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2009 Caiola Family Trust v. PWA, LLC

Court of Chancery of Delaware

December 18, 2014

2009 CAIOLA FAMILY TRUST, a New Jersey trust, and LOUIS CORTESE, Plaintiffs,
v.
PWA, LLC, a Kansas limited liability company, and WARD KATZ, Defendants, and DUNES POINT WEST ASSOCIATES, LLC, a Delaware limited liability company, Nominal Defendant.

Date Submitted: July 17, 2014.

Kurt M. Heyman, Esq., Patricia L. Enerio, Esq., Dawn Kurtz Crompton, Esq., PROCTOR HEYMAN LLP, Wilmington, Delaware; Gary M. Fellner, Esq., Michael J. Naporano, Esq., PORZIO BROMBERG & NEWMAN P.C., New York, New York; Attorneys for Plaintiffs.

Thomas E. Hanson, Jr., Esq., Patricia A. Winston, Esq., MORRIS JAMES LLP, Wilmington, Delaware; Attorneys for Defendants.

MEMORANDUM OPINION

PARSONS, Vice Chancellor.

This case concerns a Delaware limited liability company that was formed to own and operate a residential apartment complex in Kansas. The plaintiffs are non-managing members of the company who own 90% of its membership interests. The defendants are a Kansas LLC, which is a 10% interest holder and managing member of the company, and an individual who is the managing member of the Kansas LLC. The plaintiffs accuse the defendants of various breaches of the company's operating agreement and their fiduciary duties, which allegedly have resulted in damage to the company. According to the plaintiffs, these wrongs justify the removal of the Kansas LLC from its position as managing member.

The defendants have moved to dismiss the complaint on several grounds. Both defendants contend that the complaint should be dismissed for failure to state a claim under Court of Chancery Rule 12(b)(6), or in the alternative, on grounds of forum non conveniens. The individual defendant, who resides in Kansas, also seeks dismissal of the complaint as it relates to him for the additional reason that he lacks sufficient minimum contacts with the State of Delaware to be subject to personal jurisdiction in this Court. Around the same time as the defendants' motion to dismiss, the plaintiffs moved for partial summary judgment, arguing that certain of the defendants' alleged actions entitle the plaintiffs to remove the defendant LLC from its position as managing member.

For the reasons stated in this Memorandum Opinion, I deny the defendants' motion, except as it relates to the plaintiffs' claim for waste, which I dismiss. I also deny the plaintiffs' motion for partial summary judgment.

I. BACKGROUND[1]

A. Parties

Plaintiffs are the 2009 Caiola Family Trust ("CFT") and Louis Cortese. CFT is a New Jersey trust, and Cortese, an individual residing in New York, is its trustee. Plaintiffs are Non-Managing Members[2] of the nominal Defendant, Dunes Point West, LLC ("Dunes Point" or the "Company"), a Delaware limited liability company with its principal place of business in Kansas. CFT and Cortese hold respectively 86.1% and 3.9% of the total Member Interests in the Company.

Defendant PWA, LLC ("PWA") is a Kansas limited liability company, with its principal place of business in Kansas. Since the Company's inception, PWA has been its Managing Member and the holder of 10% of Dunes Point's Member Interests. Defendant Ward Katz (together with PWA, "Defendants") is an individual residing in Kansas. He holds a 10% interest in PWA and is its managing member.

B. Facts

1. The Point West Project

Dunes Point was formed in 2006 for the purpose of acquiring and operating the Point West Apartments, a 172-unit multi-family apartment complex located in Lenexa, Kansas ("the Project"). PWA, NDC Point West, LLC ("NDC Point West"), and Block Investment Group Point West, LLC ("Block") originally held all the Company's Member Interests, with stakes of 10%, 12%, and 78%, respectively. Block later assigned its interests to Cortese and Louis S. Caiola. CFT succeeded to Caiola's interest in January 2009 and acquired and succeeded to NDC Point West's stake in June 2012, bringing its ownership of Dunes Point to its current level.

Around the time of Dunes Point's formation, PWA appointed non-party Dunes Residential Services, Inc. ("DRS"), a Kansas corporation, as the Property Manager charged with overseeing the Project according to the terms of an August 14, 2006 "Management Agreement" between DRS and the Company. In addition to controlling PWA as its managing member, Katz owns DRS. Plaintiffs allege, therefore, that Katz has controlled the operation and management of the Company and the Project at all relevant times.

2. Discord at Dunes Point

At some point in 2012, Plaintiffs became dissatisfied with the Project's performance, and "sought to exert greater influence to improve its operations."[3] In July 2012, Plaintiffs called for and obtained by consent a vote of Dunes Point's Non-Managing Members, by which Plaintiffs determined to remove DRS and hire GREP South L.P. ("GREP") as Property Manager. GREP is a national company engaged in residential property management; it is apparently unaffiliated with either Plaintiffs or Defendants. Plaintiffs promptly notified PWA of the Non-Managing Members' vote and instructed PWA to implement it, but PWA refused. Through an affiliate, Curo Enterprises, LLC ("Curo Enterprises"), Plaintiffs then sued in Kansas state court to remove DRS as Property Manager. In September 2013, DRS resigned from that position. Thereafter, GREP replaced DRS and it continues to manage the day-to-day operations of the Project.

Plaintiffs' grievances regarding PWA's management of Dunes Point and the Project fall into five categories. They allege that Defendants: (1) improperly paid asset management fees; (2) provided Plaintiffs with misleading financial reports; (3) failed to improve and maintain the Project and thereby caused a loss of profits; (4) committed waste and other breaches of fiduciary duty; and (5) violated the Operating Agreement's "Key Person" provision. I briefly recite the facts relevant to each of these allegations.

a. The asset management fees

DRS and non-party NDC Capital Partners, LLC ("NDC Capital") were the original "co-sponsors" of Dunes Point.[4] NDC Capital solicited passive equity investors for the Company and until June 2012 served as "asset manager" of the Project, distributing operational and financial information about the Project to investors and acting as a liaison between them and the Company. The Operating Agreement entitled NDC Capital to receive certain "Asset Management Fees" for performing these services. According to Section 8.3(c) of the Agreement, however, the Asset Management Fee was payable "only to the extent of available Net Cash Flow from Operations and Net Event Proceeds, after payment of all outstanding party debts and liabilities of the Company then due and payable . . . ."[5] That same section provides that any installment of the Asset Management Fee which is not paid out of Net Cash Flow from Operations or Net Capital Event Proceeds "shall accrue, without interest, and continue to be due to NDC Capital Partners . . . ."[6] Plaintiffs allege that Dunes Point has not had Net Cash Flow from Operations or Net Capital Event Proceeds, as those terms are defined in the Operating Agreement, at any time since the Company's formation in 2006. PWA allegedly made Asset Management Fee payments to NDC Capital on a quarterly basis up until June 2012, however, asserting that Dunes Point in fact had sufficient Net Cash Flow from Operations to justify those payments. The payments totaled $146, 748 in the aggregate. In a July 23, 2012 letter, Plaintiffs demanded that PWA repay the allegedly improper Asset Management Fees to the Company. PWA has refused.

b. The financial and operational reports

In addition to disagreeing with PWA about the proper accounting of Net Cash Flow as it relates to the Asset Management Fees, Plaintiffs aver that the financial and operational reports provided to them by PWA consistently have been inaccurate or misleading. For example, Plaintiffs accuse PWA of manipulating Dunes Point's financial statements to give the appearance of adequate available cash flow and positive net operating income by treating repayments of principal on the Company's debt improperly and delaying the payment of certain bills. PWA also is alleged to ...


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