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In re 11 West Partners, LLC

Court of Chancery of Delaware

March 20, 2019


          Date Submitted: December 11, 2018

          C. Barr Flinn, Emily V. Burton, and Daniel Kirshenbaum, of YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; OF COUNSEL: Michael J. Bowe, Alexander B. Simkin, and John A. Dunn, of KASOWITZ BENSON TORRES LLP, New York, New York, Attorneys for Erwin Gonzalez.

          Ryan P. Newell, Kyle Evans Gay, and Shaun Michael Kelly, of CONNOLLY GALLAGHER LLP, Wilmington, Delaware; OF COUNSEL: Stan Chelney and Philipp Smaylovsky, of CHELNEY LAW GROUP PLLC, New York, New York, Attorneys for Adam Goldenberg and Abraham Eisenstat.



         This matter is the result of an unfortunate rupture in the business relationship of three former friends, Messrs. Gonzales, Eisenstat, and Goldenberg. Starting in 2015, the three began investing in real estate in Oakland, California. Goldenberg, who had recently moved to California, was the "genius" who located investment opportunities and, once acquired, made them valuable; Eisenstat found the investors, most of whom were recruited from a group of acquaintances who valued his integrity and business acumen; and Gonzales, detail-oriented and meticulous, handled the business operations. Gonzales and Eisenstat lived in New York.

         With respect to each real property investment, the parties created similar structures. Omitting pass-through entities, each property was owned by a distinct partnership of investor-limited partners, controlled by a general partner. That general partner was a specific Delaware LLC for each property, each with Gonzales, Eisenstat, and Goldenberg as its sole members, where each member held a one-third interest. The LLCs at issue here control three properties in Oakland, the "Old Oakland," the "West Grand," and the "American Steel" properties.

         The relationship between Gonzales and Goldenberg began to deteriorate in 2016; the parties dispute the cause, but the situation was exacerbated by the two men's opposing political inclinations with respect to the presidential election that year. In any event, purportedly pursuant to the LLC Joint Venture Agreements (the "JVAs"), Goldenberg attempted to remove Gonzales from any authority with respect to the three ventures. Gonzales brought this action, pointing to the JVAs in the three projects, which provided that major decisions-like ousting a member- require unanimous agreement of the members. Goldenberg and Eisenstat (the "Majority Members") brought a separate action, in which they sought reformation of the JVAs.

         Currently before me is the Majority Members' request to reform the JVAs to conform to what they allege was the parties' intent: that Goldenberg had the power to make major decisions unilaterally. They point to language providing such in an earlier JVA, pertaining to the LLC that controlled the "Peralta" property, and argue that the failure to include similar language in the later JVAs was a scrivener's error. I agreed to try this potentially-dispositive issue first, and a one-day trial on reformation was held on August 9, 2018. Briefing and further evidentiary submissions followed.

         This Memorandum Opinion addresses only the issue of reformation.

         The bulk of the testimony was given by the three principals. The stories of Gonzalez, Goldenberg, and Eisenstat, with respect to the parties' intent regarding each General Partner's control over major decisions, are divergent. This Court has previously noted the conclusions of social scientists and psychologists that witnesses may come to believe in factual scenarios beneficial to them, even though the true facts are otherwise.[1] It does not require a social scientist to note, however, that individuals may come to consider ambiguous circumstances as concrete, where doing so aligns with their own perception of justice. Nor does it require a psychologist to note that perceptions of justice may be colored by self-interest.

         Such considerations, I believe, led to discrepancies in the testimony here. I believe all three men are honorable, and are testifying to the truth as they recall it. My takeaway from the testimony is this: The control issue was debated closely by the parties as they crafted the Peralta JVA. As time to close on that property grew short with the issue unresolved, the parties agreed to defer control for that project to Goldenberg. The parties anticipated future projects, but there was no meeting of the minds as to control for such projects.

         With respect to those future projects, the parties hired new counsel to draft the subsequent JVAs. The parties gave new counsel the Peralta documents, including the JVA, as a guide. Counsel expressed to the parties that the Peralta JVA was deficient, and would need to be amended. In their single face-to-face meeting with counsel, the parties briefly discussed control and the need to protect Eisenstat's investors in that regard. Goldenberg and Eisenstat had the impression, nonetheless, that counsel would not fundamentally amend the JVAs going forward without specifically notifying the partners. Although the parties received the second JVA, which governed the Old Oakland property, with a cover letter advising them to read it and communicate any concerns, Goldenberg and Eisenstat executed the JVA, and the subsequent two JVAs, without reading them. Goldenberg and Eisenstat were unaware, therefore, that the three JVAs require that major decisions be unanimous. Gonzales, on the other hand, did read the JVAs, saw that what he considered to have been the open control question had been settled, in a manner more favorable to him (and to Eisenstat) than was the case with the Peralta JVA, and signed the document. Subsequent JVAs tracked the Old Oakland JVA; the Managing Members executed those sans review, as well.

         In order to reform the JVAs to make them consistent with the Peralta JVA, as the Defendants request, I would have to find, by clear and convincing evidence, that all three partners intended that Goldenberg have unilateral control, and mistakenly thought that the JVAs so provided, or that only Gonzales knew that the JVAs did not comport with the parties' true agreement but nonetheless executed the JVAs and failed to inform the others of the error. This, based on the record, I cannot do. More likely, in my view, is the scenario laid out above. Because I cannot find the elements for reformation by clear and convincing evidence, the request to reform the JVAs is denied, and the clear language of the JVAs as to control shall apply to the issues remaining.

         My reasoning follows.

         I. BACKGROUND

         A. The Parties

         Erwin Gonzalez, Adam Goldenberg, and Abraham Eisenstat (collectively, "the parties") are the only members of 11 West Partners, LLC ("11 West").[2] They formed 11 West in 2015, to centralize operations of their business ventures, which involved real estate investment in Oakland, California.[3]

         B. Factual Background

         1. Formation of 11 West and the Joint Ventures

         11 West was incorporated in early 2015, when its three members convened to invest in a property in Oakland, California, the Peralta Joint Venture.[4] Goldenberg identified the property, then enlisted Gonzalez to provide administrative support and Eisenstat to help raise capital.[5] Each member brought a different skill set to the LLC: Gonzalez ran the business, Goldenberg was the point-person at the properties in Oakland, and Eisenstat provided access to capital.[6] Goldenberg and Gonzalez were paid an annual salary of $300, 000 as employees of 11 West.[7] Eisenstat did not receive a salary because he was not involved in the LLC's day-to-day operation.[8]

         Ultimately, the parties pursued four real estate projects in Oakland that are relevant here: (1) 11 West 2431 Manager, LLC (the "Peralta Joint Venture"), which closed in April 2015; (2) 11 West Ninth Street Joint Venture, LLC (the "Old Oakland Joint Venture"), which closed in September 2015; (3) 1699 West Grand Joint Venture, LLC (the "West Grand Joint Venture"), which closed in October 2015; and (4) 11 WGM Joint Venture, LLC (the "American Steel Joint Venture"), which closed in November 2016.[9] For each of these four projects, 11 West is the General Partner for a Limited Partnership; it owns 0.5% of each Limited Partnership and earns an asset management fee of 2% of the Limited Partnership's assets.[10] Third-party investors serve as Limited Partners, providing the capital for the projects.[11] Each project has a JVA and a subscription agreement, which together detail the parties' and the investors' rights and obligations.

         The Peralta Joint Venture was 11 West's first investment; accordingly, that project's JVA was the first in which the parties memorialized their roles and obligations.[12] There was much back-and-forth between the parties and 11 West's counsel on how to allocate control, and specifically how much input should be delegated to Eisenstat.[13] Meanwhile, time was of the essence, and delay would jeopardize the Peralta project's success.[14] Ultimately, the parties decided to include Eisenstat in decisions (along with Gonzalez and Goldenberg), but to give Goldenberg ultimate decision-making authority for the Peralta Joint Venture in situations where the parties were unable to agree.[15] The Peralta JVA was created by counsel, Michael Marx.[16]

         When the parties pursued their second joint venture, the Old Oakland Joint Venture, they retained new counsel, Schulte Roth & Zabel LLP ("Schulte").[17] This was for primarily two reasons: first, because Goldenberg preferred to work with Schulte, and second, because of the Old Oakland Joint Venture's increased size and complexity as compared to the Peralta Joint Venture.[18] Additionally, the parties had been unsatisfied with Marx's work on the Peralta JVA.[19]

         On July 1, 2015, the parties met with Julian Wise, a partner at Schulte. At that time, Wise explained that he represented the partnership, not its individual members.[20] The parties disagree on the decision they made at that time as to the Old Oakland JVA; the Majority Members contend that the parties instructed Wise to model the Old Oakland JVA off the Peralta JVA, whereas Gonzalez submits that he left the meeting with the impression that Wise thought the Peralta JVA was "a piece of trash" and planned to "junk it."[21] Nearly one month later, on July 31, 2015, Gonzalez sent the Peralta JVA to Schulte, along with an email that said, "please let us know what should be our next step."[22] On August 11, 2015, in an e-mail chain with the subject line "Investor docs," Goldenberg instructed Schulte to keep the Old Oakland documents as similar to the Peralta documents as possible.[23] Gonzalez added, "[p]lease let us know if you need anything from us to move this along."[24] In an August 14 email within the same chain, Goldenberg asked Schulte, "Any sense of timing? Do we know if we have to start over, or if there's anything salvageable from our first deal?"[25]

         On September 11, 2015, a Schulte associate emailed a draft of the Old Oakland JVA to the parties.[26] This draft was not based on the Peralta JVA, as the associate was apparently unaware of the Peralta JVA's existence, and was instead based on a template Schulte had used previously in an unrelated transaction.[27]Unlike the Peralta JVA, the Old Oakland JVA required unanimity on major decisions.[28] It also contained an entire agreement clause.[29] Despite the fact that, per the Managing Members, the parties thought that the new JVA would mirror the Peralta JVA-which it manifestly did not-the parties signed this agreement (that is, the Old Oakland JVA) on September 29.[30] They also executed subscription agreements, which, in a section titled "Investment Risks," stated that "in the event of a disagreement or deadlock between the members the approval or disapproval of Adam Goldenberg (in his sole discretion) is final and binding."[31]

         Thereafter, the parties pursued two more deals, the West Grand Joint Venture and the American Steel Joint Venture. For each of those ventures, 11 West used Schulte as its counsel. The parties signed and executed JVAs that included the same unanimity requirement as the Old Oakland JVA, as well as substantively identical subscription agreements.[32]

         2. The Relationship Deteriorates

         In June 2016, Goldenberg took a two-week vacation with his family, while Gonzalez moved his family to San Francisco for the summer to be the point-person in the American Steel Joint Venture.[33] While Goldenberg was away, Eisenstat and Gonzalez met to discuss a construction project.[34] Gonzalez suggests that this conversation, in Goldenberg's absence, concerned and irritated Goldenberg.[35] In any event, upon his return, Goldenberg and Gonzalez had a terse discussion regarding management of the business.[36]

         On November 9, 2016, the day after the presidential election, Goldenberg confronted Gonzalez at the Old Oakland site and asked if he had voted for Donald Trump.[37] When Gonzalez told Goldenberg that he had, in fact, voted for Donald Trump, Goldenberg was angry.[38] A verbal altercation ensued, with Goldenberg becoming upset with Gonzalez's presidential vote and in which state Gonzalez had voted.[39] Goldenberg said that he could no longer trust Gonzalez, a statement he maintained even after the two parted ways and had time to cool off.[40]

         After the November 9 falling out, Goldenberg told Eisenstat that he would no longer work with Gonzalez and that he planned to liquidate the partnership's assets unless Gonzalez agreed to exit 11 West.[41] In early 2017, Eisenstat and Goldenberg realized that under the Old Oakland JVA, the Grand West JVA, and the American Steel JVA, Gonzalez had a consent right on major decisions relating to those projects.[42] Eisenstat and Goldenberg discussed this contractual language with Schulte, whose attorneys replied that upon review, they determined that they had never been instructed to use the Peralta JVA as a model, and that some of them had never seen it.[43]

         In summer 2017, Eisenstat and Gonzalez discussed Gonzalez's involvement in the partnership. Eisenstat requested that Gonzalez sign an amendment to the JVAs that would reduce ...

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