Date Submitted: July 8, 2014
Blake Rohrbacher, Brock E. Czeschin, Andrew J. Peach, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Andrew J. Levander, Neil A. Steiner, Michael H. Park, Joseph S. McFarlane, DECHERT LLP, New York, New York; Attorneys for Plaintiff.
Todd C. Schiltz, DRINKER BIDDLE & REATH, LLP, Wilmington, Delaware; Allen V. Farber, Mark H. M. Sosnowsky, DRINKER BIDDLE & REATH, LLP, Washington, District of Columbia; Attorneys for Defendants.
LASTER, Vice Chancellor.
The plaintiff and the defendants are parties to a Right of First Offer Agreement dated March 8, 2005 (the "ROFO Agreement" or "RA"). If the defendants desire to sell to a third party all or part of the property that is subject to the ROFO Agreement, then the defendants first must send the plaintiff a notice identifying the price and other material terms on which the defendants are willing to sell. The plaintiff then has thirty days to buy on those terms. If the plaintiff passes, the defendants have 225 days to sell the property to a third party for not less than 97% of the consideration specified in the notice.
The defendants believe they have complied with the ROFO Agreement and wish to sell the property to a third party. The plaintiff contends that the defendants failed to comply with the ROFO Agreement and seeks a permanent injunction barring the pending sale. This post-trial decision grants the injunction.
I. FACTUAL BACKGROUND
A two day trial was held on May 29-30, 2014. It quickly became clear that although the parties to the case are entities, the dispute actually pits Richard Ruben, who controls the plaintiff, against Ralph Dweck, who controls the defendants. Reflecting this reality, this decision frequently refers for convenience to the principals, rather than their entities. The scope of this decision, however, applies only to the entities, and not to Ruben or Dweck in their personal capacities.
It also became clear during trial that Dweck and his family dislike Ruben intensely. At several points in their professional dealings, Dweck has sought to take advantage of Ruben by making statements to him that contained falsehoods or omitted material information, and Dweck admitted on cross-examination that certain of his statements to Ruben were untrue. Perhaps Ruben harbors similar animus towards Dweck, but his actions and the contemporaneous documents do not suggest it. In determining the facts that were proven by a preponderance of the evidence, this decision has placed the greatest weight on Ruben's testimony and the contemporaneous documents.
A. Ruben Develops The Property And Sells It To Dweck.
In 1993, Ruben purchased the land located at 555 11th Street, N.W. in Washington, District of Columbia. He began constructing an office building in 1998, and the building opened in 2001. This decision refers to the land and office building together as the "Property."
In 2005, Ruben sold the Property to Dweck for approximately $265 million. The transaction was structured as a like-kind exchange under Section 1031 of the Internal Revenue Code. Ruben used the structure to defer paying taxes on his profits from the sale of the Property. Dweck used the structure to defer paying taxes on his sale of three residential real estate properties.
Dweck purchased the Property through the four Delaware LLCs that are the defendants in this proceeding: Lincoln Circle Associates, LLC; Lincoln Park Center Associates, LLC; Lincoln Commons Associates, LLC, and RCM Lincoln Square, LLC. The ROFO Agreement refers to the entities as the "Owners, " which is a convenient term.
Dweck controls the Owners. The parties did not elaborate on the ownership of the Owners, except to note that Ruben beneficially owns a 5% equity interest in the Property through a stake in RCM Lincoln Square. It appears that Dweck and members of his family own interests in the Owners that give them an aggregate equity interest in the Property of approximately 30-50%. The balance is owned by outside investors.
As part of the sale to Dweck, Ruben bargained for the right of first offer memorialized in the ROFO Agreement. Plaintiff RCM LS II, LLC ("RCM II") is a special purpose entity controlled by Ruben that was created and exists solely to hold Ruben's rights under the ROFO Agreement.
Section 1(a)(i) of the ROFO Agreement establishes the basic first-offer obligation:
If at any time after the date hereof . . . an Owner desires, or all of the Owners desire, to sell the Property or any portion thereof, or an Owner's interest in the Property or any portion thereof, then prior to each Owner or Owners, as the case may be, effecting a sale to a third party (a "Property Sale"), the Owner or Owners, as the case may be, shall first give to RCM II notice thereof (each such notice being, a "Property Offer Notice") . . . .
RA § 1(a)(i). The Property Offer Notice must "state the sale price, closing date . . ., all material economic terms and all other material terms such Owner or Owners would be willing to accept in respect of such sale." Id. Once RCM II receives a Property Offer Notice, it has 30 days to accept the offer. Id. If RCM II does not timely accept, the Owners have 225 days to "sell and close" the transaction that was the subject of the Property Offer Notice. Id. § 1(c)(i). The ultimate sale price cannot be less than 97% of the sale price offered to RCM II, "taking into account the other terms set forth in the Property Offer Notice." Id. The ROFO Agreement also provides that if RCM II elects to purchase the Property, then it is obligated to post a deposit equal to 5% "of the cash portion of the sale price set forth in the [Property Offer Notice.]" Id. § 1(e)(i).
B. Dweck Refinances The Property.
In 2007, Dweck refinanced the Property by borrowing $285 million from Citibank. The loan amount substantially exceeded the balance on the Property's existing mortgage, which enabled the Owners to distribute over $100 million in cash. The term of the loan was ten years, and the Owners would owe significant defeasance fees if the loan was paid off early. Citibank divided the loan into three notes. The first $220 million was allocated to two A-Notes, which were securitized and are serviced by LNR Partners LLC ("LNR"). The remaining $65 million was allocated to a B-Note that Citibank initially retained.
In 2009, Ruben learned that Citibank was interested in selling the B-Note at a discount. He contacted Dweck and suggested they buy it together. Without telling Ruben, Dweck bought it himself. When Ruben asked Dweck about the purchase of the B-Note, Dweck claimed to know nothing about it.
C. Dweck Decides To Sell.
In 2013, the Property's lease with its major tenant was approaching the time for renewal. Ruben had the right to manage the Property under a management agreement, and lease negotiations fell within his bailiwick. Notwithstanding the agreement, Dweck informed Ruben that he would take responsibility for negotiating the lease renewal. During the course of those negotiations, it became clear that the Property would require a major capital investment. Dweck began to think about selling.
To explore a potential sale, Dweck hired Gerald Trainor of Transwestern, a commercial real estate brokerage firm. Trainor contacted numerous parties to gauge their interest in purchasing the Property. Despite the existence of the ROFO Agreement, no one reached out to Ruben.
On December 23, 2013, JP Morgan Investment Management Inc. ("JP Morgan") sent Trainor a letter of intent contemplating a purchase of the Property for $300 million. Dweck was willing to sell at that price, but he needed to structure any transaction in a manner that would allow him to continue deferring taxes on his gains. It was not clear to Dweck that JP Morgan would agree to the aggressive structure that Dweck wanted to use.
With an acceptable price in hand, Trainor suggested to Dweck that he send a Property Offer Notice to Ruben to start ...