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MPT of Hoboken TRS, LLC v. HUMC Holdco, LLC.

Court of Chancery of Delaware

July 22, 2014

MPT OF HOBOKEN TRS, LLC, a Delaware Limited Liability Company, MPT OPERATING PARTNERSHIP, L.P., a Delaware Limited Partnership, and MPT OF HOBOKEN REAL ESTATE, LLC, a Delaware Limited Liability Company, Plaintiffs-Counterclaim Defendants,
HUMC HOLDCO, LLC, a New Jersey Limited Liability Company, and HUMC OPCO, LLC, a Delaware Limited Liability Company, Defendants-Counterclaim Plaintiffs.

Dated Submitted: March 24, 2014

Michael P. Kelly, Esquire, Andrew S. Dupre, Esquire, and Daniel J. Brown, Esquire of McCarter & English, LLP, Wilmington, Delaware; and D. Scott Funk, Esquire and Michael A. Ackal, III, Esquire of Gray Reed & McGraw, P.C., Houston, Texas, Attorneys for Plaintiffs-Counterclaim Defendants.

David P. Primack, Esquire of McElroy, Deutsch, Mulvaney & Carpenter, LLP, Wilmington, Delaware; Louis A. Modugno, Esquire of McElroy, Deutsch, Mulvaney & Carpenter, LLP, Morristown, New Jersey; and Thomas R. Ajamie, Esquire, Wallace A. Showman, Esquire, and Courtney Scobie, Esquire of Ajamie LLP, Houston, Texas, Attorneys for Defendants-Counterclaim Plaintiffs.


John W. Noble Vice Chancellor

The parties in this litigation formed and financed a Delaware limited liability company ("LLC") to acquire and operate the Hoboken University Medical Center (the "Medical Center"). The present dispute generally involves whether the LLC's members breached its operating agreement, a convertible note it issued, or both.

Plaintiff MPT of Hoboken TRS, LLC ("MPT Hoboken") and the other Plaintiffs[1] (collectively with MPT Hoboken, the "MPT Entities") bring claims for breach of contract, declaratory judgment, and attorneys' fees against Defendants HUMC Holdco, LLC ("Holdco") and HUMC Opco, LLC ("Opco, " and together with Holdco, the "HUMC Entities"). In addition, the HUMC Entities assert counterclaims for breach of contract, fraud in the inducement, and misappropriation against the MPT Entities.

The parties have moved for judgment on the pleadings under Court of Chancery Rule 12(c) as to certain claims and one of the counterclaims. The MPT Entities seek judgment in their favor that: (i) Opco is required, under the convertible note, to make tax distributions to MPT Hoboken; and (ii) Holdco violated Opco's operating agreement, which vested management authority exclusively in a manager, by creating a board of directors with purported managerial rights. Conversely, the HUMC Entities seek dismissal of these claims, contending that: (i) they have cured any alleged defaults by making the disputed tax distributions; and (ii) any purported violation of Opco's operating agreement is immaterial. The HUMC Entities also seek dismissal of the MPT Entities' allegations that they failed to use commercially reasonable efforts in a state regulatory approval process. Finally, the MPT Entities seek dismissal of the HUMC Entities' counterclaim for fraud in the inducement as barred by various contract provisions and for failure to plead fraud with particularity under Rule 9(b).

For the following reasons, the MPT Entities' motion is granted in part and denied in part, and the HUMC Entities' motion is denied.


A. The Parties

The MPT Entities are Delaware entities, each with its principal place of business in Birmingham, Alabama. Holdco is a New Jersey LLC with its principal place of business in Philadelphia, Pennsylvania, and Opco is a Delaware LLC based in Hoboken, New Jersey.

MPT Hoboken and Holdco are the sole members of Opco. Currently, MPT Hoboken owns 9.9% of the membership interests in Opco; Holdco owns the rest.

B. The Letter Agreement

MPT Operating and Holdco entered into the Letter Agreement in February 2011 to govern their relationship and the formation of Opco to acquire the Medical Center (the "Medical Center Transaction"). Briefly, in the Medical Center Transaction, MPT Real Estate would acquire the Medical Center real estate and lease it to MPT Hoboken. MPT Hoboken would then sublease the real estate to Opco, which would also acquire the Medical Center operating assets.

The Letter Agreement provided that Opco would be owned 25% by MPT Hoboken and 75% by Holdco.[3] It also contemplated that MPT Hoboken's 25% interest could initially be represented in a convertible debt instrument, provided that "the economic and other terms thereof shall be substantially the same as if an equity instrument was utilized."[4]

C. The Purchase and Sale Agreement and the Lease Agreement

The parties entered into the Purchase and Sale Agreement in May 2011 to effect the terms of the Medical Center Transaction. The Purchase and Sale Agreement provides, in part:

Section 14.5 Entire Agreement; Modification. This Agreement, including the Exhibits and Schedules attached, and other written agreements executed and delivered at the Closing by the parties, constitute the entire agreement and understanding of the parties with respect to the subject matter of this Agreement. This Agreement supersedes any prior oral or written agreements between the parties with respect to the subject matter of this Agreement. It is expressly agreed that there are no verbal understandings or agreements which in any way change the terms, covenants, and conditions set forth in this Agreement, and that no modification of this Agreement and no waiver of any of its terms and conditions shall be effective unless it is made in writing and duly executed by the parties.[5]

In November 2011, Opco and MPT Hoboken entered into the Lease Agreement through which Opco subleased the Medical Center real estate. The Lease Agreement provides, in part:

Entire Agreement; Modifications. This Lease, together with all exhibits, schedules and the other documents referred to herein, embody and constitute the entire understanding between the parties with respect to the transaction contemplated herein, and all prior to contemporaneous agreements, understandings, representations and statements (oral or written) are merged into this Lease.[6]

These contract provisions are implicated by the HUMC Entities' counterclaim for fraud in the inducement.

D. The Convertible Note

Also in November 2011, MPT Hoboken and the HUMC Entities executed the Convertible Promissory Note and Agreement (the "Convertible Note"), the convertible debt instrument that represented MPT Hoboken's initial 25% interest in Opco. Attached to the Convertible Note was a form of the Limited Liability Company Agreement of HUMC Opco, LLC (the "Opco LLC Agreement"), which Holdco and MPT Hoboken would execute upon conversion of the latter's Opco debt into equity.

The Convertible Note provides for MPT Hoboken to receive a quarterly "Interest Payment, "[7] which is defined as the greater of the "Interest Rate" or the "Distribution Payment."[8] The Distribution Payment is defined as

a payment equal to any distributions by the Company [i.e., Opco] of cash or the Fair Market Value [of] any securities or other property that the Holder [i.e., MPT Hoboken] would have received if the Holder held the number [of] Units representing the Full Conversion Percentage for each Payment Period. The Distribution Payment shall be recomputed for each subsequent Payment Period and subject to appropriate adjustment for any partial conversion by the Holder.[9]

The Full Conversion Percentage is effectively 25%, subject to adjustment to offset any partial debt-to-equity conversion by MPT Hoboken.[10] The Convertible Note also provides that MPT Hoboken "shall not have the status as a member of the Company by reason of the issuance or holding ...

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