Opinion ID: 2422541
Heading Depth: 1
Heading Rank: 3

Heading: whether the transaction was a sale

Text: Having concluded that two of the tenant associations have statutory standing to bring their suits, we now address the substantive question whether the owners were entitled to summary judgment on the ground that the transactions that occurred on June 30, 2004, considered together, were not a sale within the meaning of D.C.Code § 42-3404.02(a) as it read at that time. In light of our decision in Waterside, 2 A.3d 1084, which was issued after oral argument in these appeals, and which was the subject of supplemental briefing by the parties and by amicus curiae, we conclude that the transfers constituted a sale subject to the requirements of TOPA.
TOPA provides in pertinent part that before the owner of a housing accommodation may sell the accommodation, he or she is required to give the tenant an opportunity to purchase the accommodation at a price and [on] terms which represent a bona fide offer of sale. D.C.Code § 42-3404.02(a) (2008). At the time these suits were brought, [TOPA] did not explicitly define sale. Rather, it left the meaning of the term to courts to determine, except that it specifically `included' some transactions within the scope of the term. Waterside, 2 A.3d at 1085 (footnote omitted); see also discussion in Part II, p. 6, supra. [13] As we have noted in our discussion of the associations' standing, TOPA is a remedial statute, and it is to be generously construed toward the end of strengthening the legal rights of tenants or tenant organization to the maximum extent permitted under law. D.C.Code § 42-3405.11 (2008). In particular, as the Supreme Court explained almost a century ago in a different but relevant context, the courts will not permit themselves to be blinded . . . by mere forms . . . but, regardless of fictions, will the substance of the transaction . . . as the justice of the case may require. Chicago, M. & St. P. Ry. Co. v. Minneapolis Civic & Commerce Ass'n, 247 U.S. 490, 501, 38 S.Ct. 553, 62 L.Ed. 1229 (1918). More recently, we have reiterated that [c]ourts deal with the substance rather than the form of transactions and will not permit important legislative policies to be defeated by artifices affecting legal title but not the practical consequences of the existing situation. EDM & Assocs., Inc. v. GEM Cellular, 597 A.2d 384, 389 (D.C.1991) (quoting United States v. Beach Assocs., Inc., 286 F.Supp. 801, 807 (D.Md.1968)); accord, Tenants of 1255 New Hampshire Ave., N.W. v. District of Columbia Rental Hous. Comm'n, 647 A.2d 70, 76-77 (D.C.1994). Specifically in reference to determining whether a transfer is a sale within the meaning of TOPA, we have stated that the court must look to the true nature of the transaction. Wallasey Tenants Ass'n v. Varner, 892 A.2d 1135, 1141 (D.C.2006). Moreover, we are of the opinion that TOPA, like other remedial statutory and constitutional provisions, forecloses sophisticated as well as simple-minded modes of nullification or evasion. Goodman v. District of Columbia Rental Hous. Comm'n, 573 A.2d 1293, 1297 (D.C.1990) (citation omitted); see also Lane v. Wilson, 307 U.S. 268, 275, 59 S.Ct. 872, 83 L.Ed. 1281 (1939). We approach these appeals with the foregoing principles in mind.
Whether a particular transaction constitutes a sale within the meaning of TOPA has been the subject of much litigation. Our pre- Waterside case law on the subject was aptly summarized in our recent opinion in that case: We have held that a property transaction must involve an `absolute transfer' or amount to the passing of `general and absolute title,' in order to qualify as a sale under subjection (a) [(citing Twin Towers, 894 A.2d at 1119 (quoting West End Tenants, 640 A.2d at 727-28))]. We have established that the transfer of a special interest falling short of complete ownership does not qualify as a sale [citing Twin Towers and West End Tenants ]. Accordingly, in West End we held that a long-term lease with an option to buy was not a sale. And in Twin Towers, we concluded that a transfer of 95% interest in conjunction with a tenancy in common agreement was not a sale because it did not effect an absolute transfer. Importantly, in Wallasey we also held that a single-party conveyance to a limited liability company wholly-owned by the grantor for no purpose other than to legitimately limit [the owner's] liability was not a sale [882 A.2d at 1141]. Thus, Wallasey stands for the proposition that, even when a conveyance takes the appearance of a sale, this court will not find a sale to have occurred if the transaction (1) does not involve arms-length bargaining with a third-party, and (2) changes only the form and not the substance of the ownership. Subsequently, in Gomez [ v. Independence Mgmt. of Delaware, Inc., 967 A.2d 1276, 1283 (D.C.2009)] we held that a transfer of absolute title from one wholly-owned company to a wholly-owned subsidiary could be a sale where the transaction also involved arms-length bargaining resulting in an agreement to sell 99% of the stock of the subsidiary company to a third party in return for consideration of value. In doing so, we distinguished Wallasey because the entire transaction [meaning the transfer of absolute title from one subsidiary to another, followed by the sale of the transferee's stock] was contemplated by, and carried out in accordance with, the Stock Sale Agreement. But, in Alcazar [ Tenants' Ass'n v. Smith Prop. Holdings L.P., 981 A.2d 1202 (D.C. 2009)] a case with similar facts, we came to the opposite conclusion because we found dispositive the lack of an overarching agreement pursuant to which the parties undertook to complete the complex transactions that resulted in the transfer of ownership. [ Id. at 1207 n. 3] Waterside, 2 A.3d at 1088-89.
The Waterside Complex at issue in Waterside consisted of the Townhouses and the Towers, [14] which were located on separately-deeded parcels of real estate. In October 2003, Trilon Plaza Co. (TPC), which held title to the Townhouses in fee simple, entered into a contract with United Dominion Realty Trust (UDRT) under the terms of which ownership of the Waterside complex was transferred to UDRT. No right of first refusal was accorded to the tenants. The parties' Contribution Agreement provided that TPC would create the Townhouses Trust, and that it would convey title to the Townhouses to the Trust. The sole beneficiary of the Townhouses Trust was to be Townhouses Holding Company, wholly owned by TPC. Finally, the Contribution Agreement provided that TPC would sell 95% of its interest in the Townhouses Holding Company to UDRT in return for approximately $50,000,000 at closing. All of these transactions were executed contemporaneously in December 2003. The association representing the residents of the Townhouses brought suit, contending that the transactions constituted a sale, and that the tenants had been denied notice and an opportunity to purchase, in contravention of TOPA. The court ruled in Waterside that the conveyance of the Townhouses described above constituted a sale within the meaning of D.C. § 42-3404.02(a). The court noted that, because a contract specifically provided for the transfer of 100% of TPC's interest in the Townhouses to the Townhouses Trust, it followed 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. Waterside, 2 A.3d at 1089. Thus, neither Twin Towers, which involved a transfer of only a 95% interest in the property, nor Wallasey, in which there was no transfer of ownership to a third party, was controlling. Id. Viewing the entire transaction as a whole, id., we held in Waterside that the transfer constituted a sale: We conclude that the conveyance of the Townhouses resulted in a sale under subsection (a). The Contribution Agreement compelled the transfer of TPC's entire interest in the Townhouses to the Townhouses Trust. TPC's promise to transfer absolute title was in exchange for valuable consideration flowing from UDRT to TPC. These facts lead to the conclusion that this conveyance was not a mere restructuring as in Wallasey. Rather, viewing the entire transaction as a whole like we did in Gomez, the transfer constituted a sale because TPC transferred absolute title in Townhouses to the Townhouses Trust as part of an agreement in which a third party, UDRT, would thereby gain an interest in the property. Because none of the facts upon which we base this conclusion are in dispute, we hold that, as a matter of law, TPC indeed sold the Townhouses under subsection (a). Id. at 1090. Waterside thus stands for the proposition that when the original owner of a rental accommodation transfers absolute title to another entity, and when he or she does so pursuant to an overarching agreement as a result of which a third party obtains an interest in the accommodation, then a sale has occurred for purposes of TOPA. As we explained in Waterside, our earlier decisions in Gomez, in which we concluded that the transaction constituted a potential sale, and in Alcazar, in which we reached a contrary conclusion, illustrate the proper application of the analysis adopted in Waterside. In Gomez, we held that a transfer of absolute title to an apartment building from one wholly owned entity to a wholly owned subsidiary could constitute a sale if the transaction involved arm's length bargaining, and if it resulted in an agreement to sell 99% of the stock of the subsidiary to a third party in return for consideration of value. Gomez, 967 A.2d at 1283; see also Waterside, 2 A.3d at 1090 & n. 21 (discussing Gomez ). As we explained both in Gomez and in Waterside, Wallasey was inapposite in these circumstances because the entire transaction [meaning the transfer of absolute title from one subsidiary to another, followed by the sale of the transferee's stock] was contemplated by, and carried out in accordance with, the Stock Sale Agreement. Waterside, 2 A.3d at 1089 (quoting Gomez, 967 A.2d at 1284) (emphasis and bracketed language added in Waterside ). Thus, in Gomez and Waterside, both the initial transfer of absolute title to an entity controlled by the original owner and the subsequent transfer of 95% to 99% of the owner's interest to a third party occurred pursuant to an overarching agreement between the original owner and the third party. Under these circumstances, we held that the transfers in each case were sales (or, in Gomez, a potential sale). In Alcazar, on the other hand, the court held that the initial transfer of a rental accommodation from an individual owner to an entity controlled by that same owner, as part of a multi-step transfer, did not constitute a sale. As we explained in Alcazar and reiterated in Waterside, the dispositive difference between Alcazar and Gomez, in each of which the transaction included initial transfers of the apartment buildings to entities controlled by the original owners, was the lack of an overarching agreement [in Alcazar ] pursuant to which the parties undertook to complete the complex transaction that resulted in the transfer of ownership. Waterside, 2 A.3d at 1089 & n. 17. Alcazar, 981 A.2d at 1207 n. 3. We explained that Alcazar differed from Gomez because in Gomez, the. . . transaction was contemplated by, and carried out in accordance with, the Stock Sale Agreement, which spelled out the obligations of the parties. Id. at 1089. The result in Waterside is consistent with the authorities holding that courts should treat transactions as a whole and should avoid exalting form over substance. We agree with amicus curiae that the Waterside decision limit[s] the opportunities for gamesmanship  in which sellers of rental housing endeavor to devise increasingly ingenious mechanisms for circumventing [15] the Council's clear intent to protect tenants' opportunities to purchase their rental accommodations before owners may sell them.
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.