Limiting Developers’ Liability: Maintaining the Integrity of a Special Purpose Entity’s Existence
May 13, 2020
Developers frequently use special purpose entities (“SPEs”), like limited partnerships and limited liability companies, to insulate themselves from liability. That insulation can be lost if developers disregard the SPE’s very existence by taking actions in the developer’s name rather than in the name of the SPE. A recent CEQA decision by a California court of appeal provides an extensive list of things that developers shouldn’t do if they want to maintain the protection provided by the use of an SPE. In short, after the SPE lost a CEQA case, the opponents were awarded nearly $150,000 in attorneys fees against a developer who too often did things in his own name, instead of in the name of his SPE.
The court of appeal’s opinion upheld the trial court’s decision directing the City of Agoura Hills to set aside its approval of a developer’s project. (Save the Agoura Cornell Knoll v. City of Agoura Hills.) As part of that decision, Gelfand and his SPE were found to be liable for their share of the nearly $150,000 in attorneys fees. The SPE is the sole owner of the property located at the project site. Gelfand, as an individual, was a limited partner of the SPE.
A court may award attorneys fees to a successful party against opposing parties in actions that have resulted in the enforcement of an important right affecting the public interest. The defendant in a typical lawsuit seeking to set aside the approval of a project is the city or county that approved the project. The developer is named as a real party in interest.
Normally, it would be the SPE which took all actions in connection with the approval of a project. Unfortunately, Gelfand did too many things in his own name. A representative of the SPE wrote to the City requesting that the project be held until Gelfand decided how to proceed. The letter also stated that Gelfand was “the owner of the property for the past six years,” and had “diligently been designing a project intended to meet the City’s objectives[.]” Later on, Gelfand personally wrote the City, requesting that the hold be removed. Throughout this correspondence, Gelfand identified himself as the owner of the property, and listed his and the SPE’s names as the project’s applicants. The City Council’s entitlement resolutions for the project all named Gelfand as the sole project applicant. Finally, the opponents alleged in their pleadings that Gelfand and his SPE were the “legal and equitable owners of the Project Site and the Applicants for the entitlements being challenged in this case.” Gelfand and his SPE admitted to these allegations. Gelfand never disputed his status as a project applicant or as a real party in interest.
The case highlights important points developers should consider to better protect themselves from liability.
During the approval process, individual developers should ensure that all documents are in the name of, and refer to, the SPE. This includes using the SPE’s letterhead for all communications. If the individual developer is an officer of the SPE’s general partner or managing member, he or she should ensure that all documents reflect that he or she is signing on behalf of the general partner or managing member as an officer. In short, nothing should be done in the individual developer’s own name.
If the jurisdiction’s entitlement resolutions or ordinances name the individual developer, every effort should be made to correct the mislabeling as soon as possible. The same thing holds true if the individual developer is named in any lawsuit.
Following these straight forward rules should mean that any attorneys fees resulting from litigation will be awarded against the SPE and not the individual developer.
For additional information on how developers can protect themselves from liability throughout the development process, please contact a member of Cox Castle’s Land Use team.