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Sequoia Presidential Yacht Group LLC v. FE Partners, LLC

Court of Chancery of Delaware

July 30, 2015

Sequoia Presidential Yacht Group LLC et al.
FE Partners, LLC,

Submitted: April 15, 2015

Michael A. Weidinger, Esquire Kevin M. Capuzzi, Esquire Pinckney, Weidinger, Urban & Joyce LLC

John L. Reed, Esquire Scott B. Czerwonka, Esquire DLA Piper LLP (US)

Dear Counsel:

I am unable to locate a legal-Latin expression or equitable maxim stating, pithily, that a judge should, in his own interest, beware entering orders in which the parties stipulate that the Court shall retain jurisdiction to resolve lurking issues. Such an expression or maxim would be apt here. This matter involves the former presidential yacht, Sequoia (the "Yacht-), whose owner, Plaintiff Sequoia Presidential Yacht Group LLC (the "LLC"), and its sole member, Plaintiff Gary Silversmith, co-induced Defendant FE Partners, LLC ("FE Partners") by means of fraud to extend the LLC a loan with the Yacht as collateral. I will not reiterate that particular facet of this case, which has been set forward at length elsewhere. It is sufficient to this Letter Opinion to note that the Plaintiffs brought this case to enjoin FE Partners from pursuing its rights in connection with the loan, that FE Partners counterclaimed, and that once the fraud came to light, the Plaintiffs entered a stipulated order in default judgment on August 29, 2013 (the "Judgment Order"). Under the operative loan documents, which include the Amended and Restated Term Loan Agreement (the "Loan Agreement"), the First Priority Preferred Ship Mortgage (the "Mortgage Agreement"), the Guaranty, and the Amended and Restated Option Agreement (the "Option Agreement") (collectively, the "Loan Documents"), FE Partners had an option to purchase up to a 100% interest in either the LLC or the Yacht itself (the "Option"), either at an enterprise value of $7.8 million in the case of a default by the Plaintiffs of the Loan Documents, or otherwise at an enterprise value of $13 million. As of the time of the default judgment, FE Partners had given notice to the Plaintiffs of its intent to exercise the Option to purchase a 100% interest in the Yacht. The Judgment Order provided that FE Partners was entitled to exercise its rights under the Loan Documents, specifically including the Option, and further that the final option price would be determined by deducting, among other things, the LLC's or the Yacht's outstanding liabilities, whichever is applicable, from the $7.8 million default enterprise value (the "Default Option Price"). To facilitate FE Partners' exercise of the Option, the Judgment Order also provided for the appointment of an independent counsel to determine outstanding current and potential liabilities of the LLC and the Yacht (the "Sequoia Liabilities"). Notably, the Judgment Order retained this Court's jurisdiction to hear disputes arising out of the "accounting and calculation of the final Default Option Price" in connection with the independent counsel's investigation, as well as "any disputes arising out of the interpretation and enforcement of this order."[1]

After entry of the Judgment Order, Michael M. Maimone, Esquire, was appointed independent counsel (the "Independent Counsel") and produced a detailed report concerning the Sequoia Liabilities (the "Report"). The Plaintiffs have accepted the Report, while FE Partners vehemently disagrees with the conduct of the Independent Counsel and his conclusions regarding contingent liabilities that may constitute liens against the LLC or the Yacht. The parties have expended disproportionately large legal efforts to place their respective positions before this Court. The initial loan, under which FE Partners provided approximately $2.5 million to Silversmith, has resulted in Independent Counsel fees alone of $857, 487.26. Moreover, and in validation of the chimerical maxim alluded to above, my entry of the Judgment Order has placed the issues of the parties' rights under that Order, together with the validity of the conclusions in the Independent Counsel's Report, before the Court. Meanwhile, a tangible piece of American history sits deteriorating on a marine railway on the Western Shore, awaiting resolution of the legal issues that complicate its future.

A. Factual Background

The Parties executed the Loan Documents, including the Option Agreement, on July 3, 2012. Pursuant to the Option Agreement, FE Partners' right to exercise the Option was to last for five years from that date or until the maturity of the loan, whichever was later. The Option Agreement also provided that, before FE Partners could exercise the Option, it had to provide the Plaintiffs with written notice specifying the size and nature of the interest it intends to purchase and the contemplated closing date, but that "FE Partners may, in its sole and absolute discretion, elect to rescind an Exercise Notice at any time prior [to] the consummation of the purchase contemplated therein for any reason or for no reason."[2]

The Loan Agreement called for an initial funding of $5 million in loan proceeds. FE Partners funded $2, 501, 272.67 towards these initial proceeds before halting funding, purportedly after discovering that the LLC was in breach of a number of provisions in the Loan Agreement. After delivering a number of default notices to the LLC, on November 24, 2012, FE Partners delivered to the Plaintiffs a notice that it was "exercising the option granted pursuant to [the Option Agreement] to purchase all of [the LLC's] interest in the [Yacht], " with closing to take place on December 1, 2013 (the "First Option Notice").[3] The First Option Notice stated that, because FE Partners' exercise of the Option stemmed from the LLC's uncured default of the Loan Documents, the purchase price for the Yacht would be $7.8 million.

On February 1, 2013, the Plaintiffs filed their Verified Complaint in this action seeking to enjoin FE Partners from exercising the Option. On June 13, 2013, after preliminary discovery, FE Partners filed a Motion for Default Judgment and Other Sanctions for Fabrication of Evidence, Alteration of Evidence, Destruction of Evidence and Witness Intimidation, alleging several instances of misconduct on behalf of the Plaintiffs. As a result of that Motion and the conduct alleged therein, the Plaintiffs consented to a default judgment against themselves and in favor of FE Partners on all the parties' claims and counterclaims, as well as the shifting of FE Partners' attorneys' fees and expenses. However, the parties could not come to an agreement on several of the terms of the final default judgment order, including how the default judgment would affect the purchase price for FE Partners' Option. Both parties agreed that the approximately $2.5 million loan proceeds already delivered to the LLC would be deducted from the option purchase price, that the option purchase price should be based on an enterprise value of $7.8 million because the Plaintiffs were in default of the Loan Documents, and that the Plaintiffs had to deliver the Yacht or LLC membership interest, whichever is applicable, free and clear of any liens at that price. However, due to its lack of trust in the Plaintiffs to deliver free and clear title and its express interest in obtaining the Yacht as part of any remedy, FE Partners lobbied the Court for a system, problematic on its face, whereby FE Partners would assume control over ensuring clear title: it would investigate and determine the Sequoia Liabilities and deduct those liabilities from the $7.8 million default enterprise value. FE Partners also sought the right to deduct its award of attorneys from the option purchase price and to seek damages against the Plaintiffs in the case that, as a result of all of the deductions, the option purchase price fell below $0.00. The Plaintiffs argued that the Option Agreement did not give FE Partners a right to determine the Sequoia Liabilities, and thus too the option purchase price; they also objected to the inclusion of an express right to damages tied to the option purchase price. Conceding that they had an obligation to deliver either the LLC or the Yacht free and clear of any liens, however, the Plaintiffs offered instead to pay for a neutral third party "to aid in clearing the title to ensure it occurs."[4] The parties submitted their competing proposed orders along with a stipulation that a default judgment would be entered against the Plaintiffs and in favor of FE Partners and that they consented to the Court's determination of the specific form of judgment order carrying out that default judgment.[5]

On August 29, 2013, I entered the Judgment Order, which combined many of the provisions from the Plaintiffs' and FE Partners' proposed orders. Among other things, the Judgment Order permits FE Partners to pay the reduced Default Option Price based, in part, on the Sequoia Liabilities, but calls for independent counsel to determine those liabilities.[6] Specifically, the Judgment Order provides that the Default Option Price will be calculated by deducting from the $7.8 million default enterprise value under the Option Agreement: FE Partners' attorneys' fees and expenses then-incurred, to be determined according to the process laid out elsewhere in the Judgment Order; the amount of proceeds FE Partners had extended under the Loan Agreement; and, as determined by independent Delaware counsel at the Plaintiffs' expense, the amount of:

the outstanding and pending or potential tax or other applicable liabilities of [the LLC] that must be satisfied to deliver all legal and beneficial right, title and interest in and to either the membership interests in the [the LLC] or [the LLC's] interest in the [Yacht], in each case free and clear of all liens, encumbrances, claims, rights of first refusal, options, warrants, calls, security interests, charges, pledges, or restrictions on transfer of any nature whatsoever. With respect to any exercise of the option for the interest in [the LLC], the final Default Option Price will be further reduced by the amount necessary to satisfy all outstanding debts against the [the LLC].[7]

The Judgment Order provided that, if after making these adjustments, the Default Option Price amounted to a negative figure, FE Partners could seek damages against the Plaintiffs.[8] Further, it states that "[a]ny disputes arising out of the accounting and calculation of the final Default Option Price . . . shall be brought exclusively in the Delaware Court of Chancery, " as well as that this Court "shall retain jurisdiction for any dispute arising out of the interpretation or enforcement of this Order."[9] Shortly after the Judgment Order, the parties stipulated to the appointment of Mr. Maimone, the Independent Counsel, to determine the Sequoia Liabilities in furtherance of the Judgment Order.[10]

The Independent Counsel was not able to complete his work by December 1, 2013, the day that FE Partners was to close on its purchase of the Yacht under the First Option Notice. Instead, on that day, FE Partners provided the Plaintiffs with written notice that it was rescinding the First Option Notice and, in its place, "exercising the option granted pursuant to [the Option] Agreement to purchase 100% of Silversmith's interests in [the LLC], " with closing to take place on December 1, 2014 or such earlier date that the Independent Counsel's investigation is completed and accepted by this Court (the "Second Option Notice").[11] The Second Option Notice provided that the purchase price for the LLC at closing would not be the price called for in the Loan Documents-under which the property transferred was to be free and clear of liens-but rather would be at the Default Option Price, as defined in the Judgment Order. It further stated that FE Partners reserved its right to amend the notice in the future to instead purchase the Yacht.

Shortly after its Second Option Notice, in a meeting on December 3, 2013, FE Partners communicated to the Independent Counsel its interest in purchasing the LLC rather than the Yacht.[12] In the same meeting, FE Partners suggested to the Independent Counsel that the liabilities of both the LLC and the Yacht (both secured and unsecured) be satisfied at the closing of the sale of either the LLC or the Yacht by Plaintiffs to FE Partners.[13] In other words, FE Partners proposed that the Default Option Price reflect the combined outstanding current and potential liabilities of the LLC and the Yacht, regardless of which of the two assets was actually being purchased in the exercise of the Option. The Independent Counsel subsequently relayed FE Partners' suggestion to Silversmith, who purportedly agreed to the term.[14]

By letter dated May 20, 2014, the Independent Counsel notified the Court that it had reached a preliminary finding as to the Sequoia Liabilities and that a final report would be forthcoming. Before he could issue a final report, the Plaintiffs on August 13, 2014 moved for the Court to enforce FE Partners' compliance with the Judgment Order. Specifically, the Plaintiffs asked the Court to:

(a) excuse all interest on the Loan since the December 1, 2013 closing date that FE Partners selected and later rescinded on that date; (b) direct that the Independent Counsel's fees be shared equally by the parties due to FE Partners' bad faith and lack of cooperation; (c) compel FE Partners to either (i) close on the Option Agreement to purchase the [Yacht] (as suggested by Independent Counsel) within 30 days after the determination of this Motion, or (ii) accept rescission of the transaction, i.e., full payment on the Loan, including legal fees as ordered by the Court; and (d) order FE Partners to pay Plaintiffs' attorneys' fees and costs, together with interest . . ., incurred in connection with this Motion and any subsequent briefing or hearing thereon.[15]

In a teleconference with the parties on October 3, 2014, I determined that the Plaintiffs' Motion was premature, and should await ...

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