by Churchill were “assets” of Pelican. See Reply at 10.

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Churchill also argues that the transferred funds were not Pelican’s “assets.” Resp.

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at 22. Specifically, Churchill contends that the “assets” of Pelican were the “loans

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[Pelican] funded” through Builders Capital, not “capital investments” contributed by the

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Economic Interest Owners. Id. The face of the Operating Agreement does not

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distinguish between loans and capital investments for purposes of § 4.1. See generally

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ORDER - 15

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Op. Ag. 7 Churchill, however, derives its claimed distinction from § 3.4, which grants the

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Manager “sole discretion” to redeem Economic Interest Owners’ capital investments but

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does not mention loans. See Resp. at 22 (quoting Op. Ag. § 3.4). But the fact that § 3.4

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gives the Manager discretion to redeem investments with notice does not mean that the

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Manager can transfer investments and other assets without prior approval from the Trust.

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In short, § 3.4 has no bearing on the plain language of § 4.1. See Op. Ag. §§ 3.4; 4.1.

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Because the court finds that “asset” as used in § 4.1 is unambiguous, it must

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“enforce [the contract] as written.” Radliff, 532 P.3d at 625. Accordingly, the court

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concludes that the Trust has met its burden to show, as a matter of law, that Churchill

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breached the Operating Agreement by transferring assets out of Pelican without the

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Trust’s prior approval. The Trust has produced undisputed evidence that the breach is

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material because the Trust “negotiated to have robust management rights” to protect its

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position as Pelican’s largest investor. Wendt Decl. ¶ 3; see generally Resp. (citing no

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evidence countering the Trust’s position on materiality). The court therefore grants

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summary judgment on the transferred assets claim in favor of the Trust.

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4.

The Net Cash Distribution Claim

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Finally, the Trust argues that Churchill breached the Operating Agreement by

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The court acknowledges that the Operating Agreement defines “Capital Contribution”
as “the amount contributed by [an] Economic Interest Owner or Member to the capital of the
Company” and “Loan” as “one or more secured real estate loans to one or more borrowers . . .
upon terms and conditions acceptable to the Manager in its discretion.” Op. Ag. art. 1 at 1, 3; id.
art. 2, at 5. These definitions do not change the court’s analysis, as the Operating Agreement
does not distinguish between Capital Contributions and Loans for purposes of the § 4.1(a)
“transfer” provision. See id. § 4.1(a).
ORDER - 16

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failing to pay the Trust its contractual share of 2022 Net Cash from Operations (Net

2

Cash). See Mot. at 18-19. The parties do not dispute that Churchill distributed Net Cash

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to the Class A Economic Interest Owners and paid the remaining Net Cash to itself. See

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Mot. at 18-19; see Resp. at 23. 8 Churchill, however, argues that the Trust was not

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“entitled” to any Net Cash in 2022. Resp. at 23.

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Section 7.1.1 of the Operating Agreement outlines the process for allocating Net

7

Cash from Operations among the Economic Interest Owners and the Manager. Under

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that section, Net Cash must be distributed in accordance with the following “waterfall”

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scheme:

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(a)

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(b)
Second, to the Class A Economic Interest Owners (pro rata in
accordance with their respective accrued and unpaid cumulative but noncompounding Preferred Return), until each Class A Economic Interest
Owner has received aggregate distributions under this Section 7.l.l(a) in an
amount that is equal to (but does not exceed) such Economic Interest
Owner’s accrued and unpaid cumulative but non-compounding Preferred
Return through the date of the distribution,

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First, to repay any Guaranty Advance,

(c)
Third, sixty-eight and 15/100 percent (68.15%) of any remaining Net
Cash from Operations to the Class B Economic Interest Owners (pro rata in
accordance with their respective Class B Percentage Interest, and pro rata in
accordance with the period of time during which such Economic Interest
Owner held such Percentage Interest vis-à-vis the period of time for which
such Distribution of Net Cash from Operation is attributable), and the
remaining thirty-one and 85/100 percent (31.85%) to the Manager. The
Member and Economic Interest Owners acknowledge that [Pelican] is
obligated to pay [Builders Capital] 32.5% of the profits from Loans
following payment of expenses and the Preferred Return owing to the Class
8

The parties dispute the amount that Churchill paid itself—the Trust alleges the figure is
$600,000, while Churchill alleges the figure is $388,562.42. Compare Mot. at 19, with Resp. at
23. Because the parties have reserved the issue of damages for trial (see Mot. at 11 n.4), the
court need not resolve this dispute at this stage.
ORDER - 17

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A Economic Interest Owners.

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Op. Ag. §§ 7.1.1(a)-(c). The Trust argues that “Churchill threw this formula out the

3

window” by failing to distribute to the Trust 68.15% of the funds that remained following

4

the distribution of the Class A Economic Interest Owners’ Preferred Return. Mot. at 11,

5

19.

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Churchill counters that because the 2022 Net Cash was “generated” by “funds

7

invested in Sound Equity,” rather than in Builders Capital, the Trust was not “entitled to a

8

share of the profits” because the Operating Agreement was “inextricably linked” to the

9

Builders Capital investments. Resp. at 23-24. Therefore, according to Churchill, the

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waterfall scheme did not govern distributions of Net Cash in 2022. Id.

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The plain language of the Operating Agreement does not support Churchill’s

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narrow interpretation of § 7.1.1. Setting aside that the Operating Agreement

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contemplates Pelican’s broad “purpose” as “mak[ing] one or more secured real estate

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loans to one or more borrowers 9” as opposed to only Builders Capital, § 7.1.1 provides

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that “[d]istributions of Net Cash from Operations shall be made” in accordance with the

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waterfall scheme, subject only to two exceptions inapplicable to the parties’ case. Op.

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Ag. § 7.1.1 (emphasis added). 10 The Operating Agreement defines “Net Cash from

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Operations” as “the gross cash proceeds from [Pelican] operations less the portion

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22

9

Op. Ag. § 2.3 (emphasis added); see also Reply at 12
Specifically, § 7.1.1 provides that distributions do not follow the provided scheme in
the case of Pelican’s liquidation pursuant to §§ 7.1.2 and 8.2. Op. Ag. § 7.1.1. The parties agree
that Pelican was not liquidated, therefore those sections are irrelevant to this dispute. See Mot. at
16-17; Roller Decl., Ex. H at 189:1-10, 190:4-6.
10

ORDER - 18

1

thereof used to pay or establish Reserves.” Op. Ag. art. 1 at 3 (emphasis added). That

2

definition does not distinguish between profits generated from Builders Capital versus

3

Sound Equity investments. Rather, “[Pelican] operations” contemplates the inclusion of

4

proceeds generated from any Pelican business operation. See id. Applying this definition

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to § 7.1.1 reveals the clear command of the Operating Agreement that all Net Cash

6

generated from Pelican operations be distributed according to the waterfall scheme.

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Churchill argues that the last clause of § 7.1.1(c) supports its theory that the Trust

8

was not entitled to any Net Cash. That clause provides that “[Pelican] is obligated to pay

9

[Builders Capital] 32.5% of the profits from Loans following payment of expenses and

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the Preferred Return owing to the Class A Economic Interest Owners.” Op. Ag.

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§ 7.1.1(c). In Churchill’s view, this clause shows that the waterfall scheme is “flawed”

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“[w]ith Builders Capital out of the picture,” and therefore the scheme “no longer

13

governed” Churchill’s 2022 distribution. Resp. at 23. The court disagrees. While the

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clause provides an additional level of distribution in the waterfall scheme with respect to

15

profits generated specifically from Builders Capital Loans, it does not by its plain terms

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discard the waterfall scheme when profits are generated by investments in funds other

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than Builders Capital.

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Churchill also argues that the Trust is not entitled to any Net Cash generated from

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Sound Equity investments under the waterfall scheme because “the Trust had abandoned

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Pelican and declined to invest in Sound Equity” and therefore could not “share [those]

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profits.” Resp. at 23. Churchill, however, does not point to any language in the operative

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documents that restricts investors’ interests in Pelican to a particular borrower or fund.
ORDER - 19

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See generally id. In sum, Churchill has not identified “specific facts” to support its

2

interpretation. Celotex, 477 U.S. at 324; Anderson, 477 U.S at 250. The court therefore

3

concludes, as a matter of law, that Churchill breached the Operating Agreement by

4

failing to distribute 2022 Net Cash from Operations to the Trust in accordance with the

5

waterfall scheme. This breach is material because it deprived the Trust of profit

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distributions, and “the Trust invested in Pelican to make money.” Reply at 13.

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Accordingly, the Trust is entitled to summary judgment on this claim.

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C.

Declaratory Judgment Claim

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Having determined that the Trust is entitled to partial summary judgment on its

10

breach of contract claims, the court turns to the Trust’s request for a declaratory judgment

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that it validly removed Churchill as Manager of Pelican by its March 29, 2023, letter to

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Churchill. Mot. at 20. Churchill opposes the Trust’s request solely on the ground that

13

there are disputed facts regarding whether Churchill breached the Operating Agreement

14

and whether those breaches were material. Resp. at 24-25. The Court grants the Trust’s

15

request for declaratory judgment.

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Section 4.3 of the Operating Agreement authorizes the Trust to remove Churchill

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as Manager and elect a replacement Manager “in the event of cause.” Cause for removal

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exists if “[the] Manager has committed a material breach of th[e] [Operating]

19

Agreement.” Op. Ag. § 4.3. Because the court concludes, as a matter of law, that

20

Churchill materially breached the Operating Agreement (see infra), the court also

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concludes that the Trust has demonstrated sufficient “cause” to remove the Manager

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under § 4.3.
ORDER - 20

1

The Operating Agreement provides procedures that must be followed to effectuate

2

removal of the Manager. Specifically, the Operating Agreement requires that the

3

nonbreaching party provide the Manager “written notice . . . specifying in reasonable

4

detail the grounds for” its proposed removal and providing the Manager an opportunity to

5

cure the breaches. Op. Ag. § 4.3. On December 16, 2022, the Trust notified Churchill by

6

letter that the Trust was invoking its right under § 4.3 to remove Churchill as Manager of

7

Pelican. Wendt Decl. ¶ 16, Ex. E. That letter describes in detail the breaches addressed

8

in the Trust’s summary judgment action, among others. On February 27, 2023, Churchill

9

indicated that it “disagree[d] with [the] assertions” in the Trust’s December 2022 letter.

10

Id. ¶ 16, Ex. F. Churchill’s response letter attached “several financial documents” but did

11

not otherwise explain how those documents cured the breaches, nor did it provide any

12

substantive response to the breaches. See id. On March 29, 2023, following the

13

expiration of the cure period, the Trust sent another letter notifying Churchill that the

14

breaches remained uncured, and that Churchill had been removed as Manager effective

15

that date. Id. ¶ 17, Ex. G. Churchill did not respond to that letter. See id. ¶ 17; see

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generally Resp. Mr. Churchill confirmed that, “to the best of [his] knowledge,

17

[Churchill] did not” make any changes to rectify the breaches identified in the December

18

2022 letter. See Craig Churchill Dep. at 219:4-221:23.

19

Based on the foregoing, the court concludes, as a matter of law, that the Trust

20

complied with the § 4.3 removal procedures. Because Churchill failed to cure the

21

breaches within the cure period, the court also concludes, as a matter of law, that the

22

Trust validly removed Churchill as Manager of Pelican on March 29, 2023, and validly
ORDER - 21

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elected Spruce Street Management, LLC, as Churchill’s replacement. Accordingly, any

2

actions taken by Churchill on behalf of Pelican on or after March 29, 2023, are invalid.

3

IV. CONCLUSION

4

For the foregoing reasons, the court GRANTS in part and DENIES in part the

5

Trust’s motion for partial summary judgment and declaratory judgment, Dkt. 32. The

6

court GRANTS summary judgment with respect to the Trust’s loss misallocation claim

7

(infra § III.B.1), the 2023 transferred assets claim (infra § III.B.3), the net cash

8

distribution claim (infra § III.B.4), and the declaratory judgment claim (infra § III.C).

9

The court DENIES summary judgment with respect to the Trust’s interest redemption

10

claim (infra § III.B.2).

11

Dated this 22nd day of November, 2024.

12

A

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BENJAMIN H. SETTLE
United States District Judge

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ORDER - 22