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Terramar Retail Centers, LLC v. Marion #2-Seaport Trust

Court of Chancery of Delaware

December 4, 2018

TERRAMAR RETAIL CENTERS, LLC, Plaintiff,
v.
MARION #2-SEAPORT TRUST U/A/D JUNE 21, 2002 Defendant.

          Date Submitted: November 7, 2018

          Kenneth J. Nachbar, Lauren Neal Bennett, Coleen W. Hill, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Richard A. Heller, PROCOPIO, CORY, HARGREAVES & SAVITCH LLP, San Diego, California; Attorneys for Plaintiff Terramar Retail Centers, LLC.

          Thad J. Bracegirdle, WILKS, LUKOFF & BRACEGIRDLE, LLC; Ben D. Whitwell, Melissa C. McLaughlin, VENABLE LLP, Los Angeles, CA; Attorneys for Defendant Marion #2-Seaport Trust U/A/D/ June 21, 2002.

          MEMORANDUM OPINION

          LASTER, V.C.

         Plaintiff Terramar Retail Centers, LLC filed a motion in limine to address extreme positions taken in discovery by defendant Marion #2-Seaport Trust U/A/D June 21, 2002 (the "Trust"). Terramar framed its filing as a motion in limine because of the form of relief Terramar seeks: an order precluding the Trust from introducing evidence at trial on matters where the Trust refused to provide discovery. While the motion was pending, the Trust engaged in discovery misconduct by selectively producing a limited number of documents by the deadline for substantial completion of production, then dumping twenty-two times that amount on Terramar just ten days before the discovery cutoff while promising even more documents to come. Heightening the abusive nature of its actions, the Trust's document avalanche hit just after Terramar completed the key deposition in the case: the Rule 30(b)(6) deposition of the Trust, given by its principal Michael Cohen. The Trust's actions prevented Terramar from using any of the documents during the deposition.

         Throughout this litigation, the Trust has engaged in serial efforts to delay this case. The Trust has deployed these tactics both for litigation advantage and to gain leverage in the underlying business dispute, which involves the dissolution of an entity and the sale of its assets. This litigation makes a sale of assets problematic, providing the Trust with holdup value.

         After taking into account the Trust's conduct as a whole, I believe a serious sanction is warranted. I have weighed Terramar's request for an evidence-preclusion order against more onerous sanctions, such as a default judgment, adverse factual determinations, adverse inferences, or modifications to the burden of proof. I have also weighed Terramar's request for an evidence-preclusion order against the milder remedy of postponing the trial now set for January 2019 and granting a re-do of the discovery process. Although I believe that the Trust's conduct could have warranted a more serious sanction, I will not impose anything more than what Terramar has requested. A lesser sanction would not be a sufficient consequence for the Trust's misconduct. To the contrary, it would reward the Trust for its pattern of behavior by granting the Trust the delay it has sought all along.

         This decision therefore grants Terramar's motion in limine. It also awards Terramar the expenses it incurred pursuing this motion.

         I. FACTUAL BACKGROUND

         The facts are drawn from the pleadings and the submissions made in connection with Terramar's motion. Because this is a discovery ruling, the description of events provided in this section does not constitute formal findings of fact. It only represents how the record appears at this preliminary stage.

         A. Seaport Village And The Company

         Seaport Village is a specialty shopping center and tourist attraction in San Diego, California. The Port of San Diego owns the land where Seaport Village sits.

         In 1978, non-party San Diego Sea Port Village, Ltd. ("Limited") entered into a forty-year lease with the Port for the Seaport Village property. To finance the development of Seaport Village, Limited borrowed $40 million from Yasuda Trust & Banking Co. Ltd.

         In 1998, Limited defaulted on the Yasuda loan. In 2000, Limited's affiliate, San Diego Seaport Lending Co., LLC ("Lending"), bought the Yasuda loan for approximately $25 million. Cohen helped Limited finance the purchase. As consideration for his services, a Cohen-affiliated entity received a 50% interest in the net cash flows of Limited and Lending, plus a 50% interest in the net proceeds from any sale of those companies. Through this structure, Cohen obtained the cash flow rights associated with a 50% equity interest in Limited and Lending but without taking a formal ownership stake.

         By 2002, the Seaport Village project needed more financing. Cohen and Limited approached Terramar, which owns and operates commercial real estate.[1] As part of a larger financial restructuring of the project, the parties formed a Delaware limited liability company named Seaport Village Operating Company, LLC (the "Company"). The business and affairs of the Company are governed by its operating agreement dated September 1, 2002 (the "Operating Agreement").

         As part of the restructuring, Limited subleased the land for Seaport Village to the Company and received a 50% member interest. Limited allocated half of this interest (25%) to Cohen in accordance with the effective split of the cash-flow rights from Limited and Lending. To hold his 25% member interest, Cohen formed the Trust. Under the Operating Agreement, Cohen received an exclusive right to broker any future financing for the Seaport Village project.[2]

         Terramar made a capital contribution of $7 million to the Company, guaranteed half of Lending's outstanding loan, took over the management of Seaport Village, and agreed to seek to renew the lease with the Port and to attempt to obtain a lease for an adjacent property. In return, Terramar received 50% of the member interests in the Company. Terramar also became sole manager of the Company, with "full, exclusive, and complete discretion to manage and control the business affairs of the Company . . . ."[3]

         Terramar obtained two additional rights under the Operating Agreement. First, Terramar obtained the right to receive a preferential return of 11.5% per year on its capital contribution of $7 million before the Company could make any pro rata distributions to its members.[4] Second, Terramar received the right to request that the other members buy out its member interest at fair market value at any time after January 1, 2006 (the "Put Right"). To give teeth to the Put Right, Terramar received the right to dissolve the Company and receive a contractually determined payout if the members did not purchase Terramar's interest within six months (the "Dissolution Right").[5]

         B. Disputes Arise.

         Over the years, the Company's members have disagreed about a variety of matters. In April 2012, Limited sued Terramar in the Superior Court of the State of California for the County of San Diego, seeking the dissolution of the Company. In August 2013, that court held that any claim for dissolution must be brought in Delaware.

         In August 2013, Limited sued Terramar in this court (the "Limited Action"). Limited alleged that Terramar breached the Operating Agreement by failing to act diligently to obtain an extension of the Seaport Village lease and the lease on an adjacent property. Limited also alleged that Terramar breached the Operating Agreement by providing first-party financing to the Company and wrongfully allocating income to Limited. The Trust was not a party to the Limited Action.

         On November 9, 2015, this court rendered its post-trial decision in the Limited Action, which ruled in favor of Terramar on all claims. Limited appealed. By order dated September 26, 2016, the Delaware Supreme Court affirmed this court's decision, bringing the Limited Action to a close.

         C. Terramar Exercises The Put Right.

         On December 18, 2015, Terramar exercised the Put Right. Under the Operating Agreement, the exercise notice had to specify (i) Terramar's assessment of the Company's fair market value ("Fair Market Value") and (ii) Terramar's calculation of a contractually determined purchase price for Terramar's interests (the "Put Price"). A key component of the Put Price was the amount Terramar would receive under the waterfall distribution provisions in the Operating Agreement if all of the Company's assets were sold for an amount equal to Fair Market Value (the "Waterfall Amount"). Terramar's exercise notice specified a Fair Market Value of $42, 932, 927 and a Put Price of $55, 445, 552.[6]

         Both the Trust and Limited disputed Terramar's calculation of Fair Market Value. By doing so, they triggered a contractual valuation procedure spelled out in the Operating Agreement. The procedure resulted in a Fair Market Value of $57, 503, 287.

         The Operating Agreement did not contain a mechanism for resolving other disputes over the Put Price. Both Limited and the Trust contended that Terramar had misapplied the distribution provisions when calculating the Waterfall Amount.

         Under the Operating Agreement, once the Put Price was set, the other members had six months to buy out Terramar's interest at that price. If they did not, then Terramar could exercise the Dissolution Right. As part of the dissolution process, Terramar could sell the property and assets of the Company "on such terms and conditions as [Terramar] determined in its sole and absolute discretion," except for sales to controlled affiliates of Terramar, where other contractual restrictions would apply.[7]

         The six-month period expired on November 9, 2016. Terramar never received the Put Price.

         D. This Litigation

         On November 4, 2016, Terramar filed this action against Limited and the Trust. Terramar sought a declaration that it was entitled to dissolve the Company, could sell the Company's assets unilaterally to a third party as part of that process, and had correctly calculated the Waterfall Amount. The parties agreed to extend the response date until January 6, 2017. When that date arrived, the Trust moved to dismiss, contending that this court could not assert jurisdiction over the Trust and that Terramar's lawsuit was not ripe.

         In lieu of responding, Limited entered into a further stipulation with Terramar that extended its response date. Shortly thereafter, Limited sold its 25% interest in the Company to Terramar. As a result, Terramar and the Trust became the only remaining members of the Company.[8] Terramar stipulated to the dismissal of Limited from this action with prejudice.

         E. The Trust's Motions To Dismiss

         On February 10, 2017, Terramar filed the currently operative complaint. On February 24, the Trust moved to dismiss, again disputing the existence of personal jurisdiction and contending that the litigation was not ripe. That same day, Terramar served its first set of document requests (the "First Requests").

         On March 27, 2017, the Trust moved to stay discovery pending a decision on its motion to dismiss. The parties stipulated to a stay of discovery with an exception for requests for admissions.

         Oral argument on the motion to dismiss was scheduled for July 18, 2017. On the day before the oral argument, the Trust filed a competing action against Terramar in the Superior Court of the State of California for the County of Los Angeles. In that action, the Trust asserts that Terramar breached its fiduciary duties, violated the implied covenant of good faith and fair dealing, and failed to comply with Section 5.10(a) of the Operating Agreement. The Trust seeks declarations that (i) Terramar's conduct forecloses it from exercising the Put Right or the Dissolution Right; (ii) Section 5.6 of the Operating Agreement requires 75% of the member interests to approve any sale of a substantial portion of the Company's assets; (iii) Terramar owns two thirds of the member interests and the Trust owns one third; and (iv) the Trust's competing interpretation of the waterfall provisions is correct.[9]

         Even after filing the California action, the Trust did not formally withdraw its ripeness argument. Counsel argued instead at the hearing that the existence of the California action provided a new reason to dismiss the case.[10] According to the Trust, "whether it's a question of ripeness of a question of judicial comity, this case should be dismissed and the parties should be allowed to resolve their dispute in California."[11]

         On August 18, 2017, I issued a memorandum opinion denying the Trust's motion.[12]The Trust moved for reargument, which I denied. The Trust then moved for certification of an interlocutory appeal on the question of personal jurisdiction. I granted the application, and the Delaware Supreme Court accepted the appeal. By order dated April 20, 2018, the Delaware Supreme Court agreed that this court could exercise personal jurisdiction over the Trust.

         At that point, the Trust might have been expected to finally answer the complaint. It didn't. Instead, on May 22, 2018, the Trust moved to dismiss or stay this case, claiming that the doctrine of forum non conveniens required deference to the second-filed California action. The Trust thus formally asserted as a second pleadings-stage motion exactly the same argument that its counsel had made eleven months earlier during the hearing on the Trust's first motion to dismiss.

         Terramar attempted to engage in discussions with the Trust about beginning discovery. As Terramar saw it, the parties were going to litigate somewhere, and the parties should start litigating. The Trust disagreed, refused to discuss a schedule, and contended that the Delaware case should remain in suspension until the court decided the Trust's second pleadings-stage motion to dismiss.

         Understandably perceiving the Trust's motion as a delay tactic, Terramar sought entry of a scheduling order. After receiving the Trust's opposition, I held a hearing at which the parties presented argument.

         On June 14, 2018, I entered a scheduling order substantially in the form requested by Terramar. Because the case had been stalled long enough and presented what appeared to be straightforward issues of contract interpretation, I scheduled trial for January 23-24, 2019.[13] To facilitate preparation for trial, the scheduling order set the following deadlines:

• June 28, 2018: The Trust answers the complaint, without prejudice to its then-pending motion to dismiss or stay.
• August 31, 2018: Substantial completion of document production in response to requests served on or before July 20, 2018.
• October 26, 2018: Completion of all fact discovery, including party and third-party depositions (except for any fact discovery subject to a motion to compel or motion for protective order pending on this date).

         As revealed by subsequent events, the Trust did not comply in good faith with the scheduling order. It set out to evade the order.

         F. The Discovery Requests And Responses

         On June 28, 2018, the Trust answered the complaint. It did not file any counterclaims. In its answer, the Trust purported to

reserve[] the right, pursuant to Court of Chancery Rules 13 and 15, to amend this pleading in the event such amendment may be necessary pursuant to the terms of any Order entered by the Court that determines the issues to be litigated in this action. While the Court already has held that claims will proceed in the California Action, the Cohen Trust specifically, and without limitation, reserves the right to amend this pleading to assert in this action, as a counterclaim and/or affirmative defense, any rights or claims currently asserted in the California Action if necessary pursuant to an Order entered by the Court after the filing of this pleading.[14]

         By letter dated July 10, 2018, Terramar objected that "[t]he Trust's claimed unilateral right to assert counterclaims at some indeterminate point in the future violates the compulsory counterclaim rule (Court of Chancery Rule 13(a)) and appears to be a deliberate attempt to use self-help to nullify the case scheduling order."[15]

         On July 13, 2018, Terramar served its second set of document requests (the "Second Requests"). The scheduling order had set August 31, 2018, as the date for substantial completion of the production of documents responsive to any requests served before July 20, 2018. Accordingly, that deadline covered both the First Requests and the Second Requests.

         On July 23, 2018, Terramar served a third set of "cleanup" document requests (the "Third Requests").[16] Having reviewed all three sets of Terramar's document requests, I find it hard to believe that there are many documents responsive to the Third Requests that are not also responsive to the First or Second Requests. Nevertheless, the Third Requests were technically not covered by the deadline for substantial completion of document production.

         On August 10, 2018, the Trust served its responses and objections to the Second Requests. The Trust refused to produce documents addressing numerous positions the Trust had taken in its answer or raised through its affirmative defenses.

         For example, the scope of Section 9.5 of the Operating Agreement is obviously at issue in the case. That section contains both the Put Right and the Dissolution Right. It also sets forth the procedure for determining Fair Market Value. In its answer, the Trust contended that Terramar had not properly invoked its rights under Section 9.5.[17] The Trust also asserted as an affirmative defense that Terramar was guilty of unclean hands because its conduct "frustrated the intent" of Section 9.5.[18]

         Because the Trust had taken these positions, Terramar requested "[a]ll documents, regardless of when created, relating to Section 9.5 of the Operating Agreement."[19] Despite having taken these positions, the Trust said that it "will not produce documents in response to this request."[20] Then, to obfuscate this seemingly clear refusal, the Trust immediately added that "non-privileged documents 'relating to Section 9.5 of the Operating Agreement' may be produced as responsive to other requests."[21] The Trust did not identify what other requests it was referring to or explain whether this meant that it was in fact producing responsive documents.

         Along similar lines, because the Trust was contending that Terramar had misinterpreted the Dissolution Right, Terramar requested "[a]ll Documents, regardless of when created, relating to the proceeds of dissolution to which Terramar is entitled pursuant to Section 9.5(d) of the Operating Agreement."[22] The Trust refused to produce documents, claiming that the request "assume[d] a hypothetical 'dissolution . . . pursuant to Section 9.5(d) of the Operating Agreement' that has not occurred."[23] Yet by contesting Terramar's exercise of the Dissolution Right, including the resulting proceeds, the Trust necessarily had taken a position regarding what was supposed to happen in precisely that dissolution. This objection was not asserted in good faith.

         In a parallel request, Terramar asked for "[a]ll Documents, regardless of when created, relating to proceeds of dissolution to which The Cohen Trust is entitled pursuant to Section 9.5(d) of the Operating Agreement."[24] The Trust again refused to produce documents, claiming again that the request "assume[d] a hypothetical 'dissolution . . . pursuant to Section 9.5(d) of the Operating Agreement' that has not occurred."[25] The Trust obviously had a view about what it was supposed to receive, because it was disputing Terramar's exercise of the Dissolution Right and its calculations. Once again, this objection could not have been asserted in good faith.

         The Trust took similarly unfounded positions in response to requests relating to Section 4.1 of the Operating Agreement. That section governs the calculation of the Waterfall Amount, and the Trust disputes Terramar's calculation.[26] Because of this dispute, Terramar requested "[a]ll Documents, regardless of when created, relating to the rights of any member of [the Company] under the Waterfall."[27] In response, the Trust deployed its obfuscatory refusal, saying that it "will not produce documents in response to this request, although non-privileged documents 'relating to the rights of any member of [the Company] under the Waterfall' may be produced as responsive to other requests."[28]

         Because the Trust was disputing the calculation of the Waterfall Amount, Terramar requested "[a]ll Documents, regardless of when created, relating to the Waterfall and/or distributions and/or the calculation of potential distributions, to members pursuant to the Waterfall provisions."[29] The Trust again asserted that it "will not produce documents in response to this request, although non-privileged documents 'relating to the Waterfall and/or distributions and/or the calculation of potential distributions, to members pursuant to the Waterfall provisions' may be produced as responsive to other requests."[30]

         For similar reasons, Terramar asked for "[a]ll Documents, regardless when created, relating to the distribution of proceeds of dissolution" under Section 4.1(c).[31] The Trust responded that it "will not produce documents in response to this request, although non-privileged documents relating to distribution of proceeds pursuant to Section 4(c) of the Operating Agreement may be produced as responsive to other requests."[32]

         The Trust even refused to answer requests related to its affirmative defense of unclean hands, in which the Trust contended that Terramar "refused to use [the Company's] excess net cash flow to pay down Terramar's purported 'priority' on its original $7 million investment . . . ."[33] To explore this contention, Terramar requested "[a]ll Documents constituting or relating to communications with any accountant, financial advisor, tax advisor or other person concerning distribution of funds, or potential distribution of funds, pursuant to the Operating Agreement."[34] The Trust responded that it "will not produce documents in response to this request, although non-privileged documents 'constituting or relating to communications with any accountant, financial advisor, tax advisor or other person concerning distribution of funds, or potential distribution of funds, pursuant to the Operating Agreement' may be produced as responsive to other requests."[35]

         In a final example, Terramar's complaint described the Put Right and Dissolution Right. The Trust denied those allegations, responding, "To the extent Paragraph 3 purports to describe the terms of the Operating Agreement, Defendant respectfully refers to that document for the true and correct contents thereof. Defendant otherwise denies the allegations of Paragraph 3."[36] To explore this denial, Terramar sought "[a]ll Documents, regardless of when created, concerning Defendant's denial, in Paragraph 3 of the Answer . . . ." [37] The Trust refused to produce documents, citing non-substantive general objections and ...


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