HREF Senior Worthington LLC v. Conroe WM LLC
This text of HREF Senior Worthington LLC v. Conroe WM LLC (HREF Senior Worthington LLC v. Conroe WM LLC) is published on Counsel Stack Legal Research, covering Court of Chancery of Delaware primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
HREF SENIOR WORTHINGTON ) LLC and SL1 B LLC, ) ) Plaintiffs, ) ) v. ) C.A. No. 2024-1148-MTZ ) CONROE WM LLC and WM ) PROPERTY HOLDINGS LLC, ) ) Defendants, ) ) and ) ) WM CONROE PROPERTY ) HOLDINGS LLC, ) ) Nominal Defendant. )
MEMORANDUM OPINION Date Submitted: December 31, 2025 Date Decided: January 12, 2026
J. Clayton Athey, John G. Day, Stacey A. Greenspan, Kirsten M. Valania, PRICKETT, JONES & ELLIOT, P.A., Wilmington, Delaware; Rebecca Woods, SEYFARTH SHAW LLP, Atlanta, Georgia, Attorneys for Plaintiffs HREF Senior Worthington LLC and SL1 B LLC.
Kevin J. Mangan, Stephanie S. Riley, Zachary Murphy, WOMBLE BOND DICKINSON (US) LLP, Wilmington, Delaware, Attorneys for Defendants Conroe WM LLC and WM Property Holdings LLC.
ZURN, Vice Chancellor. This post-trial opinion identifies the manager of a holding company, which
holds an operating company, which owns and operates an assisted living facility.
The plaintiff, an institutional lender in the commercial residential space, lent the
holding company necessary capital secured by the right to step in as manager if the
holding company failed to make timely payments. The lender’s right to become
the holding company’s manager upon nonpayment was undisputedly triggered.
But the team that built the facility does not want to give up control to the
lender. The defendants contend agreements between the operating company and
its mortgage insurer impose approval requirements to change the holding
company’s manager that have not been fulfilled.
This opinion concludes the lender is the holding company’s manager. The
approval requirements the defendants invoke do not apply to the holding company,
the contract giving rise to the lender’s step-in rights is not illegal, and this Court
can resolve the control dispute with the parties before it.
2 I. BACKGROUND1
The following facts were either uncontested in this summary proceeding, or
were proven by a preponderance of the evidence. Trial was held on a paper record,
including the parties’ joint exhibits and the stipulated facts in the parties’ Joint Pre-
Trial Order.2
A. The Project Is Funded With A HUD-Insured Loan.
At least by 2019, Curtis Lindsey owned some undeveloped land in Conroe,
Texas, and had a plan to build a 117-bed assisted living facility on that land (the
“Project”).3 Defendant Conroe WM LLC (“OpCo”) is a Delaware limited liability
company formed “to acquire, develop and operate” the Project.4
1 Citations in the form “AC ¶ __” refer to the Amended Verified Complaint, available at docket item (“D.I.”) 18. Citations in the form “Ans. ¶ __” refer to the defendants’ answer to the Amended Verified Complaint, available at D.I. 27. Citations in the form “DOB __” refer to the defendants’ corrected opening pre-trial brief, available at D.I. 74. Citations in the form “PB __” refer to the plaintiff’s corrected pre-trial brief, available at D.I. 72. Citations in the form “RB __” refer to the defendants’ corrected reply brief, available at D.I. 75. Citations in the form “PSR __” refer to the plaintiff’s sur-reply brief, available at D.I. 66. Citations in the form of “Trial Tr. __” refer to the trial transcript, available at D.I. 79. Citations in the form “JX __” refer to the parties’ joint exhibits. 2 D.I. 77 [hereinafter “Joint Stip.”]. 3 JX 14 at 55-70; JX 4 at 3, 25, 113; Trial Tr. 10. 4 JX 14 at Recital A [hereinafter the “Master Agreement”].
3 The Project was primarily financed with a loan from Greystone Funding
Company LLC (“Greystone” or “Lender”) to OpCo (the “Loan”).5 All the relevant
financing documents defined OpCo as the “Borrower” on the Loan.6
The Loan had to be insured by the U.S. Department of Housing and Urban
Development (“HUD”), through its Section 232 loan program.7 That program
provides mortgage insurance for residential care facilities, including the new
construction of assisted living facilities.
When HUD agreed to insure the loan, it imposed certain conditions on
OpCo.8 HUD required OpCo to designate a specific individual to be an owner,
member, and co-manager with operational and day-to-day control over “the
Borrower’s entity.”9 To start, that person was Lisa Ann Shelton.10 HUD required
Shelton’s role to be documented in OpCo’s organizational documents.11 HUD also
required a consent right over removing Shelton from those roles, as set forth in
HUD’s letter agreeing to insure the loan:
5 JX 4 at 175; Joint Stip. ¶ 16. 6 See, e.g., JX 4 at 175 (“We understand that [Greystone], as Lender, ha[s] agreed to make a loan to Conroe WM LLC (hereinafter called the ‘Borrower’)”); JX 3 (identifying OpCo as the borrower). 7 JX 2 at 4; JX 4 at 175; Joint Stip. ¶ 16. 8 JX 4 at 175–186. 9 Id. §§ 7–7(c). 10 Id. § 7. In the trial record, Shelton’s first name is sometimes spelled “LisaAnn” and other times “Lisa Ann.” I apologize if I have spelled it incorrectly.
4 7) . . . Prior to closing, the Borrower’s Organizational Documents must be amended to address the below provisions and be satisfactory to HUD:
a) Clearly delineate her co-manager’s roles and responsibilities and provide sufficient operational control to allow her to direct day-to- day operations at the facility including the sole right to manage the operations, including hiring all of the employees and operating the facility;
b) Give Ms. Shelton the deciding vote between the two co- managers; and,
c) Provide that Ms. Shelton cannot be removed from her co- manager role without HUD and Greystone Funding’s explicit written approval.
8) Borrower Structure: LisaAnn Shelton, the member and co-manager of the Borrower entity, is being relied upon to provide the relevant residential health care experience in the lease-up and operations of the proposed facility. As a result, the Borrower Regulatory Agreement shall be amended to state that prior HUD notification and approval is required before it is removed as a participant, or as the co- manager of the borrower entity.12 As for Greystone, HUD required Greystone to collect three separate escrows
for working capital, minor moveable equipment, and an initial operating deficit.13
B. HREF Joins The Deal.
In May 2019, plaintiff HREF Senior Worthington LLC (“HREF” or
“Plaintiff”)14 was brought in to fund the HUD-required escrows.15 On June 26,
11 Id. §§ 7–8. 12 Id. (emphasis added). 13 Id. §§ 6–6(e).
5 HREF provided its letter of intent (“LOI”) and its corresponding term sheet to fund
HUD’s escrow requirements.16
The LOI outlined the pertinent terms of HREF’s investment. HREF’s
investment would be redeemed in full 42 months from closing; HREF would
receive monthly payments until its investment was redeemed; and upon the
occurrence of an “Additional Rights Event,” HREF “may (i) remove the Sponsor
from the day-to-day management of the Project[.]”17 The LOI explained that in
addition to funding the HUD-required escrows, a portion of HREF’s capital would
fund HREF’s monthly payments, and “[s]uch amount shall be deposited into an
account that can only be used for the designated purpose and be drawn with the
consent of [HREF].”18
On July 18, Greystone shared with HREF HUD’s firm commitment to insure
the Loan.19
14 Plaintiff operated as MidHudson Health Worthington LLC until early 2023 when its name was changed to MidHudson Real Estate Finance LLC. I understand references in the record to MidHudson Health Worthington LLC or MH refer to Plaintiff. 15 Joint Stip. ¶¶ 1, 29; JX 1. 16 JX 2. 17 Id. at 4–6.
Free access — add to your briefcase to read the full text and ask questions with AI
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
HREF SENIOR WORTHINGTON ) LLC and SL1 B LLC, ) ) Plaintiffs, ) ) v. ) C.A. No. 2024-1148-MTZ ) CONROE WM LLC and WM ) PROPERTY HOLDINGS LLC, ) ) Defendants, ) ) and ) ) WM CONROE PROPERTY ) HOLDINGS LLC, ) ) Nominal Defendant. )
MEMORANDUM OPINION Date Submitted: December 31, 2025 Date Decided: January 12, 2026
J. Clayton Athey, John G. Day, Stacey A. Greenspan, Kirsten M. Valania, PRICKETT, JONES & ELLIOT, P.A., Wilmington, Delaware; Rebecca Woods, SEYFARTH SHAW LLP, Atlanta, Georgia, Attorneys for Plaintiffs HREF Senior Worthington LLC and SL1 B LLC.
Kevin J. Mangan, Stephanie S. Riley, Zachary Murphy, WOMBLE BOND DICKINSON (US) LLP, Wilmington, Delaware, Attorneys for Defendants Conroe WM LLC and WM Property Holdings LLC.
ZURN, Vice Chancellor. This post-trial opinion identifies the manager of a holding company, which
holds an operating company, which owns and operates an assisted living facility.
The plaintiff, an institutional lender in the commercial residential space, lent the
holding company necessary capital secured by the right to step in as manager if the
holding company failed to make timely payments. The lender’s right to become
the holding company’s manager upon nonpayment was undisputedly triggered.
But the team that built the facility does not want to give up control to the
lender. The defendants contend agreements between the operating company and
its mortgage insurer impose approval requirements to change the holding
company’s manager that have not been fulfilled.
This opinion concludes the lender is the holding company’s manager. The
approval requirements the defendants invoke do not apply to the holding company,
the contract giving rise to the lender’s step-in rights is not illegal, and this Court
can resolve the control dispute with the parties before it.
2 I. BACKGROUND1
The following facts were either uncontested in this summary proceeding, or
were proven by a preponderance of the evidence. Trial was held on a paper record,
including the parties’ joint exhibits and the stipulated facts in the parties’ Joint Pre-
Trial Order.2
A. The Project Is Funded With A HUD-Insured Loan.
At least by 2019, Curtis Lindsey owned some undeveloped land in Conroe,
Texas, and had a plan to build a 117-bed assisted living facility on that land (the
“Project”).3 Defendant Conroe WM LLC (“OpCo”) is a Delaware limited liability
company formed “to acquire, develop and operate” the Project.4
1 Citations in the form “AC ¶ __” refer to the Amended Verified Complaint, available at docket item (“D.I.”) 18. Citations in the form “Ans. ¶ __” refer to the defendants’ answer to the Amended Verified Complaint, available at D.I. 27. Citations in the form “DOB __” refer to the defendants’ corrected opening pre-trial brief, available at D.I. 74. Citations in the form “PB __” refer to the plaintiff’s corrected pre-trial brief, available at D.I. 72. Citations in the form “RB __” refer to the defendants’ corrected reply brief, available at D.I. 75. Citations in the form “PSR __” refer to the plaintiff’s sur-reply brief, available at D.I. 66. Citations in the form of “Trial Tr. __” refer to the trial transcript, available at D.I. 79. Citations in the form “JX __” refer to the parties’ joint exhibits. 2 D.I. 77 [hereinafter “Joint Stip.”]. 3 JX 14 at 55-70; JX 4 at 3, 25, 113; Trial Tr. 10. 4 JX 14 at Recital A [hereinafter the “Master Agreement”].
3 The Project was primarily financed with a loan from Greystone Funding
Company LLC (“Greystone” or “Lender”) to OpCo (the “Loan”).5 All the relevant
financing documents defined OpCo as the “Borrower” on the Loan.6
The Loan had to be insured by the U.S. Department of Housing and Urban
Development (“HUD”), through its Section 232 loan program.7 That program
provides mortgage insurance for residential care facilities, including the new
construction of assisted living facilities.
When HUD agreed to insure the loan, it imposed certain conditions on
OpCo.8 HUD required OpCo to designate a specific individual to be an owner,
member, and co-manager with operational and day-to-day control over “the
Borrower’s entity.”9 To start, that person was Lisa Ann Shelton.10 HUD required
Shelton’s role to be documented in OpCo’s organizational documents.11 HUD also
required a consent right over removing Shelton from those roles, as set forth in
HUD’s letter agreeing to insure the loan:
5 JX 4 at 175; Joint Stip. ¶ 16. 6 See, e.g., JX 4 at 175 (“We understand that [Greystone], as Lender, ha[s] agreed to make a loan to Conroe WM LLC (hereinafter called the ‘Borrower’)”); JX 3 (identifying OpCo as the borrower). 7 JX 2 at 4; JX 4 at 175; Joint Stip. ¶ 16. 8 JX 4 at 175–186. 9 Id. §§ 7–7(c). 10 Id. § 7. In the trial record, Shelton’s first name is sometimes spelled “LisaAnn” and other times “Lisa Ann.” I apologize if I have spelled it incorrectly.
4 7) . . . Prior to closing, the Borrower’s Organizational Documents must be amended to address the below provisions and be satisfactory to HUD:
a) Clearly delineate her co-manager’s roles and responsibilities and provide sufficient operational control to allow her to direct day-to- day operations at the facility including the sole right to manage the operations, including hiring all of the employees and operating the facility;
b) Give Ms. Shelton the deciding vote between the two co- managers; and,
c) Provide that Ms. Shelton cannot be removed from her co- manager role without HUD and Greystone Funding’s explicit written approval.
8) Borrower Structure: LisaAnn Shelton, the member and co-manager of the Borrower entity, is being relied upon to provide the relevant residential health care experience in the lease-up and operations of the proposed facility. As a result, the Borrower Regulatory Agreement shall be amended to state that prior HUD notification and approval is required before it is removed as a participant, or as the co- manager of the borrower entity.12 As for Greystone, HUD required Greystone to collect three separate escrows
for working capital, minor moveable equipment, and an initial operating deficit.13
B. HREF Joins The Deal.
In May 2019, plaintiff HREF Senior Worthington LLC (“HREF” or
“Plaintiff”)14 was brought in to fund the HUD-required escrows.15 On June 26,
11 Id. §§ 7–8. 12 Id. (emphasis added). 13 Id. §§ 6–6(e).
5 HREF provided its letter of intent (“LOI”) and its corresponding term sheet to fund
HUD’s escrow requirements.16
The LOI outlined the pertinent terms of HREF’s investment. HREF’s
investment would be redeemed in full 42 months from closing; HREF would
receive monthly payments until its investment was redeemed; and upon the
occurrence of an “Additional Rights Event,” HREF “may (i) remove the Sponsor
from the day-to-day management of the Project[.]”17 The LOI explained that in
addition to funding the HUD-required escrows, a portion of HREF’s capital would
fund HREF’s monthly payments, and “[s]uch amount shall be deposited into an
account that can only be used for the designated purpose and be drawn with the
consent of [HREF].”18
On July 18, Greystone shared with HREF HUD’s firm commitment to insure
the Loan.19
14 Plaintiff operated as MidHudson Health Worthington LLC until early 2023 when its name was changed to MidHudson Real Estate Finance LLC. I understand references in the record to MidHudson Health Worthington LLC or MH refer to Plaintiff. 15 Joint Stip. ¶¶ 1, 29; JX 1. 16 JX 2. 17 Id. at 4–6. The LOI noted that “[HREF] is a passive investor with no authority except in the event of fraud, bankruptcy, breach of project contracts or failure to pay the preferred return.” Id. at 13. 18 Id. at 6. 19 JX 4 at 1, 175.
6 C. The Project’s Corporate Structure Is Papered.
Several agreements supporting the Project were signed on December 1,
2019.20 They memorialized HUD’s consent right over changing OpCo’s
management, and show HREF’s capital contributions were foundational to getting
the Project going.21
1. The OpCo Agreement
OpCo adopted its Limited Liability Company Agreement for Conroe WM
LLC (the “OpCo Agreement”).22 OpCo’s two initial members were nominal
defendant WM Conroe Property Holdings LLC (“HoldCo”), and Lindsey’s entity
Conroe Senior Living, LLC (“LindseyCo”).23 OpCo is a manager-managed LLC,
and HoldCo is its manager.24
The OpCo Agreement includes specific “HUD Provisions” applicable while
the HUD-insured Loan is outstanding.25 Those HUD Provisions bake in HUD’s
consent right over removing the HUD contact from OpCo’s management.
(a) Conflicts with the Loan Documents. If any of the provision of the Company’s Certificate of Formation, this Agreement or any other
20 JX 5 [hereinafter “OpCo Agreement”]; JX 6 [hereinafter “HoldCo Agreement”]. 21 OpCo Agreement §§ 14.6(a)–(b)(vi); HoldCo Agreement § 5.1; HoldCo Agreement at Ex. B. 22 Joint Stip. ¶ 13; see generally OpCo Agreement. 23 OpCo Agreement at Recital; id. at Ex. A. 24 Id. §§ 14.1(a)–(b). 25 Id. §§ 14.6–14.6(i).
7 organizational document of the Company conflicts with the provisions of any of the Loan Documents, the provisions of the Loan Documents shall control.26
(b) Restrictions on Amendments. No provision required by HUD to be inserted in this Agreement or any other organizational document of the Company may be amended without the prior written approval of HUD. No provision of this Agreement or any other organizational document of the Company that results in any of the following will have any force or effect without the prior written approval of HUD:
...
(iv) Any amendment that would authorize any member, partner, owner, officer, manager, director, and/or any other person, other than one previously approved by HUD, to bind the Company for all matters concerning the Project that require the consent or approval of HUD . . . .27
The OpCo Agreement provides when OpCo would fund HoldCo’s monthly
payments to HREF.28
From time-to-time and before any distribution of Net Cash Flow pursuant to Section 9.2, the Company shall make payments to, or on behalf of, [HoldCo] sufficient to allow [HoldCo] to timely make required payments to [HREF] pursuant to the terms of the [HoldCo Agreement], including monthly payments of the [HREF] Current Return and all outstanding payments owed on the Anticipated Redemption Date.29
26 Id. § 14.6(a). 27 Id. §§ 14.6(b), 14.6(b)(iv). 28 Id. § 9.1. 29 Id. § 9.1.
8 And the OpCo Agreement builds HoldCo’s redemption of HREF into OpCo’s
liquidation waterfall in the event of a sale.30
2. The HoldCo Agreement
HoldCo adopted its Limited Liability Company Agreement for WM Conroe
Property Holdings LLC (the “HoldCo Agreement”).31 HoldCo’s stated purpose “is
to be the manager of [OpCo] and cause [OpCo] to be operated in accordance with
the [OpCo Agreement].”32
HoldCo’s initial members were defendant WM Property Holdings LLC
(“WMPH,” and with OpCo the “Defendants”), plaintiff SL1 B LLC, (“SL1”)33 and
nonparty Shelton-Conroe, LLC (“Shelton-Conroe”).34 OpCo’s designated HUD
contact Lisa Ann Shelton was Shelton-Conroe’s majority member.35
30 Id. §§ 9.3–9.3(e). 31 JX 6 [hereinafter “HoldCo Agreement”]. 32 HoldCo Agreement, Art. 4. 33 SLI is a plaintiff in this plenary action, but only HREF brings Count V under 6 Del. C. § 18-110. 34 Joint Stip. ¶ 15; HoldCo Agreement at Recital; id. at Ex. A. 35 OpCo Agreement § 14.6(f) (“The key principals of the Company identified in Section 38 of the Regulatory Agreement are liable in their individual capacities to HUD as set forth in the Regulatory Agreement.”); JX 9 [hereinafter “Borrower Agreement”] at Section 38 Addendum (identifying Shelton along with Norma Upshur and SL1); HoldCo Agreement §§ 14.1(b).
9 The HoldCo Agreement provides HREF would become a HoldCo member
upon execution of an attached addendum (the “HREF Addendum”).36 The HoldCo
Agreement also states that “the terms of the [HREF] Addendum shall control over
any conflicting terms or inconsistencies with th[e] [HoldCo] Agreement.”37
HoldCo is also a manager-managed LLC, with management decisions
subject to overlapping consent rights.38 The HoldCo Agreement named WMPH
and Shelton-Conroe as “initial Managers.”39 In the event of a managerial deadlock,
WMPH’s decision “shall be binding unless the other [co-manager] . . . has received
prior written consent or approval of SL1,” in which case SL1’s prior written
approval controls.40 The HoldCo Agreement specified that “while Shelton[-
Conroe] is a Manager . . . Shelton[-Conroe] shall have the authority to take any act
or make any decision . . . with respect to resident care and all other decisions
regarding day-to-day management and operation of the Project.”41
As for manager removal, the HoldCo Agreement provides “[a] Manager may
be removed only for its failure to enforce the contractual rights of the Company
under the terms of and conditions of the Development Agreement, the
36 HoldCo Agreement § 5.1. 37 Id. 38 Id. §§ 14.1(a)–14.1(d). 39 Id. § 14.1(d). 40 Id. § 14.1(b).
10 Management Agreement or its other legally enforceable agreements, or for
cause.”42
The HoldCo Agreement requires any amendments to the HoldCo Agreement
to be in writing and approved by all the Members.43
D. HUD’s Insurance Is Papered.
On February 1, 2020, OpCo and HUD executed the Healthcare Facility Note
(the “Note”),44 Healthcare Regulatory Agreement–Borrower Agreement (the
“Borrower Agreement”),45 and the Healthcare Regulatory Agreement–Operator
Agreement (the “Operator Agreement”)46 (collectively, the “HUD Documents”).
The HUD Documents are agreements among OpCo as the borrower, Greystone as
the Lender, and HUD as the Loan insurer.47 HoldCo is not a party to the HUD
Documents.
The Note between OpCo and Greystone governs OpCo’s payment
obligations to Greystone.48 The Note echoes HUD’s approval to insure
41 Id. 42 Id. § 14.1(d). 43 HoldCo Agreement § 20.12. 44 JX 8 [hereinafter “Note”]. 45 Borrower Agreement. 46 JX 10 [hereinafter “Operator Agreement”]. 47 Note at 1; Borrower Agreement at 1; Operator Agreement at 1; see JX 4 at 175 (defining OpCo as “Borrower” in HUD’s “Firm Commitment” to insure the Loan). 48 See generally Note.
11 Greystone’s Loan to OpCo.49 The Note also includes a forum selection clause
sending actions “arising under” the Note to Texas or federal court.50
The Borrower Agreement between OpCo, as borrower, and HUD requires
HUD’s prior written approval before Shelton can be removed from “the
Borrower’s organizational structure[.]”51 The Borrower Agreement recites that
Shelton-Conroe was a member and co-manager of HoldCo, OpCo’s sole
manager.52 And it recites that Shelton was Shelton-Conroe’s “sole member.”53
Against that backdrop, the Borrower Agreement provides HUD must provide prior
written approval before “any change in [OpCo’s] organizational structure” that
would result in Shelton’s removal as Shelton-Conroe’s manager.
(b) HUD NOTIFICATION AND APPROVAL FOR REMOVAL OF LISAANN SHELTON. LisaAnn Shelton is the sole member of Shelton-Conroe, LLC, an Oregon member managed limited liability company (“Shelton”). Shelton is a member and co-manager of [HoldCo], the sole manager of [OpCo]. It is understood an[d] agreed by the Borrower and HUD that LisaAnn Shelton is being relied upon to provide the relevant residential health care experience in the lease- up and operations of the proposed facility. Therefore, while any mortgage is insured or held by HUD, Borrower acknowledges and agrees that it must notify HUD and HUD must approve in advance and in writing any change in the Borrower’s organizational structure that would result in any of the following:
49 Id. at 10. 50 Id. §§ 16(a)–(b). 51 Borrower Agreement § 46(b). 52 Id. 53 Id.
12 a) LisaAnn Shelton no longer being a participant in the Borrower or
b) Shelton[-Conroe] no longer being the co-manager of the Borrower’s manager or
c) LisaAnn Shelton no longer being the sole member of Shelton[- Conroe].54
The Borrower Agreement also requires OpCo to secure HUD’s approval before
amending its organizational documents in a way that would remove Shelton from
those positions.55 The Borrower Agreement provides:
34. Borrower shall not without the prior written approval of HUD, including without limitation in accordance with Program Obligations: ...
(i) Amend the organizational documents of Borrower in such a way that modifies the terms of the organizational documents required by HUD, Lender, and/or Program Obligations, including, but not limited to: ...
(iii) any amendment that would change the identity of the persons and/or entities authorized to bind Borrower previously approved by HUD or pre-approve a successor general partner, manager or member to bind the partnership or company for any matters concerning the Project which require HUD’s consent or approval; (iv) a change in any general partner, manager or managing member or pre-approved successor general partner, manager or managing member of the partnership or company or any change in a guarantor of any obligation to HUD; and
54 Id. (emphasis added). 55 Id. § 34(i).
13 (v) any proposed changes to the mandatory HUD language included in the organizational documents. Copies of all fully executed amendments to the organizational documents must be provided to HUD within ten (10) days of the effective date of the amendment . . . .56 E. HREF Becomes A HoldCo Member With The Potential To Become Manager. On February 13, as the HoldCo Agreement required, the HREF Addendum
was executed by all HoldCo members, and HREF became a HoldCo member. 57 At
that point, HoldCo had four members: WMPH, SL1, Shelton-Conroe, and HREF.
HREF loaned $4.5 million to HoldCo.58 HREF’s investment was to be
redeemed 42 months from the HREF Addendum’s execution.59 HoldCo was to
repay HREF’s contribution, plus a preferred return, in part through a $31,500
payment due the first of every month (the “Monthly Return”).60 HoldCo’s Monthly
Return obligation was specifically drafted to oblige HoldCo, not OpCo, consistent
56 Id. §§ 34–34(i) (hard returns added). 57 JX 13 at 6–7 [hereinafter “HREF Addendum”]. In that exhibit, the HREF Addendum is at pdf pages 1–8; the collateral assignment, pledge and security agreement among HoldCo, WMPH, SL1, and Shelton-Conroe is at pdf pages 22–27 [hereinafter “Collateral Assignment, Pledge, and Security Agreement”]; HoldCo’s security agreement is at pdf pages 28–31 [hereinafter the “Security Agreement”]; and the blocked account control agreement between HoldCo, HREF, and U.S. Bank National Association Depositary Bank (“U.S. Bank”) is at pdf pages 32–38 [hereinafter the “BACA”]. 58 HREF Addendum § 2. 59 Id. § 4(iv). 60 Id. §§ 4(iii), 5(i)–5(v).
14 with HUD’s restrictions on OpCo.61 HREF’s $4.5 million investment was split
between $3,235,000 to satisfy the HUD-required escrows, and $1,265,000 to fund
the first twenty-five months of the Monthly Return (the “Monthly Return Fund”).62
In exchange for funding the HUD-required escrows, HREF acquired 100%
of the “Special Membership Interests of HoldCo.”63 HREF did not acquire any
HoldCo common equity or managerial rights.64 Rather, to protect its investment,
HREF contracted for step-in rights if HoldCo did not repay it.65 Failure to make
HREF’s Monthly Return would constitute an “additional rights event” (“ARE”)
granting HREF certain rights, including the right to “immediately” become
HoldCo’s sole manager.66
(ii) Upon the occurrence of an ARE, in addition to and without limiting the applicable provisions set forth in the Agreement:
(a) [HREF] shall become attorney-in-fact to act on behalf of the Company and the Members, the Project Managers shall use best
61 JX 49 [hereinafter “Carroll Dep.”] 124–31. 62 HREF Addendum §§ 2, 4 (i)–4(iii); Carroll Dep. 14–15 (“[A]t closing we funded an amount that was to go to an account that we were to be paid our preferred return out of until - - project the property [to be] cash flowing. . . .”); Trial Tr. 15. 63 HREF Addendum § 2. 64 Id. 65 Id. § 3; Carroll Dep. 222 (explaining HREF “ha[s] the ability to protect [its] investment by operating the facility in a manner designed to maximize financial and economic results” if an Additional Rights Event occurs); id. 46–47 (explaining HREF’s “most important consideration is making sure that our addendum works to put us in a position to get control of the project if the thing goes sideways”). 66 HREF Addendum §§ 3(i)(a)–(ii)(b).
15 efforts to modify applicable HUD forms and any other relevant forms, and shall otherwise use best efforts to take all other steps necessary, to provide that [HREF] or its designee shall be a key principal thereunder and to cause [HREF] or its designee to replace the Project Managers as sole manager of the Company with all decision making authority of the Company as the manager of [OpCo]. Without limiting any other provision of this Addendum, the Sponsor Members agree that they shall execute such additional documents as [HREF] may request in order to facilitate the foregoing provisions (including, without limitation, a power of attorney).
(b) [HREF] shall without the consent of the Sponsor Members immediately become the sole manager of the Company with full control over all aspects of the Company and the Company’s rights in the Project including, without limitation, the right to remove the Project Managers, and to remove the Sponsor Members from any and all of their management roles with respect to the Company and Project (including, without limitation, removing Sponsor Members from any and/or all of their management rights under the relevant documents of the Project Owner).67
The HREF Addendum required the Monthly Return Fund to be deposited in
a “Pledged Account” in HoldCo’s name, and could “only be drawn on by [HREF]
when amounts under this Addendum are due and payable to [HREF].”68 HoldCo
agreed the Pledged Account was a lockbox account subject to a blocked account
control agreement, and granted HREF control over, and a first priority security
interest in, the Pledged Account.69
67 Id. §§ 3(ii)–3(ii)(b). 68 HREF Addendum § 4(iii); see also JX 11 at 1; JX 2 at 6. 69 HREF Addendum § 4(iii); Security Agreement § 3 (“Contemporaneously with the execution and delivery of this Security Agreement, [HoldCo], [HREF] and the [U.S.] Bank are executing a deposit account control agreement . . . .”); BACA § 2 (“[HoldCo]
16 But the Monthly Return Fund was deposited in an account in OpCo’s name,
not HoldCo’s as required. The Pledged Account was opened in OpCo’s name.70
And HoldCo’s initial manager “incorrectly booked” HREF’s investment as a loan
to OpCo.71 The Pledged Account was exclusively utilized to pay HREF’s Monthly
Return.72 Because the Pledged Account was incorrectly opened in OpCo’s name,
the HREF Addendum’s required payments from HoldCo to HREF were all papered
as payments from OpCo to HREF.73
In the summer of 2024, when this mistake was unearthed, Lindsey correctly
noted HREF’s investment was not a loan to OpCo, but instead was a HoldCo
obligation.74
covenants with [HREF] that it shall not enter into any acknowledgment or agreement that gives any other person or entity expect [HREF] control over, or any other security interest, lien or title in, the [Pledged] Account.”); id. § 4 (“Neither [HoldCo], nor any other person or entity, acting through or under [HoldCo], shall have any control over the use of, or any right to withdraw any amount from, the Deposit Account.”). The Security Agreement and BACA were executed by Norma Upshur as HoldCo’s managing member. The creation of a Pledged Account for the Monthly Return was specifically included in HREF’s initial LOI. JX 2 at 6 (“In addition to the providing the Reserves of $3,400,000, [HREF] is providing $1,100,000 to fund preferred returns due to [HREF]. Such amount shall be deposited into an account that can only be used for the designated purpose and be drawn with the consent of [HREF]. At all times, such account shall maintain a balance of sufficient to cover three months’ Residual Preferred Return.”). 70 Compare BACA with JX 61 at 1; compare BACA at Recital with JX 24 at 1, 9. 71 JX 58 at 1. 72 See generally JX 61. 73 E.g., id. at 1, 5–10. 74 JX 58 at 1; see id. at 4 (“The most recent financials and 2023 audit have been substantially delayed due to a restatement of the previously issued 2022 audit. It was
17 F. Shelton Is Terminated As HoldCo’s Co-Manager; MStar Enters The Picture.
On June 9, 2021, Shelton-Conroe was removed as HoldCo’s co-manager,
taking Shelton herself out of the organizational structure.75 By July 14, HoldCo
was preparing governance documents to address Shelton-Conroe’s removal as
HoldCo’s co-manager.76 Some HoldCo members intended to replace Shelton-
Conroe with MStar Conroe, LLC (“MStar”) as a HoldCo co-manager.77
Under the Borrower Agreement, OpCo had to secure HUD’s prior written
approval for “any change in Borrower’s organization structure” resulting in the
removal of Shelton or Shelton-Conroe.78 OpCo did not seek or obtain that
preapproval.
Instead, eight months after Shelton-Conroe’s removal as co-manager, HUD
provided Greystone its “Preliminary Approval of Change in Ownership &
discovered, recently, that the contribution by [HREF] was booked on [OpCo]’s Balance sheet as a Note Payable []. This was never the case, and the auditors have been working to correct [OpCo]’s Balance sheet as well as [HoldCo]’s Balance sheet.”). 75 Id. at 1. 76 JX 17. 77 JX 18. 78 Borrower Agreement § 46(b); see also HoldCo Agreement § 14.1(b) (“While Shelton is a Manager … Shelton shall have the authority to take any act or make any decision … with respect to resident care and all other decisions regarding day-to-day management and operation of the Project.”) (emphasis added).
18 Management Agent” (the “Preliminary Approval Letter”).79 That Preliminary
Approval Letter provided “preliminary approval authorizing [the] replacement of
Lisa Ann Shelton by [MStar], as a manager and member of the subject’s Borrower,
[OpCo].”80 But Shelton was not a member of OpCo; her entity was a member and
co-manager of HoldCo.81 HoldCo was OpCo’s manager at that time.82
HUD’s Preliminary Approval Letter to Greystone imposed on OpCo
organizational and preapproval requirements for MStar similar to those HUD had
imposed for Shelton-Conroe and Shelton:
2. The Borrower’s organizational documents must be amended to add MStar Conroe LLC as a member and co-manager of the Borrower and remove Lisa Ann Shelton. In addition, the documents shall be amended to address the below provisions and be satisfactory to HUD:
a. Clearly delineate MStar Conroe LLC as a co-manager roles and responsibilities and provide it sufficient operational control to allow to direct day-to-day operations at the facility including the sole right to manage the operations, including hiring all the employees and operating the facility.
b. Give MStar Conroe LLC the deciding vote between the two co- managers: and,
79 JX 19. The Preliminary Approval Letter purports to be in response to Greystone’s “September 29, 2020 transfer of physical asset (TPA) proposal.” At trial, the parties appeared to agree that reference was a mysterious mistake. Trial Tr. 37–40. 80 JX 19. 81 OpCo Agreement, Ex. A (identifying LindseyCo and HoldCo as the two OpCo members); OpCo Agreement § 14.1(b); HoldCo Agreement § 14.1(d) (providing that “WMPH and Shelton will serve as [HoldCo’s] initial Managers”). 82 OpCo Agreement § 14.1(b).
19 c. Prevent MStar Conroe LLC’s removal as a co-manager of the Borrower without HUD and Greystone Funding’s explicit written approval.
. . . You have 45 days from the date of this letter in which to execute and record all applicable required documentation. All mandatory documents must be submitted and executed in the form as reviewed and approved by HUD Office of General Counsel.83
HoldCo’s members other than HREF sought to amend the HoldCo
Agreement to conform to those conditions. WMPH, SL1, Shelton-Conroe, and
MStar executed the First Amendment to the Limited Liability Agreement for WM
Conroe Property Holdings LLC (the “MStar Amendment”).84 The MStar
Amendment would bake into the HoldCo Agreement that HUD and Greystone
must provide written approval for MStar to be removed as HoldCo’s Manager.85
The relevant provisions of the MStar Amendment state:
1. Replacement of Shelton. All references to “Shelton-Conroe, LLC, an Oregon limited liability company” in the Operating Agreement (and in all other provisions contained in this Amendment and henceforth) shall hereby be replaced with “MStar Conroe, LLC, a Delaware limited liability company”.
2. Appointment of Manager. Pursuant to Section 14.1 of the Operating Agreement, the undersigned appoint MStar as a Manager of the Company.
3. Removal of Manager. Notwithstanding anything contained in the Operating Agreement or this First Amendment, removal of MStar as a
83 JX 19 §§ 2–4. 84 JX 20 [hereinafter the “MStar Amendment”]. 85 Id. §§ 1, 3.
20 Manager of the Company shall require the explicit written approval by each of (i) the U.S. Department of Housing and Urban Development and (ii) Greystone Funding Company, LLC, a Delaware limited liability company.86 The MStar Amendment was not effective.87 The HoldCo Agreement
requires “[a]ny amendments to this Agreement . . . be in writing and shall be
approved by all the Members.”88 The MStar Amendment was not approved by all
members of HoldCo: HREF did not execute the MStar Amendment to the HoldCo
Agreement.89 HREF was not even mentioned in the MStar Amendment.90
More documents purporting to paper MStar’s status as HoldCo’s manager
followed. Eight months after the MStar Amendment and HUD’s Preliminary
Approval Letter, OpCo and HUD executed the First Amendment to the Borrower
Agreement (the “First Amendment to Borrower Agreement”).91 It updated HUD’s
notice and approval requirements to reflect MStar as a HoldCo member and
86 Id. §§ 1–3. 87 6 Del. C. § 18-302(d) (“If a limited liability company agreement provides for the manner in which it may be amended . . . it may be amended only in that manner or as otherwise permitted by law.”). 88 HoldCo Agreement § 20.12. 89 Joint Stip. ¶ 32 (“HREF was not included as a signatory, HREF did not sign the [MStar] Amendment, and HREF was never consulted about this proposed amendment to the HoldCo Agreement.”); see generally MStar Amendment. Carroll saw the MStar Amendment for the first time at his deposition. Carroll Dep. 197. 90 See generally MStar Amendment. 91 Joint Stip. § 33; JX 22.
21 manager, and Robert A. Sweet’s status as HUD’s MStar contact.92 The First
Amendment to Borrower Agreement was executed by OpCo on October 27, 2022,
and approved by HUD on November 9.93
G. Lindsey Obtains A Majority Membership Stake, Assumes Control, And Closes The Pledged Account.
More changes in HoldCo’s membership occurred without HUD preapproval
and without effective changes to HoldCo’s organizational documents. In
December 2022, Lindsey bought a majority stake in WMPH through LindseyCo.94
Once Lindsey purchased a majority of WMPH, he held a majority stake in both
HoldCo members.
Just like previous transactions, this one changed the HUD contact and
required HUD preapproval under the HUD Documents.95 Just like previous
transactions, HoldCo’s members excluding HREF purported to cause HoldCo to
92 JX 22 at Recitals A–F; id. at 3(b). 93 Joint Stip. ¶ 33; JX 22 at 5–6. 94 Joint Stip. ¶ 34; JX 28 at 1. 95 Borrower Agreement §§ 34, 34(i) (“Borrower shall not without the prior written approval of HUD, including without limitation in accordance with Program Obligations . . . (i) any amendment that results in the creation or elimination of a [Key] Principal . . . (ii) any amendment that in any way affects the Loan Documents; (iii) any amendment that would change the identity of the persons and/or entities authorized to bind Borrower previously approved by HUD or pre-approve a successor general partner, manager or member to bind the partnership or company for any matters concerning the Project which require HUD’s consent or approval”); JX 22 at Recital F (identifying WMPH’s principal Norma Upshur as a “Key Principal” under the Loan Documents); JX 30 at Recitals D–E, §§ 2–3, Ex. B (Lindsey replacing WMPH’s principal as “Key Principal” under the Loan Documents); OpCo Agreement §§ 14.6–14.6(g).
22 act: here, purportedly by unanimous written consent to cause OpCo to update the
Borrower Agreement, and to authorize Lindsey to act “on behalf of [HoldCo] as a
member and sole Manager of [OpCo].”96 It took nine months for OpCo and HUD
to update the Borrower Agreement to name Lindsey as the designated HUD
contact.97 Just like previous transactions, no HUD preapproval is in the record.
And just like previous transactions, the HoldCo members other than HREF
purported to amend the HoldCo Agreement.98
Lindsey began speaking for OpCo and HoldCo.99 On January 12, 2023,
Lindsey asked HREF to approve closing the Pledged Account and using a new
96 JX 31 at Recital (“[WMPH], a Delaware limited liability company [], [SL1], a Delaware limited liability company, and [MStar], a Delaware limited liability company [], being all the members [] of [HoldCo], a Delaware limited liability company [], hereby consent to the adoption of, and adopt, the following as Unanimous Written Consent of the Members of the Company as of September 1, 2023.”) (emphasis added); id. at 2 (“[T]he Members approve of the [HoldCo]’s approval and actions to cause [OpCo] to enter into the Second Amendment [to Borrower Agreement]; Id. (“FURTHER RESOLVED, that the Members authorize, direct, and empower Lindsey as ‘Authorized Representative’ of [HoldCo] and [OpCo], to take any and all actions . . . as a member and sole Manager of [OpCo], . . . including, but not limited to” updates to the Borrower Agreement). 97 JX 30 ¶ E; JX 30 at Ex. B; Joint Stip ¶¶ 34, 36. 98 JX 32 (“WHEREAS, effective December 28, 2022, C[APA] Consulting, LLC, a Tennessee limited liability company [] sold and assigned all of its interest in [WMPH] to Conroe Senior Living, LLC, a Texas limited liability company, and consequently C[APA] and Norma B. Upshur no longer own any interest, directly or indirectly, in Holdings or the Company.”); id. at ¶ 1 (amending Section 15.2 to state “WMPH warrants, represents, agrees and acknowledges that Curtis Lindsey owns or controls, directly or indirectly, a majority of the voting rights of WMPH.”); see generally JX 31. 99 E.g., JX 54; JX 23 (accessing OpCo’s bank account information and seeking to close an OpCo bank account); JX 28 (providing an investor update, which included OpCo financial statements and noting, “I became the Managing Member”); see JX 33
23 account Lindsey intended to open at his local bank to pay the HREF Monthly
Return.100 Lindsey explained to HREF that utilizing his bank for HREF’s Monthly
Return would be more convenient and allow Lindsey to easily “move funds to
cover your interest carry if need be.”101 HREF consented and provided the
necessary documentation to close the Pledged Account.102
H. HoldCo and HREF Extend HREF’s Redemption Deadline, Referencing MStar As A Member. HREF’s investment in HoldCo was due to be fully redeemed by August
2023.103 When that seemed unlikely, HREF and HoldCo agreed to extend the
redemption deadline to August 13, 2024.104 They did so via an August 13, 2023,
(identifying himself as “the managing member and the majority owner” and informing the Project’s management company “the financial reporting should come from me as the managing member”); JX 58 (noting “I took over managing member 12/28/2022”). I make no comment on whether Lindsey was properly empowered to speak for HoldCo or OpCo. 100 JX 23 at 4. 101 Id. 102 JX 24. 103 HREF Addendum § 4(iv). In March 2023, Lindsey updated the investors on the status of the Project and noted that “[t]he balance sheet reflects a loan to [HREF] in the amount of $4.5MM, as well as accrued interest of $318K ($31.5k paid monthly) that is due and payable August 2023.” JX 28 at 2–3. In July 2023, Lindsey wrote to HoldCo’s counsel and HREF noting “that [HREF] and I have started the conversation of the extension and renewal of the [HREF] loan for our [P]roject. We currently have an outstanding balance of [$]4.5MM and accrued interest of [$]315K that is due next month. My proposal is to pay the interest and paydown the note [by] [$]500K. [T]his would leave a balance of [$]4MM on a 1-year extension.” JX 57. 104 JX 29 [hereinafter “First Amendment to HoldCo Agreement”] at Recital F (“The scheduled Anticipated Redemption Date under the Addendum is August 13, 2023. The Sponsor Parties have requested an extension of the Anticipated Redemption Date to
24 First Amendment to Amended and Restated Addendum to HoldCo Agreement (the
“First Amendment to HoldCo Agreement”).105 The First Amendment to HoldCo
Agreement required HoldCo to pay HREF $500,000 upon execution, and increased
the Monthly Return to $40,000.106 The First Amendment to HoldCo Agreement
did not alter HREF’s ARE rights or the conditions that would constitute an ARE.107
The First Amendment to HoldCo Agreement was executed by all members
of HoldCo, as the HoldCo Agreement requires.108 It states the HoldCo Agreement
was amended by the MStar Amendment; that MStar became a HoldCo manager
and member; that HoldCo’s members are HREF, WMPH, MStar, and SLI; and that
WMPH and MStar are HoldCo’s managers.109
August 13, 2024, and HREF has agreed to such extension on the terms and conditions set forth below.”). 105 See generally id. 106 Id. §§ 1(b)–(c); see JX 35. 107 First Amendment to HoldCo Agreement § 7 (“The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided in this Amendment, operate as a waiver of any right power or remedy of HREF, nor constitute a waiver of any provision of the [HoldCo] Agreement or [HREF] Addendum or any other documents, instruments and agreements executed or delivered in connection therewith.”); HREF Addendum §§ 3(i)–3(ii)(b). 108 HoldCo Agreement § 20.12; First Amendment to HoldCo Agreement at 5–7. 109 First Amendment to HoldCo Agreement at Recital ¶ A (; id. §§ 3–3(c); id. §6(c) (“Except as specifically modified pursuant to the terms hereof, the HoldCo Agreement and the [HREF] Addendum (and all covenants, terms, conditions and agreements therein) shall remain in full force and effect, and are hereby ratified and confirmed in all respects by [HoldCo, WMPH, MStar, and SL1].”); see also id. § 8(c) (“The recitals set forth at the beginning of this Amendment and the schedules attached hereto are incorporated by reference.”).
25 I. HoldCo Stops Paying HREF, HREF Asserts Management Rights, and WMPH Refuses To Recognize Them. HREF received its one-time $500,000 payment and Monthly Returns
through February 2024.110 Then the HREF Monthly Return payments stopped.111
On November 11, HREF told WMPH and Lindsey that “HREF has not
received any payment due under the [HREF Addendum] since March 2024”; that
the “failure to timely pay, redeem or distribution any amount due to [HREF]”
under the HREF Addendum “constitute[s] an [ARE];” and that once HREF’s ARE
rights are triggered, “[HREF] shall without the consent of the Sponsor Members
immediately become the sole manager of [HoldCo] with full control over all
aspects of [HoldCo] . . . .”112 HREF went on: “effective immediately HREF
intends to assume the management responsibilities for [HoldCo].”113 HREF
requested WMPH’s assistance in transitioning the managerial functions, including
by “executing documents that may be necessary or reasonable[.]”114 WMPH
refused to recognize HREF as HoldCo’s manager.
HREF also contacted Greystone and the Project’s management company to
inform them HREF had exercised its rights under the HREF Addendum to assume
110 Joint Stip. ¶ 37. 111 Id. 112 JX 39; HREF Addendum §§ 3(i)(a)-3(i)(e). 113 JX 39. 114 Id. at 2.
26 control of HoldCo and requested information to transfer managerial authority.115
Lindsey has stymied HREF’s efforts to facilitate managerial control, including its
efforts to engage with Greystone.116
J. Litigation Ensues and MStar Is Belatedly Given Notice. HREF initiated this action on November 8, 2024, and amended its complaint
(the “Amended Complaint”) on November 26.117 The Amended Complaint
contains six counts. The Amended Complaint added HoldCo as a nominal
defendant and added Count V, which seeks a declaration under 6 Del. C. § 18-
110(a) that HREF, a HoldCo member, is HoldCo’s sole manager.118 Only Count
V, requesting declaratory relief against defendant WMPH and nominal defendant
HoldCo, was tried on an expedited basis.119 In Count V, HREF requests an order
that HREF is the sole manager of HoldCo with control over all aspects of HoldCo,
including the right to remove defendant WMPH from all management roles within
HoldCo and with respect to the Project.120 Trial on Count V was held on a paper
record on August 20, 2025.121
115 JX 39; JX 59; JX 60; Carroll Dep. at 59–62. 116 Carroll Dep. 59–60; JX 50 at 1. 117 D.I. 1; D.I. 18. 118 AC ¶¶ 19, 150–57, Prayer (vii); Joint Stip. ¶¶ 44–45. 119 D.I. 48; D.I. 62. 120 AC ¶¶ 152–157. 121 D.I. 71.
27 After trial, I came to understand that MStar, a purported HoldCo member
that Defendants argue was and is a HoldCo co-manager instead of HREF, never
received notice of HREF’s Section 18-110 claim.122 Plaintiff conceded it only
provided notice of the Amended Complaint to defendant WMPH, not HoldCo, and
therefore failed to adequately inform MStar of Plaintiff’s Section 18-110 claim.123
When a party with a potential claim to the res does not receive adequate notice,
that party is not bound to the results of the litigation.124 Accordingly, on October
2, I informed the parties that Plaintiff had to give MStar notice before the Court
could rule on Count V.125 I also advised the parties that I believed HREF was
HoldCo’s sole manager.126
122 D.I. 80. 123 PB 11–12. If Plaintiff had served the Amended Complaint on HoldCo’s registered agent, that would have constituted constructive service on MStar, but Plaintiff did not do that. Cornerstone Techs., LLC v. Conrad, 2003 WL 1787959, at *11 (Del. Ch. Mar. 31, 2003) (“[T]he plaintiffs may constructively serve [defendant] under § 18-110(a), because he is a ‘person . . . whose right to serve as a manager is contested.’”). 124 Cedar Lane Farms, Inc. v. Taylor, 1992 WL 111210, at *3 (Del. Ch. May 18, 1992) (“[No]tice to Cedar Lane by publication alone was constitutionally inadequate and does not bind Cedar Lane to the results of the prior litigation.”); Feeley v. NHAOCG, LLC, 2012 WL 966944, at *5 (Del. Ch. Mar. 20, 2012) (explaining a claimant to the corporate office in question must receive “actual notice” of the dispute before “the adjudication is binding”). 125 D.I. 80; Cedar Lane Farms, Inc., 1992 WL 111210, at *3–4. 126 D.I. 80.
28 On October 6, Plaintiff emailed my October 2 letter, the Amended
Complaint, and the parties’ pretrial briefs to MStar’s principals.127 They both
opened the service email by October 7.128 Also on October 7, MStar’s registered
agent was served with those same documents.129 Plaintiff filed an affidavit of
service on October 14, and followed up on November 14 with a letter informing
the Court that MStar had received notice of Count V.130 Plaintiff promptly served
its November 14 letter on MStar’s registered agent.131
On November 18, Plaintiff filed a letter it received from MStar’s counsel.132
MStar’s letter noted MStar received Plaintiff’s service package, and subsequently
“participated in multiple telephone calls with Plaintiff[’s] representatives”
regarding Count V.133 MStar shared its general view that Plaintiff’s filing
contained factual inaccuracies that “materially affect the factual record on which
Plaintiff[] ask[s] the Court to rely.”134 MStar concluded by noting “MStar remains
willing to continue discussion with Plaintiff[] to clarify the historical facts, or, if
127 D.I. 84; id. at Affidavit of Rebecca Woods Concerning Notice to MStar Conroe LLC Regarding Count V of the Amended Complaint and Status of Proceedings [hereinafter “Woods Aff.”] ¶¶ 3–5. 128 D.I. 84 at Exs. B–G; Woods Aff. ¶¶ 7–8. 129 D.I. 84 at 3; Woods Aff. ¶ 9; D.I. 81. 130 D.I. 81; D.I. 84. 131 D.I. 85. 132 D.I. 86 [hereinafter “MStar Letter”]. 133 MStar Letter at 1.
29 the Court prefers, to participate in a more formal process to ensure the record is
complete.”135 I gave MStar until December 31 to enter its appearance in this action
if it wished to participate.136 It did not do so.137
For in rem proceedings, including actions under Section 18-110, due
process requires “reasonable steps be taken to notify claimants to the office of the
forthcoming adjudication and that they receive an opportunity to be heard.”138 Due
process in that setting requires notice to the claimant that is “reasonably calculated,
under all the circumstances, to apprise [the claimant] of the pendency of the action
and afford [it] an opportunity to present [its] objections.”139 For a Delaware
limited liability company, service of process must be made by delivering a copy
personally to its registered agent, which must forward it to the company.140 The
notice must reasonably convey information necessary to apprise the claimant of the
disputed corporate office “and it must afford a reasonable time for [the claimant] to
134 Id. at 1. 135 Id. at 2. 136 D.I. 88; D.I. 89. 137 See D.I. 93. 138 Feeley, 2012 WL 966944, at *5 (quoting Haft v. Dart Gp. Corp., 1996 WL 255899, at *2 (Del. Ch. Apr. 26, 1996)). 139 Mullane v. Central Hanover Bank & Tr. Co., 339 U.S. 306, 314 (1950); see Tsipouras v. Tsipouras, 677 A.2d 493, 496 (Del. 1996) (“The right to notice and an opportunity to be heard ‘must be granted at a meaningful time and in a meaningful manner.’” (quoting Fuentes v. Shevin, 407 U.S. 67, 80 (1972))). 140 6 Del. C. § 18-105(a); 6 Del. C. § 18-104(e)(1)(c).
30 make [its] appearance.”141 “[I]f with due regard for the practicalities and
peculiarities of the case these conditions are reasonably met the constitutional
requirements are satisfied.”142
Once a claimant to a contested corporate office receives actual notice of the
claim, “failure to participate in [the] adjudication will not foreclose the
authoritative adjudication in this proceeding of [its] claim of title.”143 Actual
notice can be established where the recipient of service demonstrates knowledge of
the action, particularly where following service the recipient directly
communicates with a party to the action regarding such action.144
MStar received statutorily compliant, actual notice of Count V. Its
principals and registered agent received the operative pleading, the parties’ pretrial
141 Mullane, 339 U.S. at 314; see Lynch v. Gonzalez Gonzalez, 2020 WL 3422399, at *5 (Del. Ch. June 22, 2020) (“A proceeding under Section 18-110(a) is summary in character, and its scope is limited to determining those issues that pertain to the validity of action to elect or remove a manager. A Section 18-110 proceeding is designed to focus with precision on the corporate interest in prompt resolution of grievances respecting claims to office.” (internal footnote and quotations omitted)), aff’d, 253 A.3d 556 (Del. 2021) (TABLE). 142 Prunckun v. Delaware Dep’t of Health & Soc. Servs., 201 A.3d 525, 549 (Del. 2019) (quoting Mullane, 339 U.S. at 314–15). 143 Haft, 1996 WL 255899, at *2 (emphasis removed). 144 E.g., Walker v. Martin, 54 A.3d 257 (Del. 2012) (ORDER) (finding a phone call after receiving service to constitute actual notice in a custody proceeding); Hines v. New Castle Cnty., 640 A.2d 1026, 1029 (Del. 1994); Maldonado v. Matthews, 2010 WL 663723, at *4 (Del. Super. Feb. 23, 2010) (finding a voicemail from the party served, acknowledging that service had been received, to be “satisfactory” evidence of personal delivery even though the certified mail was returned as “unclaimed”).
31 briefs, and my views on service and the merits after trial.145 MStar demonstrated
its knowledge of this action via its letter and multiple calls with HREF.146 MStar
allowed the December 31 deadline to pass without retaining counsel and entering
its appearance. Having received adequate notice, MStar shall be bound by the
adjudication of Count V. This is my post-trial decision.
II. ANALYSIS
HREF seeks a ruling that it is HoldCo’s sole manager with control over all
aspects of HoldCo and HoldCo’s rights with respect to the Project.147 Under 6 Del.
C. § 18-110(a), “[u]pon application of any member or manager, the Court of
Chancery may hear and determine the validity of any admission, election,
appointment, removal or resignation of a manager of a limited liability company,
and the right of any person to become or continue to be a manager of a limited
liability company.”148 “A proceeding under Section 18-110(a) ‘is summary in
character, and its scope is limited to determining those issues that pertain to the
validity of action to elect or remove’ a manager.”149 A Section 18-110 plaintiff
“bears the burden of proving by a preponderance of the evidence that it is entitled
145 D.I. 81; D.I. 84; Woods Aff. ¶¶ 3–5, 9. 146 MStar Letter at 1; Woods Aff. ¶ 10. 147 AC ¶ 157. 148 6 Del. C. § 18-110(a). 149 Llamas v. Titus, 2019 WL 2505374, at *15 (Del. Ch. June 18, 2019) (quoting Genger v. TR Invs., LLC, 26 A.3d 180, 199 (Del. 2011)).
32 to relief.”150
The limited liability company agreement is the primary governor of “the
affairs of a limited liability company and the conduct of its business.”151 A
Delaware limited liability company is a “creature of contract” and its members
“must appreciate that ‘with the benefits of investing in alternative entities often
comes the limitation of looking to the contract as the exclusive source of protective
rights.’”152 “The first step when analyzing a case involving the internal affairs of
an LLC is . . . to examine the LLC agreement to determine whether it addresses
the issue.”153 “LLC members’ rights [and obligations] begin and typically end
with the Operating Agreement.”154 “When analyzing an LLC agreement, a court
applies the same principles that are used when construing and interpreting other
contracts.”155 Where the agreement covers the issue, the agreement controls unless
it violates a mandatory provision under the Delaware Limited Liability Company
150 In re IAC/InterActive Corp., 948 A.2d 471, 493 (Del. Ch. 2008). 151 6 Del. C. § 18-101; Soleimani v. Hakkak, 2024 WL 1593923, at *5 (Del. Ch. Apr. 12, 2024) (explaining a Section 18-110 claim “turns on the interpretation of contracts governing the parties’ relationship”), aff’d, 327 A.3d 1060 (Del. 2024) (TABLE). 152 Dieckman v. Regency GP LP, 155 A.3d 358, 366 (Del. 2017) (quoting The Haynes Fam. Tr. v. Kinder Morgan G.P., Inc., 135 A.3d 76, 2016 WL 912184, at *2 (Del. Mar. 10, 2016) (TABLE)). 153 Godden v. Franco, 2018 WL 3998431, at *7 (Del. Ch. Aug. 21, 2018). 154 Walker v. Res. Dev. Co., L.L.C. (DE), 791 A.2d 799, 813 (Del. Ch. 2000). 155 Holifield v. XRI Inv. Hldgs. LLC, 304 A.3d 896, 924 (Del. 2023).
33 Act (the “Act”).156
Then, if the agreement is silent on the issue, the inquiry reaches the second
step, which instructs the Court to “look to the Act” as a gap filler “to see if one of
its default provisions apply.”157 The Act is “an enabling statute . . . ‘replete with
fundamental provisions made subject to modification in the [a]greement, and
therefore leaves latitude for substantial private ordering,’ provided that statutory
and judicially imposed parameters are honored.”158 If neither the agreement nor
the Act address the issue before the Court, “the rules of law and equity . . . shall
govern.”159
When an LLC desires to create a manager-managed structure, “the LLC
agreement must expressly vest authority in one or more managers.”160 It does so
by contract: “[t]he selection of managers is subject to the control of the members
as provided in the limited liability company agreement or the certificate of
formation . . . . ”161 Section 18-402 of the Act is clear, and mandatory:
156 In re Coinmint, LLC, 261 A.3d 867, 900 (Del. Ch. 2021). 157 Holifield, 304 A.3d at 923 (quoting Coinmint, 261 A.3d at 900–01). 158 Holifield, 304 A.3d at 899 (quoting Elf Atochem N. Am., Inc. v. Jaffari, 727 A.2d 286, 291 (Del. 1999)). 159 Godden, 2018 WL 3998431, at *7 (quoting 6 Del. C. § 18-1104). 160 Metro Storage Int’l LLC v. Harron, 2019 WL 3282613, at *19 (Del. Ch. July 19, 2019); 6 Del. C. § 18-402. 161 Robert L. Symonds, Jr. & Matthew J. O’Toole, Symonds & O’Toole on Delaware Limited Liability Companies § 9.05[A], at 9-54 (2d ed. 2025).
34 management “shall be vested in the manager who shall be chosen in the manner
provided in the limited liability agreement.”162 Where an LLC agreement provides
such managerial authority, “such agreements will be honored by a reviewing
court.”163
Section 18-402 tells us to look to the HoldCo Agreement to identify
HoldCo’s manager.164 Section 18-402 vests HoldCo’s management “in the
manager who shall be chosen in the manner provided in the [HoldCo]
agreement.”165 The HoldCo Agreement states that it “shall be managed by a
Manager” and that “[v]acancies in the position of Manager will be filled by the
approval of the Members . . . .”166 The HoldCo Agreement further provides that
“[t]he Members and [HREF] intend to execute an Addendum to this Agreement”
and “[a]fter execution of the Addendum the terms of the Addendum shall control
162 6 Del. C. § 18-402; Elf Atochem N. Am., Inc., 727 A.2d at 296 (explaining when interpreting the Act “the legislature’s use of ‘may’ connotes the voluntary, not mandatory or exclusive, set of options”); see Delaware Citizens for Clean Air, Inc. v. Water & Air Res. Comm’n, 303 A.2d 666, 667 (Del. Super. 1973) (“While the words ‘shall’ and ‘may’ do not always by themselves determine the mandatory or permissive character of a statute, it is generally presumed that the word ‘shall’ indicates a mandatory requirement.”), aff’d, 310 A.2d 128 (Del. 1973); Manti Hldgs., LLC v. Authentix Acquisition Co., Inc., 261 A.3d 1199, 1219 (Del. 2021) (“[W]hen construing [a] statute, ‘shall’ generally signals [a] mandatory requirement while ‘may’ is permissive. Further, the mandatory ‘shall’ ... normally creates an obligation impervious to judicial discretion.” (internal cites and quotations omitted)). 163 Huatuco v. Satellite Healthcare, 2013 WL 6460898, at *1 (Del. Ch. Dec. 9, 2013). 164 6 Del. C. 18-402. 165 Id.
35 over any conflicting terms of inconsistencies with this Agreement.”167 The
HoldCo Agreement as modified by the HREF Addendum is clear and specific:
upon the occurrence of an ARE, “[HREF] shall without the consent of the Sponsor
Members immediately become the sole manager of the Company.”168 The HoldCo
Agreement does not mention HUD, or HUD’s rules or regulations, in any
manner.169 Under Section 18-402, the HREF Addendum provisions are
dispositive.
It is undisputed that HoldCo failed to timely pay HREF’s Monthly
Returns,170 constituting an ARE that triggered HREF’s right to immediately
become HoldCo’s sole manager.171 Under the Act, HoldCo Agreement, and HREF
Addendum, that is the end of the story.
Defendants seek to avoid that conclusion by contending HUD’s written
approval was needed before HREF could become manager. These arguments stray
166 HoldCo Agreement §§ 14.1(a), 14.1(d). 167 Id. § 5.1. 168 HREF Addendum §§ 3(ii)-3(ii)(b). 169 See generally HoldCo Agreement. 170 Joint Stip. ¶ 37. 171 HREF Addendum §§ 3(i)(e) (“Each of the following shall constitute an [ARE] . . . failure to timely pay, redeem or distribute any amount due to [HREF] including but not limited to, the payments required under Sections 5, 6 and 7”); see First Amendment to HoldCo Agreement (“Except as specifically modified pursuant to the terms hereof, the [HoldCo] Agreement and the [HREF] Addendum (and all covenants, terms, conditions and agreements therein) shall remain in full force and effect, and are hereby ratified and confirmed in all respects by the Sponsor Parties.”).
36 beyond the sanctioned two-step analysis for determining rights in an LLC: no
iteration of the HoldCo Agreement requires HUD approval, and neither does the
Act. Defendants look for that requirement in a series of arguments increasing in
distance from the HoldCo Agreement. Defendants first look to the HoldCo
Agreement’s purpose clause, and to the MStar Amendment’s HUD and Greystone
approval requirements.172 From there, Defendants turn outside the HoldCo
Agreement. They look to HUD’s approval requirements in the HUD Documents
between HUD and OpCo.173 And, swinging for the fences, they look to HUD
rules and regulations to argue HREF’s step-in rights are illegal and
unenforceable.174 None of Defendants’ arguments impede or displace the
operation of the HREF Addendum’s specific provisions making HREF HoldCo’s
sole manager upon the occurrence of an ARE.
A. The HoldCo Agreement Does Not Compel HUD Preapproval. I begin with Defendants’ arguments under the only statutorily recognized
source of input on choosing a manager: the HoldCo Agreement.175 Defendants
contend the HoldCo Agreement’s purpose clause binds HoldCo to the HUD
approval requirements in OpCo’s HUD Documents. They also contend the MStar
172 MStar Amendment § 3; Trial Tr. 115. 173 DOB 1–2, 17. 174 DR 19–24; Trial Tr. 110–116, 150–155, 157–158. 175 See 6 Del. C. § 18-402.
37 Amendment’s HUD approval requirements are effectively part of the HoldCo
Agreement.
Defendants’ first argument tries to chain HoldCo’s purpose clause to the
HUD Documents’ approval requirements. The first link: the HoldCo Agreement’s
purpose provision stating “[t]he purpose of [HoldCo] is to be the manager of
[OpCo] and to cause [OpCo] to be operated in accordance with the [OpCo]
Agreement[.]”176 The second link: the OpCo Agreement’s “HUD Provisions”
providing that “[w]hile the HUD Loan is outstanding” OpCo shall “execut[e]
deliver[] and perform[] its obligations under the HUD Loan Documents . . . .”177
And the third link: the HUD approval requirements in the HUD Documents.178
Linking the three together, Defendants conclude “HREF is bound to comply with
all HUD Loan Documents and related requirements” at the HoldCo level, so HREF
cannot become HoldCo’s manager without prior HUD approval.179
Defendants’ argument asks this Court to use HoldCo’s purpose provision to
reach through OpCo’s operating agreement to the HUD Documents in a way that
nullifies the HoldCo Agreement’s specific step-in rights for HREF. Defendants’
theory would displace the HoldCo Agreement and bind HREF to obligations found
176 HoldCo Agreement Art. 4. 177 OpCo Agreement §§ 14.6(a), 14.6(h). 178 E.g., Note § 16; Borrower Agreement §§ 34(i), 46; First Amendment to Borrower Agreement §§ 2–3.
38 in OpCo’s contracts with HUD. Defendants offer no Delaware precedent to
support determining HoldCo’s manager according to OpCo’s operating agreement
and promises to a third party, rather than HoldCo’s operating agreement as the Act
requires.
The Act does not require an LLC operating agreement to include a purpose
clause, and by default permits companies to “carry on any lawful business,
purpose, or activity.”180 Purpose clauses “generally may be viewed more as
helpful clarification than as a necessity and, depending on their wording, may
function more as limiting than enabling provisions.”181 An operating agreement’s
purpose clause defines the scope of action the company can permissibly
undertake.182 It serves to “restrict the company’s power to engage in any activity
179 DR 17. 180 6 Del. C. § 18-106(a). 181 Symonds & O’Toole, supra note 161, § 2.07[A], at 2-22. 182 Symbiont.io, Inc. v. Ipre Hldgs., LLC, 2021 WL 3575709, at *43 (Del. Ch. Aug. 31, 2021) (“A purpose clause that places limits on what an entity can do deprives the entity of the authority to engage in activities that otherwise would be permissible under default principles of law.”); Malt Fam. Tr. v. 777 Partners LLC, 2023 WL 7476966, at *8 (Del. Ch. Nov. 13, 2023) (noting a purpose clause in an operating agreement acts to “deprive the entity of authority to validly engage in activities beyond those limits”); see also In re Arrow Inv. Advisors, LLC, 2009 WL 1101682, at *4 (Del. Ch. Apr. 23, 2009) (“[A]n important reason for parties to include a broad purpose clause in an entity’s governing instrument is to ensure that the entity has flexibility to adapt in the face of changing circumstances.”).
39 not in furtherance of its stated objective.”183 “A limited purpose clause restricts the
company, not its members.”184
So the purpose clause defines HoldCo’s scope of authority to act.185 It can
“be the manager of [OpCo] and cause [OpCo] to be operated in accordance with
the [OpCo] Agreement . . . .”186 And the HoldCo Agreement limits the purpose
clause: HoldCo’s purpose “shall not be extended by implication or otherwise
unless expressly agreed to in writing by all the Members.”187 The purpose clause
does not create or impose conditions on who can be HoldCo’s manager,
particularly where the HREF Addendum speaks to that specifically.188 The
183 Symonds & O’Toole, supra note 161, § 2.09[B], at 2-27. 184 Malt Fam. Tr., 2023 WL 7476966, at *8; Symbiont.io, Inc., 2021 WL 3575709, at *43. 185 Malt Fam. Tr., 2023 WL 7476966, at *8; Symbiont.io, Inc., 2021 WL 3575709, at *43. 186 HoldCo Agreement Art. 4. 187 Id. 188 See Seidensticker v. Gasparilla Inn, Inc., 2007 WL 1930428, at *6 (Del. Ch. June 19, 2007) (“Delaware law will not create contract rights and obligations that were not part of the original bargain, especially, where, as here, the contract could easily have been drafted to expressly provide for them.”) (quoting Union Oil Co. of California v. Mobil Pipeline Co., 2006 WL 3770834, at *12 (Del. Ch. Dec. 15, 2006)); Kuroda v. SPJS Hldgs., L.L.C., 971 A.2d 872, 880 (Del. Ch. 2009) (“Limited liability companies are creatures of contract, and the parties have broad discretion to use an LLC agreement to define . . . the rights and obligations of its members.”); Touch of Italy Salumeria & Pasticceria, LLC v. Bascio, 2014 WL 108895, at *4 (Del. Ch. Jan. 13, 2014) (“[R]ecognizing that LLCs are creatures of contract, I must enforce LLC agreements as written.”); see also EBG Hldgs. LLC v. Vredezicht's Gravenhage 109 B.V., 2008 WL 4057745 (Del. Ch. Sept. 2, 2008) (explaining “an LLC agreement . . . is a foundational document that controls the governance of the entity”).
40 purpose provision limits the company’s power and authority to undertake certain
acts or transactions; it does not override a different provision specifically
governing how a manager is chosen.189
Defendants next look to the MStar Amendment, specifically its provision
requiring HUD and Greystone written preapproval to remove MStar as manager.190
Defendants contend the MStar Amendment is valid and binding on HoldCo and its
members, including HREF, because HREF and the other HoldCo members ratified
the MStar Amendment through the First Amendment to the HoldCo Agreement.191
Defendants argue the First Amendment to the HoldCo Agreement’s reference to
the MStar Amendment in the recitals, its references to MStar as a member and
manager, and its “incorporation by reference” provision ratified the MStar
Amendment, such that its preapproval terms are binding on HREF.192
189 See Symonds & O’Toole, supra note 161, §§ 2.06–2.09[B]. 190 MStar Amendment § 3 (“Removal of Manager. Notwithstanding anything contained in the Operating Agreement or this First Amendment, removal of MStar as a Manager of the Company shall require the explicit written approval by each of (i) the U.S. Department of Housing and Urban Development and (ii) Greystone Funding Company, LLC, a Delaware limited liability company.”). 191 DR 11-14. 192 DOB 17–18; Trial Tr. 115. Defendants also contend HREF is bound by the MStar Amendment because HREF relies on the First Amendment to HoldCo Agreement for its Section 18-110 claim. DOB 14; id. n.27 (citing AC ¶¶ 150–57); see also DR 11–14. But HREF is not relying on that First Amendment to HoldCo Agreement. Trial Tr. 127–28. The rights HREF seeks to vindicate here are granted by the HREF Addendum—not the First Amendment to HoldCo Agreement. AC ¶¶ 152–57; AC ¶ 3 (defining Exhibit 2 as the HoldCo
41 The HoldCo Agreement is silent on ratification, so I look to the Act.193
Section 18-106(e) “provides a safe harbor procedure for the ratification or waiver
of acts or transactions taken by or in respect of a Delaware limited company under
the [] Act or limited liability company agreement that are void or voidable.”194
Section 18-106(e) permits an LLC to ratify a company act that is void or voidable
because the approvals required by the company’s operating agreement were not
obtained via its “members, managers or other persons whose approval would be
required under the limited liability company agreement.”195
The authority to ratify “is limited to ratification of the LLC’s own breaching
acts. It does not apply to acts of LLC members.”196 Two of HoldCo’s members,
Agreement); AC Ex. 2 (attaching HoldCo Agreement, HREF Addendum, an unexecuted draft First Amendment to HoldCo Agreement, an unexecuted Amended and Restated Addendum to HoldCo Agreement, and the First Amendment to HoldCo Agreement). 193 Achaian, Inc. v. Leemon Fam. LLC, 25 A.3d 800, 802 (Del. Ch. 2011); Paul v. Delaware Coastal Anesthesia, LLC, 2012 WL 1934469, at *2 (Del. Ch. May 29, 2012). 194 Symonds & O’Toole, supra note 161, § 2.10, at 2–29. 195 6 Del. C. § 18-106(e). 196 Holifield, 304 A.3d at 927 (citing Absalom Absalom Tr. v. Saint Gervais LLC, 2019 WL 2655787, at *2 (Del. Ch. June 27, 2019)). In both Holifield and Absalom, the act at issue was a transfer of interest in contravention to the applicable operating agreement, which was perpetrated by a member of the company, not the LLC. Holifield, 304 A.3d at 900 (“The issue in this litigation is whether Holifield validly transferred his limited liability membership units in XRI to Blue on June 6, 2018.”); Absalom, 2019 WL 2655787, at *4 (addressing a member’s transfer of an LLC interest in violation of an anti- transfer provision).
42 not HoldCo, tried to amend the HoldCo Agreement without HREF.197 That
member act cannot be ratified.198
Even if ratification were available, Defendants did not prove HREF ratified
the MStar Amendment through the First Amendment to HoldCo Agreement.
“Ratification may be either express or implied through a party’s conduct, but it is
always a ‘voluntary and positive act.’”199 “Knowledge, actual or imputed, of all
material facts is an essential” element of ratification and the requisite knowledge
may be implied through conduct or expressed by words.200 HREF’s principal saw
the MStar Amendment for the first time at his deposition in this matter.201
Defendants offered no evidence HREF had knowledge “of all material facts” of the
MStar Amendment—specifically the HUD approval requirements—when it
197 MStar Amendment at 3–5; Zohar III Ltd. v. Stila Styles, LLC, 2022 WL 1744003, at *15 (Del. Ch. May 31, 2022) (holding an amendment to an LLC operating agreement purportedly adopted by a manager was an act by the manager, not the company), aff’d sub nom. Tilton v. Zohar III Ltd., Inc., 285 A.3d 1204 (Del. 2022). 198 Holifield, 304 A.3d at 927; Absalom, 2019 WL 2655787, at *2. 199 Genger, 26 A.3d at 195 (quoting Frank v. Wilson & Co., 32 A.2d 277, 305 (Del. 1943)); see Manti Hldgs. LLC, 261 A.3d at 1210 (Del. 2021) (“Under Delaware law, ‘[w]aiver is the intentional relinquishment of a known right.’” (quoting Minna v. Energy Coal S.p.A., 984 A.2d 1210, 1214 (Del. 2009))); George v. Frank A. Robino, Inc., 334 A.2d 223, 224 (Del. 1975) (“Intention forms the foundation of the doctrine of waiver and it must clearly appear from the evidence.”). 200 Frank, 32 A.2d at 305; Manti Hldgs., LLC, 261 A.3d at 1210–11 (Del. 2021) (“A waiver may be either express or implied, but either way, it must be unequivocal.”) (quoting Dirienzo v. Steel P’rs Hldgs. L.P., 2009 WL 4652944, at *4 (Del. Ch. Dec. 8, 2009)). 201 Carroll Dep. at 197 (“I believe this is the first time I’ve seen this document . . . we clearly were not consulted on it.”).
43 executed the First Amendment to HoldCo Agreement.202 Defendants failed to
prove by a preponderance of the evidence HREF ratified the MStar Amendment or
its HUD approval requirements in executing the First Amendment to HoldCo
Agreement.203
B. The HUD Documents Do Not Inform Selection Of HoldCo’s Manager. Defendants then look beyond the HoldCo Agreement for HUD preapproval
requirements.204 First, they look to the HUD Documents.205
But again, per Section 18-402, only the HoldCo Agreement can speak to the
manner of choosing HoldCo’s manager.206 The HoldCo Agreement as modified by
202 Frank, 32 A.2d at 305; Zohar III Ltd., 2022 WL 1744003, at *14 n.129 (declining to find waiver when “[t]here is absolutely no evidence that [plaintiff] intended to waive its right” when the manager purported to amend the LLC agreement in depravation of plaintiff’s consent right). 203 Braga Inv. & Advisory, LLC v. Yenni Income Opportunities Fund I, L.P., 2020 WL 3042236, at *11 (Del. Ch. June 8, 2020) (“Ratification of an unauthorized act may be found from conduct which can be rationally explained only if there were an election to treat a supposedly unauthorized act as in fact authorized.”) (quoting Genger, 26 A.3d at 195); In re Numoda Corp. S’holders Litig., 2015 WL 402265, at *10 (Del. Ch. Jan. 30, 2015) (finding a defective corporate act ratified through “formal ratification” and contemporaneous evidence the parties acted as is the corporate act with authorized), aff’d sub nom. In re Numoda Corp., 128 A.3d 991 (Del. 2015) (TABLE). Defendants also argue since the MStar Amendment named MStar as a co-manager of HoldCo, HREF is barred from immediately acting as “sole manager” of HoldCo. DOB 17–18. Even if the MStar Amendment’s terms were ratified, the HREF Amendment is clear: HoldCo would displace both co-managers as “sole manager.” HREF Addendum § 3(ii)(b). 204 DOB 14, 17; DR 18–19. 205 E.g., Borrower Agreement §§ 34, 46.
44 the HREF Addendum specifies the manner of choosing HoldCo’s manager if
HREF goes unpaid.207
And per Section 18-402, management is “vested” in the manager chosen by
the process in the operating agreement.208 “Vested” means “[h]aving become a
completed, consummated right for present or future enjoyment; not contingent;
unconditional; absolute.”209 So once a manager is chosen as specified in the HREF
Addendum, that manager holds managerial authority.210 The Act provides that the
process for choosing a manager must come from the operating agreement, and
managerial authority vests upon performing that process: it definitionally does so
206 6 Del. C. § 18-402 (“[I]f a limited liability company agreement provides for the management, in whole or in part, of a limited liability company by a manager, the management of the limited liability company, to the extent so provided, shall be vested in the manager who shall be chosen in the manner provided in the limited liability company agreement.”); 6 Del. C. § 18-101(12) (defining “manager” to be a person named “or designated as a manager of a limited liability company pursuant to, a limited liability company agreement”); Symonds & O’Toole, supra note 161, § 4.01[C], at 4-13 (“The limited liability company agreement [] serves as the primary source of organization for the entity; it governs relationships between and among the company, its members. . . .”). 207 HREF Addendum §§ 3(ii)–3(ii)(b). 208 6 Del. C. § 18-402. 209 Vested, Black’s Law Dictionary (12th ed. 2024); see also Branin v. Stein Roe Inv. Couns., LLC, 2014 WL 2961084, at *10 (Del. Ch. June 30, 2014) (explaining a “vested right [] cannot be unilaterally terminated”). 210 Symonds & O’Toole, supra note 161, § 9.01[B][2], at 9-11 (“The [Act] specifically authorizes terms in the liability company agreement providing for management of the company . . . by one or more managers. In such a case, management of the limited liability company is vested, to the extent so provided, in those designated persons.”).
45 notwithstanding obligations in other contracts to third parties.211 OpCo might have
promised HUD to seek preapproval before the manager of its manager was
replaced.212 But OpCo’s promise, and any consequences of its breach, is irrelevant
to how HoldCo’s manager is actually changed. The HUD Documents have no
effect on HREF’s right in the HoldCo Agreement to become HoldCo’s manager
upon an ARE, and do not interrupt vesting of HREF’s managerial authority.
There is more. Defendants have shown no reason why OpCo’s agreements
with HUD should bind or restrict HREF or HoldCo. 213 “It is well established in
Delaware that only parties to a contract may be liable for breach of that particular
contract.”214 A contract “is an attempt by market participants to allocate risks and
opportunities” and the role of the Court “is not to redistribute these risks and
211 Javice v. JPMorgan Chase Bank, N.A., 2023 WL 4561017, at *2 (Del. Ch. July 13, 2023) (“[C]ontracting parties may not unilaterally eliminate vested rights of third parties.”); Salaman v. Nat’l Media Corp., 1992 WL 808095, at *6 (Del. Super. Oct. 8, 1992) (holding “a vested contract right [] cannot be unilaterally terminated”). 212 The HREF Addendum recognizes there might be work to do with HUD once HREF exercised its step-in rights: HoldCo’s members must “use best efforts to modify applicable HUD forms” upon the occurrence of an ARE. HREF Addendum § 3(ii)(a); see also JX 39 (HREF informing Defendants of an ARE and requesting Defendants’ cooperate to effectuate a transition of managerial authority). 213 See 13 Williston on Contracts § 37.1 (4th ed. 2025) (“The mere fact of entering into a contract gives rise to a relationship between or among the contracting parties known as “privity.” . . . [And, generally,] only parties in privity of contract [can] sue on the contract.” (internal footnote omitted)). 214 B&B Fin. Servs., LLC v. RFGV Festivals, LLC, 2019 WL 5849770, at *3 (Del. Super. Nov. 7, 2019); see Vichi v. Koninklijke Philips Elecs. N.V., 62 A.3d 26, 59 (Del. Ch. 2012) (“[B]asic contract principles [recognize] that a person not a party to [a] contract cannot be held liable to it.”).
46 opportunities as [it sees] fit, but to enforce the allocation the parties have agreed
upon.”215 Under Delaware law, “‘only parties to a contract are bound by that
contract.’”216
Defendants’ argument asks this Court to impose the HUD Documents’
preapproval requirements on HoldCo and HREF—two strangers to those contracts
between OpCo and HUD.217 Neither is a party to the HUD Documents, so neither
is bound by their terms or obligations. To be sure, the Borrower Agreement
requires OpCo, as borrower, to receive HUD’s written approval before changing
the HUD-designated contact or amending its organizational documents.218 But that
approval right does not bind HREF, so it does not bar HREF from exercising its
ARE rights and immediately becoming HoldCo’s sole manager.
215 11 Williston on Contracts § 31.5 (4th ed. 2025) (“While the parties to a contract often request the courts, under the guise of interpretation or construction, to give their agreement a meaning which cannot be found in their written understanding … the courts properly and steadfastly reiterate the well-established principle that it is not the function of the judiciary to change the obligations of a contract which the parties have seen fit to make. A court will not rewrite the contract of the parties.”) (internal footnotes omitted). 216 Strougo v. Hollander, 111 A.3d 590, 597 (Del. Ch. 2015) (quoting Am. Legacy Found. v. Lorillard Tobacco Co., 831 A.2d 335, 343 (Del. Ch. 2003)); Strougo, 111 A.3d at 592 (“I conclude based on principles of contract law that the Bylaw does not apply to this case because … [the] changes made to the Company’s bylaws after the plaintiff was cashed out are not binding on him for the same reason that a non-party to a contract is not bound by the terms of that contract.”); Am. Legacy Found., 831 A.2d at 343 (“There is no doubt that a fundamental principal of contract law provides that only parties to a contract are bound by that contract.”); see, e.g., Wallace v. Wood, 752 A.2d 1175, 1180 (Del. Ch. 1999); EEOC v. Waffle House, Inc., 534 U.S. 279, (2002) (“It goes without saying that a contract cannot bind a nonparty.”). 217 See, e.g., DOB 2–3, 16–17; RB 17.
47 C. The HREF Addendum Is Not Illegal.
Finally, Defendants look to HUD rules and regulations to argue the HREF
Addendum in its entirety is “illegal and [] unenforceable,” because it “required
[OpCo] to make distributions to pay HREF’s [Monthly Return] beginning in
February 2020 and for each month thereafter.”219 Defendants contend 24 C.F.R. §
232.254, as reflected in the HUD Documents and the HUD Financial Operations
and Accounting Procedures for Insured Handbook, prohibited OpCo from funding
the Monthly Return.220 That regulation requires that prior to making “distributions
of mortgaged property … [the] borrower must demonstrate positive surplus
cash[.]”221 Defendants assert the HREF Addendum compelled monthly payments
irrespective of whether a positive cash surplus had been demonstrated. 222 From
there, Defendants conclude the HREF Addendum was illegal from the outset and is
unenforceable as a matter of law.223
218 Borrower Agreement §§ 34(a)–(i). 219 RB 19. 220 DOB 14, 17–20; RB 22–24; Trial Tr. 39–40, 90–96, 151–153; Borrower Agreement § 16. At trial, Defendants’ counsel struggled to identify a specific statute that was being violated and to identify which payments allegedly violated the HUD requirements. Trial Tr. 86–90, 103–104. Defendants argued 24 C.F.R. § 232.254 prohibited the Monthly Return payments to HREF and therefore the HREF Addendum is illegal and unenforceable. Trial Tr. 90–92, 106–109. 221 24 C.F.R. § 232.254. 222 DR 23. 223 Id. at 3.
48 “Illegality is an affirmative defense on which Defendants bear the burden of
proof.”224 Delaware courts may find a contract unenforceable if it is “illegal per se
or violative of public policy.”225 “[C]ontracts that offend public policy are void.”226
As the Delaware Supreme Court explained:
Under Delaware law, it is against the public policy of this State to permit its courts to enforce an illegal contract prohibited by law. Ordinarily, we think, when such is the fact, neither party has a remedy to any extent against the other. Moreover, this Court has held that a court may never enforce agreements void ab initio, no matter what the intentions of the parties. Thus, when an agreement is void ab initio as against public policy, the courts typically will not enforce a remedy to any extent against either party. In other words, the courts typically will leave the parties where they find them.227
Delaware courts will not aid in the enforcement of an illegal contract.228
At the same time, our courts “hold freedom of contract in high—some might
say, reverential—regard. Only ‘a strong showing that dishonoring [a] contract is
required to vindicate a public policy interest even stronger than freedom of
224 Lighthouse Behav. Health Sols., LLC v. Milestone Addiction Counseling, LLC, 2023 WL 3486671, at *10 (Del. Ch. May 17, 2023); Tygon Peak Cap. Mgmt., LLC v. Mobile Invs. Investco, LLC, 2023 WL 4857281, at *7 (Del. Ch. July 31, 2023), aff’d sub nom. Mobile Invs., LLC v. Tygon Peak Cap. Mgmt., LLC, 315 A.3d 445 (Del. 2024); Ct. Ch. R. 8(c). 225 Bunting v. Citizens Fin. Grp., Inc., 2007 WL 2122137, at *5 (Del. Super. June 29, 2007). 226 U.S. Bank Nat’l Ass’n v. Stevens Tr. of Heather Michele Stevens Tr., 2025 WL 1139329, at *7 (Del. Super. Apr. 17, 2025); Lincoln Nat. Life Ins. Co. v. Joseph Schlanger 2006 Ins. Tr., 28 A.3d 436, 441 (Del. 2011). 227 Geronta Funding v. Brighthouse Life Ins. Co., 284 A.3d 47, 61 (Del. 2022) (internal citations omitted). 228 Lynch, 2020 WL 4381604, at *44.
49 contract’ will induce our courts to ignore unambiguous contractual
undertakings.”229 “When parties have ordered their affairs voluntarily through a
binding contract, Delaware law is strongly inclined to respect their agreement[.]”230
“[C]ourts are averse to voiding agreements on public policy grounds unless their
illegality is clear and certain” and Delaware courts exercise “this authority with
caution, an only in cases that are free from doubt.”231
Delaware has recognized a contract that “violates the explicit mandate of a
statutory provision” is per se illegal.232 In determining whether a contract violative
of a statute should be unenforceable as a matter of public policy, the Court must
consider
the statute’s language, nature, object, purpose, subject matter, reach, the wrong or evil which the law seeks to remedy or prevent, the class of persons sought to be controlled, the legislative history and the effects of holding a contract in violation of the law invalid as well as
229 Cantor Fitzgerald, L.P. v. Ainslie, 312 A.3d 674, 676–77 (Del. 2024) (quoting ev3, Inc. v. Lesh, 103 A.3d 179, 181 n.3 (Del. 2014), aff’d in pertinent part, 892 A.2d 1068 (Del. 2006)); see Ascension Ins. Hldgs., LLC v. Underwood, 2015 WL 356002, at *4 (Del. Ch. Jan. 28, 2015) (“This jurisdiction respects the right of parties to freely contract and to be able to rely on the enforceability of their agreements; where Delaware’s law applies, with very limited exceptions, our courts will enforce the contractual scheme that the parties have arrived at through their own self-ordering, both in recognition of a right to self-order and to promote certainty of obligations and benefits.”). 230 New Enter. Assocs. 14, L.P. v. Rich, 295 A.3d 520, 556 (Del. Ch. 2023). 231 Bennett v. Lally, 2014 WL 4674623, at *4 (Del. Ch. Sept. 5, 2014) (quoting Sann v. Renal Care Centers Corp., 1995 WL 161458, at *5 (Del. Super. Mar. 28, 1995)). 232 Preferred Fin. Servs., Inc. v. A & R Bail Bonds LLC, 2019 WL 315331, at *5 (Del. Super. Jan. 23, 2019), aff’d, 217 A.3d 60 (Del. 2019).
50 balancing the interest in enforcement of the contract against the law's underlying public policy.233 And if only one provision within a contract is illegal, the analysis considers
materiality and severability before deciding whether the plaintiff may still prevail
on its claim.234
Defendants’ argument fails at the threshold. Defendants contend the HREF
Addendum is illegal because it required OpCo “to make distributions” to pay
HREF: distributions governed by 24 C.F.R. § 232.254.235 But the HREF
Addendum did not require distributions from OpCo at all or in violation of the
regulation.236 The HREF Addendum required HoldCo to pay the HREF Monthly
233 Bunting, 2007 WL 2122137, at *5 (citing Bank of Baltimore v. Auto’s Plus, 1994 WL 19937, *2 (Del. Super. Jan. 4, 1994)); Preferred Fin. Servs., Inc., 2019 WL 315331, at *5 (identifying the same factors); Lighthouse Behav. Health Sols., LLC, 2023 WL 3486671, at *10 (accord). 234 Lighthouse Behav. Health Sols., LLC, 2023 WL 3486671, at *11 (collecting authorities). 235 Trial Tr. 151–54; 24 C.F.R. § 232.254 (“Borrower may make and take distributions of mortgaged property, as set forth in the mortgage loan transactional documents, to the extent and as permitted by the law of the applicable jurisdiction, provided that, upon each calculation of borrower surplus cash (as defined by HUD), which calculation shall be made no less frequently than semi-annually, borrower must demonstrate positive surplus cash, or to the extent surplus cash is negative, repay any distributions taken during such calculation period within 30 calendar days unless a longer time period is approved by HUD . . . .”). 236 HREF Addendum § 4(iii); Collateral Assignment, Pledge, and Security Agreement §§ 4–5; Security Agreement § 1 (“The [Pledged Account] means the deposit account maintained by [HoldCo] ….”); BACA. § 2 (“[HoldCo] represents and warrants that it has the legal right to pledge the [Pledged] Account to [HREF], that the funds in the Deposit Account are not held for the benefit of a third party” and “[HoldCo] covenants with [HREF] that it shall not enter into any acknowledgment or agreement that gives any other
51 Return payments from the Pledged Account—“a segregated account in the name of
the Company”—that “may only be drawn on by [HREF] when amounts under this
Addendum are due and payable to HREF[.]”237 The contract required the funds to
come from an account in HoldCo’s name.238 Putting the Pledged Account under
OpCo’s name was a mistake in performing the contract, not a term of the contract
that could possibly make the contract itself illegal. And the HREF Monthly Return
Fund fully funded HoldCo’s first twenty-five payments of the HREF Monthly
Return.239
After the HREF funds ran dry, the OpCo Agreement—not the HREF
Addendum—required OpCo to fund HoldCo’s payments to HREF.240 The OpCo
Agreement states that “[f]rom time-to-time and before any distribution of Net Cash
Flow . . . [OpCo] shall make payments to, or on behalf of, [HoldCo] sufficient to
allow [HoldCo] to timely make required payments to [HREF] pursuant to the terms
of the [HoldCo] Agreement, including monthly payments of the [HREF] Current
person or entity except [HREF] control over, or any other security interest, lien or title in, the [Pledged] Account.”). 237 HREF Addendum § 4(iii); see Security Agreement at Recital (“[T]he Additional Amount [] will be used to fund Project related fees, expenses and amounts due to [HREF], as more fully set forth in the Addendum.”). 238 HREF Addendum § 4(iii); Security Agreement § 1; see generally BACA. 239 HREF Addendum § 4(iii); Trial Tr. 15, 68, 123–24,135–36; Carroll Dep. at 14–15; see BACA ¶¶ 1–2. 240 Trial Tr. 15–17; OpCo Agreement § 9.1.
52 Return[.]”241 Defendants contend this language required OpCo to make
“distributions” to fund HREF payments even when OpCo should not have under
24 C.F.R. § 232.254.242
It does not. It simply provides that OpCo would pay HREF before making
any other distributions.243 OpCo was not required to fund HREF’s Monthly
Returns no matter what.244 Indeed, Section 16 of the Borrower Agreement
prevents distributions “from borrowed funds” or when the Project is cash flow
negative.245 OpCo could refrain from making distributions and suffer the
consequences, like an ARE that gave HREF control.246 Instead, Lindsey sought to
maintain control by causing LindseyCo to loan OpCo money after the Pledged
Account ran dry.247 Defendants failed to establish clear and certain illegality in
OpCo’s obligations to pay HREF, which are not even in the HREF Addendum.
241 OpCo Agreement § 9.1. 242 DR 22; DR 24. Defendants claim an affidavit submitted by HREF’s principal as part of litigation in Texas relating to the Project establishes the HREF Addendum is illegal. Trial Tr. 104, 125–26; see JX 45 ¶¶ 8–11. Not so. The pertinent portion of that affidavit tracks the language of Section 9.1 of the OpCo Agreement, which as discussed above did not require OpCo to remit payments to HREF in violation of HUD rules or regulations. Compare JX 45 ¶ 9 with OpCo Agreement § 9.1. 243 OpCo Agreement § 9.1. 244 Trial Tr. 154–156. 245 Borrower Agreement § 16. 246 See PB 18. 247 Trial Tr. 123–125, 138, 149–151; JX 23 at 1; JX 28 at 1–2.
53 Defendants also assert the HREF Addendum in its entirety is illegal because
HREF’s right to step in as HoldCo’s manager effectively eliminated HUD’s
approval right.248 Defendants posit the HREF Addendum circumvents HUD’s
approval right in the HUD Documents because (i) the HUD Documents provide
HUD with a consent right over managerial changes in “the organizational
documents of Borrower;”249 (ii) OpCo executed the HUD Documents before the
HREF Addendum; (iii) HUD did not approve the HREF Addendum; and (iv) the
HREF Addendum provides that upon the occurrence of an ARE, HREF becomes
HoldCo’s sole manager.250
HREF’s exercise of the step-in rights it contractually secured from HoldCo
might put OpCo in hot water in its contract with HUD.251 But that does not make
HREF’s contract with HoldCo “illegal per se or violat[ive] [of] public policy.”252
The HREF Addendum anticipated smoothing things over with HUD: “[u]pon the
occurrence of an ARE . . . the Project Managers shall use best efforts to modify
applicable HUD forms and any other relevant forms, and shall otherwise use best
248 Trial Tr. 105–106. 249 Borrower Agreement § 34(i). 250 RB 17–18; DOB 18–19; Trial Tr. 105–106. 251 See MetCap Secs. LLC v. Pearl Senior Care, Inc., 2007 WL 1498989, at *6 n. 49 (Del. Ch. May 16, 2007). 252 Bunting v. Citizens Fin. Grp., Inc., No. CIV.A. 05C-03-013ESB, 2007 WL 2122137 (Del. Super. June 29, 2007).
54 efforts to take all other steps necessary, to provide that [HREF] . . . replace[s] the
Project Managers as sole manager of the Company . . . .253 And at worst, HREF
stepping in would cause OpCo to breach a contract with HUD: neither HREF nor
OpCo would have done anything illegal. And even if they had, Defendants have
not attempted to show HREF’s step-in rights should be unenforceable as a matter
of public policy.254 Defendants have failed to preclude enforcement of HREF’s
step-in rights.
D. The Proper Parties are Before the Proper Venue to Resolve HREF’s Claim Under Section 18-110. In a last-ditch effort, Defendants cast about for missing parties and a
different venue. Defendants assert HREF’s 18-110 claim “arises under or in
relation to the HUD [Loan Documents]” and the contracts between OpCo and
HUD require HUD, Greystone, MStar as a purported co-manager, MStar’s
principal Robert A. Sweet, and the Project’s property manager, Meridian Senior
Living, LLC, to be joined as parties to this action.255
HREF’s Section 18-110 claim is a claim in rem. Section 18-110 requires
only that “the limited liability company shall be named as a party.”256 Only the
253 HREF Addendum § 3(ii)(a). 254 Lighthouse Behav. Health Sols., LLC, 2023 WL 3486671, at *10 (collecting authorities). 255 DOB 3. 256 6 Del. C. § 18-110(a).
55 entity itself appears before the Court in its “individual” capacity because the entity
embodies the res.257 Other parties to an in rem proceeding appear “not
individually, but rather, as respondents being invited to litigate their claims to
the res (here, the disputed corporate office) or forever be barred from doing so.”258
HoldCo’s purported managers need not be made parties: they need only be
provided adequate notice of the pendency of Plaintiff’s claim.259 “Because a
Section 18-110 proceeding affects the Delaware LLC and the office of managing
member, it is not necessary for all claimants to the office to be subject to the
Court’s in personam jurisdiction in order for the Court to make an authoritative
determination.”260 This Court has the “constitutional authority” to determine
HoldCo’s managing member once “persons with potential claims to the [office] in
question . . . receive adequate notice and an opportunity to be heard.”261 While
claimants to the res are entitled to “notice and an opportunity to be heard,” they
need not be made parties to the proceeding.262
257 Genger, 26 A.3d at 220. 258 Id. at 199–220. 259 6 Del. C. § 18-110(a). 260 Feeley, 2012 WL 966944, at *5. 261 Cedar Lane Farms, Inc., 1992 WL 111210, at *3; Feeley, 2012 WL 966944, at *5; McMillan, 2024 WL 3311812, at *5; Haft, 1996 WL 255899, at *2; see Mullane, 339 U.S. at 314. 262 Haft, 1996 WL 255899, at *2; Feeley, 2012 WL 966944, at *5.
56 As for Greystone and HUD, they hold only a consent right. They, Sweet,
and Meridian have no claim to the contested res. They lack even the interest that
compels adequate notice.263
Finally, Defendants argue Count V is “procedurally defective” because the
Note requires any controversy arising under it to be brought in Texas, the location
of the Project.264 The “Borrower agree[d]” to litigate any “controversy arising
under or in relation to th[e] Note” in Texas.265 The Note explicitly defined
“Borrower” to refer to OpCo.266 Neither HoldCo nor Plaintiff is a party to the Note
with HUD, or bound by its forum selection clause. And this is not a controversy
under OpCo’s Note with HUD. This is a controversy under the HoldCo
Agreement amended by the HREF Addendum. The Amended Complaint seeks to
vindicate Plaintiff’s right under the HoldCo Agreement amended by the HREF
Addendum: Count V relates to HoldCo’s internal affairs and is properly
adjudicated by this Court.267
*****
263 See Restatement (Second) of Judgments § 6 (1982) (“The concept of in rem jurisdiction presupposes the existence of a legal relationship that is conceived of as property.”). 264 DOB 9; see JX 8 §§ 16(a)–16(b). 265 Note § 16. 266 See generally Note. 267 Cornerstone, 2003 WL 1787959, at *13 (“[T]his state has a strong interest in resolving disputes regarding the internal affairs of LLCs formed under its laws.”).
57 HREF became HoldCo’s sole manager when its ARE step-in right was
undisputedly triggered. Nothing in the HoldCo Agreement disturbs that
conclusion, and nothing outside it can. Judgment on Count V shall be entered
accordingly.
E. HREF’s Request For Specific Performance
HREF additionally seeks relief from this Court in the form of an order
requiring Defendants to comply with the “best efforts” provision under the HREF
Addendum.268 The HREF Addendum provides in relevant part:
“[u]pon the occurrence of an ARE … (a) the Project Managers shall use best efforts to modify applicable HUD forms and any other relevant forms, and shall otherwise use best efforts to take all other steps necessary, to provide that [HREF] or its designee shall be a key principal thereunder and to cause [HREF] or its designee to replace the Project Managers as sole manager of the Company with all decision making authority of the Company as the manager of the [OpCo]. Without limiting any other provision of this Addendum, the Sponsor Members agree that they shall execute such additional documents as [HREF] may request in order to facilitate the foregoing provisions (including, without limitation, a power of attorney).269
In a Section 18-110 action, Delaware law counsels against doing more than
what is necessary to determine who holds the disputed office. Some requests for
relief may exceed the Court’s ancillary authority.270 Others may require personal
268 Joint Stip. ¶ 45. 269 HREF Addendum § 3(ii)(a) (emphasis added). 270 Lynch, 2020 WL 3422399, at *5 (“A Section 18-110 proceeding is ‘designed to focus with precision on the corporate interest in prompt resolution of grievances respecting claims to office.’” (quoting Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and
58 jurisdiction that the Court does not have in an in rem action.271 In this case,
HREF’s Section 18-110 claim is but one claim in a sprawling plenary action.
HREF has secured personal jurisdiction over Defendants. There is another reason
to deny relief at this time: ripeness.
“There must be an actual controversy present for the court to exercise
declaratory judgment jurisdiction.”272 Where an actual controversy is lacking the
Court “[t]he ripeness doctrine prevents Delaware courts from exercising
Commercial Practice in the Delaware Court of Chancery § 9.09[b], at 9-201 to -02 (2018))); Zohar III Ltd., 2022 WL 1744003, at *10 (“[T]he test for determining whether a claim can properly be decided under § 18-110 is ‘whether it is necessary to decide [the claim] in order to determine the validity of the election or designation by which the defendant claims to hold office.’” (quoting Kahn Bros. & Co. Profit Sharing Plan & Tr. v. Fischbach Corp., 1988 WL 122517, at *5 (Del. Ch. Nov. 15, 1988)). If the resolution of a claim is not necessary to determine an LLC’s proper manager, “those claims ‘are said to be collateral to the purpose of a [Section 18-110] action and must be raised in a [separate] plenary action.’” Genger, 26 A.3d at 199 (quoting Agranoff v. Miller, 1999 WL 219650, at *17 (Del. Ch. Apr. 12, 1999)). Section 18-110 “does not address … what is required [] of former managers who have been properly removed”—such relief exceeds the scope of this narrow statutory proceeding. Avgiris Bros., LLC v. Bouikidis, 2022 WL 4672075, at *16 (Del. Ch. Sept. 30, 2022). 271 In re Doehler Dry Ingredient Sols., LLC, 2022 WL 4281841, at *4 (Del. Ch. Sept. 15, 2022) (explaining that where a plaintiff seeks “specific performance of a contract, even where it relates to property [the claim] is in personam insofar as it [] s[eeks] to compel performance by the defendant”), aff’d sub nom. In re Dissolution of Doehler Dry Ingredient Sols., LLC, 294 A.3d 64 (Del. 2023) (TABLE); Genger, 26 A.3d at 199 (explaining proceeding in rem “‘imposes important limits on the scope of [a] court’s remedial powers even as to claims bearing on whether a person lawfully holds corporate office’” (quoting Agranoff, 1999 WL 219650, at *18)); Lynch, 2020 WL 3422399, at *5 (explaining the Court “cannot go further and actually rescind a transaction, award money damages, or otherwise fashion a remedy that is binding on individuals or entities beyond the res, unless the Court has in personam jurisdiction that would allow it to fashion that type of ultimate relief and bind those individuals or entities”) (internal quotations omitted).
59 jurisdiction over [such] disputes” because “doing so would result in the rendering
of an advisory or hypothetical opinion.”273 “[I]f the mere threat of future breach or
disregard of court orders triggered equitable jurisdiction, such jurisdiction would
be general, not limited,” and guidance from the Court in such a situation would be
too attenuated from an existing dispute to satisfy the ripeness doctrine.274
An order from this Court declaring the proper manager of HoldCo “changes
the incentives of the parties to the contract. . . . The fact that a breaching party
theoretically may re-breach” does not establish a live controversy.275 “Any future
breach following a court’s ruling would be hypothetical, such that instructing
[Defendants] to ‘go, and breach no more’ would be ‘entirely unnecessary’ and thus
inappropriate.”276
HREF has prevailed in establishing it is HoldCo’s proper manager and that
the HREF Addendum is binding on HoldCo and its members. Defendants are
bound by this Court’s order, and the HREF Addendum. I expect they will comply
with both. Having not yet been shown they failed to comply, it is premature to
272 Cardinale v. Feingold, 2023 WL 142510, at *2 (Del. Ch. Jan. 10, 2023). 273 Solak v. Sarowitz, 153 A.3d 729, 736 (Del. Ch. 2016). 274 Athene Life & Annuity Co. v. Am. Gen. Life Ins. Co., 2019 WL 3451376, at *8 (Del. Ch. July 31, 2019). 275 Id. 276 All. Compressors LLC v. Lennox Indus. Inc., 2020 WL 57897, at *5 (Del. Ch. Jan. 6, 2020).
60 compel them to do so. HREF’s request for an order compelling Defendants to
comply with Section 3(ii)(a) is denied without prejudice.
F. HREF’s Request for Attorney’s Fees
“Delaware follows the ‘American Rule,’ whereby a prevailing party is
generally expected to pay its own attorney’s fees and costs.”277 “Under the
American Rule, litigants are expected to bear their own costs of litigation absent
some special circumstances that warrant a shifting of attorneys’ fees.”278 While
this Court has the discretion to shift fees if appropriate, “the American Rule
remains the default.”279
At this point HREF’s request for attorneys’ fees is premature.280 The parties
to this action still have five pending claims that remain to be adjudicated, and the
277 Montgomery Cellular Hldg. Co., Inc. v. Dobler, 880 A.2d 206, 227 (Del. 2005). 278 Avgiris Bros., 2023 WL 7137104, at *2. 279 Star Am. Rail HoldCo, LLC v. Cathcart, 2024 WL 5239938, at *10 (Del. Ch. Dec. 17, 2024); Montgomery Cellular Hldg. Co., Inc. v. Dobler, 880 A.2d 206, 227 (Del. 2005) (“Delaware follows the ‘American Rule,’ whereby a prevailing party is generally expected to pay its own attorney's fees and costs.”). 280 HREF did not brief its request for fees in its opening brief; HREF briefed its request for attorneys’ fees for the first time in its sur-reply. SR 9–10 (dedicating a mere 10 lines of text to its request for fees). But for there being more to do in this case, it would have been waived. Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are deemed waived.”); In re IBP, Inc. S’holders Litig., 789 A.2d 14, 62 (Del. Ch. 2001) (deeming a party to have waived arguments that it did not present in its opening post-trial brief); ABC Woodlands L.L.C. v. Schreppler, 2012 WL 3711085, at *3 (Del. Ch. Aug. 15, 2012) (finding an argument “first raised in a pretrial brief” to be waived); see Gans v. MDR Liquidating Corp., 1993 WL 193526, at *1 (Del. Ch. May 28, 1993) (“applications for attorney fees are often rejected if the litigation has not been completed”).
61 outcome could alter the analysis of whether to deviate from the default American
Rule. Accordingly, HREF’s request for fees is held in abeyance pending the
resolution of the remaining claims.
III. CONCLUSION
Judgment on Count V shall be entered in HREF’s favor. HREF is entitled to
immediately become HoldCo’s sole manager. The parties shall submit an
implementing order.
Related
Cite This Page — Counsel Stack
HREF Senior Worthington LLC v. Conroe WM LLC, Counsel Stack Legal Research, https://law.counselstack.com/opinion/href-senior-worthington-llc-v-conroe-wm-llc-delch-2026.