A Co-Tenancy Is Not a Partnership

                                                       A Co-Tenancy Is Not a Partnership

In a case from a few years ago, namely Jad Farhat Irrevocable Trust #1 v. TTM Group, LLC, 2018 WL 1980764 (Ky. App. April 17, 2018), the court considered and rejected the assertion that a co-tenancy was as well a partnership, a status crucial in determining whether some or all of the participants are bound by fiduciary obligations.  In this instance there was no partnership and for that reason no fiduciary obligations.

TTM Group, LLC owned certain developed real property in Hardin County; the property was a fitness center that was leased to Energy Sports and Fitness of Elizabethtown, LLC (Energy Sports).  Both TTM and Energy group had the same cast of members.  Around the same time that Energy Sports entered into its $24,000 per month lease with TTM, it (TTM agreed to sell a one-fifth unaided interest in the property to the Jad Farhat Irrevocable Trust #1 for $180,000.  That sale was effected by a general warranty deed.   Under the related purchase agreement TTM agreed to pay to the trust “twenty (20%) percent of the [net] rental proceeds; on a monthly basis.”  That was all in 2009; in 2010 the members in TTM sold more than 70% of their ownership therein to a new LLC, DJD, LLC, and one of its members took over everyday management of TTM. 

In a prior decision it was held that the Purchase Agreement commitment to pay to the Trust 20% of net rental proceeds was unenforceable.  See Jad Farhat Irrevocable GSTT Tr. #1 v. T.T.M. Group, LLC, 2014 WL 5314701 (Ky. App. Oct. 17, 2012).  There was in that decision a remand to the trial court to address the question of the co-tenancy because “one co-tenant is liable to other co-tenants for any rents and profits collected from the joint property.”

The property was encumbered with two mortgages, and Farhat acknowledged he was aware of them at the time he made his investment. As described by the Court of Appeals:

At some point after DJD took control of TTM and began managing the property, TTM started having difficulty making regular payments on the mortgages. The parties dispute the underlying cause of TTM’s failure to make its mortgage payments. Farhat Trust asserted this was due to DJD paying themselves from the proceeds on the property instead of paying on the mortgages. However, even after discovery, Farhat Trust was unable to produce evidence supporting this contention, with the sole exception of Jad Farhat’s affidavit indicating his personal belief. For their part, the appellees asserted the failure to pay the mortgages was due to the following: (1) TTM had generally mismanaged the property prior to acquisition by DJD; (2) despite the best efforts of DJD and TTM, the athletic club regularly failed to pay rent and other required expenses under its lease; and (3) as a result of the athletic club’s failure to pay rent, TTM did not have the funds to pay the mortgages.

 

In August 2012, the second mortgage holder, First Federal Savings Bank, filed a petition to foreclose on the property in Hardin Circuit Court. Bank of the Bluegrass filed responsive pleadings asserting its position as the first mortgage holder. The property was foreclosed upon and sold through a master commissioner sale on December 19, 2013. Bank of the Bluegrass purchased the property for $1.4 million. All co-owners of the property—Farhat Trust, TTM, and DJD—lost their equity in the property due to the foreclosure. Approximately ten months after foreclosure, on October 17, 2014, EAC secured financing and bought the property from Bank of the Bluegrass for $1,461,344  2018 WL 1980764, *2.

The Farhat Trust filed suit in 2015 alleging a variety of claims including “it was in partnership with the appellees when they mismanaged the property and allowed the mortgages to go unpaid, resulting in the loss of Farhat Trust’s twenty percent ownership interest in the property.”  The trial court granted the defendants summary judgment as to the alleged partnership and this appeal followed.

As to the existence of a partnership, after a brief (but ultimately dicta) description of the requirements of those subject to fiduciary duties, and in reliance upon the prior decision, it was found that the co-tenancy was not a partnership.  First, they cited Kentucky Uniform Partnership Act (KRS 362.180) for the rules as to what is and is not a partnership; while the recitation of the law is accurate in and of itself it is curious as to why it was discussed at all -– the earliest that the partnership could have come into being was 2009, several years after KyUPA could have applied to the formation of a new partnership. It then cited that actually applicable provision of the Kentucky Revised Uniform Partnership Act (KRS 362.1-202) which provides that a joint tenancy in property is not a partnership.

The court as well rejected claims that a fiduciary relationship arose out of agency:

The evidence before the trial court was that Farhat Trust was simply willing to act as a passive co-owner and collect its portion of the monthly rent. This is not sufficient to support a finding of agency. Farhat Trust cannot claim fiduciary duties through an agency relationship. 2018 WL 1980764, *5

or out of special confidence:

Finally, we examine Farhat Trust’s claim to fiduciary duties through a special confidence placed in the appellees to act in its best interests. In order to find a fiduciary relationship, one requirement is that the party claiming the relationship “must show [the] reliance was not merely subjective.” Ballard, 430 S.W.3d at 242 (quoting In re Sallee, 286 F.3d at 892). Inexplicably, Farhat Trust asserts its “reliance on Appellees was not subjective since the Trust completely entrusted Appellees with managing the Property on its behalf and looking out for its interests.” This statement fails to show anything but a subjective reliance. Farhat Trust cannot demonstrate it was entitled to fiduciary duties through a special confidence. Id.