August 30, 2013
Florida R&D Fund Investors, LLC
Florida BOCA/Deerfield R&D Investors, LLC, et al.
Submitted: May 10, 2013
Plaintiff Florida R&D Fund Investors, LLC ("R&D"), a member of Defendant Florida BOCA/Deerfield R&D Investors, LLC (the "Joint Venture"), brought a books and records action under 6 Del. C. § 18-305 and the Joint Venture's limited liability company agreement. R&D seeks two categories of books and records that are in the possession and control of Defendant HDG Mansur Investment Services, Inc. ("Investment Services"), which, until recently, managed the Joint Venture's assets. R&D offers two reasons to support its inspection requests: appointing a new asset manager and investigating and determining the extent of possible mismanagement at the Joint Venture.
The primary question focuses on whether this Court has jurisdiction over Investment Services, an Indiana corporation, under either Delaware's long-arm statute or its Limited Liability Company Act (the "LLC Act"). Whether the LLC Act confers jurisdiction will depend upon whether Investment Services is a manager of the Joint Venture or whether its asset management activities constitute material participation in the management of the Joint Venture.
Defendants, other than the Joint Venture, have moved to dismiss under Court of Chancery Rules 12(b)(2) and 12(b)(6).
R&D holds an approximately 87% interest as a member in the Joint Venture. The Joint Venture, a Delaware limited liability company, "was formed to invest in, own, develop, and operate a real estate project" in Florida (the "Project"). The other Defendants (the "HDG Defendants") are companies affiliated with, and under the control of, Harold D. Garrison ("Garrison"). The HDG Defendants' primary location is Indianapolis, Indiana.
Defendant HDG Florida Research, LLC ("HDG Florida") and Defendant HDG Florida Research II, LLC ("HDG Florida II") are Delaware limited liability companies and members of the Joint Venture (collectively, the "HDG Members"). The HDG Members hold an approximately 13% interest in the Joint Venture. Defendant HDG Mansur Properties, Inc. ("HDG Properties") is an Indiana corporation. Defendant HDG Mansur Capital Group, LLC ("HDG Capital") is a Delaware limited liability company. HDG Capital guaranteed certain obligations of the HDG Members and HDG Properties. Investment Services, until its recent termination, served as asset manager for the Joint Venture and its subsidiary companies (collectively, the "Group Companies").
B. The Relevant Agreements
1. The LLC Agreement
The Joint Venture was created in March 2008 and is governed by the LLC Agreement,  which allows for the books and records of the Joint Venture to be maintained by a third party selected by the Board of Directors. Section 5.3 of the LLC Agreement provides that:
• The Board of Directors shall cause to be kept full and accurate records of the Group Companies' affairs.
• The Group Companies' books and records, this Agreement and the Certificate of Formation and all amendments thereto, the Master Lease Financing Documentation, and all other records required to be maintained by [the Joint Venture] and the other Group Companies pursuant to the LLC Act shall be maintained or caused to be maintained by the Board of Directors and shall be made available to the Members at a reasonable location.
• The Members, their internal staff and their counsel and accountants shall have the right at any time during normal business hours to inspect and audit all such books and records, to make copies thereof and to take extracts therefrom.
• The Board of Directors shall ensure that all deeds, Leases, contracts, title matters, surveys and other documentation, records and financial information relating to the ownership, maintenance, development and sale of Properties are maintained in safekeeping and organized and accessible to the Members.
• The Board of Directors shall promptly deliver to the Members, upon request, and at the expense of [the Joint Venture], a copy of the information required to be maintained by the LLC Act and this Agreement.
2. The Asset Management Agreement
The LLC Agreement anticipated that Investment Services would provide asset management services for the Group Companies. In March 2008, the Joint Venture and Investment Services executed the Asset Management Agreement,  which was then incorporated into the LLC Agreement.
Investment Services was required under the Asset Management Agreement to "advise [the Joint Venture] and the other Group Companies on how best to preserve and enhance the asset value of the Properties and to provide asset management services to the Joint Venture and the other Group Companies." The Asset Management Agreement states that Investment Services "is an independent contractor and is not acting as agent, partner, joint venturer, lessee, coprincipal, or associate of any Group Company or any person claiming by, through or under any Group Company, in the conduct of any Group Company's businesses."
Although R&D characterizes Section 3 of the Asset Management Agreement as imposing an "obligation" on Investment Services to maintain the books and records of the Joint Venture,  the Defendants instead contend that there is no such obligation, because Section 3: "(1) only addresses certain financial reporting requirements which are not at issue in this case; (2) does not mention maintenance of the Joint Venture's books and records; [and] (3) does not cite to or reference the LLC Agreement's Section 5.3 books and records clause."
The parties do not dispute that, to the extent of R&D's knowledge, the two categories of books and records sought by R&D are currently in the possession of Investment Services,  and physically located in either Indianapolis, Indiana or Boca Raton, Florida.
3. The Suspension Agreement
In 2009, HDG Florida II became unable to fund its proportionate share of additional capital required by the LLC Agreement. As a result, on October 9, 2009, the Joint Venture and Investment Services entered into a suspension agreement (the "Suspension Agreement"), under which, if R&D made an excess payment to fund a deficient capital contribution by the HDG Members, then the payment of the management fee under the Asset Management Agreement to Investment Services would be suspended.
The Suspension Agreement further allowed R&D to terminate the Asset Management Agreement on behalf of the Joint Venture upon the failure of HDG Florida II to make certain capital contributions when due. After HDG Florida II failed to make several such contributions when due, R&D, on January 17, 2013, terminated the Asset Management Agreement.
C. Plaintiff's Demand for Books and Records
R&D decided to exercise its right to inspect the Joint Venture's books and records in February 2013 after it learned of: (i) an e-mail chain suggesting an unauthorized payment to Investment Services by the Joint Venture, and (ii) an action filed in the United States District Court for the Southern District of New York against Investment Services by some of its other fund clients concerning allegedly improper payments.
First, R&D alleges that it discovered emails among officers and employees of the HDG Defendants suggesting that Investment Services was being paid fees to which it was not entitled and that the HDG Defendants were attempting to conceal the payments from the Joint Venture's auditors.
In a December 1, 2011 email chain, Etter wrote to Garrison: "ok on the 200K total from FAU [a project]. we will be holding paying some things so will need back, " to which Garrison responded: "tell Brian [Reeve]." Reeve then informed Garrison: "[w]ith suspension in place, this will get caught with subsequent events in audit." Reeve also wrote to Gabbert: "[n]ow we need to make sure we get it paid back prior to [the Joint Venture's auditor] asking for subsequent event cash activity." Gabbert's February 1, 2012, email on the subject of "FAU [the Project] $200k" to Reeve asked: "Did Harold [D. Garrison] have any feedback on your suggestion to hide part of this in accum[ulated] depr[eciation]?" Reeve responded, "Go forward with that."
Second, R&D learned that an action had been filed in the United States District Court for the Southern District of New York against Investment Services, alleging that it had made improper payments to itself in connection with an unrelated fund management agreement.
On February 19, 2013, R&D delivered a demand for the Joint Venture's books and records to the Joint Venture, the HDG Members, HDG Properties, and Investment Services. The HDG Defendants allowed copies to be made of some of the Joint Venture's books and records, but they did not grant access to all of the books and records requested by R&D.
On February 27, 2013, R&D sent a supplemental demand seeking the remaining books and records to which it had not been granted access (the "February 27 Demand") and, in particular, sought the following:
1. All email or other internal or external correspondence regarding any payments made to HDG Mansur Investment Services, LLC, or any of its affiliates, or any officers, directors, employees or agents of the foregoing;
2. Related party listing, transaction detail and support for October 1, 2008 – January 31, 2013.
On February 28, 2013, Investment Services responded by stating that it would not provide R&D with emails or correspondence regarding payments made to itself or to its affiliates, officers, directors, employees, or agents. Investment Services also refused to make available to R&D a related party listing or to provide an account receivable ledger beyond its tenant ledgers.
R&D seeks two categories of books and records now in the possession of Investment Services under 6 Del. C. § 18-305 and Section 5.3 of the LLC Agreement. The HDG Defendants, in moving to dismiss under Court of Chancery Rules 12(b)(2) and 12(b)(6), assert that: (i) this Court does not have personal jurisdiction over Investment Services or HDG Properties; (ii) there is no statutory or contractual obligation binding Investment Services or any of the other HDG Defendants under 6 Del. C. § 18-305 or Section 5.3 of the LLC Agreement that entitles R&D to inspect the books and records it seeks; and (iii) R&D has not articulated a proper purpose to justify the production of the two categories of books and records at issue. At the core of this dispute is the right of a member of a limited liability company to inspect books and records not held by the limited liability company.
A. Standard of Review
1. Court of Chancery Rule 12(b)(2)
When confronted with a motion to dismiss challenging the Court's personal jurisdiction, the plaintiff bears the burden of showing a basis for the Court's exercise of jurisdiction over a defendant. The Court conducts "a two-step analysis to determine whether the exercise of personal jurisdiction over a nonresident is appropriate." First, the Court considers "whether 'Delaware statutory law offers a means of exercising personal jurisdiction' over the nonresident defendant." Second, "after establishing a statutory basis for jurisdiction, the [C]ourt must determine 'whether subjecting the nonresident to jurisdiction in Delaware violates the Due Process Clause of the Fourteenth Amendment.'" The due process analysis involves the Court deciding "as a matter of fact, whether the defendant had enough connection with the state so that it does not offend traditional notions of fair play and justice for the Court to exercise jurisdiction."
In deciding a Rule 12(b)(2) motion to dismiss, the Court "may consider the pleadings, affidavits, and any discovery of record." If no evidentiary hearing has been held, plaintiffs only need to make a prima facie showing of personal jurisdiction,  and "the record is construed in the light most favorable to the plaintiff."
2. Court of Chancery Rule 12(b)(6)
On a motion to dismiss for failure to state a claim, the Court:
should accept all well-pleaded factual allegations in the Complaint as true, accept even vague allegations in the Complaint as "well-pleaded" if they provide the defendant notice of the claim, draw all reasonable inferences in favor of the plaintiff, and deny the motion unless the plaintiff could not recover under any reasonably conceivable set of circumstances susceptible of proof.
In deciding a Rule 12(b)(6) motion to dismiss, the Court may review documents outside the pleadings if "the document is integral to [the] plaintiff's claim and incorporated in the complaint." The Court "need not 'accept conclusory allegations unsupported by specific facts or . . . draw unreasonable inferences in favor of the non-moving party, '" but the Court will deny a Rule 12(b)(6) motion to dismiss "as long as there is a reasonable possibility that a plaintiff could recover."
B. Jurisdiction over Investment Services
Investment Services is an Indiana corporation with an Indiana address.The two categories of books and records sought by R&D were created, maintained, and held by Investment Services in either Indiana or Florida. R&D does not allege that the books and records were ever maintained or located in Delaware.Although Investment Services entered into the Asset Management Agreement with the Joint Venture, "[a] non-resident's entering into a contract with a domicile of the forum State has been held insufficient, in and of itself, to permit the exercise of personal jurisdiction over the [non-resident]." The Asset Management Agreement provides for the management of assets based in Florida, and the agreement is to be governed by New York law. R&D bears the burden of establishing a basis for the Court's exercise of jurisdiction over Investment Services. R&D argues that the Court may exercise jurisdiction over Investment Services under Delaware's long-arm statute, 10 Del. C. § 3104, and the service of process provisions of the LLC Act, 6 Del. C. § 18-109(a)(i) and (ii). It further contends that the exercise of jurisdiction is consistent with due process.
1. The Long-Arm Statute
R&D invokes Delaware's long-arm statute to obtain jurisdiction over Investment Services. R&D argues that Investment Services is "subject to the personal jurisdiction of this Court under 10 Del. C. § 3104(c)(1)" because of its "active participat[ion] in the management of the Joint Venture." Under that subsection of Delaware's long-arm statute, the Court may exercise jurisdiction over a nonresident if "the nonresident transacted some sort of business in the state, and . . . the claim being asserted arose out of that specific transaction." Merely participating in the management of a Delaware entity—with no allegation of "extensive and continuing contacts with Delaware"—does not subject a party to this Court's long-arm jurisdiction. There simply is no allegation in the Complaint that Investment Services took any actions, let alone actions giving rise to R&D's claims, inside the State of Delaware. The books and records that it maintained and the assets that it managed are located either in Florida or Indiana. The Complaint alleges nothing about what Investment Services did in Delaware with respect to the Joint Venture, and there is no allegation that Investment Services was involved in the formation of the Joint Venture or of any of the other related Delaware entities. Accordingly, the Court declines to exercise jurisdiction over Investment Services under the long-arm statute.
2. Section 18-109 of the LLC Act
Section 18-109 of the LLC Act authorizes service of process on persons serving as managers of Delaware limited liability companies
in all civil actions or proceedings brought in the State of Delaware involving or relating to the business of the limited liability company, or a violation by the manager . . . of a duty to the limited liability company or any member of the limited liability company, whether or not the manager . . . is a manager . . . at the time suit is commenced.
Service as a manager "constitutes such person's consent to the appointment of the registered agent of the limited liability company (or, if there is none, the Secretary of State) as such person's agent upon whom service of process may be made as provided in this section." Managers of Delaware limited liability companies are thus deemed to have consented to the jurisdiction of the Court in litigation arising out of their service as managers.
For purposes of service of process, "manager" refers:
(i) to a person who is a manager as defined in § 18-101(10) of [the LLC Act] and
(ii) to a person, whether or not a member of a limited liability company, who, although not a manager as defined in § 18-101(10) of [the LLC Act], participates materially in the management of the limited liability company.
R&D argues that the Court may exercise jurisdiction over Investment Services under either subsection.
a. Section 18-109(a)(i)
Section 18-109(a)(i) identifies the managers of a Delaware limited liability company by reference to Section 18-101(10), which defines a manager as "a person who is named as manager of a limited liability company in, or designated as a manager of a limited liability company pursuant to, a limited liability company agreement or similar instrument under which the limited liability company is formed." The LLC Agreement provides in Section 6.1 that "the management of the business and affairs of the [Joint Venture] shall be vested in a board of directors of the [Joint Venture]." Section 6.1 further states that "[f]or the purposes of the LLC Act, the management of the [Joint Venture] shall be vested in a Manager as defined in the LLC Act and not in the Members" and that "[t]he Manager shall consist of the Board of Directors." Therefore, under Section 18- 109(a)(i), the Joint Venture's manager is the Board of Directors. Because Investment Services is not listed in the LLC Agreement as a member of the Joint Venture's Board of Directors, it may not be considered a manager of the Joint Venture for the purposes of either Section 18-109(a)(i) or Section 18-101(10).
b. Section 18-109(a)(ii)
Section 18-109(a)(ii) of the LLC Act also provides that "a person, whether or not a member of a limited liability company, who, although not a manager as defined in § 18-101(10) of this title, participates materially in the management of the limited liability company" can nonetheless be served with process as a manager under Section 18-109(a). R&D argues that given Investment Services' broad authority to act on behalf of the Joint Venture under the Asset Management Agreement, and the fact that it thereby was to run the day-to-day operations of the Joint Venture, Investment Services can be said to have "participated materially" in the management of the Joint Venture.
The Asset Management Agreement specifically provides that Investment Services "is an independent contractor and is not acting as agent, partner, joint venturer, lessee, coprincipal, or associate of any Group Company [including the Joint Venture] or any person claiming by, through or under any Group Company, in the conduct of any Group Company's businesses." As the HDG Defendants note, the fact that the Asset Management Agreement specifies Investment Services' role as an "independent contractor, " and that it is "not acting as agent, " detracts from R&D's contention that Investment Services had participated materially in the management of the Joint Venture.
Further, under the Asset Management Agreement, the role of Investment Services was confined to acting "as the asset manager and to provide the [listed] Services with respect to the Properties, Assets and Business in a manner consistent with the Business Plan." The management of the underlying assets of an LLC is analytically distinct from the management of the LLC itself for the purposes of Section 18-109(a)(ii). Under the Asset Management Agreement, the discretion and decision-making ability of Investment Services was contractually (and materially) constrained: for instance, Investment Services (i) had to "act in material compliance with the Business Plan and the applicable Annual Budget, " and (ii) could not enter into any "sale, assignment, transfer, encumbrance, hypothecation, or pledge of any Property or other material asset of any Group Company."
The degree of involvement in a limited liability company that constitutes material participation in its management has not been defined with precision.Here, the Asset Management Agreement does give Investment Services relatively broad authority to engage in most of the operation and supervision of the Joint Venture. Yet, the Complaint does not allege—especially in a non-conclusory fashion—that Investment Services actually engaged in any of its contractually authorized conduct. Merely having the capacity to participate in management does not constitute material participation in management. The Complaint offers very little, if anything, about Investment Services' actual role in the operation of the Joint Venture. There is an allegation that it maintains the books and records, but that alone does not constitute material participation in the management, especially in light of the designation of the board of directors as the Joint Venture's manager. There are other incidental steps taken by Investment Services that are alleged in the Complaint, but those allegations do not demonstrate the control or decision-making role necessary to satisfy the statutory standard for personal jurisdiction. In short, the Complaint does not allege that Investment Services materially participated in the management of the Joint Venture and, accordingly, jurisdiction may not be exercised over it by virtue of Section 18-109(a)(ii). R&D has not met its burden to make a prima facie showing of a statutory basis for personal jurisdiction over Investment Services under either Delaware's long-arm statute or Section 18-109 of the LLC Act. Therefore, R&D's claim against Investment Services must be dismissed under Rule 12(b)(2) for lack of personal jurisdiction.
C. Jurisdiction over HDG Properties
As with Investment Services, R&D bears the burden of making a showing that the Court has jurisdiction over HDG Properties relating to its books and records request. R&D's sole allegation is that HDG Properties consented to the jurisdiction of the Delaware courts in the LLC Agreement "[w]ith respect to any legal actions or proceedings arising out of or in connection with [the LLC] Agreement." As R&D correctly notes, "[a] party may expressly consent to jurisdiction by contract, " and "[i]f a party properly consents to personal jurisdiction by contract, a minimum contacts analysis is not required."
R&D's claim here has a definite nexus to the LLC Agreement. That agreement confers certain rights upon R&D to inspect the Joint Venture's books and records. It may be that R&D has no claim against HDG Properties, but that is an issue to be reviewed under Court of Chancery Rule 12(b)(6), not Rule 12(b)(2). Thus, the Court does have jurisdiction over HDG Properties because of its contractual consent.
D. Does the Complaint State a Claim Against the HDG Defendants Other than Investment Services?
R&D has not identified any source—either the LLC Act or the LLC Agreement—for a right to inspect records allegedly held by other members (or contracting parties) of the Joint Venture. R&D has not alleged that any of the HDG Defendants, except for Investment Services, has possession or control of the books and records which it seeks. It has not alleged, even if all reasonable inferences are drawn in its favor, that the LLC Act entitles it to inspect the books and records of other members or parties affiliated with other members. Thus, R&D has failed to allege any "reasonably conceivable" collection of facts upon which it could prevail against these other HDG Defendants. It necessarily follows that R&D's inspection claims against these HDG Defendants must be dismissed under Rule 12(b)(6) because of R&D's failure to state a claim upon which relief can be granted.
For the foregoing reasons, the Court does not have personal jurisdiction over Investment Services. The Complaint does not state a claim upon which relief can be granted against the other HDG Defendants. Thus, the motion to dismiss will be granted as to all of the HDG Defendants.
IT IS SO ORDERED.
Very truly yours,
John W. Noble J.