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UMC Development, LLC v. District of Columbia

United States District Court, District of Columbia

August 13, 2019

UMC DEVELOPMENT, LLC, et al., Plaintiffs,
v.
DISTRICT OF COLUMBIA, et al., Defendants.

          MEMORANDUM OPINION

          DABNEY L. FRIEDRICH United States District Judge.

         Plaintiffs UMC Development, LLC, and Jacksophie GSCH, LLC, brought this suit in 2013 against the District of Columbia, its Mayor, and a Not-for-Profit Hospital Corporation (NFPHC) created under D.C. law. Second Am. Compl. ¶¶ 9-13, Dkt. 88. According to UMC, the District unlawfully foreclosed on land that UMC eventually expected to own and in which UMC had made significant investments. Id. ¶¶ 2-6. UMC filed its latest complaint following a series of D.C. and federal court proceedings. It alleges violations of the Takings Clause, the Due Process Clause, and District of Columbia law, and it seeks, among other things, just compensation for the taking of its alleged property and injunctive relief rescinding the foreclosure and transferring title to the property to UMC. See Id. ¶¶ 85-156. Before the Court are two motions to dismiss filed by the District of Columbia and NFPHC. D.C.'s Mot., Dkt. 93; NFPHC's Mot., Dkt. 94. For the reasons that follow, the Court will grant the motions.

         I. BACKGROUND

         The Court divides its discussion of the factual and procedural background into two parts. First, it discusses the formation of the relevant contractual relationships and the foreclosure that ultimately prompted this lawsuit. Second, it summarizes the procedural history. In considering the defendants' motions to dismiss, the Court accepts as true all material allegations in the complaint. See Muir v. Navy Fed. Credit Union, 529 F.3d 1100, 1105 (D.C. Cir. 2008).

         A. The Facts

         1. Greater Southeast Investments, L.P., Capitol Medical Center, LLC, and Capitol Medical Center Realty

         In 2007, the District of Columbia attempted to save a failing hospital in the Anacostia neighborhood by contracting with, and providing funding to, a private company that would acquire and rehabilitate the hospital. Second Am. Compl. ¶¶ 14-16, 20-21. To permit the transfer of funds, the Council of the District of Columbia enacted the East of the River Hospital Revitalization Emergency Amendment Act of 2007, which authorized the District to enter into a limited-partnership agreement with Specialty Hospital of Washington-GSE Holdings, LLC (SHW-GSE), a wholly owned subsidiary of Specialty Hospitals of America, LLC (SHA). Id. ¶¶ 19-22. The District, the sole limited partner, then provided $49 million in equity capital to the partnership, which became known as Greater Southeast Investments, L.P. (GSI). Id. ¶ 22. SHW-GSE served as the sole general partner. Id. ¶ 21.

         The partnership agreement significantly limited the District's authority over GSI's dealings. The District could not, for example, “take part in the operation, management, or control of the Partnership [or] transact any business in the Partnership's name.” D.C.'s Mot. Ex. 1 ¶ 5.2, at 12, Dkt. 93-1. But SHW-GSE's authority over GSI was not unlimited either. Most importantly, SHW-GSE could not “cause the Partnership to sell, transfer or otherwise dispose of any property or assets in a single transaction or series of related transactions” without “obtaining the prior written approval” of the District. Id. Ex. 1 ¶ 4.2, at 5.

         Around the same time, SHW-GSE's parent company, SHA, established two limited liability companies to further its development plans. Second Am. Compl. ¶ 24. It created Capitol Medical Center, LLC (CMC) to operate the hospital. And it created CMC Realty to own the real property, including the land surrounding the hospital. Id.

         On November 7, 2007, GSI loaned $49 million to CMC and CMC Realty after executing a series of loan agreements and notes secured by a Deed of Trust. Id. ¶¶ 25, 27. The Deed of Trust provided that GSI could foreclose on the secured property in the event that CMC or CMC Realty defaulted. Id. ¶ 28; D.C.'s Mot. Ex. 2 ¶ 5.1(e), Dkt. 93-2. GSI and the two CMC companies also executed an Acquisition Loan Agreement that prohibited the CMCs from “[d]ispos[ing], convey[ing], transfer[ing], licens[ing] the use of, or encumber[ing], or permit[ting] the conveyance, transfer or encumbrance of, any part of the Property” without GSI's “prior approval (which may be given or withheld in [its] sole and absolute discretion).” D.C.'s Mot. Ex. 3 ¶ 11, Dkt. 93-3. It is undisputed that, together, these contracts prohibited the transfer of any part of the relevant property without the District's prior approval.

         2. UMC Development, LLC

         A few days before these contracts were executed, SHW-GSE contracted with Jacksophie GSCH, LLC to form a joint venture-later named UMC Development, LLC-to acquire and develop the land surrounding the hospital. Second Am. Compl. ¶ 30; D.C.'s Mot. Ex. 4, Dkt. 93-4. CMC Realty also signed the Operating Agreement for the joint venture “for the purpose of confirming its obligations under [the Agreement].” D.C.'s Mot. Ex. 4 at 25. The Operating Agreement stated, “It is presently anticipated that CMC Realty . . . shall initially acquire title to the [l]and upon the closing of the Asset Purchase Agreement.” Id. ¶ 3. It went on to state that CMC Realty was to cooperate with Jacksophie to subdivide the property by obtaining multiple assessment and tax lots from the D.C. Office of Tax and Revenue. Id. According to the Operating Agreement, “promptly following [the] assignment of separate . . . lots . . ., SHW-GSE and CMC [Realty] shall convey title to the [d]evelopment [l]ots to [UMC].” Id.

         In the same paragraph, the Operating Agreement referenced the Acquisition Loan Agreement that prohibited both CMC and CMC Realty from transferring “any part of the [p]roperty” without the prior approval of GSI-and, by extension, the District. D.C.'s Mot. Ex. 3 ¶ 11; see also D.C.'s Br. at 3-4. The Operating Agreement stated that “CMC [Realty] acknowledges that it is funding the acquisition of the [l]and pursuant to the terms and conditions of the Acquisition Loan.” D.C.'s Mot. Ex. 4 ¶ 3. And it stated that Jacksophie and SHW-GSE “acknowledge and agree that it is presently their intent in accordance with the terms and provisions of the Acquisition Loan to have [UMC] construct buildings and other structures on the [d]evelopment [l]and . . . for medical uses complimentary to the [h]ospital.” Id.

         UMC immediately invested significant resources into developing the land surrounding the hospital. Second Am. Compl. ¶¶ 37-46. For example, it obtained the District's approval for the creation of multiple tax lots, it engaged a company to help develop comprehensive redevelopment plans, it signed a lease agreement and received rental payments, and it attempted to finalize deals with other potential tenants. Id.

         UMC and Jacksophie (collectively, the Developers) allege that the District participated in weekly meetings about the progress of their work, id. ¶ 47, that it actively encouraged them to continue their development activities, and that it “assured [the Developers] that the District's approval for transfer of title would promptly be forthcoming, ” id. ¶ 48. “At no point prior to [July 2010] did the District indicate to the Developers that it did not intend to approve the transfer of title from CMC Realty to the Developers.” Id.

         Yet when CMC Realty requested that the District approve the transfer in 2008, it withheld its consent and “requested that the Developers provide it with additional information about their development plans.” Id. ¶ 50. It also failed to provide its consent after the Developers wrote to it in 2010 “to make sure that [it] was still aware . . . that SHW-GSE and CMC Realty were contractually obligated to convey title to the development lots to Jacksophie.” Id. ¶ 69 (internal quotation marks omitted). Indeed, the District “never formally responded to CMC Realty's request to transfer title to the [d]evelopment [l]and.” Id. ¶ 51.

         3. The 2010 Foreclosure

Unfortunately, chronic mismanagement of the hospital led the District to conclude in early 2010 that the hospital was in “imminent danger of financial insolvency.” Id. ¶ 65 (internal quotation marks omitted). In April 2010, the District “unilaterally purported to declare a default under the Deed of Trust, ” alleging that the CMC companies “had failed to make required loan payments in 2009, had failed to disclose material facts to GSI, had committed fraud against GSI, and had made material misrepresentations to GSI.” Id. ¶ 67. On June 3, 2010, the District filed a Notice of Foreclosure that stated that the District was the “Holder of the Note” secured by the Deed of Trust. Id. ¶ 72, 74-75. On July 9, 2010, the District purchased the hospital and land “for a mere fraction of their actual market value” at a foreclosure auction at which it was the only bidder. Id. ¶ 78-79.

         According to the Developers, it is no surprise that the District was the only bidder in light of the participation requirements that the District itself imposed. Id. For example, all bidders other than the District had to post a $1, 000, 000 deposit subject to forfeiture “in the event a final settlement did not occur within thirty days.” Id. ¶ 78(a). The District also reserved the right to block any sale and retain the purchaser's deposit if, “at any point prior to settlement, ” the purchaser failed to demonstrate its ability to operate the hospital “on terms satisfactory” to the District. Id. ¶ 78(b) (internal quotation marks omitted). And the District “indicated that it would announce entirely new transactional terms-known only to the District-at the auction itself.” Id. ¶ 78(c). The parties do not dispute, at least at this stage, that GSI, not the District, was the holder of the note, and that the District had no authority under the GSI partnership agreement (or otherwise) to unilaterally foreclose on the hospital and the land. See id. ¶ 75-76.

         Three days after the foreclosure sale, the District transferred the purchased assets to NFPHC, an instrumentality of the District that was created through the enactment of the Not-for-Profit Hospital Corporation Establishment Emergency Act of 2010. Id. ¶¶ 13, 80.

         B. ...


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