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Rs-Anb Fund, Lp, Lead v. Kms Spe LLC

September 7, 2011

RS-ANB FUND, LP, LEAD
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, DEFENDANTS/COUNTERCLAIMANTS. KMS SPE, LLC
BLW PLAINTIFF/COUNTERDEFENDANT,
v.
RS-ANB FUNDS, LP, DEFENDANT/COUNTERCLAIMANT. RS-ANB FUNDS, LP,
PLAINTIFF,
v.
DAVID ORVILLE KINGSTON, DEFENDANT.



The opinion of the court was delivered by: B. Lynn Winmill Chief Judge United States District Court

MEMORANDUM DECISION AND ORDER

INTRODUCTION

The Court has before it a motion for judgment on the pleadings (Dkt. 10), filed in consolidated action 4:11-cv-00179-BLW. In Case No. 4:11-cv-00179-BLW, KMS SPE, LLC sued RS-ANB Funds, LP, seeking declaratory and other relief in relation to a Participation Agreement dated April 1, 2009, to which both KMS SPE, LLC and RSANB Fund, LP, are parties. (Docket No. 1-8.) Also parties to the agreement are a group of investors who are defendants in related case, Case No. 4:11-cv-00175-BLW. Those investors, including Kingston Properties, L.P., which intervened in Case No. 4:11-cv-00179-BLW, and David Kingston, a defendant in a consolidated bankruptcy adversary proceeding, have also filed responses to the motion for judgment on the pleadings.

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 grant the motion for judgment on the pleadings.

BACKGROUND*fn1

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 for $12 million. The original investors, KMS, and RS executed a Participation Agreement outlining the terms of the sale and distribution of the profit proceeds to RS. See Participation Agreement, Dkt. 11-1. Under the Agreement, RS 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 about the effect of Section 4.5 of the Agreement -- the "Payments" section -- arose not long after the parties executed the agreement. This dispute drives these consolidated actions. Section 4.5 entitles RS to receive monthly payments when KMS 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] shall be as follows (Participant's Monthly Payment):  50% of the Gross Proceeds until [RS] receives $12,000,000;  thereafter, 25% of the Gross Proceeds (Participant's Monthly Payment). Id. ¶ 4.5.

In accordance with this section, KMS initially distributed 50% of the Gross Proceeds to the original investors and 50% to RS. KMS continued this distribution allotment until RS received $12 million (the amount it paid for its participation interest). Once RS received $12 million, however, KMS did not distribute 25% of the Gross Proceeds. Instead, KMS began distributing less than 25% of the earnings to offset the phase when RS received 50% of the earnings. Otherwise, according to KMS and the original investors, RS's participation payments would exceed the 25% participation interest RS purchased from the original investors.

This is the crux of the parties' dispute. RS argues that the plain and unambiguous language of the Payments section mandates that it receive monthly payments equal to (1) 50% of Gross Proceeds until RS receives $12 million; and (2) thereafter, 25% of the Gross Proceeds. The original investors respond that the Agreement must be read as awhole. Applying that canon, the original investors argue, it becomes clear that the 25% purchase provisions, by which RS agreed to purchase 25% of the original investors' "right, title and interest" to participate in the distributions, conflicts with the Payments section, which entitles RS to monthly payments equaling more than 25% of original investors' right to total distributions. David Kingston offers an illustration to clarify this point:

To illustrate, assume that SPE, over its lifespan, has $60 million of distributable earnings. In the 50% phase, RS would receive $12 million of the first $24 million of distributable earnings. If RS then were paid 25% of the remaining $36 million of distributable earnings, its total share of SPE's $60 million in distributable earnings would be $21 million ($12 million from the 50% phase plus $9 million from the 25% phase). That is 35% of the total distributions, far more than the 25% interest RS bought. For RS's overall distribution percentage to be brought in line with its 25% interest, RS should receive, in total, $15 million of the $60 million distributed by SPE. Accordingly, of the $36 million to be distributed after the 50% phase, its share is $3 million (a share that, by mathematical necessity, is less than 25%).

David Orville Kingston's Resp. at 5, Dkt. 66.

The original investors contend that Section 4.5 "was intended to accelerate RS's return of its $12 million investment by providing for the 50% phase, but not to both accelerate RS's return of its investment and grant RS more than 25% of the Current Investors' rights to receive distributions from [KMS]." David Kingston's Opp'n at 6, Dkt. 66. By filing its declaratory judgment action, KMS seeks guidance from the Court on how to distribute the portfolio's earnings now that the 50% phase has ended. ...


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