Opinion ID: 614511
Heading Depth: 1
Heading Rank: 3

Heading: The lack of an intent to join together

Text: Culbertson directs our attention to the conduct of the parties in execution of the partnership agreement's provisions, [65] and Beal and Montgomery's conduct after Southgate's formation demonstrates that they did not truly intend to join together with Cinda in the present conduct of a business. Concededly, Beal and Montgomery's intent at the time they acquired the NPLs was to conduct the business of realizing value from the loans. But their subsequent conduct discloses no intent to conduct that business as a partnership with Cinda. Most damning is their response to Cinda's shortcomings as a loan servicer shortcomings that, as noted above, were the primary cause of Southgate's failure to turn a profit on its NPL portfolio. By late 2003, with the net collection rate on the portfolio languishing at less than 1.1 percent, these shortcomings had become apparent, and Montgomery retained an attorney to help him develop a strategy for improving collections. The attorney wrote a letter to Cinda complaining about its servicing efforts. Cinda responded by threatening to disclose the Southgate transaction to the IRS. Montgomery's attorney immediately apologized to Cinda, and he made no further efforts to goad Cinda into improving its performance as the loan servicer. This sequence of events decisively gives the lie to the notion that Montgomery and Beal intended to jointly conduct a business with Cinda. Without an improved collection rate, Southgate's profit potential was doomed. Cinda's repeated, willful breaches of the LSA and the Southgate Operating Agreement had put Beal and Montgomery to a decision: they could preserve the business but risk the tax benefit, or they could sacrifice the business and preserve the tax benefit. With no hesitation, they charted the latter course. Their decision manifests an unmistakable intent to forgo the joint conduct of a profit-seeking venture. [66] Beal and Montgomery's outside dealings with Cinda also shine an illuminating light on their intentions within Southgate. In late 2003, around the same time that Cinda's shortcomings as a servicer became so egregious that Montgomery began contemplating legal action, Beal and Montgomery entered into another NPL transaction with Cinda. As the district court delicately put it, It is unclear why they would return to the same unprofitable NPL trough after their difficulty with Cinda's servicing of the Southgate portfolio, other than the anticipated tax benefits. Armed with first-hand information that a second partnership with Cinda had no chance of being profitable, they nonetheless formed such a partnership. If Beal and Montgomery's intent in forming Southgate had been to jointly conduct a legitimate business, they would not have entered into a second, identically structured partnership with Cinda just as Southgate's legitimate business was foundering. Cinda's post-formation conduct is similarly incompatible with its status as a Southgate partner. Rather than an intent to join together with Beal and Montgomery to pursue profitable business activity, Cinda's actions exhibit an intent to sabotage and undermine Southgate's efforts to make a profitable business out of servicing and collecting on its portfolio of NPLs. Southgate's plan for turning a profit on the NPLs hinged on identifying a few high-value nuggets within the portfolio and collecting on those loans. If Cinda had been acting as a true partner, it would have concentrated its most aggressive collection efforts on these loans. Instead, Cinda repeatedly sold off the NPLs that Southgate had identified as nuggets, deliberately thwarting Southgate's profit potential. Cinda did not execute or abide the partnership agreement as a true partner would have. In addition, Cinda did not even profess to view Southgate as a true partnership. In its public announcement of the Southgate transaction, Cinda declared that it had completed a package sale of bad debts. Regulatory approval of the transaction was predicated on Cinda's representation that it would retain a 10 percent interest in Southgate only symbolically. And from Cinda's perspective, its interest in Southgate was purely symbolic. Cinda had received a $19.42 million capital-account credit when it contributed the NPLs to Southgate. Just one month later, Beal paid Cinda $19.41 million to acquire an interest in Southgate. Although on paper Cinda only sold 90 percent of its interest in Southgate to Beal, in real dollars it received 99.93 percent of the value of its loans. Cinda also did not participate in major partnership decisions. When Southgate was restructured and its operating agreement amended in connection with the GNMA basis-build, Cinda did not make an additional, matching capital contribution, sign the restructuring agreement or the amended operating agreement, or receive notice that its interest in Southgate had been diluted. In short, the district court's pertinent findings of fact establish that Cinda, Beal, and Montgomery acted in a manner that was inconsistent with an intent to come together in the joint conduct of business.