IN THE CIRCUIT COURT FOR THE STATE OF OREGON COUNTY OF MULTNOMAH

Transcription

1 //01 ::00 AM 1CV IN THE CIRCUIT COURT FOR THE STATE OF OREGON COUNTY OF MULTNOMAH THE ESTATE OF ALEXANDER T. CALDERWOOD by its personal representative Thomas B. Calderwood, v. Plaintiff, ACE HOTEL PORTLAND LLC, an Oregon limited liability company; DOUGLAS E. HERRICK, an individual; WADE WEIGEL, an individual; and JACK BARRON, an individual, Defendants. No. COMPLAINT (Declaratory Judgment, Breach of Contract) Claim Amount: $,, Filing Fee: $ Source: ORS 1.(1)(d) CLAIM NOT SUBJECT TO MANDATORY ARBITRATION JURY TRIAL DEMANDED 1 SUMMARY OF THE COMPLAINT 1. Alex Calderwood was the businessman and visionary behind the Ace brand of boutique hotels. He grew the company from a flophouse in a rundown part of Seattle to a successful international hotel chain, which includes the Ace Hotel in Portland, Oregon. Alex died tragically on November 1, Complaint Page 1 00\v1

2 Upon his death, Alex ceased to be a member of defendant Ace Hotel Portland LLC ( Ace Portland ), but his estate (the Estate ) nevertheless retained Alex s economic interest in Ace Portland.. In the wake of Alex s death, defendants have wrongfully sought to extinguish and buy out the Estate s interest in Ace Portland for the lowest possible price. Indeed, just three weeks after Alex s death, Alex s former business partners in Ace Portland defendants Herrick, Weigel, and Barron purported to expel Alex from Ace Portland (necessarily finding Alex in default for having died) and demanded to buy out Alex s shares. Defendants have demanded to buy Alex s shares at an unreasonably low price based on an appraisal that fails to meet Appraisal Institute standards applicable to appraisals performed by MAI appraisers. The appraisal s many shortcomings include using a capitalization rate that lacks credibility and failing to reconcile the appraisal s radically higher capitalization rate and much lower per-room value with available market data.. The Estate, through its personal representative, Alex s father Thomas Calderwood, has brought this suit for: (1) a declaration that the Estate is not obligated to sell Alex s interest in Ace Portland, or () in the alternative, damages because defendants breached their contract, including the duty of good faith and fair dealing, by offering to buy Alex s shares based on a defective appraisal and by failing to make the first payment on time. PARTIES. Plaintiff is the Estate of Alexander T. Calderwood. This action is brought on behalf of the Estate by Thomas Calderwood, as duly-appointed Complaint Page 00\v1

3 personal representative of the Estate. Thomas Calderwood is the sole beneficiary of the Estate. The Estate is being probated in King County, Washington.. Defendant Ace Hotel Portland LLC ( Ace Portland ) is an Oregon limited liability company that runs the Ace Hotel in Portland, Oregon. Until his death, Alex Calderwood was one of the four members of Ace Portland.. Defendant Douglas Herrick is a resident of Seattle, Washington and a member of Ace Portland.. Defendant Wade Weigel is a resident of Seattle, Washington and a member of Ace Portland.. Defendant Jack Barron is a resident of Portland, Oregon and a member of Ace Portland. JURISDICTION AND VENUE. Jurisdiction over defendants Ace Portland and Barron is proper because they reside in Portland, Oregon. Jurisdiction over defendants Herrick and Weigel is proper because this case arises out of their contacts with Ace Portland and the Ace Hotel in Portland, Oregon.. Venue is proper in Multnomah County because this dispute arises out the parties contacts with the Ace Hotel located in Multnomah County. Complaint Page 00\v1

4 BACKGROUND FACTS A. After turning a Seattle flophouse into a successful hotel in Seattle, Alex Calderwood expanded the Ace brand to Portland.. Alex Calderwood has been described as a business genius. A Washington native, he parlayed his affable nature, work ethic, and sense of style into multiple successful business ventures. 1. For example, in 1 Alex and his friend, defendant Weigel, had an idea to create a rock and roll barber shop. The next day, armed with $1,000, they went looking for spaces. Rudy s Barbershop was born. Today there are 1 Rudy s Barbershop locations in Seattle, Portland, New York, and Los Angeles. 1. Alex founded other successful businesses: a marketing company, a promotions company, a design firm, even a nightclub. But his greatest success was yet to come. 1. In 1, Alex and Weigel were offered a lease on a -room flop house in the run-down Belltown area of Seattle. They took it, complete with its existing tenants, and renovated it, with Alex bringing his unique style to the project. According to Alex s 01 New York Times obituary, [t]he thenpioneering blend of reclaimed furniture and touches like street art, turntables in rooms and low prices became Mr. Calderwood s signature and was widely imitated. The name Ace was chosen because it represented both the high and the low card in a deck, reflecting the principles Alex incorporated into his hotels. Complaint Page 00\v1

5 Alex eventually opened additional Ace hotels in New York, Palm Springs, London, and Los Angeles. But his first expansion was to open the Ace Hotel in Portland, Oregon. 1. In 00, Alex, along with defendants Weigel, Herrick, and Barron, formed defendant Ace Portland to develop, position, market and manage the Ace Hotel in Portland, Oregon. 1. Alex, Weigel, Herrick, and Barron entered into a limited liability company operating agreement, which they later amended. The operative version of this agreement is the Amended and Restated Limited Liability Company Operating Agreement of Ace Hotel Portland LLC dated March 1, 00 (the Ace Portland Agreement ). 1. B. The Ace Portland Agreement does not provide for buying out Alex s shares. 1. Under the Ace Portland Agreement, Alex, Weigel, Herrick, and Barron were equal members, and each owned % of Ace Portland. 0. The Ace Portland Agreement provides that a member who dies immediately ceases to be a member: Section.1 Dissociation of a Member. A Member ceases to be a Member upon the happening of any of the following events: (d) In the case of a Member who is a natural Person, the death of the Member or the entry of an order by a court of competent Complaint Page 00\v1

6 jurisdiction adjudicating the Member incompetent to manage the Member s personal estate. Complaint Page 00\v1 1. The Ace Portland Agreement does not provide for the buy-out of the membership interests of former members who have died.. The Ace Portland Agreement s buy-out provisions apply only after a member has defaulted and been expelled by the other members.. The expulsion and buy-out provisions do not apply to persons who cease being members because of death.. When applicable, the buy-out provision of the Ace Portland Agreement allows for a 0% discount and requires that the first payment be made within 0-days after the first anniversary of the transfer of the membership interest.. The Ace Portland Agreement provides for the prevailing party to recover attorney fees. C. Alex died unexpectedly, and defendants took advantage by invoking the inapplicable buy-out provision and commissioning an unreasonably low appraisal of Ace Portland. years old.. Alex died in the Ace Hotel in London on November 1, 01. He was. Just three weeks after Alex s death, on December, 01, defendants counsel wrote to the Estate s probate counsel announcing that, by dying, Alex

7 had transferred his interest in Ace Portland without proper permission, thereby breaching the Ace Portland Agreement. Counsel further stated that as a result of the breach, the remaining members had elected to expel Alex as a member, and exercise their option to purchase Alex s interest at a 0% discount to the appraised value.. Defendants counsel sent another letter on February, 01, which attached an appraisal dated January, 01, purporting to value Ace Portland at $,00,000, or $,000 per room, and calculated the discounted price defendants would pay for Alex s % interest to be $1,0,000. The appraisers based this valuation on using a 1.% capitalization rate.. The Estate s probate counsel responded on April, 01, making three points: First, defendants could not expel Alex as a member of Ace Portland since, under the Ace Portland Agreement s terms and Oregon law, Alex had already ceased to be a member upon his death. Second, the Estate s probate counsel pointed out that, even if defendants had the right to buy-out the estate, they had mis-calculated the date their first payment would be due. Third, the Estate s probate counsel noted that the appraisal made unwarranted and unjustified assumptions about risk to reach a valuation result that was far out of line with the market and that the appraisal s purported calculation of the capitalization rate contained a basic mathematical error: it mis-added numbers to reach the 1.% capitalization rate. The correct sum of the mis-added numbers was 1.%. 0. Defendants counsel responded on May 0, 01 with a revised appraisal. Using the 1.% capitalization rate, the appraisal valued Ace Complaint Page 00\v1

8 Portland at $,000,000, or $,00 per room, and calculated the value of Alex s interest at $1,00,000. The appraiser s 1% addition error in the capitalization rate alone had a $00,000 impact on the overall valuation of Ace Portland. 1. Aside from correcting the 1%-$00,000 mathematical error, the revised appraisal made no other changes and continued to make unjustified assumptions in calculating the value of Ace Portland, including: Using a base capitalization rate of.% a value at the extremeupper-end of the spectrum and out of line with the capitalization rates for comparable hotels; Increasing the base capitalization rate by 1% because Ace Portland s lease has a remaining term of 1 years despite Ace Portland also having an option for four ten-year renewals; Increasing the base capitalization rate by an additional.% based on supposed uncertainties related to affiliation and a change in control; Failing to justify the 1.% overall capitalization rate in light of market data showing sales of comparable hotels with much lower capitalization rates, including the Hotel Rose, which had actually sold for a % capitalization rate; and Failing to justify the $,00 price per room for Ace Hotel when comparable hotels had actually sold at much higher rates, including the Hotel Rose at $0,000 per room and the Hotel Modera at $,000 per room. Complaint Page 00\v1

9 Defendants May 0, 01 letter also contains an error based on the order of operations used to calculate the payment due to the Estate: Defendants included an amount distributed to the members in the value of Ace Portland, and then deducted the amount distributed from their calculation of the amount due to the Estate. This had the effect of increasing the amount to which the 0% discount was applied, resulting in a larger dollar-figure discount than was appropriate.. The revised appraisal fails to meet the standards of the Appraisal Institute applicable to appraisals prepared by MAI appraisers in the ways outlined above in paragraph 1, among others.. Other than changing the overall discount rate to 1.%, defendants made no further corrections to the first appraisal and insisted on proceeding with their purported buyout under the revised appraisal, along with their distribution miscalculation.. If defendants had the right to buy Alex s shares of Ace Portland, the first payment would have been due on December 1, 01.. Defendants failed to make any payment by December 1, 01.. Defendants nevertheless continue to insist that they have the right to buy Alex s shares of Ace Portland and to do so at a price based on the unreasonably low appraisal. Complaint Page 00\v1

10 The Estate has filed this suit seeking a declaration that it is not obligated to sell Alex s shares at all and retains Alex s % economic interest in Ace Portland, or, in the alternative, damages because defendants have breached the Ace Portland Agreement and the duty of good faith and fair dealing by using an unreasonably low appraisal that did not comply with the required standards, by failing to properly calculate their payments, and by failing to make the first payment on time. FIRST CAUSE OF ACTION (Declaratory Judgment). The Estate hereby incorporates the allegations in paragraphs 1 through by reference. 0. A present and justiciable controversy exists regarding whether defendants can force the Estate to sell Alex s membership interest to defendants. 1. The Ace Portland Agreement and Oregon law do not obligate the Estate to sell Alex s membership interest in Ace Portland to defendants.. Moreover, defendants have waived, or are estopped from invoking, any right they might otherwise have had to buy Alex s membership interest by failing to make the first payment by the contractual deadline.. Finally, defendants have breached their duty to act in good faith and deal fairly with the Estate by, among other things, basing their demand to Complaint Page 00\v1

11 purchase Alex s membership interest on an appraisal that failed to comply with applicable Appraisal Institute guidelines, including by failing to explain its use of an extremely high capitalization rate or reconciling its extremely low value with comparable market data.. The Estate is therefore entitled to a declaration that it is not obligated to sell Alex s membership interest in Ace Portland to defendants. SECOND CAUSE OF ACTION (Breach of Contract). The Estate hereby incorporates the allegations in paragraphs 1 through by reference.. Even if the Estate is somehow obligated to sell Alex s membership interest in Ace Portland to defendants, defendants have breached the Ace Portland Agreement, including their duty to act in good faith and deal fairly with the Estate.. Defendants have breached the Ace Portland Agreement and their duty to act in good faith and deal fairly with the Estate by failing to make timely payment, by miscalculating the payment to be made, and by basing the amount of payment on an appraisal that failed to comply with applicable Appraisal Institute guidelines, including by failing to explain its use of an extremely high capitalization rate or reconciling its extremely low value with comparable market data. Complaint Page 00\v1

12 A reasonable value for the Estate s interest in Ace Portland, reflecting the 0% discount, is at least $,,.. The Estate has been damaged by defendants breach in an amount to be proven at trial, but not less than $,,. 0. The Estate demands a jury trial of all issues so-triable. Complaint Page 1 00\v1

13 follows: PRAYER FOR RELIEF WHEREFORE, the Estate respectfully demands judgment as On its first cause of action, for judgment declaring that the Estate is not obligated to sell Alex s membership interest in Ace Portland; On its second cause of action, for judgment awarding damages in an amount to be proven at trial but not less than $,,; On both causes of action for its reasonable costs and attorney fees; And for such other and further relief as the Court may deem just and proper. DATED: May, 01 BALL JANIK LLP By: /s/ James T. McDermott_ James T. McDermott, OSB No. jmcdermott@balljanik.com Ciaran P. A. Connelly, OSB No. 1 cconnelly@balljanik.com Portland, Oregon Phone: 0.. Fax: 0.. Trial Attorney: James T. McDermott Attorneys for Plaintiff the Estate of Alexander T. Calderwood Complaint Page 1 00\v1