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Gatz Properties LLC v. Preston

Superior Court of Delaware, New Castle

April 15, 2014

GATZ PROPERTIES LLC, et al., Plaintiffs,
v.
THOMAS P. PRESTON, ESQ., et al., Defendants.

Submitted: January 6, 2014

Upon Defendants Thomas P. Preston, Esquire, Steven L. Caponi, Esquire and Blank Rome LLP's Motion to Dismiss

Upon Defendants Thomas P. Preston, Esquire, Steven L. Caponi, Esquire and Blank Rome LLP's Motion to Strike Peconic Bay Golf LLC, as a Party.

Kevin William Gibson, Esquire, Gibson & Perkins, P.C., Wilmington, Delaware, Attorney for Plaintiffs.

Joseph R. Slights, III, Esquire, Morris James, LLP, Wilmington, Delaware, and John G. Harkins, Jr., Harkins Cunningham LLP, Philadelphia, Pennsylvania Attorneys for Defendants.

Eric M. Davis Judge

Introduction

This is a legal malpractice action brought by Plaintiffs William Gatz, Gatz Properties LLC ("Gatz Properties") and Peconic Bay Golf LLC ("Peconic Bay")[1] against Defendants Thomas P. Preston, Esq., Ronald J. Fisher, Esq., Steven L. Caponi, Esq., Millcrest Law LLP ("Millcrest Law") and Blank Rome LLP ("Blank Rome"). This action arose out of Blank Rome's representation of Plaintiffs in connection with transactions and litigation surrounding Gatz Properties' acquisition of a long-term lease of a golf course from Peconic Bay.

In their Second Amended Complaint (the "Complaint"), Plaintiffs allege seven (7) causes of action based in negligence and legal malpractice. Now before the Court is (i) the Motion to Dismiss filed by Defendants Thomas P. Preston, Esquire, Steven L. Caponi, Esquire and Blank Rome (collectively, the "Moving Defendants"), and (ii) Defendants' Motion to Strike Peconic Bay as a party (the "Motion to Strike"). For the reasons stated in this Opinion, the Motion to Dismiss is GRANTED in part with leave to amend and GRANTED in part without leave to amend, and the Motion to Strike is GRANTED.

FACTUAL BACKGROUND

The following is the factual background of this action as it was alleged in the Complaint. In 1997, Gatz Properties and Auriga Capital Corporation ("Auriga"), along with other minority investors, created Peconic Bay for the purpose of holding a long-term lease (the "Lease") on a property to develop a golf course.[2] The property had been owned by the Gatz family since the 1950s[3] and was leased to Peconic Bay for an initial 40-year term starting on January 1, 1998.[4]

Peconic Bay was governed by an Amended and Restated Limited Liability Company Agreement (the "LLC Agreement"). Under the LLC Agreement, Peconic Bay was managed by Gatz Properties, which was managed and partially owned by Mr. Gatz.[5] The LLC Agreement specified that the golf course would be operated by a third party.[6]

Peconic Bay entered into a Sublease (the "Sublease") with American Golf Corp. ("American Golf"), which ran for a term of 35 years but granted American Golf an early termination right after ten years of operation.[7] The golf course's operations were never profitable, and by 2005 Gatz Properties became concerned that American Golf would terminate the Sublease in 2010.[8]

In anticipation of American Golf terminating the Sublease, Gatz Properties began creating a cash reserve under Section 11 of the LLC Agreement in 2005.[9] The reserve had grown to $1.5 million as of mid-2009.[10] Gatz Properties also consulted Flushing Savings Bank ("FSB") about refinancing.[11] As a prerequisite to approving the refinancing, FSB commissioned an appraisal which valued the land with the golf course improvements at $10.1 million and at $15 million as vacant land available for development.[12]

In March of 2005, unhappy with the management of Peconic Bay, William Carr filed a lawsuit in New York, on behalf of Auriga, to have Mr. Gatz removed as the manager.[13] The suit was dismissed. Then, in April 2006, Mr. Carr initiated a books and records examination of Peconic Bay, at which time Gatz Properties retained Blank Rome to secure a confidentiality agreement from Mr. Carr.[14] The representation was handled by Mr. Preston, a partner at Blank Rome.

In August 2007, Matthew Galvin of RDC Golf Group, Inc. ("RDC"), contacted Gatz Properties and expressed an interest in obtaining Peconic Bay's long-term lease.[15] Mr. Gatz instructed Mr. Galvin to put his oral interest to acquire Peconic Bay in writing.[16] In response, Mr. Galvin submitted a non-binding letter of intent to buy Peconic Bay's leasehold assets, exclusive of any other assets or liabilities, for $3.75 million, premised on a due diligence review of Peconic Bay's books and records.[17]

Mr. Gatz hired an attorney, Jack Wilson, to review the offer and advise Mr. Gatz regarding the negotiations with Mr. Galvin. Mr. Gatz also submitted the offer to Mr. Preston for review, with Mr. Wilson playing the larger role in the negotiations as Mr. Wilson had a lower hourly rate.[18] The Peconic Bay members rejected Mr. Galvin's offer as well as another written offer for $4.15 million, which was submitted in November of 2007.[19]

In December 2007, Mr. Gatz advised Mr. Galvin that Peconic Bay would not entertain any further offers unless they were "well north of six million."[20] In an email to Mr. Gatz on December 29, 2007, Mr. Galvin told Mr. Gatz that he might submit an offer north of $6 million, but Mr. Galvin never made a formal offer.[21] On the advice of Mr. Wilson to only convey formal written offers to the Peconic Bay members, Mr. Gatz did not share Mr. Galvin's December email with the minority members of Peconic Bay.[22]

In January of 2008, Mr. Gatz decided that the Gatz family should attempt to buy out the interest of the LLC's minority members and, in a written offer dated January 14, 2008, proposed a cash payment to the minority of $734, 131.00 contingent on the offer being accepted by all of the minority members.[23] All but one minority member rejected the offer.

On August 1, 2008, Plaintiffs retained Mr. Preston and Blank Rome to fashion a way for the majority to buy out the interests of the minority members of Peconic Bay under Delaware law.[24] A proposal to purchase each minority interest in Peconic Bay was conveyed by the Gatz family on August 7, 2008.[25] On August 29, 2008 Mr. Preston wrote a letter to the minority members of Peconic Bay, urging them to accept the proposal.[26] However the minority members still refused to accept the proposal.[27] After that, Mr. Fisher, another partner at Blank Rome, proposed selling Peconic Bay at auction where the Gatz family could bid in their interests as a means of eliminating the minority interests.[28] In December 2008, Mr. Fisher passed along the names of three auctioneers to Mr. Gatz for his consideration.[29] Subsequently, on January 22, 2009, Mr. Fisher interviewed all three auctioneers.[30]

Mr. Gatz was of the opinion that Alan Kravets, one of the three auctioneers, would be the best choice. However, Mr. Fisher and Mr. Preston recommended Richard Maltz of Maltz Auctions, Inc. over Mr. Kravets.[31] Mr. Fisher informed Mr. Gatz in an email that Mr. Kravets cautioned Mr. Fisher to make sure that Mr. Maltz was properly qualified to act as the auctioneer, particularly with regards to golf course experience.[32] Before 2009, Mr. Maltz had never been involved in auctioning a golf course.[33] Mr. Gatz and Mr. Maltz entered into an agreement in late May of 2009, under which the golf course would be marketed for 90 days and the auction would take place on August 18, 2009.[34]

In June of 2009, Mr. Fisher left Blank Rome and became a partner at Millcrest Law.[35]Plaintiffs retained Mr. Fisher and Millcrest Law on June 19, 2009.[36] While employed at Millcrest Law, Mr. Fisher approved of Mr. Maltz using small-print classified advertisements in general circulation newspapers and magazines, online advertisements, and direct mailings to publicize the auction.[37] Mr. Fisher and Mr. Preston reviewed everything that Mr. Maltz prepared for the auction.[38] Although Mr. Fisher and Mr. Preston knew of Mr. Galvin's interest in Peconic Bay, neither Mr. Preston nor Mr. Fisher ever suggested that Mr. Maltz contact Mr. Galvin as a potential bidder.[39] Mr. Galvin learned of the action through third parties but, after conferring with Mr. Maltz, Mr. Galvin chose not to attend the auction.[40]

On February 23, 2009, before the auction, the minority members of Peconic Bay filed a complaint in the Delaware Court of Chancery (the "Chancery Court") to enjoin Gatz Properties from proceeding with the auction.[41] The Chancery Court denied the request for injunctive relief.[42]

The Auction took place on August 18, 2009. On that day, Mr. Maltz informed Mr. Gatz that he would be the only bidder.[43] Mr. Gatz then bid and purchased Peconic Bay for $50, 000 cash plus assumption of Peconic Bay's debt.[44] The minority received $20, 985.00 from the proceeds of the auction.[45]

On August 28, 2009, the minority members renewed their request for injunctive relief and, again, the Chancery Court denied their request.[46] In 2010, the Peconic Bay minority members amended their complaint to add Mr. Gatz as a party and assert a cause of action against him for breach of fiduciary duty.[47] A trial was conducted before then-Chancellor Strine in the early fall of 2011.[48] Mr. Caponi, also a partner at Blank Rome, represented Plaintiffs at trial.[49]

At the end of the trial, the Chancellor ruled in favor of the minority members of Peconic Bay, holding that Mr. Gatz had breached both his contractual and fiduciary duties to the minority members by virtue of the "sham" auction.[50] In his written opinion, the Chancellor stated:

Despite Gatz's repeated efforts to convince me otherwise, I believe the Auction process used by Gatz was a bad faith sham. The process used was so far short of minimally responsible as to render Gatz's continued defense of it frivolous and burdensome. At an earlier preliminary injunction hearing, I made a probabilistic determination to that effect, following the procedural rubric for such a motion, and encouraged Gatz to engage in a bona fide marketing effort. He and his counsel apparently did not view those findings and guidance as sound. I adhere to my earlier view, and the trial record clearly demonstrated that this sales process was one that no rational person acting in good faith could perceive as adequate. The Auction process was not a good faith effort to generate bids at a good price for Peconic Bay. Rather, the sham Auction was the culmination of Gatz's bad faith efforts to squeeze out ...

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