Opinion ID: 2422541
Heading Depth: 2
Heading Rank: 4

Heading: Application of Waterside to the present appeals

Text: The record in the present case is, in our view, indistinguishable in principle from that in Waterside. Here, as in Waterside, the Bernsteins transferred absolute title to the buildings in question to wholly owned entities as part of an overarching agreement in which third parties  Carmel and, nominally, Quarry  acquired an interest in the property. The real estate transaction which resulted in the transfer of the buildings at issue in this case was consummated on June 30, 2009 in accordance with the parties' comprehensive Purchase and Sale Agreement. This single Purchase and Sale Agreement dictated the terms of both steps of the transfer of the apartment buildings. It specified first, that [i]mmediately prior to Closing, each of the LLC I entities shall contribute its properties to a subsidiary  e.g., Richman shall contribute the Richman Property to the Richman Subsidiary. The agreement provided that the transfers of the properties to the subsidiaries shall be made in accordance with special warranty deeds, bills of sale, assignments and other instruments of conveyance, and that these instruments must be approved as to their form and content by Purchasers (acting reasonably). The sellers (the LLC I entities) agreed to sell 99.99% of their membership interests in these subsidiaries to Carmel and 0.01% to Quarry for $88,000,000 (later reduced to $83,000,000). The purchasers' obligation to close under the agreement, and to pay the agreed upon purchase price, was explicitly made subject to the Sellers' performance of all of the covenants, agreement and obligations required to be performed under this Agreement. These obligations included the transfer of title from the LLC I entities to the subsidiaries, as specified in the agreement. Thus, pursuant to the Purchase and Sale Agreement, two transfers occurred for each building on June 30, 2004, the closing date. First, the Bernsteins transferred by special warranty deed, from the LLC I entities to the related LLC II entities (the subsidiaries contemplated by the Purchase and Sale Agreement), a 100% fee simple ownership interest in each building. Second, the LLC I entities sold 99.99% of their membership interests in the LLC II entities to Carmel and 0.01% to Quarry. The Resolutions adopted by the members of the LLC I entities (the sellers), confirm that both (a) the conveyance, in accordance with the terms of such Agreement, of all real and personal property owned by the Company to the LLC II entities, and (b) the conveyance of all membership interests in and to the subsidiaries (the LLC II entities) by the Company to the Purchasers were necessary steps to consummate a single transaction  referred to in the Resolutions as collectively, the Transaction  under which the properties were sold by the LLC I entities controlled by the Bernsteins. After the transaction closed, the LLC I entities no longer owned any interest in the apartment buildings. As the sellers, however, the LLC I entities  and thus, for all practical purposes, the Bernsteins  received the $83,000,000 purchase price paid by the transferees. In our view, this two-step conveyance of the apartment buildings is analogous in all material respects to the transfer of the Townhouses that the court held to be a sale in Waterside. In that case, the Contribution Agreement required the transfer of TPC's entire interest in the Townhouses to the Townhouses Trust. 2 A.3d at 1086-87. Similarly, in the Richman Towers cases, the Purchase and Sale Agreement provided for the transfer of the entire interest of the LLC I entities in the apartment buildings to the LLC II entities. In Waterside, the recipient of the initial transfer, the Townhouses Trust, was an entity owned and controlled by TPC, the seller. So, too, in the Richman Towers cases, the recipients of the initial transfer, the LLC II entities, were owned and controlled by the Bernsteins. In Waterside, the court concluded that TPC received valuable consideration for its promise to transfer absolute title to the Townhouses Trust, because TPC's right to receive the proceeds of the sale was contingent on that initial transfer of fee simple title from TPC to the Trust. Likewise, in the Richman Towers case, the LLC I entities received valuable consideration for their promise to transfer absolute title to the LLC II entities, because the right of the LLC I entities to receive the $83,000,000 in proceeds of the sale was contingent on the initial transfer of fee simple title. Viewing the entire transaction as a whole, as we did in Waterside, 2 A.3d at 1089, we conclude that the transfer here constituted a sale because the LLC I entities transferred absolute title in the apartment buildings to the LLC II entities as part of an agreement in which a third party  here, Carmel  would thereby gain an interest in the property. Id. At the end of the day on which the parties closed in Waterside, TPC, the seller, no longer owned the property, and it had received the proceeds of the sale from a third party. Similarly, in the Richman Towers cases, after the closing on June 30, 2004, the LLC I entities (the sellers) no longer owned the properties, and they had received the purchase price from a third party. The two defining characteristics of a sale under subsection (a) are (1) the passing of general and absolute title (2) in exchange for consideration. Waterside, 2 A.3d at 1090 n. 21 (citing Gomez, 967 A.2d at 1282). We are satisfied that each of these defining characteristics is present here. The owners contend that the first transfers in Richman Towers cases differ from the first transfer in Waterside because the Bernsteins transferred title for each property from the LLC I entities, which they owned and controlled, to the newly formed LLC II entities, which they also owned and controlled, and that the Bernsteins did so for their own tax and estate purposes, and for no consideration. However, in Waterside, absolute title to the Townhouses was transferred from the original seller, TPC, to a trust owned and controlled by the original seller, TPC. We discern no legally significant difference. Further, in asserting that there was no consideration for the initial transfer from the LLC I to the LLC II entities, the owners treat that transfer in isolation, rather than viewing the entire transaction as a whole, as Waterside instructs, 2 A.3d at 1090. In Waterside, the contract specifically provided for the transfer of 100% of TPC's interest in the Townhouses to the Townhouses Trust, leading the court to conclude that TPC's right to receive the proceeds of the sale of the Townhouses Holding Company was contingent on the initial transfer of fee simple title in the Townhouses from TPC to the Townhouses Trust. Id. Accordingly, in making the transfer, TPC received valuable consideration that flowed from the third party, UDRT to TPC. Id. The same is true here. The Purchase and Sale Agreement specifically provided for the transfer of absolute title to the apartment buildings from the LLC I to the LLC II entities, and consummation of the entire agreement was made subject to the performance of that obligation. In this case, as in Waterside, the transaction as a whole was supported by ample consideration. But, say the owners, The [f]irst [t]ransfers here were critically different from those at issue in Gomez and Waterside because the [f]irst [t]ransfers were not a necessary element of the Bernsteins' transfers to third parties (Carmel Partners and Quarry). Carmel Partners and Quarry could have purchased the membership interests of the LLC I Entities without the Bernsteins transferring absolute title from the LLC I Entities to the LLC II Entities. In other words, had the [f]irst [t]ransfers not occurred, the substance and the results of the transaction would have been the same. By contrast, in Gomez and Waterside, the first transfers there were necessary for the contemplated transaction to be completed. In Gomez, the housing accommodation needed to be isolated from other assets so that only the relevant apartment building could be transferred. In Waterside, the absolute deed to the building was owned by a limited partnership, but the parties had contemplated transferring ownership through a trust structure in order to avoid the Sale Act. The property in Waterside had to be transferred to a trust for the parties to close the contemplated transaction. The [f]irst [t]ransfers here are materially different. Based on the uncontroverted record below, the only reason those transfers occurred was for the Bernsteins' own business convenience  that is, tax and estate purposes. There was no need to place assets into the LLC II entities for the contemplated transaction to close. Accordingly, the first transfers were corporate restructuring without consideration and not sales. Therefore, according to the owners, it is Wallasey, not Gomez or Waterside, that controls these appeals, and because the stated purpose of the first transfers was estate planning and tax restructuring, the transaction was not a sale. The owners' argument is a creative one, but we do not believe that it can carry the day. First, there is nothing in the opinions in Gomez or Waterside that makes the outcome of those cases turn on the factors suggested by the owners  the purported need for isolation of assets in Gomez or the contemplated trust structure in Waterside. It was the presence in Gomez and Waterside of an overarching agreement which, taking the record as a whole, resulted in a transfer to a third party for consideration, that distinguishes these cases from, e.g., Wallasey and Alcazar, where there was no comparable agreement. Second, the assertion that the transaction with Carmel (and, minimally, with Quarry) could have been carried out without the first transfers having taken place is, in our view, essentially irrelevant. We are not concerned here with a scenario that did not occur. [16] Here, the Purchase and Sale Agreement  a single contract that governs both parts of a single Transaction carried out on the same day  explicitly made the transferees' obligation to pay the purchase price on the due execution of the first transfers in a form that must be acceptable to the transferees. This would not have been true in the owner's hypothetical. Third, the owners' reliance on Wallasey, although thoughtfully crafted, necessarily fails. In Wallasey there was no agreement to transfer the properties to a third party, and the decision in that case did not anticipate, nor did it purport to address, such a situation. Wallasey could control only if we were to disregard Waterside's common sense directive that we view the entire transaction as a whole. The owners also argue that in Gomez and Waterside, it was essentially acknowledged by the sellers that the transaction had been structured in order to avoid the reach of TOPA. This case is different, according to the owners, because there was uncontradicted deposition testimony to the effect that the first transfers were effected for tax and restructuring purposes. We note first that the intentional structuring of a transaction so that TOPA will not apply does not render TOPA applicable if the transaction does not run afoul of the statute as written. But in any event, there can be no question that in the cases now before us, the intent of the transferor and transferee was to ensure that TOPA would not apply. To suggest that the creation of a 0.01% interest in Quarry was designed for any other purpose than to avoid a transfer of a 100% interest to a single buyer (and thus, the owners hoped, to avoid the requirements of TOPA) taxes our credulity. The owners remind us that [i]t is of particular importance to guard against the danger of stating propositions of law in wider terms than is necessary, lest essential factors be omitted and the inherent adaptability of law be unduly restricted. (Quoting Lord Akin of the House of Lords in Donoghue v. Stevenson, [1932] A.C. 562, 584 (H.L.)); see also Roscoe Pound, Survey of Conference Problems, 14 U. OF CIN. L.REV. 324, 330-31 (1940). They suggest that the language in Gomez and Waterside on which we have relied was written in the context of the facts in those cases, and may not be carried over to the allegedly different circumstances of the present appeals. We generally agree with the legal proposition asserted by Lord Akin and Dean Pound  indeed, we have made essentially the same point in Part II A of this opinion, citing Khiem, 612 A.2d at 164  but we do not believe that it can fairly be applied here. For the reasons previously stated, we are of the opinion that the dispositive facts giving rise to these appeals are indistinguishable in principle from those in Waterside, and we have no hesitation in following Waterside here.