Submitted: March 26, 2019
Kenneth J. Nachbar, Lauren Neal Bennett, Coleen W. Hill,
MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington,
Delaware; Edward C. Walton, PROCOPIO, CORY, HARGREAVES &
SAVITCH LLP, San Diego, California; Attorneys for Plaintiff
Terramar Retail Centers, LLC.
J. Bracegirdle, Andrea S. Brooks, 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.
case concerns the dissolution of Seaport Village Operating
Company, LLC (the "Company"), a privately held,
manager-managed Delaware limited liability company. When the
events giving rise to this litigation unfolded, the Company
had three members: (i) Terramar Retail Centers, LLC, (ii)
Marion #2-Seaport Trust U/A/D June 21, 2002 (the
"Trust"), and (iii) San Diego Seaport Village, Ltd.
("Limited"). Terramar served as the Company's
Company's LLC agreement gave Terramar the right to exit
by offering its member interest to the other members. If the
other members did not purchase Terramar's interest within
six months, then Terramar could dissolve the Company. In a
dissolution, Terramar could sell "all of the property
and assets of the Company . . . on such terms and conditions
as shall be determined by [Terramar] in its sole and absolute
December 2015, Terramar exercised its exit right. The other
members failed to purchase Terramar's interest, and
Terramar exercised its dissolution right.
other members disputed whether Terramar had validly exercised
its exit right. Terramar responded by filing this action, in
which it seeks a declaration that it may dissolve the Company
and unilaterally sell its assets to a third party. Terramar
also seeks a declaration that it has correctly determined the
allocation of the sale proceeds.
filing this action, Terramar settled with Limited, purchased
Limited's member interest, and dismissed Limited from the
case. The litigation proceeded against the Trust. This
post-trial decision rules in favor of Terramar on all claims.
facts are drawn from the record that the parties crafted
during a two-day trial. It consists of 350 exhibits, live
testimony from four fact witnesses and two experts, and
lodged testimony in the form of twelve deposition
transcripts. The parties also agreed to thirty-seven
stipulations of fact.
party seeking declaratory judgments, Terramar bore the burden
of proving the facts necessary to support its claims by a
preponderance of the evidence. See, e.g., San
Antonio Fire & Police Pension Fund v. Amylin Pharms.,
Inc., 983 A.2d 304, 316 n.38 (Del. Ch. 2009). At the
same time, the Trust asserted affirmative defenses and bore
the burden of establishing any additional facts necessary to
support them, again by a preponderance of the evidence.
See, e.g., Empls.' Liab. Assurance Corp. v.
Madric, 183 A.2d 182, 184 (Del. 1962). Although the
competing burdens could complicate fact-finding in theory,
the reality is simpler. When the preponderance standard
applies, "the burden becomes relevant only when a judge
is rooted on the fence post and thus in equipoise . . .
." In re S. Peru Copper Corp. S'holder Deriv.
Litig., 52 A.3d 761, 792 (Del. Ch. 2011) (Strine, C.),
aff'd sub nom. Ams. Mining Corp. v. Theriault,
51 A.3d 1213 (Del. 2012). In this case, the evidence was not
in equipoise, and the preponderance-of-the-evidence standard
would result in the same findings of fact regardless of which
party bore the burden of proof.
Seaport Village, Limited, and Cohen
Village is a tourist attraction and specialty shopping center
in San Diego, California. The Port of San Diego owns the
ground where Seaport Village sits. In 1978, Limited leased
the ground from the Port for a period of forty years (the
"Seaport Lease"). After securing the Seaport Lease,
Limited and its affiliates developed Seaport Village.
finance the development, Limited borrowed $40 million from
Yasuda Trust & Banking Co. Ltd. In 1998, Limited
defaulted on the Yasuda loan. For help with a refinancing,
Limited turned to non-party Michael A. Cohen and his real
estate advisory firm, M.A. Cohen & Company. At trial,
Cohen carefully distinguished between himself personally and
his firm. For purposes of the facts underlying this case, the
distinction is not important. For simplicity, this decision
refers simply to Cohen.
Cohen's assistance, an affiliate of Limited-San Diego
Seaport Lending Co., LLC ("Lending")-bought the
Yasuda loan for approximately $25 million. As compensation
for his services, Cohen received a 50% interest in the net
cash flows from 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 without taking a formal
Terramar and the Company
2002, Seaport Village needed more financing. Cohen and
Limited approached Terramar, a commercial real estate firm.
At the time, Terramar was known as GMS Realty. For
simplicity, this opinion refers to the entity as
of a larger restructuring of Seaport Village, the parties
formed the Company. The business and affairs of the Company
are governed by its LLC agreement dated September 1, 2002
(the "LLC Agreement").
return for a 50% member interest, Limited subleased the land
for Seaport Village to the Company. Limited allocated half of
its member interest to Cohen, consistent with the effective
split of the cash-flow rights from Limited and Lending. Cohen
formed the Trust to hold his 25% member interest. Although
the Trust is a separate entity, Cohen makes decisions for the
Trust. Under the LLC Agreement, Cohen also received an
exclusive right to broker any future financing for the
Company. See JX 3 § 5.4(b).
return for the other 50% member interest, Terramar
contributed $7 million in capital, guaranteed half of
Lending's outstanding loan, and took over the management
of Seaport Village. Terramar also became the Company's
manager, with "full, exclusive, and complete discretion
to manage and control the business affairs of the Company . .
. ." Id. § 5.1(a). In this capacity,
Terramar committed to seek to renew the Seaport Lease and to
seek a lease for an adjacent property called Old Police
Headquarters (the "Headquarters Lease"), which the
parties planned to develop into a shopping center. The LLC
Agreement referred to the redevelopment of Old Police
Headquarters as "Phase Two."
Agreement entitled Terramar to receive a priority return of
11.5% per year on its initial capital contribution of $7
million (the "Terramar Priority Return") if (i) the
Port failed to approve an extension of the Seaport Lease
within thirty months after the Company took possession of
Seaport Village and (ii) the extension did not cover at least
twenty-five additional years. Id. § 4.1(c). If
the Terramar Priority Return was triggered, then the Company
could not make any pro rata distributions to its
members until after the Terramar Priority Return was paid.
Agreement allowed Terramar to make capital calls on the
Company's members (including itself) if Terramar was
unable to obtain third-party financing after "a good
faith effort." Id. § 3.2(a). The LLC
Agreement also gave Terramar the "sole discretion"
to cause the Company to obtain a loan from any member (a
"Member Loan"), subject to a maximum interest rate
of 12%. Id. § 3.3.
LLC Agreement, Terramar obtained 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"). Id. § 9.5. If the other members
did not purchase Terramar's interest within six months,
then Terramar could dissolve the Company and receive a
contractually determined payout (the "Dissolution
Right"). Id. § 9.5(d). The LLC Agreement
provided that upon Terramar's exercise of the Dissolution
Right, "all of the property and assets of the Company
shall be sold on such terms and conditions as shall be
determined by [Terramar] in its sole and absolute discretion
. . . ." Id.
dissolution, the distribution of proceeds to the
Company's members would depend on the applicable
contractual waterfall. If Terramar exercised the Dissolution
Right after the Terramar Priority Return kicked in, then the
waterfall called for distributions to be made as follows:
• First, to repay any interest on any Member Loan;
• Second, to repay the principal of any Member Loan;
• Third, to pay any unpaid priority return of 12% per
year on additional capital contributions;
• Fourth, to the members in proportion to the
members' additional capital contributions, less any
• Fifth, to Terramar until the satisfaction of the
Terramar Priority Return;
• Sixth, pro rata to the members other than
Terramar, in an amount equal to the Terramar Priority Return;
• Seventh, pro rata to the members based on
their member interest.
Id. § 4.1(c).
The 2010 Capital Call
the restructuring that brought Terramar into the picture, the
Company obtained a $25 million loan from Wells Fargo with a
three-year term. On multiple occasions, Wells Fargo agreed to
extend the loan, but ultimately declined to extend it beyond
2010. Beginning in 2008, the Company sought to refinance the
2010, rather than agreeing to extend the loan, Wells Fargo
offered to provide a new loan of $12-15 million, but Wells
Fargo conditioned its proposal on receiving a guarantee from
Terramar for up to half of the loan amount. See JX
34. Other financing sources offered less attractive terms.
See JX 33. Terramar had no obligation to provide a
guarantee and declined to do so.
30, 2010, with bank financing unavailable, Terramar made a
capital call on the Company's members. The Trust and
Limited refused to participate. Terramar funded the entire
capital call, contributing $20, 080, 000.
Terramar Seeks to Extend the Seaport Lease and
Commences Phase Two.
2003, 2007, and 2010, Terramar tried unsuccessfully to obtain
an extension of the Seaport Lease. After striking out for a
third time in 2010, Terramar asked the Port to clarify its
objectives for Seaport Village. In September 2011, the Port
adopted seven visioning goals for redeveloping the property.
JX 47 at 1. Terramar responded with a revised plan, and in
December 2011, the Port adopted a resolution declaring
Terramar's proposal "consistent with the
[Port's] visioning goals." PTO ¶ 13.
the same time, Terramar secured a forty-year Headquarters
Lease and began Phase Two-the redevelopment of Old Police
Headquarters. In September 2012, the Company retained Cohen
to secure a construction loan for Phase Two.
The Limited Action
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 (the "Limited
Action"). Limited alleged that Terramar failed to
diligently pursue an extension of the Seaport Lease. Limited
also alleged that Terramar provided financing to the Company
on unfair terms. The Trust was not a party to the Limited
Limited Action moved forward in California until August 2013,
when the California court held that Limited's claim for
dissolution had to proceed in Delaware. Limited promptly
refiled its claims in this court.
the Limited Action was pending, Cohen secured a term sheet
from Bank of America, N.A. for a construction loan for Phase
Two in the amount of $33.5 million. Bank of America withdrew
its offer in February 2013 after Limited and Terramar failed
to resolve the Limited Action through mediation. JX 62;
see Cohen Tr. 269.
2013, Cohen secured another term sheet for a construction
loan for Phase Two, again in the amount of $33.5 million, but
this time from BMO Harris Bank N.A. Unlike other financing
sources, BMO offered to lend notwithstanding the pendency of
the Limited Action, as long as Terramar agreed to indemnify
BMO for "any costs or losses" resulting from the
litigation. JX 70 at '072; see Cohen Tr. 332-33.
Terramar had no obligation to provide indemnification and
declined. The BMO loan fell through.
point, there was no third-party financing available to the
Company, and Terramar supplied the Company with Member Loans
totaling $16.3 million. The Company used the Member Loans and
cash flows from Seaport Village to redevelop Old Police
Headquarters, expending a total of $46.5 million for
Police Headquarters opened for business in November 2013. Its
tenants have included the Cheesecake Factory, Sunglass Hut,
Renewed Financing Efforts
March 2014, the Company retained Cohen to help refinance the
outstanding Members Loans. Cohen contacted approximately two
dozen lenders. Most were uninterested, citing some
combination of the Limited Action, the expiring Seaport
Lease, and the Company's request for a non-recourse loan.
One lender asked Terramar to guarantee the loan, which
Terramar declined to do.
2015, Cohen secured a term sheet from NorthStar Realty
Finance for a loan in the amount of $36.65 million on
attractive terms. NorthStar insisted on modifications to the
Headquarters Lease that the Port refused to accept, and the
refinancing fell apart.
The Port Changes Its Mind.
2015, Terramar completed a long-term project to update its
redevelopment plan for Seaport Village. Terramar and Cohen
believed that the updated proposal was even better than the
one the Port had endorsed in 2011.
Port opted for a different path. The Board of Port
Commissioners invited Terramar to present its proposal at a
hearing on October 6, 2015. Four days before the hearing, the
Port staff informed Terramar that they would recommend that
the board reject Terramar's proposal. Terramar responded
with a six-page rebuttal letter, which a Terramar
representative read into the record at the hearing. The board
nevertheless decided not to extend the Seaport Lease, and the
board formally rescinded the visioning goals on which
Terramar's proposal had relied. The Port instead endorsed
a new vision to redevelop the broader waterfront.
The Trust Settles With Terramar.
Limited refiled the Limited Action in 2013, the Trust
threatened to assert similar claims against Terramar.
See JX 68. In June 2014, Cohen offered to settle the
Trust's claims for $2 million, but the parties could not
agree on terms. JX 89; see JX 92.
August 2015, the Limited Action went to trial in this court.
After trial, the Trust and Terramar reached a settlement (the
"Settlement Agreement"). See JX 138. In
exchange for a payment of $400, 000 and a reciprocal release,
Cohen released Terramar from all claims relating to the
Company that existed as of the Settlement Agreement's
effective date of October 2, 2015. The release carved out a
claim against Terramar for allocating phantom income to the
Trust, which had not been tried in the Limited Action. By
settling, Cohen made a tactical decision to release
challenges that seemed likely to fail based on the trial in
the Limited Action, while preserving the untried claim.
November 9, 2015, this court rendered its post-trial decision
in the Limited Action, ruling in favor of Terramar on all
claims. Seaport Village Ltd. v. Terramar Retail Ctrs.,
LLC, C.A. No. 8841-VCL, at 85-101 (Del. Ch. Nov. 9,
2015) (TRANSCRIPT), aff'd, 148 A.3d 1170, 2016
WL 5373085 (Del. Sept. 26, 2016) (ORDER).
Terramar Exercises the Put Right.
end of 2015, Terramar had decided that the Company was no
longer an attractive investment. See Zwieg Tr. 42,
55-67. Under Section 9.5 of the LLC Agreement, Terramar could
exercise the Put Right by sending "a notice . . .
indicating to all other Members and to the Company that
[Terramar] desires to have its interest purchased by the
other Members of the Company." This decision refers to
that document as the "Terramar Buy-Out Notice."
9.5(a) specified that the Terramar Buy-Out Notice had to
contain "a statement of [Terramar's] opinion"
of the following two items:
(i) the fair market value of the Company (the
"Company Fair Market Value") taking into
account the fair market value of the Project [i.e.,
the Seaport Lease and the Headquarters Lease] (as determined,
if necessary, in the manner set forth below) and all other
assets of the Company, and all liabilities thereof, including
the Yasuda Loan, and hypothetical sales expenses of three
percent (3%) of the gross value, and
(ii) the amount (the "[Terramar] Purchase
Price") equal to
(A) the amount that would be distributed to [Terramar]
pursuant to Section 4.1(b) and/or 4.1(c), as applicable, if a
hypothetical cash sale of the assets of the Company subject
to such liabilities resulted in net proceeds to the Company
equal to the Company Fair Market Value, plus
(B) an amount equal to the value of the Percentage Fee Amount
reasonably anticipated to be received by [Terramar] from and
after the date of the [Terramar] Buy-Out Notice in accordance
with the provisions of Section 4.8 hereof, which the parties
hereto agree shall be equal to the average Percentage Fee
Amount for the three consecutive twelve (12) month periods
ending on the last day of the month immediately preceding the
month in which the [Terramar] Buy-Out Notice is delivered by
[Terramar], divided by the "cap rate" applied by
the parties in determining the Company Fair Market Value (or
if the parties cannot agree on a cap rate, the rate selected
by the Appraiser (as described below), and if there is more
than one Appraiser, the average cap rate selected by all
(C) would be paid [sic] to [Terramar] or its
affiliates upon repayment of any loan to the Company by
[Terramar] or its Affiliates.
JX 3 § 9.5(a) (formatting added). This decision uses
"Company Fair Market Value" and "Terramar
Purchase Price" as defined in Section 9.5(a) of the LLC
December 18, 2015, Terramar sent the Terramar Buy-Out Notice
to Limited and the Trust. The notice stated:
The purpose of this letter is to advise you that pursuant to
Section 9.5 of the [LLC Agreement], [Terramar] desires to
have its membership interest in [the Company] purchased by
[Limited] and [the Trust]. Pursuant to the terms of Section
9.5(a) of the [LLC Agreement], the following information is
1. The "Company Fair Market Value" is $42, 932,
2. The "[Terramar] Purchase Price" equals $55, 445,
Please refer to Section 9.5 of the [LLC Agreement] for the
specific requirements and time constraints it imposes.
A key component of the Terramar Purchase Price was the amount
that Terramar would receive under the waterfall provisions in
the LLC Agreement if the Company sold all of its assets for
an amount equal to Company Fair Market Value (the
"Waterfall Amount"). Terramar believed its waterfall
priorities were greater than the Company Fair Market Value.
Terramar thus specified a Waterfall Amount equal to Company
Fair Market Value. Another key component of the Terramar
Purchase Price was the balance on Terramar's Member
Loans. Tracking the definition of the Terramar Purchase