GREG de VRIES, an individual, and RAYMOND MURRAY, an individual, Plaintiffs,
DIAMANTE DEL MAR, L.L.C. Defendant.
Submitted: March 11, 2015
Stamatios Stamoulis, Esquire and Richard C. Weinblatt, Esquire of STAMOULIS & WEINBLATT, L.L.C., Wilmington, Delaware; Steven R. Main, Esquire and Christopher T. Hill, Esquire of HILL, RUGH, KELLER & MAIN, P.L., Orlando, Florida; Attorneys for Plaintiffs.
Joanna J. Cline, Esquire and James G. McMillan, III, Esquire of PEPPER HAMILTON, L.L.P, Wilmington, Delaware; OF COUNSEL: Thomas McC. Souther, Esquire of PEPPER HAMILTON, L.L.P., New York, New York; Attorneys for Defendant.
MASTER'S REPORT (PLAINTIFFS' MOTION TO COMPEL)
Abigail M. LeGrow Master in Chancery
The operating agreement of a limited liability company requires the managing member to prepare and provide to the other members certain quarterly and annual reports. In the last five years, the managing member has ignored that obligation. During that same period, the managing member caused the company to surrender its only asset to satisfy a debt with a balance approximately one-twentieth the value for which the asset previously appraised. The managing member had personally guaranteed that debt and the property transfer extinguished that personal guarantee.
Shortly after the transfer, two members of the limited liability company demanded to inspect the company's books and records to value their investment and investigate possible mismanagement. At the time, the members were unaware the asset had been surrendered. The company granted the inspection, but withheld privileged documents. It is undisputed that the company's non-privileged documents do not provide any information about the events or decision-making process that ultimately led to the surrender of the company's only asset. The plaintiffs therefore moved to compel the production of privileged documents under the fiduciary exception to the attorney-client privilege. Because they have shown good cause to inspect some of the documents on the privilege log, I recommend that the Court grant in part the motion to compel. This is my final report.
Diamanté Del Mar, LLC ("DDM") is a limited liability company organized under the laws of Delaware with its principal place of business in Danbury, Connecticut. DDM was formed in September 2002 along with its wholly-owned Mexican subsidiary for the purpose of acquiring the rights to approximately 10, 000 acres of undeveloped land, including three miles of Pacific coastline in El Rosario, Baja California, Mexico (the "Property"). DDM's managing member is Baja Management, LLC ("Baja"). Kenneth A. Jowdy ("Jowdy") serves as Baja's President and sole managing member and, as such, has control over the day to day operations of DDM. Baja owns a 93% interest in DDM.
DDM expected to develop the Property in three phases. The initial phase would include construction of a hotel and residential properties, as well as roads, a golf course, and a club house, and was estimated to cost $65 million. A report prepared by KPMG in 2005 indicated DDM was seeking a $20 million loan to fund this phase of the development. Phases two and three would produce additional recreational facilities such as a spa, tennis complex, fitness centers, a winery and vineyards, and an equestrian center.
The plaintiffs, Greg deVries and Raymond Murray, each invested $500, 000 in DDM pursuant to subscription agreements dated April 14, 2004 and March 29, 2005 respectively, and each received a 0.5% class A membership interest in the company. At the time, the plaintiffs were professional ice-hockey players in the National Hockey League. In all, 14 individuals invested $500, 000 each in DDM. Under DDM's operating agreement (the "Operating Agreement"), Baja was required to prepare annual and quarterly reports and transmit to DDM's non-managing members unaudited financial statements and quarterly business reports.The quarterly business reports never were prepared and the plaintiffs have not received any reports or statements since at least 2010.
DDM obtained clear title to the Property and permits to complete the aforementioned renovations, but the Property remains largely undeveloped. An appraisal performed by KPMG in April 2005 valued the Property at $68.9 million and reported that DDM had:
[G]ood, clear, marketable, insurable title to three parcels of land that comprised 8, 065 of the 9, 727 total acres … [and DDM] expects to obtain fee simple title on the three parcels that comprise 1, 218 acres three to six months after the date of value. This transfer would bring the total acreage held in fee simple estate to approximately 9, 283 acres."
The report also stated that as of June 2005, the Property had no encumbrances.
On February 21, 2006, DDM secured – with Jowdy's personal guarantee – a loan for $3 million from KSI Capital Corp. ("KSI"), a "hard money lender." The plaintiffs were not aware of the loan or its terms at the time the Property was encumbered. DDM paid its required interest-only payments on a monthly basis up to and including July 2009. ...