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Sehoy Energy LP v. Haven Real Estate Group, LLC

Court of Chancery of Delaware

April 17, 2017

SEHOY ENERGY LP, and DEAN KETCHAM, Plaintiffs,
v.
HAVEN REAL ESTATE GROUP, LLC, HAVEN CHICAGO LP, and ALBERT ADRIANI, Defendants, and HAVEN REAL ESTATE FOCUS FUND, LP, Nominal Defendant.

          Submitted: January 25, 2017

          John P. DiTomo and Lauren K. Neal, of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware, Attorneys for Plaintiffs.

          Natalie D. Ramsey and Lisa Zwally Brown, of MONTGOMERY MCCRACKEN WALKER & RHOADS, LLP, Wilmington, Delaware, Attorneys for Defendants Haven Real Estate Group, LLC and Albert Adriani.

          David A. White and Hayley J. Reese, of McCARTER & ENGLISH, LLP, Wilmington, Delaware; OF COUNSEL: Ellen C. Brotman, of GRIESING LAW, LLC, Philadelphia, Pennsylvania, Attorneys for Defendant Haven Chicago LP and Nominal Defendant Haven Real Estate Focus Fund, LP.

          MEMORANDUM OPINION

          GLASSCOCK, Vice Chancellor

         This matter involves a suit by investors in a partnership. They allege that the general partner, and its principal, falsely induced their entry into the partnership, breached the partnership agreement by denying them access to records and preventing their exit from the entity, and breached contractual and fiduciary duties by making investment decisions based on self-interest, decisions which had a devastating effect on the partnership. The investors brought suit against the general partner, the controller and an affiliate.

         Thereafter, the partnership (and the Defendant affiliate) filed for bankruptcy. The Plaintiffs filed the instant motion; in effect, a prophylactic motion seeking a determination that the resulting bankruptcy stay does not apply to their claims against the general partner-Haven Real Estate Group-or its controller, Albert Adriani. The partnership itself is not a defendant here, they note, and thus the automatic stay of actions against the debtor-in-bankruptcy does not apply. The Defendants argue that all claims are, or should be, stayed.

         A cause of action brought on behalf of an entity is an asset of that entity. Like any other asset of an entity entering bankruptcy, the cause of action passes to the bankruptcy trustee, to be deployed on behalf of the bankruptcy estate and its beneficiaries. To the extent, therefore, that Plaintiffs' claims in this action are in fact derivative claims belonging to the partnership, their consideration here must be stayed pending resolution of the matter in bankruptcy. To the extent, however, that the Plaintiffs have brought direct claims against non-bankrupt Defendants, those claims belong to the Plaintiffs themselves. Such claims are not a part of the estate in bankruptcy, and thus may proceed despite the bankruptcy. In other words, I must examine the causes of action in the complaint, and determine if they are derivative of the partnership, and stayed; or direct, and free to proceed. I find the Plaintiffs' claims largely direct in nature: my reasoning follows.

         I. BACKGROUND

         A. The Parties and Relevant Non-parties

         The following facts are drawn from the Amended Complaint and adopted for purposes of this motion only.[1] Plaintiff Sehoy Energy LP is a Delaware limited partnership with its principal place of business located in Seattle, Washington. Plaintiff Dean Ketcham is an individual residing in Brownfield, Maine.[2]

         Nominal Defendant Haven Real Estate Focus Fund LP (the "Partnership") is a Delaware limited partnership formed pursuant to the Delaware Revised Uniform Limited Partnership Act. The Partnership's registered office is in Bethany Beach, Delaware. Defendant Albert Adriani founded the Partnership.[3]

         Defendant Haven Real Estate Group, LLC (the "General Partner") is an Illinois limited liability company with its principal place of business located in Clarendon Hills, Illinois. The General Partner is general partner of the Partnership and is a shell entity controlled by Defendant Albert Adriani, who serves as its managing member.[4]

         Defendant Haven Chicago, LP ("Haven Chicago") is a Delaware limited partnership formed pursuant to the Delaware Revised Uniform Limited Partnership Act. Haven Chicago's registered office is in Bethany Beach, Delaware. Haven Chicago is a shell entity controlled by Defendant Albert Adriani and used by Adriani to invest his own money in real estate and private notes.[5] Adriani is the managing member of the General Partner and is the Partnership's founder.[6] Nonparty Kazi Hassan is a friend of Adriani, and is the principal of SK Capital Investment, [7] an entity to which the Partnership made loans that are now the subject of this litigation.

         B. The Structure of the Partnership

         Adriani formed the Partnership on June 1, 2011.[8] According to Section 1.03 of the Limited Partnership Agreement (the "LPA"), the purpose of the Partnership is to "serve as a fund through which the assets of its Partners may be utilized for the purpose of active and speculative trading in publicly traded real estate securities listed on the U.S. stock exchanges."[9]

         Section 3.01 of the LPA provides that the power to manage the business and affairs of the Partnership, including the "authority to select investments, " is vested exclusively with the General Partner.[10] That section goes on to require that the General Partner "shall invest the funds" as it deems appropriate "in accordance with the purposes set forth in Section 1.03."[11] In solicitation of investors in the Partnership, Adriani circulated a Confidential Private Placement Memorandum of the Partnership (the "PPM") to potential purchasers.[12] The PPM discloses that Defendant Adriani is the "managing member and controlling person of the General Partner" and "controls all of the Partnership's operations and activities."[13]

         The limited partners' interests in the Partnership are "not freely transferable" due to the lack of a market.[14] The limited partners' interests are not registered under federal or state securities laws.[15] Consequently, the only way that the limited partners may redeem or liquidate their interests is by withdrawal from the Partnership in accordance with the LPA.[16] Section 7.02 of the LPA prescribes the parameters applicable to such a withdrawal, including the minimum amount, the written notice to the General Partner, and the payment schedules.[17]

         The LPA provides that limited partners are entitled to "inspect and copy the Partnership's books and records upon prior written notice, " and that, after the end of each fiscal year, the General Partner "shall cause to be prepared and distributed to each Partner" an audited annual financial statement prepared in accordance with Generally Accepted Accounting Principles ("GAAP").[18]

         C. Events Leading to this Litigation

         In January 2013, Adriani and the Plaintiffs began discussions about a potential investment in the Partnership.[19] During those meetings, Adriani distributed a "pitch book" to the Plaintiffs (the "Pitch Book").[20] The Pitch Book explained that the Partnership's philosophy was to invest "opportunistically across all areas of the real estate securities universe."[21] The Pitch Book further disclosed that the maximum position size taken by the Partnership was "25% of the portfolio" and the maximum liquidity of any of the [Partnership]'s positions was "3 days' average volume."[22] The discussions continued from January to March, 2013, during which Adriani also delivered the PPM and LPA to the Plaintiffs.[23]

         On April 14, 2013, as part of the negotiation, Adriani executed an addendum to the LPA (the "Addendum") to make it easier for the Plaintiffs to withdraw their investment if they chose to exercise that right.[24] On or about April 30, 2013, the Plaintiffs invested approximately $1.6 million in the Partnership.[25] The Plaintiffs entered into a subscription agreement in connection with their investment.[26]

         From the date of their investment, the Plaintiffs received "regular e-mail communications regarding the Partnership's performance" from Adriani.[27] In one e-mail dated June 10, 2013, Adriani disclosed the Partnership's investments in certain "publicly traded real estate securities."[28] In another e-mail dated April 7, 2014, Adriani stated that the Partnership was "up more than 7% year to date."[29]Adriani also issued financial statements that showed the net returns to the Plaintiffs year-to-date.[30] The Plaintiffs now contend that these disclosures were false and misleading.[31]

         The Plaintiffs began noticing problems with the Partnership following the receipt of their 2013 K-1s.[32] In response to the Plaintiffs' inquiry about their interest income, Adriani explained that he had made "a lot of hard money loans in the portfolio last year."[33] Adriani further disclosed he made the loans to SK Capital Investment, an entity owned by Kazi Hassan who Adriani identified as "a gentleman I have known for over [ten] years."[34] He also represented that the outstanding loans were $3.7 million "secured and cross collateralized by three [of Hassan's] restaurants"[35] and that the Partnership had "the senior position, with the exception of" one restaurant which was subject to a first mortgage.[36] In July 2014, the Plaintiffs demanded that Adriani "get Plaintiffs' money out of the loans to Hassan as soon as possible, " which Adriani agreed to do.[37] On August 2, 2014, Adriani circulated an e-mail stating that the "loan portfolio has shrunk by more than expected to $2.6 million."[38] One month later, Adriani disclosed that "an additional $500k" of the loan balance was paid down and the Partnership was up "about 17.25% for the year to date."[39]

         In 2015, the Plaintiffs continued to receive "updated financial disclosures" from Adriani that showed "a steady net gain."[40] The good news proved illusory, however. On December 16, 2015, the Plaintiffs received a letter from Adriani regarding the "Investment Impairment" of the Partnership (the "Mea Culpa Letter").[41] In the Mea Culpa Letter, Adriani admitted that "a significant asset" of the Partnership had become "substantially impaired."[42] Adriani disclosed that "[o]ver the course of nearly [four] years, the [Partnership] loaned approximately $4.4 million" to Hassan and his business entities "primarily to fund the acquisitions and buildouts of restaurant franchises."[43] In describing the circumstances regarding these loans to Hassan, Adriani stated:

I have known Mr. Hassan for over 10 years, and I have done business with Mr. Hassan on a multitude of projects for more than 5 years without problem until last year, including outside of the [Partnership] and through other funds. Our oldest sons are even good friends. However, based upon our discovery to date, I believe Mr. Hassan built a house of cards, including by 'acts of omission' and affirmative misstatements, to me and others. It is my opinion Mr. Hassan began to feel the pinch several years ago, and started borrowing from Peter to pay Paul, then vice versa, then moving to outright fraud, until his house collapsed. While hardly a positive, we appear to be the first to recognize the circumstances and obtain a judgment before several other creditors. Mr. Hassan and his entities were subsequently named defendants in at least three other lawsuits subsequent to our judgment.[44]

         Adriani further stated that following Hassan's nonpayment, he had instructed his lawyer to rewrite the loan documents to "cross-collateralize the obligations and rescheduled Mr. Hassan's payments" but Hassan refused to agree.[45] The letter identified the "major asset" owned by Hassan available for collection was "a piece of commercial real estate" subject to "two priority mortgages."[46] Adriani promised that, in addition to waiving his management fees from 2015 onwards, he would "not receive anything on [his] investments until each of the limited partners are repaid their basis in full."[47] Accordingly, Adriani also "promised to allocate any portion of recovery attributable to his personal debt 'first [] to the limited partners of the [Partnership] until they recover their basis in full.'"[48]

         After receiving the Mea Culpa Letter, the Plaintiffs demanded the investor list and other books and records as well as annual audited financial statements for 2013 through 2015 pursuant to Section 5.04 of the LPA; however, Adriani never responded to this request.[49] In March 2016, the Plaintiffs learned that the only major asset available to collect against Hassan (the "Collateral") was scheduled to be sold in April 2016 and that Adriani had "secured a $1 million security interest in favor of Haven Chicago, LP, " his personal investment vehicle.[50] The Plaintiffs "subsequently learned that the sale of the property netted $986, 438.74 available for distribution to [the Partnership]."[51] Contrary to Adriani's prior representations, he now contends that the Partnership is owed only $682, 570.45, and proposes to allocate $183, 819.76 to the General Partner and $120, 048.53 to Haven Chicago.[52]This action followed.

         D. Procedural History

         The Plaintiffs filed this action on May 27, 2016, asserting eleven counts against the General Partner, Adriani and Haven Chicago.[53]

         Counts I, II and VIII are breach of contract claims. Count I alleges breach of the LPA by the General Partner and Adriani in "loaning unsecured money to Hassan in violation of the LPA's purpose."[54] Count II alleges that the General Partner and Adriani breached the LPA by refusing to produce to the Plaintiffs the Partnership's audited financial statements and denying the Plaintiffs' right of inspection.[55] Count VIII alleges that the General Partner and Adriani breached the implied covenant of good faith and fair dealing by making "unsecured, junior loans on non-market terms" to Hassan and by not securing the loans or obtaining priority positions.[56]

         Counts III through V are breach of fiduciary duty claims. Count III alleges that the General Partner and Adriani breached fiduciary duties by making "illegal loans" to Hassan.[57] Count IV alleges that the General Partner and Adriani breached fiduciary duties by "disclosing false and misleading statements regarding the [Partnership]'s performance and the [Partnership]'s exposure to unsecured loans with no priority" so as to avoid the Plaintiffs' exercise of their right to withdraw.[58]Count V alleges that the General Partner and Adriani breached their fiduciary duties by unfairly allocating sale proceeds from the sale of the Collateral.[59]

         Counts VI and VII are fraud claims. Count VI alleges fraud against the General Partner and Adriani for knowingly making "false and materially misleading statements" regarding the Partnership's performance and the loans to Hassan, in reliance on which the Plaintiffs forwent their rights to withdraw from the Partnership or enjoin the loans.[60] Count VII alleges fraud in the inducement against the General Partner and Adriani in the concealing of Adriani's true intent to loan Partnership money to Hassan, a concealment that resulted in the Plaintiffs investing in the Partnership.[61]

         Count IX seeks to pierce the corporate veil of the General Partner and Haven Chicago "so as to hold Adriani jointly and severally liable."[62] Count X seeks a declaratory judgment that Adriani and the General Partner are not entitled to advancement of attorneys' fees.[63] Count XI seeks an accounting of Adriani, the General Partner and Haven Chicago to determine the extent of commingling of Plaintiffs' investment with assets of Adriani and those entities, as well as the extent the Plaintiffs are "entitled to recover on any collections made on the loans to Hassan."[64]

         The Plaintiffs seek, among other things, rescissory or compensatory damages as well as costs and expenses incurred in this action.[65] The Plaintiffs moved to expedite the issue of advancement rights. After a hearing on this matter on July 5, 2016, I entered a status quo order and allowed the remaining claims to proceed on a non-expedited basis.

         On August 12, 2016, the Defendants moved to dismiss certain claims and answered others. In response, the Plaintiffs filed an Amended Complaint on September 9, 2016. The Defendants subsequently renewed their motions to dismiss and answered other claims on September 23, 2016.

         On November 7, 2016, both the Partnership and Haven Chicago filed bankruptcy under Chapter 11 of the Bankruptcy Code. A Suggestion of Bankruptcy and Notice of Automatic Stay was filed on November 10, 2016 (the "Automatic Stay"). Accordingly, the action against Haven Chicago is stayed. In a letter dated November 23, 2016, counsel for the General Partner and Adriani asked this Court to confirm that the Automatic Stay applied to all claims in this pending action.

         On December 9, 2016, the Plaintiffs filed the instant motion to "confirm the trial schedule" with respect to their claims against non-bankrupt Defendants Adriani and the General Partner (the "NB Defendants"). The Plaintiffs argue that Counts I, II, IV, VI, VII, VIII, and IX are direct claims and not subject to the Automatic Stay. On January 9, 2017, the NB Defendants filed an opposition to the Plaintiffs' motion, alleging that all claims against them are derivative claims and must be stayed. I heard oral argument on this matter on January 25, 2017.

         II. ANALYSIS

         The parties' present dispute concerns the applicability of the Automatic Stay to the claims against the NB Defendants. Three issues are presented: first, whether this Court has jurisdiction to determine the scope and applicability of the Automatic Stay; second, if this Court has jurisdiction, which of the claims against the NB Defendants are derivative and must be stayed; third, regardless of the outcome of those two questions, whether I should nevertheless stay the entire action in the interest of judicial economy.

         A. Jurisdiction

         The preliminary question is whether this Court has jurisdiction to determine whether the Automatic Stay applies to the claims in the pending case. I find the law on this issue is clear: "a non-bankruptcy court has the right to consider whether the automatic stay order applies to matters before it."[66] This rule is consistent with "the idea of [a court's] inherent jurisdiction to determine jurisdiction."[67] It is "clear that it is not the intent of Code § 362(a) to override that authority."[68]

         The NB Defendants, citing In re Mid-City Parking, Inc., [69] argue that state courts lack jurisdiction to rule on the scope and applicability of the automatic stay in the first instance, "because [according to the Defendants] such a matter is a 'core proceeding' under 28 U.S.C. § 157(b) as well as an integral part of the overarching bankruptcy 'case.'"[70] I do not read Mid-City as supportive of that position; that case provides that state courts in these circumstances may rule on their own jurisdiction, but subject to collateral attack in the federal courts.[71]

         In the alternative, the NB Defendants ask me to refrain from adjudicating this matter because the issue of whether the claims are direct or derivative "inevitably will come in front of the bankruptcy court" and the bankruptcy court, which has the final say on the Automatic Stay, may entertain a collateral attack to void this Court's ruling.[72] In the interest of efficiency, the NB Defendants ask me to stand down.

         In the first instance, it seems unlikely, rather than inevitable, that the bankruptcy court will reach the question of whether the Automatic Stay extends to the claims against the NB Defendants. In a hearing at the bankruptcy proceeding, Adriani testified that he had no intention to assert any derivative claims against himself or the General Partner.[73] In other words, in order for the bankruptcy court to be faced with this issue, it would be up to the Plaintiffs to bring a derivative case before the bankruptcy court, contrary to their current position that the claims in dispute are direct. Even assuming that the bankruptcy court would entertain this question, such consideration would not render this Court's determination a waste of judicial resources. Rather, because determination of this issue ultimately turns on a question of Delaware law regarding derivative and direct claims, I consider this Court-not the bankruptcy court-in the best position to evaluate the matter.

         In light of the foregoing, I conclude that I have jurisdiction to decide the nature of the Plaintiffs' claims and thus inherently determine the applicability of the Automatic Stay to the claims against the NB Defendants.

         B. The Nature of the Claims

         I now turn to the primary issue: whether any of the Plaintiffs' claims against the NB Defendants, Adriani and the General Partner, are derivative and thus subject to the Automatic Stay.

         Section 362 of the Bankruptcy Act provides, in part:

Automatic stay. (a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title . . . operates as a stay, applicable to all entities, of- (1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title . . . (3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate . . . .[74]

         The scope of the automatic stay is broad. Nonetheless, "the clear language of [S]ection 362(a) indicates that it stays only proceedings against a 'debtor.'"[75] It is not available to "non-bankrupt co-defendants of a debtor even if they are in a similar legal or factual nexus with the debtor."[76] Accordingly, the bankruptcy of the Partnership and Haven Chicago is no bar to the case proceeding against the NB Defendants.

         When a suit is brought by stockholders on behalf of a corporation against its non-bankrupt directors and officers, the stockholders "assert[] a cause of action belonging to the corporation."[77] Upon the corporation's filing of bankruptcy, such derivative claims for injury to the debtor from "actionable wrongs committed by the debtors' officers and director[s] become property of the estate under 11 U.S.C. § 541" and the right to bring the claims "vests exclusively to the trustee."[78] Under Section 362(a)(3), a plaintiff who asserts such derivative claims would be acting to exercise control over property of the estate and violate the automatic stay.[79]

         In this case, the claims against Adriani and the General Partner must be stayed in favor of the bankruptcy proceeding if I determine that these claims are derivative in nature and thus belong to the Partnership. Conversely, if the claims are direct, they are the individual property of the Plaintiffs, and do not belong to the bankrupt party. A bankruptcy stay is inapplicable to such claims.

         The law of the state of the debtor's formation-Delaware law-governs the issue of the nature of these claims.[80] Under Delaware law, the test for whether a claim is derivative or direct is set forth in Tooley v. Donaldson, Lufkin & Jenrette, Inc.[81] Specifically, two questions must be answered under Tooley: "(1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)?"[82] To prove a claim is direct, plaintiffs must "demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation."[83] Our Supreme Court has noted that "[t]he Tooley direct/derivative test is substantially the same for claims involving limited partnerships" as it is for claims involving corporations.[84]

         Among the claims that the Plaintiffs argue are direct, [85] Counts I, II and VIII can be properly characterized as the "Contract Claims, " Count IV as the "Fiduciary Duty Claim, " and Counts VI and VII as the "Fraud Claims."[86] I analyze each in turn below.

         1. The Contract Claims

         The Plaintiffs initially argued that the Contract Claims were direct because they related to the contract terms of the LPA and thus were properly excluded from a Tooley analysis, a position supported by certain decisions of this Court.[87] Since the matter was briefed, this area of the law has been clarified by our Supreme Court, in El Paso Pipeline GP Co. L.L.C. v. Brinckerhoff:[88]

when a plaintiff asserts a claim based upon the plaintiff's own right, such as a claim for breach of a commercial contract, Tooley does not apply. [But our caselaw] does not support the proposition that any claim sounding in contract is direct by default, irrespective of Tooley. Nor does it mean that [plaintiff's] status as a limited partner and party to the LPA enable him to litigate directly every claim arising from the LPA. Such a rule would essentially abrogate Tooley with respect to alternative entities merely because they are creatures of contract.[89]

         In light of the Supreme Court's holding in El Paso, I find the Tooley test applicable to the Plaintiffs' Contract Claims, even though they are specifically based on the contractual terms in the LPA.[90] The Plaintiffs conceded this point during the oral argument.[91]

         I now turn to the specific counts sounding in contract. Count I alleges that Adriani and the General Partner breached the LPA by loaning "unsecured money to Hassan" in violation of the purpose provisions in the LPA.[92] Initially, under Tooley, this count appears derivative, as the direct result of such mismanagement would seem to be financial loss to the Partnership, and any corresponding recovery would thus flow to the Partnership.[93] However, this Court in equity has recognized that direct claims exist when the entity at issue is a mere pass through entity and the benefits flow directly back to the investors.[94] For example, Anglo American Security Fund, L.P v. S.R. Global International Fund, L.P.[95] characterized a claim as direct, rather than derivative, based on the fundamental pass-through nature of the entity involved, and the fact that, if recovery ran to the entity, new investors-who had not been harmed by the wrong at issue-would nonetheless share in the recovery.[96] As a matter of equity, the Anglo American Court permitted the matter to proceed directly.[97] The Plaintiffs argue that the Partnership here is "a small pooled-capital vehicle with a handful of limited partners, and under the LPA, it is neither entitled to nor required to partake in gains or losses achieved or suffered in connection with the investments Adriani selects."[98] The Plaintiffs also add that two limited partners joined the Partnership almost a year after the Plaintiffs joined and after "a significant amount of money had already been loaned to Hassan."[99] Additionally, the Plaintiffs argue that certain limited partners, excluding the Plaintiffs, were allowed to withdraw their money while the loans were in default.[100] While the Complaint and citations to the record are vague in this regard, it is not clear to me that this count should be stayed. Accordingly, I find that I need a more developed record to determine this issue and this count should go forward to full development at trial.[101]

         Count VIII alleges that the General Partner and Adriani breached the implied covenant of good faith and fair dealing by making loans to Hassan. This count is based on the same alleged wrongdoings on the part of the NB Defendants as Count I.[102] Because I find I need a more developed ...


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