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Coit Capital Sec., LLC v. Turbine Asset Holdings, LLC

Superior Court of Delaware

August 21, 2019

COIT CAPITAL SEC., LLC, Plaintiff,
v.
TURBINE ASSET HOLDINGS, LLC, et ah, Defendants.

          Submitted: May 15, 2019

         Upon Plaintiff's Motion to Dismiss Defendants' Securities Acts Counterclaim, GRANTED.

          Stephen D. Dargitz, Esquire, Corinne E. Amato, Esquire (argued), Prickett, Jones & Elliot, P.A., Wilmington, Delaware, Counsel for Plaintiff Coit Capital Securities, LLC.

          David A. Felice, Esquire (argued), Bailey & Glasser, LLP, Wilmington, Delaware, James H. Billingsley, Esquire (pro hac vice) (argued), Ashley N. Gould, Esquire (pro hac vice), Polsinelli PC, Dallas, Texas, Attorneys for Defendants Turbine Asset Holdings, LLC and Turbine Inventory Holdings CC3, LLC.

          MEMORANDUM OPINION AND ORDER

          PAUL R. WALLACE, JUDGE.

         I. INTRODUCTION AND PROCEDURAL HISTORY

         Plaintiff Coit Capital Securities, LLC, filed an amended complaint in February 2018[1] against Turbine Asset Holdings, LLC ("TAH"), Turbine Asset Holdings Group LLC ("TAHG"), Turbine Inventory Holdings CC1, LLC ("TIH1"), Turbine Inventory Holdings CC2, LLC ("TIH2"), Turbine Inventory Holdings CC3, LLC ("TIH3"), JSS Holdings Group, LLC ("JSS"), Credit Suisse Asset Management, LLC ("Credit Suisse Management"), Credit Suisse Securitized Products Fund L.P. ("Credit Suisse Products," and together with Credit Suisse Management, "Credit Suisse"), Wilmington Savings Fund Society, FSB, d/b/a Christiana Trust ("Christiana Trust"), and United Technologies Corporation, Pratt & Whitney Division ("Pratt & Whitney").[2]

         Generally speaking, Coit alleges that these named Defendants engaged in a conspiratorial scheme designed to deprive Coit of: (1) its share of the proceeds from the sale of certain aircraft parts and inventory for which Coit helped to secure financing; and (2) opportunities to partake in future business transactions of the same nature.

         Coit's amended complaint charges:

a. Breach of Contract against TAH and TIH3 ("Count I");
b. Breach of the Implied Contractual Covenant of Good Faith and Fair Dealings against TAH and TIH3 ("Count II");
c. Unjust Enrichment against TAHG, TIH1, TIH2 and JSS ("Count III");
d. Tortious Interference with Contract against Credit Suisse ("Count IV");
e. Tortious Interference with Prospective Business Relations against Credit Suisse ("Count V");
f. Aiding and Abetting Tortious Interference with Contract and Prospective Business Relations against Christiana Trust and Pratt & Whitney ("Count VI"); and
g. Civil Conspiracy against Co-Conspirators TAH, Pratt & Whitney, Credit Suisse and Christiana Trust ("Count VII").

         The many first-named Defendants filed earlier motions to dismiss Coit's amended complaint.[3] And the Court did dismiss Coit's Count III (Unjust Enrichment) against TAHG, TIH1, TIH2 and JSS, and Coit's Count VI (Aiding and Abetting Tortious Interference with Contract and Tortious Interference with Prospective Business Relations) against Christiana Trust. In addition, TAHG, TIH1, TIH2 and JSS were dismissed from the action altogether.[4]

         In its answer, TAH and TIH3 (collectively, the "Turbine Defendants") asserted affirmative defenses of laches and unclean hands. The Turbine Defendants also brought two counterclaims against Coit. First, they allege that Coit has defamed them through the allegations made in Coit's amended complaint in the instant action (the "Defamation Counterclaim").[5] Second, the Turbine Defendants claim that Coit violated the state Securities Acts of Texas and Delaware by failing to register as a broker-dealer in connection with the aircraft financing transactions it participated in (the "Securities Acts Counterclaim"). As a result, the Turbine Defendants say, the agreements evidencing 50/50 profit-sharing between them and Coit are void and unenforceable.

         II. THE ALPHABET SOUP OF PARTIES AND ACTORS

         Coit is a privately held brokerage firm that provides structured finance and investment banking services.[6] Coit Capital Management, LLC, is a registered investment advisor with the same ownership structure as Coit.[7]

         TAH is a Delaware limited liability company with its principal place of business in Connecticut.[8] TAH was formed in 2012 by Ted Glassman and Chad Stanford, each of whom possess a 50% interest in TAH.[9] TAH is in the business of purchasing and selling engines and engine parts for commercial turbine aircrafts.[10]

         TAHG is also a Delaware limited liability company with its principal place of business in Connecticut.[11] TAHG was formed in 2014 by Glassman, Stanford and Robert Stanford (on behalf of Zenith Aviation, Inc.), each of whom owns a 33% interest in TAHG.[12] TAHG was formed for the purpose of continuing TAH's business of buying and selling aircraft engine parts.[13] In connection with the formation of TAHG, TAH agreed to wind down and terminate its operations upon completion of its existing transactions for aircraft engines and parts.[14]

         TIH1, TIH2, TIH3 and JSS are each special-purpose Delaware limited liability companies that are wholly owned by TAH.[15] TIH1 was used in connection with a portfolio transaction for engine parts consummated on September 30, 2013.[16] TIH2 was used in connection with a portfolio transaction for engine parts consummated on December 20, 2013.[17] TIH3 was used in connection with a portfolio transaction for engine parts consummated on March 27, 2014.[18] JSS was used in connection with a portfolio transaction for engine parts consummated on December 14, 2015.[19]

         Credit Suisse Management is a Delaware limited liability company and the Investment Manager of Credit Suisse Products.[20] James Drvostep is employed as a fund manager at Credit Suisse Management.[21] Credit Suisse Products is a Delaware limited partnership that acts as a hedge fund in the financial services industry.[22]

         Christiana Trust is a division of Wilmington Savings Fund Society, FSB, a Delaware corporation and a wholly owned subsidiary of WSFS Financial Corporation.[23] Christiana Trust provides trust, asset management and agency services.[24]

         Pratt & Whitney is a Delaware corporation and one of the world's leading suppliers of aircraft engines.[25] Pratt & Whitney also provides fleet management services and aftermarket maintenance and repair services to major airline carriers.[26]Mike Coleman is employed as a sales manager at Pratt & Whitney.[27]

         III. FACTUAL BACKGROUND

         The Court derives this factual recitation from the allegations in Coit's amended complaint, the Turbine Defendants' answer and counterclaims, documents incorporated by reference or integral to those pleadings, the parties' filings related to the instant motion and judicially noticeable facts.[28] As the Court must, it has accepted as true the counterclaims' well-pled factual allegations and has drawn all reasonable inferences from those allegations in the Turbine Defendants' favor.[29]

         A. The Early Discussions of the Portfolio Transactions.

         Representatives of Coit first met with Glassman in 2011 to discuss the purchase of a cargo aircraft and the lease of the aircraft to an international carrier company.[30] Glassman was looking for an entity to fund the deal and identified Coit as a potential source.[31] Although the deal never came to fruition, Glassman continued to keep Coit apprised of other potential aviation transactions.[32]

         After the formation of TAH in June 2012, Glassman approached Coit regarding the financing of potential Pratt & Whitney portfolio transactions on TAH's behalf.[33] Glassman explained the transaction structure and its benefits as follows:[34]

• TAH would purchase a portfolio of aircraft engines and engine parts from Pratt & Whitney, but Pratt & Whitney would retain possession of the parts pursuant to an inventory management agreement with the authority to resell those parts to third parties.[35]
• This structure permitted Pratt & Whitney to recognize the portfolio sales as "true sales," thereby permitting Pratt & Whitney to remove certain inventory from its books to improve its revenue figures for the fiscal year.[36]
• As the purchaser of the portfolio, TAH would profit from Pratt & Whitney's resale of the engines and parts to third parties.[37]
• If Coit were to secure the financing for the portfolio transactions, TAH would agree to share the proceeds from Pratt & Whitney's resale of the assets with Coit on an equal basis.[38]

         In early 2013, a Pratt & Whitney portfolio transaction emerged for which TAH sought Coit's assistance in securing approximately $10 million to fund the purchase.[39] Coit secured a financing commitment from an investor who, through no fault of Coit, unexpectedly backed out of the deal just before closing.[40] TAH nonetheless remained interested in working with Coit because Coit was amenable to a 50-50 split and Coit could provide financing contacts capable of funding large transactions.[41]

         B. The Portfolio Transactions: CC1, CC2, CC3.

         With the promise of future deals on the horizon, Coit identified Credit Suisse as an interested investor and contacted its fund manager, Drvostep, to discuss a potential investment.[42] Drvostep expressed interest in participating in the Pratt & Whitney portfolio transactions.[43] Accordingly, when Coit learned from TAH that Pratt & Whitney had made a portfolio of assets available, Coit contacted Drvostep who subsequently agreed to finance the transaction.[44] That transaction, known as "CC1" to Coit, was later consummated for $5 million in September 2013.[45]

         Nearly a week before the CC1 transaction closed, on September 24, Coit and TAH executed a letter agreement for the CC1 transaction to confirm the parties' 50-50 profit-sharing agreement (the "September 2013 Letter Agreement").[46] CC1 was structured such that TAH bought aircraft engines and engine parts from Pratt & Whitney, who maintained physical possession in order to market the engines and parts for sale.[47] TAH would assign its interest in the engines and parts to TIH1, which would then use the funds from Credit Suisse to pay Pratt & Whitney for the inventory. Under the 50-50 profit-sharing terms of the September 2013 Letter Agreement, any proceeds recognized by Pratt & Whitney from this sale would be distributed evenly between Coit and TAH.

         On September 30, 2013, TAH, TIH1, Credit Suisse, Christiana Trust and Pratt & Whitney consummated CC1 via numerous instruments relating to the CC1 transaction, including a Loan and Security Agreement.[48] Coit was neither party to nor bound by the terms of any of these agreements governing CC1.[49] The Loan and Security Agreement, executed by and among TIH1, Credit Suisse and Christiana Trust, set forth the cash flow priority for distribution of proceeds from the sale of assets in the CC1 portfolio. Under the Loan and Security Agreement, any proceeds from Pratt & Whitney's sale of the engines and parts would be remitted to Christiana Trust as the trustee. Christiana Trust would then be responsible for distributing the proceeds in order of priority.[50]

         On December 30, 2013, with the CC1 transaction structure serving as a template, TAH purchased a second portfolio of plane engines and parts from Pratt & Whitney for approximately $28 million (referred to as "CC2").[51] TAH then sold the CC2 portfolio of engines and parts to TIH2-its newly created, wholly owned subsidiary.[52] As with the first transaction, Coit and TAH executed a letter Agreement wherein they agreed to share the profits from the inventory involved in the CC2 transaction equally (the "December 2013 Letter Agreement").[53]

         A third portfolio transaction ("CC3") followed in March of 2014, using terms and documentation substantially similar to the prior two transactions; this included a Loan and Security Agreement and terms of distribution.[54] Again, this documentation provided that the profits recognized from Pratt & Whitney's resale of the CC3 portfolio assets would be equally divided between TAH and Coit.[55] But unlike CC1 and CC2's letter agreements, that for CC3 (the "March 2014 Letter Agreement") was executed by Coit and TIH3, rather than TAH.[56] Additionally, the March 2014 Letter Agreement provided that TIH3 share profits with Coit on all transactions that TIH3 consummated from time to time.[57]

         Following the success of the CC1, CC2, and CC3 portfolio transactions, Drvostep inquired whether Credit Suisse could share in a cut of the profits from TAH's sale of the portfolio assets.[58] Coit rejected this request.[59] Drvostep additionally sought to include one of Credit Suisse's offshore funds in a large-scale transaction.[60] This request demanded the involvement of a partner to ensure the investment was in compliance with applicable tax laws.[61] As a result, Coit arranged for a meeting between Glassman, Drvostep, and its contact, David Moran of PartnerRe, a Bermuda-based reinsurance company.[62] After the meeting, Glassman privately approached Moran and requested that Moran sign a non-circumvent agreement which stipulated PartnerRe would do business with TAH and not Coit for any Pratt & Whitney transactions.[63] Moran declined to sign the agreement and informed Coit of Glassman's offer.[64]

         Coit, concerned with the future of its relationship with TAH, contacted Drvostep concerning Glassman's actions.[65] Drvostep responded by reassuring Coit that it would be included in any future Pratt & Whitney portfolio transactions involving Credit Suisse and TAH.[66] A follow-up phone call between Drvostep, Coit and TAH reinforced this verbal guarantee.[67]

         By late 2014, relevant inventory management report analyses revealed that CC1 was not performing as anticipated and Credit Suisse was facing a loss of up to $ 1 million on the CC1 portfolio transaction.[68] Because CC1, CC2 and CC3 were not cross-collateralized, any positive performances in CC2 and CC3 could not be used to cover the loss on CC1, [69] Credit Suisse advised TAH and Coit that it would not participate in any future portfolio transactions unless and until the loss on CC1 was mitigated.[70] In an effort to quell Credit Suisse's loss of confidence, Glassman assured Coit that he had ideas to remedy the CC1 loss.[71]

         C. The Allegations in Coit's Amended Complaint.

         Coit contends that CC1's underperformance created a unique opportunity for Credit Suisse and TAH to work together to advance their own interests.[72] Credit Suisse had already requested a share of the profits from any portfolio transactions, had previously expressed its desire for larger Pratt & Whitney portfolio transactions, and now sought to cover its losses from the CC1 transaction.[73] TAH had already attempted to exclude Coit from future portfolio transactions when Glassman proposed the non-circumvent agreement to Moran.[74]

         Coit suggests that Credit Suisse and TAH had reason to benefit from excluding Coit from subsequent transactions. The opportunity to do so, Coit says, was presented to Credit Suisse and TAH in the form of a $78.5 million Pratt & Whitney portfolio transaction, referred to as the Waypoint transaction.[75]

         TAH identified the Waypoint transaction in early 2015, and, without notifying Coit, directly contacted Credit Suisse for financing.[76] JSS, an affiliate of TAH, purchased the portfolio and a Credit Suisse subsidiary financed the transaction.[77]The Credit Suisse subsidiary also entered into a profit-sharing agreement with the TAH affiliate regarding the proceeds from the resale of the Waypoint portfolio assets.

         In early May 2015 when Coit contacted Drvostep about CC1, CC2 and CC3, Drvostep cryptically claimed that Glassman and Stanford had forced him to write a check.[78] It wasn't until June 2015, after receiving Christiana Trust's May 2015 statement, that Coit discovered a $1.75 million advance from Credit Suisse dated May 20, 2015.[79] This amount, less the amount owed for legal fees, resulted in a $1.58 million distribution directly to TAH or one of its wholly owned subsidiaries TIH1, TIH2 or TIH3.[80] Coit received no share of that distribution.[81] Coit contacted Christiana Trust to notify the trustee of this distribution and to request information as to why the distribution had occurred. Coit received no response.[82] Thereafter, Coit received no more monthly statements from Christiana Trust.[83] And though Coit also contacted TAH for financial updates, Glassman never disclosed the $1.75 million distribution to Coit.[84]

         Coit claims that Credit Suisse advanced Christiana Trust the $1.75 million to distribute to TAH to secure the Waypoint transaction.[85] In exchange, CC1, CC2 and CC3 were cross-collateralized and Credit Suisse replaced Coit as TAH's profit-sharing partner.[86] Coit also alleges-based on court filings from certain related Texas litigation-that TAH used the funds it received from Credit Suisse to bribe Coleman, a high-ranking Pratt & Whitney employee, to funnel the Waypoint deal to TAH and Credit Suisse.[87]

         Coit further contends that after the CC1, CC2, and CC3 transactions were closed, TAH, Credit Suisse and Christiana Trust amended the terms of the September 2013 Loan Security Agreement on May 20, 2015.[88] This amendment altered the cash flow priority for distribution of proceeds from the sale of the assets in each transaction and resulted in Coit moving from fifth in priority to tenth.[89] The September 2013 Loan Security Agreement was further amended on June 30, 2015, by the CC4 Loan and Security Agreement, which was executed by TAH, Credit Suisse and Christiana Trust. Coit was not a party to the CC4 Loan and Security Agreement, and its effect caused Coit to move from tenth to twelfth in priority.[90] On September 30, 2015, TAH, Credit Suisse and Christiana Trust amended the September 2013 Loan and Security Agreement for the third time by completing the CC5 Loan and Security Agreement, which Coit was not a party to and which provided that payments to Coit were tenth in priority.[91] In December 2015, JSS entered into an IMA with Pratt & Whitney.[92]

         In essence, the Letter Agreements provide that if and when all other obligations were paid, Coit and TAH (and TIH3 in the case of the CC3 transaction) would share the remaining profits equally.[93] To date, Coit has received no payments on CC1, on CC2 or on CC3.[94]

         IV. APPLICABLE LEGAL STANDARDS

         A party raising a statute of limitations defense to a claim or counterclaim may do so in a motion to dismiss when the pleadings themselves demonstrate that the questioned action was not brought within the applicable statutory period.[95] The Court accepts the allegations contained in the opposing party's pleading as true for purposes of such a motion.[96]

         V. PARTIES' CONTENTIONS

         The Turbine Defendants ask the Court to declare that the Letter Agreements are unenforceable and thus void as a matter of law because, in their view, Coit failed to register as securities brokers of as agents of brokers in either Delaware or Texas before selling "a security" to the Turbine Defendants or seeking compensation related to "a security."[97]

         Coit seeks to dismiss the Securities Acts Counterclaim as untimely because any action for a purported violation of the Securities Act of either Delaware or Texas expired in March 2017.[98] Even if the Security Acts Counterclaim was timely filed, Coit argues that the claim itself fails as a matter of law because the actions in dispute did not involve the transfer of a "security" as defined by either state's Securities Act and so Coit was not required to register as a broker-dealer.[99] Lastly, Coit contends that the Turbine Defendants may not bring a private cause of action under either state's Securities Act because the Security Acts Counterclaim fails to allege (i) any injury to the Turbine Defendants as a result of Coit's purported failure to register, and (ii) that the Turbine Defendants are within the class of persons those Securities Acts were designed to protect.[100]

         VI. DISCUSSION

         The three portfolio transactions at issue in the Securities Acts Counterclaim include: (1) CC1, which closed in September 2013; (2) CC2, which closed in December 2013; and (3) CC3, which closed in March 2014.[101] Under the Securities Acts of both Delaware and Texas, a civil action for failure to register as a broker-dealer must be brought within three years from the date of the sale.[102]

         For purposes of this particular argument in this motion, the parties agree that the Letter Agreements executed by Coit and the Turbine Defendants in connection to the closing of each of portfolio transaction serve as the only potential "security" for purposes of measuring the timeliness of claims arising under the Securities Acts.[103] Thus, the window for filing the Securities Acts Counterclaim appears to have expired in March 2017.

         Coit moves to dismiss the Securities Acts Counterclaim as time-barred because it was filed in September 2018.[104]

         The Turbine Defendants assert that the Securities Acts Counterclaim is not time-barred because it is "exclusively defensive" and arises from the same transactions in dispute in Coit's Amended Complaint.[105] Coit says the Securities Acts Counterclaim is hardly "exclusively defensive;" instead, it seeks affirmative relief in the form of a declaration that the Letter ...


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