In re Morrow Park Holding LLC
This text of In re Morrow Park Holding LLC (In re Morrow Park Holding 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
) CONSOLIDATED IN RE MORROW PARK HOLDING LLC ) C.A. No. 2017-0036-PAF
MEMORANDUM OPINION
Date Submitted: January 18, 2022 Date Decided: August 1, 2022
Brian E. Farnan, Michael J. Farnan, FARNAN LLP, Wilmington, Delaware; Attorneys for Plaintiffs and Counterclaim Defendants Jonathan Holtzman, Village Green Residential Properties, L.L.C., and VGM Clearing, LLC, and Counterclaim Defendant City Club Apartments, LLC.
Richard P. Rollo, Travis S. Hunter, Angela Lam, Nicole M. Henry, John T. Miraglia, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Alan S. Loewinsohn, Kerry Schonwald, LOEWINSOHN DEARY SIMON RAY LLP, Dallas, Texas; Attorneys for Defendants and Counterclaim Plaintiffs CCI Historic, Inc., Compatriot Capital Inc., VG ECU Holdings, LLC, Village Green Holding, LLC, and Village Green Management Company, LLC.
FIORAVANTI, Vice Chancellor This is the latest chapter of a business divorce among real estate developers.
One side is referred to as the Holtzman Parties and the other as the Compatriot
Parties. To accomplish their separation, the parties established limited liability
companies with operating agreements governing the continued operation and
subsequent division of their jointly owned assets. One of those assets was the
Morrow Park City Apartments in Pittsburgh, Pennsylvania (the “Apartments” or the
“Property”). The agreements provided for the development and financing of the
Apartments and contemplated that one of the two developers would acquire the
Apartments from the other after they had been substantially completed and occupied.
Despite having negotiated detailed agreements governing the process of their
divorce, the parties deviated from the deal terms, leading to further complications,
subterfuge, and chiseling. In 2016, one of the developers, Village Green Residential
Properties, L.L.C. (“VGRP”—one of the Holtzman Parties), sought to exercise its
right to acquire the Apartments by purchasing the interests of two of the Compatriot
Parties. The parties’ contract specified a process for setting the purchase price, but
the parties ignored it. Disagreements over the valuation process ensued, culminating
in VGRP filing this action. The initial complaint sought specific performance and
an injunction to enforce VGRP’s purchase right. The court entered an injunction,
conditioned on a bond, essentially maintaining the status quo until a final judgment
as to the purchase price. Since then, the disputes multiplied. This litigation has expanded with the
addition of new parties, claims, counterclaims, and third-party claims. There has
also been related litigation in this court and elsewhere. Most notably, during the
course of this action, the Holtzman Parties encouraged a minority investor to file suit
in Pennsylvania. That litigation led to a court-ordered sale of the Apartments to the
Compatriot Parties. A portion of the sale proceeds from that transaction has been
deposited with this court to apportion in this case.
The parties tried this case over several days via Zoom. The court is tasked
with deciding several claims and issues, including among others: (1) did either side
breach the agreement governing the sale of the entity that owned the Apartments?;
(2) did the Compatriot Parties violate the implied covenant of good faith and fair
dealing?; (3) did any of the Compatriot Parties violate an agreement providing for
its management of properties owned by the Holtzman Parties or their affiliates?; and
(4) how should the proceeds from the sale of the Apartments be allocated? The court
concludes that both sides failed to comply with the terms of their agreement
governing the sale of the Apartments, but the Holtzman Parties have failed to
establish damages. The Holtzman parties also lack standing to assert other claims
and otherwise failed to establish breaches of their agreements. Thus, the court leaves
the parties where they are following the court-ordered sale of the Apartments to the
Compatriot Parties. Finally, the court accepts the Compatriot Parties’ interpretation
2 and calculation of the accrual of preferred returns under the parties’ agreements, and
the proceeds from the sale of the Apartments must be distributed accordingly.
I. BACKGROUND
The following recitation reflects the facts as the court finds them after trial.1
A. The Parties and the Ownership Structure of the Morrow Park City Apartments
The Plaintiffs are Jonathan Holtzman and certain affiliated companies:
Plaintiff VGRP and Plaintiff VGM Clearing, LLC (“VGM Clearing”). They, along
with Counterclaim Defendant City Club Apartments, Inc. (“CCA”), another
Holtzman affiliate, are the “Holtzman Parties.”2
The Defendants and Counterclaim Plaintiffs consist of CCI Historic, Inc.
(“CCI”); VG ECU Holdings, LLC (“VG ECU”); Compatriot Capital, Inc.
(“Compatriot”); Village Green Holding, LLC (“Village Green Holding”); and
Village Green Management Company, LLC (“Village Green Management” and
collectively with CCI, VG ECU, Compatriot, and Village Green Holding, the
1 Documents filed on the docket for this case are cited as “Dkt.” followed by their docket number. The trial testimony (Dkt. 642–47) is cited as “Tr.”; post-trial oral argument (Dkt. 670) is cited as “Hrg.”; deposition testimony is cited as “Dep.”; trial exhibits are cited as “JX”; and stipulated facts in the pre-trial order (Dkt. 626) are cited as “PTO,” with each followed by the relevant page, paragraph, or exhibit number. 2 VGRP and VGM Clearing are Michigan limited liability companies, and CCA is a Delaware limited liability company. PTO, III ¶¶ 2, 4, 5.
3 “Compatriot Parties”). CCI and Compatriot are Delaware corporations; 3 VG ECU,
Village Green Holding, and Village Green Management are Delaware limited
liability companies. 4
In 2011, Compatriot acquired a 50% interest in Village Green Holding, a
property-holding entity that was previously under the sole control of Holtzman
Parties VGM Clearing and VGRP.5 Previously, Holtzman had used the entities
under his control to develop and manage multifamily housing properties. By 2016,
the relationship between the parties had deteriorated, and they decided to part ways.
To effectuate their separation, Village Green Holding, VGM Clearing, VGRP, CCI,
VG ECU, and Holtzman entered into a “Redemption Agreement,” dated February 1,
2016, which contemplated a series of transactions adjusting the parties’ interests in
their various joint projects.6 Among those contemplated transactions was a plan to
create two “New Companies” to control two then-unfinished properties: Morrow
Park City Apartments and Southside Works City Apartments. 7
3 Id. ¶¶ 6, 7. 4 Id. ¶¶ 8–10. 5 JX 71 § 3.3(a)(i) & Schedule A. 6 See JX 109 (“Redemption Agreement”). 7 Id. § 1.1(a)(iv); see also id., Schedule D.
4 The Apartments were wholly owned through Morrow Park City Apartments,
LLC (“MP Operating”). 8 VG Morrow Park Capital LLC (“MP Managing”) held a
majority interest in MP Operating. 9 Non-party L.A.V. Associates, LP (“LAV”) held
a minority stake in MP Operating as well.10 The owners of LAV previously owned
the land underlying the Apartments, and they contributed this land to the project in
exchange for an equity stake in MP Operating. 11 The parties to the Redemption
Agreement eventually assigned the whole interest in MP Managing to the “New
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
) CONSOLIDATED IN RE MORROW PARK HOLDING LLC ) C.A. No. 2017-0036-PAF
MEMORANDUM OPINION
Date Submitted: January 18, 2022 Date Decided: August 1, 2022
Brian E. Farnan, Michael J. Farnan, FARNAN LLP, Wilmington, Delaware; Attorneys for Plaintiffs and Counterclaim Defendants Jonathan Holtzman, Village Green Residential Properties, L.L.C., and VGM Clearing, LLC, and Counterclaim Defendant City Club Apartments, LLC.
Richard P. Rollo, Travis S. Hunter, Angela Lam, Nicole M. Henry, John T. Miraglia, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Alan S. Loewinsohn, Kerry Schonwald, LOEWINSOHN DEARY SIMON RAY LLP, Dallas, Texas; Attorneys for Defendants and Counterclaim Plaintiffs CCI Historic, Inc., Compatriot Capital Inc., VG ECU Holdings, LLC, Village Green Holding, LLC, and Village Green Management Company, LLC.
FIORAVANTI, Vice Chancellor This is the latest chapter of a business divorce among real estate developers.
One side is referred to as the Holtzman Parties and the other as the Compatriot
Parties. To accomplish their separation, the parties established limited liability
companies with operating agreements governing the continued operation and
subsequent division of their jointly owned assets. One of those assets was the
Morrow Park City Apartments in Pittsburgh, Pennsylvania (the “Apartments” or the
“Property”). The agreements provided for the development and financing of the
Apartments and contemplated that one of the two developers would acquire the
Apartments from the other after they had been substantially completed and occupied.
Despite having negotiated detailed agreements governing the process of their
divorce, the parties deviated from the deal terms, leading to further complications,
subterfuge, and chiseling. In 2016, one of the developers, Village Green Residential
Properties, L.L.C. (“VGRP”—one of the Holtzman Parties), sought to exercise its
right to acquire the Apartments by purchasing the interests of two of the Compatriot
Parties. The parties’ contract specified a process for setting the purchase price, but
the parties ignored it. Disagreements over the valuation process ensued, culminating
in VGRP filing this action. The initial complaint sought specific performance and
an injunction to enforce VGRP’s purchase right. The court entered an injunction,
conditioned on a bond, essentially maintaining the status quo until a final judgment
as to the purchase price. Since then, the disputes multiplied. This litigation has expanded with the
addition of new parties, claims, counterclaims, and third-party claims. There has
also been related litigation in this court and elsewhere. Most notably, during the
course of this action, the Holtzman Parties encouraged a minority investor to file suit
in Pennsylvania. That litigation led to a court-ordered sale of the Apartments to the
Compatriot Parties. A portion of the sale proceeds from that transaction has been
deposited with this court to apportion in this case.
The parties tried this case over several days via Zoom. The court is tasked
with deciding several claims and issues, including among others: (1) did either side
breach the agreement governing the sale of the entity that owned the Apartments?;
(2) did the Compatriot Parties violate the implied covenant of good faith and fair
dealing?; (3) did any of the Compatriot Parties violate an agreement providing for
its management of properties owned by the Holtzman Parties or their affiliates?; and
(4) how should the proceeds from the sale of the Apartments be allocated? The court
concludes that both sides failed to comply with the terms of their agreement
governing the sale of the Apartments, but the Holtzman Parties have failed to
establish damages. The Holtzman parties also lack standing to assert other claims
and otherwise failed to establish breaches of their agreements. Thus, the court leaves
the parties where they are following the court-ordered sale of the Apartments to the
Compatriot Parties. Finally, the court accepts the Compatriot Parties’ interpretation
2 and calculation of the accrual of preferred returns under the parties’ agreements, and
the proceeds from the sale of the Apartments must be distributed accordingly.
I. BACKGROUND
The following recitation reflects the facts as the court finds them after trial.1
A. The Parties and the Ownership Structure of the Morrow Park City Apartments
The Plaintiffs are Jonathan Holtzman and certain affiliated companies:
Plaintiff VGRP and Plaintiff VGM Clearing, LLC (“VGM Clearing”). They, along
with Counterclaim Defendant City Club Apartments, Inc. (“CCA”), another
Holtzman affiliate, are the “Holtzman Parties.”2
The Defendants and Counterclaim Plaintiffs consist of CCI Historic, Inc.
(“CCI”); VG ECU Holdings, LLC (“VG ECU”); Compatriot Capital, Inc.
(“Compatriot”); Village Green Holding, LLC (“Village Green Holding”); and
Village Green Management Company, LLC (“Village Green Management” and
collectively with CCI, VG ECU, Compatriot, and Village Green Holding, the
1 Documents filed on the docket for this case are cited as “Dkt.” followed by their docket number. The trial testimony (Dkt. 642–47) is cited as “Tr.”; post-trial oral argument (Dkt. 670) is cited as “Hrg.”; deposition testimony is cited as “Dep.”; trial exhibits are cited as “JX”; and stipulated facts in the pre-trial order (Dkt. 626) are cited as “PTO,” with each followed by the relevant page, paragraph, or exhibit number. 2 VGRP and VGM Clearing are Michigan limited liability companies, and CCA is a Delaware limited liability company. PTO, III ¶¶ 2, 4, 5.
3 “Compatriot Parties”). CCI and Compatriot are Delaware corporations; 3 VG ECU,
Village Green Holding, and Village Green Management are Delaware limited
liability companies. 4
In 2011, Compatriot acquired a 50% interest in Village Green Holding, a
property-holding entity that was previously under the sole control of Holtzman
Parties VGM Clearing and VGRP.5 Previously, Holtzman had used the entities
under his control to develop and manage multifamily housing properties. By 2016,
the relationship between the parties had deteriorated, and they decided to part ways.
To effectuate their separation, Village Green Holding, VGM Clearing, VGRP, CCI,
VG ECU, and Holtzman entered into a “Redemption Agreement,” dated February 1,
2016, which contemplated a series of transactions adjusting the parties’ interests in
their various joint projects.6 Among those contemplated transactions was a plan to
create two “New Companies” to control two then-unfinished properties: Morrow
Park City Apartments and Southside Works City Apartments. 7
3 Id. ¶¶ 6, 7. 4 Id. ¶¶ 8–10. 5 JX 71 § 3.3(a)(i) & Schedule A. 6 See JX 109 (“Redemption Agreement”). 7 Id. § 1.1(a)(iv); see also id., Schedule D.
4 The Apartments were wholly owned through Morrow Park City Apartments,
LLC (“MP Operating”). 8 VG Morrow Park Capital LLC (“MP Managing”) held a
majority interest in MP Operating. 9 Non-party L.A.V. Associates, LP (“LAV”) held
a minority stake in MP Operating as well.10 The owners of LAV previously owned
the land underlying the Apartments, and they contributed this land to the project in
exchange for an equity stake in MP Operating. 11 The parties to the Redemption
Agreement eventually assigned the whole interest in MP Managing to the “New
Company,” Morrow Park Holding, LLC (“MP Holding”).12
The following chart reflects the chain of entities that controlled the
Apartments as of January 2017:
8 PTO, III ¶ 1. 9 Id. 10 Id. 11 Tr. 807:2–4 (Greenberg); id. at 1190:2–3 (Van Kirk). Specifically, the owners of LAV contributed three parcels of land valued at $4 million. JX 507 at 25; Tr. 1190:2–3 (Van Kirk). 12 PTO, III ¶ 1; see Redemption Agreement § 1.6 & Schedule D.
5 B. The Relevant Agreements
This dispute centers on the parties’ respective contractual rights and
obligations under the limited liability company agreements of MP Holding (the “MP
Holding Operating Agreement”), MP Managing (the “MP Managing Operating
Agreement”), and agreements that were later executed in connection with those two
agreements. The relevant provisions from each agreement are expounded upon
below.
6 1. The MP Holding Operating Agreement
Under the Redemption Agreement, CCI and Holtzman initially agreed to be
co-managing members with mutual decision rights for the Apartments.13 Holtzman
would later be provided with the opportunity to purchase CCI’s interest in the
Property, upon the Apartments being “substantially completed” and attaining at least
a 93% occupancy rate for at least 45 days, otherwise known as “Stabilization” (the
“VGRP Purchase Right”). 14 This was later reiterated in the MP Holding Operating
Agreement, dated May 31, 2016:
VGRP Purchase Right. From and after the date of this Agreement and upon the occurrence of Stabilization with respect to the apartment project owned and operated by [MP Operating], VGRP shall have the first right to purchase from CCI and Compatriot, as applicable, and such Persons shall have the obligation to sell to VGRP, the entirety of both of (i) CCI’s Membership Interests in the Company and (ii) Compatriot’s membership interest in [MP Managing] on the terms hereinafter provided in this Section 10.10. For purposes of this Agreement, “Stabilization” shall be defined as (x) [the Apartments] having been substantially completed (subject only to punch list items that do not directly limit occupancy of units) and (y) such apartments having been at least 93% leased and occupied for at least 45 days. The property manager of such apartments, designated as such by the Co- Managing Members, shall send prompt written notice to the Members at such time as Stabilization shall have occurred with respect to [the Apartments] (the “Notice of Stabilization”). VGRP must notify CCI in writing not later than 60 days after its receipt of the Notice of
13 Redemption Agreement § 1.1(a)(iv)(1). 14 Id. § 1.1(a)(iv)(2); JX 131 (“MP Holding Operating Agreement”) § 10.10(a).
7 Stabilization whether or not it intends to exercise its purchase rights under this Section 10.10(a). 15
The agreement provides CCI with a similar, secondary right to purchase VGRP’s
interest in MP Holding in the event that “VGRP determines not to so exercise such
purchase rights, or it fails to timely provide the written notice referenced in Section
10.10(a)” (the “CCI Purchase Right”).16 The possible exercise of the VGRP
Purchase Right or the CCI Purchase Right is sometimes referred to herein as a
“Section 10.10 Transaction.”
The MP Holding Operating Agreement also provides that upon either party’s
exercise of its respective purchase right, the purchaser shall pay an amount based on
an “Appraised Value” of the Apartments.17 Schedule C to the agreement dictates
the process the parties must use to determine the Appraised Value (the “Appraisal
Schedule”). If they cannot reach an agreement as to the Appraised Value within 15
days of either party’s exercise of its respective purchase right, the parties are required
to follow a three-appraiser process to determine the Appraised Value. The required
framework, in pertinent part, is as follows:
15 MP Holding Operating Agreement § 10.10(a). 16 Id. § 10.10(c). 17 Id. §§ 10.10(b), (d).
8 1. . . . If the Parties are unable to reach an agreement [on the Appraised Value] within [15 days], then CCI shall designate an appraiser for the purpose of establishing the Appraised Value of [the Apartments], and shall give notice thereof in writing to VGRP (“Notification”). Within ten (10) days after CCI gives the Notification, VGRP shall designate a second appraiser for establishing the Appraised Value of [the Apartments], and shall give notice thereof in writing to CCI. If VGRP shall fail to timely appoint an appraiser, the appraiser appointed by CCI shall select the second appraiser within ten (10) days after VGRP[’s] failure to appoint.
2. The two appraisers so appointed shall appoint a mutually agreed third appraiser within ten (10) days following the selection of the second appraiser. If the two appraisers so appointed shall not be able to agree on the selection of a third appraiser within ten (10) days after the two initial appraisers have been appointed, then either appraiser, on behalf of both, may request such appointment by the head of the local chapter of the Appraisal Institute. The appraisers shall specialize in the appraisal of real estate projects similar to [the Apartments] in the region where [the Apartments] are located, shall have no less than five years’ experience in such field and shall be recognized as ethical and reputable. No appraiser shall have any personal or financial interest as would disqualify such appraiser from exercising an independent and impartial judgment as to the value of [the Apartments]. The Appraised Value of [the Apartments] shall be equal to the average of the valuations of [the Apartments] as determined by the appraisers; provided, however, that if any appraiser's valuation for [the Apartments] deviates by more than ten percent (10%) from the average of the valuation of the other two appraisers for [the Apartments], the Appraised Value shall be determined by using the average of the other two appraisers’ valuations. . . . The appraisals shall be submitted to CCI and VGRP within thirty (30) days after the panel of three (3) appraisers is constituted. The decision of the appraisers shall be binding on the Members.18
18 Id., Schedule C.
9 2. The MP Managing Operating Agreement and the Business Plan
In general, the parties financed a project’s construction with a construction
loan, and when the project was complete, they would convert that loan to
“permanent” financing and secure a permanent mortgage loan. 19 The parties
contemplated that structure for the Apartments, which is also reflected in the
agreements governing the parties’ separation. The MP Managing Operating
Agreement references a “Business Plan,” which is appended to the agreement as an
exhibit:
The Manager, in connection with the Development Company, has prepared a business plan attached as Exhibit B hereto (the “Business Plan”), which has been approved by Compatriot and incorporates (i) an acquisition and initial construction and development budget for costs related to the acquisition, design, development, and lease-up of the [Apartments] (“Development Budget”), and (ii) a site plan for the [Apartments]. Any material changes or deviations from the Business Plan must be approved by Compatriot.20
The Business Plan comprises numerous sections containing tables with financial and
operational data regarding the Apartments. The sections are titled, “General and
Operating Assumptions,” “Development Timing and Cost Assumptions,” “Equity
and Debt Capitalization,” “Equity Pricing/Projected Returns,” and “Village Green
19 Tr. 15:15–17:6 (Holtzman); JX 18 at 2–3. 20 JX 62 (“MP Managing Operating Agreement”) § 2.8(c).
10 Morrow Park City Apartments Development Budget.”21 Of importance to this
dispute is the Equity and Debt Capitalization section and its accompanying table
titled, “Permanent Mortgage Upon Stabilization”:
The MP Managing Operating Agreement also imposes limitations on the
manager of MP Managing’s authority. Specifically, the manager may not make
“Major Decisions,” including those relating to modifying the Business Plan or taking
out certain loans, absent Compatriots prior written consent:
Limitations on Authority of Manager: Notwithstanding anything to the contrary contained in this Agreement (other than as expressly permitted in this Section 6.2), without the prior written approval of Compatriot, the Manager shall not have the power to do any of the following either directly or on behalf of the Project Owner (each, a “Major Decision”):
21 Id., Ex. B.
11 (a) Adopt, amend or modify all or any portion of the Business Plan or Annual Plan, or vary from the limitations set forth therein; provided, however, the Manager may make adjustments to individual cost and expense line items set forth on the Operating Budget without the approval of Compatriot [subject to additional limitations]; ... (e) . . . subject all or any portion of the Company’s or Project Owner’s property (including, without limitation, the [Apartments]) to any mortgage, lien, or other encumbrance or pledge any Company or Project Owner assets; provided, pursuant to the Business Plan, the Members have approved a permanent mortgage for the [Apartments], on market terms and conditions from an institutional lender, subject to the following factors: (1) an amount up to 80% loan to value (which value shall be ascertained at the time the permanent mortgage is being applied for); (2) non-recourse, with no guaranties by any party other than customary non-recourse carve-out guaranty by the Borrower or Village Green, (3) have a minimum term of 7 years, (4) amortization of not less than 25 years, (5) debt service coverage ratio of not less than 1.2 (with amortization), and (6) not more than 2 years interest-only payments. 22
3. The Preferred Returns
The MP Holding Operating Agreement and the MP Managing Operating
Agreement each provided for a preferred return that would accrue for the benefit of
certain members (the “Preferred Returns”).23
Under the MP Holding Operating Agreement, each member holding Class B
Preferred Units was entitled to a 10% annual preferred return compounded quarterly
22 Id. § 6.2. 23 MP Operating’s operating agreement also provided that its members were entitled to a 9% preferred return. JX 63 §§ 9.2(f), 9.3. The parties’ dispute does not concern any distributions tied to this preferred return.
12 on the difference between its capital contributions and any distributions it may have
received. 24 VGRP and CCI each owned half of MP Holdings’ Class B Preferred
Units.25 The proceeds from a sale of the Apartments were to be distributed to MP
Holding’s members in the following order of priority: (1) members who had
outstanding loans to the company to the extent of their loans, (2) members who had
accrued an outstanding preferred return to the extent it had accrued, (3) members
owning Class B Preferred Units to the extent of their unreturned capital
contributions, and (4) to all members in proportion to the number of Common Units
held.26
Under the MP Managing Operating Agreement, each member was furnished
with a Contribution Account.27 The Contribution Account accounted for the
difference between a member’s capital contributions and the distributions they had
received from a Capital Transaction e.g., a sale of the Apartments. 28 MP Managing
also maintained a Contribution Cumulative Preference Account and Contribution
Current Preference Account for each of its members. A member’s Contribution
Current Preference Account balance was calculated as the sum of the balances of
24 MP Holding Operating Agreement § 13.1, “Unpaid Class B Preferred Return.” 25 Id., Schedule A. 26 Id. § 4.3(d). 27 MP Managing Operating Agreement, art. XIV, “Contribution Account.” 28 Id., “Contribution Account”; id., “Capital Transaction.”
13 their respective Contribution Account and Contribution Cumulative Preference
Account. 29 Any funds credited to a member’s Contribution Current Preference
Account were subject to a 13% preferred return compounded annually. 30 Any
balance remaining in a member’s Contribution Current Preference Account at the
end of the fiscal year was subsequently credited to the member’s Contribution
Cumulative Preference Account.31 The proceeds from a sale of the Apartments were
to be distributed to MP Managing’s members in the following order of priority: (1)
Compatriot, in an amount equal to the credit balance of its Contribution Current
Preference Account; (2) Compatriot, in an amount equal to the credit balance of its
Contribution Cumulative Preference Account; (3) Village Green Holding, in an
amount equal to the credit balance of its Contribution Current Preference Account;
(4) Village Green Holding, in an amount equal to the credit balance of its
Contribution Cumulative Preference Account; (5) to the members, in an amount
equal to the sum of the credit balances of their respective Contribution Accounts, in
the ratio that the credit balance of each member’s Contribution Account held to the
sum of the credit balances of all members’ Contribution Accounts; (6) to the
29 MP Managing Operating Agreement, art. XIV, “Contribution Current Preference Account.” 30 Id.; id., amend. I § 4. 31 MP Managing Operating Agreement, art. XIV, “Contribution Cumulative Preference Account.”
14 members, in accordance with their respective percentage interests.32 As of May 31,
2016, the last modification to the MP Managing Operating Agreement, Village
Green Holding held a 61.58% interest and 15.2% capital interest valued at
$1,243,251.85 in the aggregate, while Compatriot held a 38.42% interest and 84.8%
capital interest valued at $6,937,887.41 in the aggregate. 33
4. The Closing Agreement and Redemption Agreement
The Redemption Agreement called for a closing date no later than March 31,
2016. 34 After failing to close by that date, however, the parties to the Redemption
Agreement agreed to twice extend that agreement’s closing date, eventually setting
it for May 27, 2016.35 But the parties again failed to close on the Redemption
Agreement by the extended closing date. 36 On June 3, Village Green Holding,
Holtzman, VGM Clearing, VGRP, and CCI entered into a Closing Agreement (the
“Closing Agreement”). 37 The Closing Agreement stipulated that the Redemption
Agreement’s closing was effective as of May 31.38 Additionally, the Closing
32 Id., amend. I § 5.2. 33 Id., amend. II, fifth Whereas clause. 34 Redemption Agreement § 2.1. 35 Tr. 56:9–57:9 (Holtzman); id. at 1321:10–19 (Van Kirk); JX 894. 36 Tr. 57:24–58:2 (Holtzman); id. at 1323:5–1324:1 (Van Kirk). 37 See JX 136 (“Closing Agreement”); see also PTO, III ¶ 17. 38 Closing Agreement ¶¶ 1, 12.
15 Agreement contained a provision regarding how Village Green Holding was to
continue managing properties that Holtzman controlled (the “Holtzman-Controlled
Properties”) following the severance of the Holtzman Parties’ interests from those
of the Compatriot Parties:
[Village Green Holding] (including all subsidiaries . . . ) and [Holtzman, VGRP, and VGM Clearing] (including . . . CCA properties) will commit to honor the terms of existing management agreements. No services will be performed and no fees will be incurred or charged other than as pursuant to written agreements and fee schedules attached thereto (and/or schedules as may be mutually agreed upon) and pursuant to written authorizations and procedures as set forth in the management agreements. [Village Green Holding] subsidiaries personnel will treat [Holtzman] and his controlled entities in the same manner as [Village Green Holding] subsidiaries treat all other third party clients. 39
The Redemption Agreement also contained provisions governing the
management of Holtzman-Controlled Properties following the separation of the
Compatriot Parties’ interests from those of the Holtzman Parties. Under the
Redemption Agreement:
The Parties agree that [Village Green Holding and its subsidiaries] currently manage and/or provide other services . . . to . . . certain real estate entities owned or controlled by [Holtzman] [(“Holtzman- Controlled Properties”)]. . . . Following the Closing and subject to the remaining provisions of this Section . . . , the Parties agree that the [Village Green Holding and its subsidiaries] shall continue to provide such services pursuant to the terms of the existing written property management agreements . . . . The Parties also agree that all such agreements are (and shall remain) terminable by either the [Village
39 Id. ¶ 2.
16 Green Holding and its subsidiaries] or [Holtzman] and/or [VGM Clearing and VGRP], as applicable, without payment or penalty upon 60 days prior written notice to the other party or parties to such agreement, with or without cause, provided that the Parties agree, during the 180-day period following the Closing Date with respect to the [Holtzman-Controlled Properties] . . . , such agreements shall remain in effect and shall not be terminated without cause, and shall continue to be staffed by substantially the same [Village Green Holding and its subsidiaries’] personnel (subject to the right of the [Village Green Holding and its subsidiaries] to request the consent of [Holtzman] and/or [VGM Clearing and VGRP] to the modification of such staffing arrangements, which consent shall not be unreasonably be withheld, conditioned or delayed). 40
C. The Parties Begin to Negotiate an Appraisal of the Apartments
After executing the MP Holding Operating Agreement, the parties began to
arrange for a potential Section 10.10 Transaction. In September 2016, the parties
discussed the possibility of Holtzman purchasing the Apartments through exercise
of the VGRP Purchase Right, leading to the purchase of CCI’s membership interest
in MP Holding and Compatriot’s interest in MP Managing. Rather than follow the
terms of their agreements, the parties chose to deviate from the three-appraisal
process that they had documented in the Appraisal Schedule.41 One suggested
departure was to establish the purchase price using only the appraisal that would be
40 Redemption Agreement § 1.3(a). 41 See, e.g., JX 193.
17 submitted in connection with obtaining the permanent financing mortgage for the
Apartments (the “Mortgage Appraisal”).42
On September 23, Village Green Management notified Holtzman and VGRP
that the Apartments had reached Stabilization and that VGRP had until November
22 to inform CCI whether it intended to exercise the VGRP Purchase Right.43 By
the end of September, both sides could not agree as to how a modified appraisal
process would operate.44 Therefore, each side communicated that absent an
expeditious resolution, the parties should follow “the already-agreed upon process”
in the Appraisal Schedule.45 But days later, on October 5, Jonathan Borenstein,
counsel for the Holtzman Parties, emailed Mark van Kirk and Jason Koehn from
Compatriot asking if the parties could use “the mortgage appraisal as the third”
appraiser.46 Compatriot did not respond to Borenstein’s email.
Both the Holtzman Parties and the Compatriot Parties sought to secure Brian
Flanagan of Property Valuation Advisors, Inc. (“Property Valuation Advisors”) as
their appraiser in the appraisal process. Flanagan and his firm had previously been
42 See JX 188; Tr. 74:6–75:2 (Holtzman); JX 121 (arranging a tour of the Apartments for the Freddie Mac loan officers); see also JX 41 (HFF engagement letter). 43 JX 196. 44 See JX 205. 45 Id. 46 JX 209.
18 engaged to conduct appraisals on 27 separate occasions for the Village Green
entities, most of which occurred under Compatriot’s ownership. 47 On October 10,
2016, Jason Koehn, President of Albion Residential, a CCI entity, 48 emailed
Flanagan, requesting that he and his team serve as the Compatriot Parties’
appraiser.49 Flanagan declined Koehn’s offer the next day, explaining that Holtzman
had already requested his services.50 Flanagan acknowledged that he had been
placed in an “awkward position.”51 He told Koehn, via email, that “both you and
[Holtzman] have been loyal people to me. . . . My motto is fair is fair and there will
be no bias involved. I really appreciate the business opportunities that Village Green
has provided to me over the years and hope that I can continue this relationship.”52
Koehn responded asking if Flanagan could provide him with the dates on which
Holtzman offered and he accepted the appraiser position. 53
47 Tr. 650:5–9 (Flanagan); see, e.g., JX 25 (Village Green of Ann Arbor 2012 appraisal); JX 35 (Village Green of Southgate West 2013 appraisal); JX 75 (Village Green Wyandotte 2014 appraisal); see also Tr. 487:18–20 (Platt) (“Village Green had utilized Brian Flanagan on a multitude of occasions to complete appraisals for prior projects.”). 48 Tr. 1471:22–1472:7 (Koehn). 49 JX 224. 50 Id. 51 Id. 52 Id. 53 Id.
19 The Compatriot Parties were none too pleased that Holtzman had gotten the
jump on them by retaining Flanagan. When Koehn forwarded Flanagan’s response
to Mark Van Kirk, then-Senior Vice President and General Counsel of Compatriot,
Van Kirk responded, “[d]amn. Can you think of any others [appraisers]?” 54 Van
Kirk also broke the news to Paul Rowsey, Compatriot’s then-President and Chief
Executive Officer, informing him that “Holtzman already hired the appraiser we
wanted for” the Apartments and that Koehn “was a little worried that this might
happen.”55
After considering three alternative appraisers,56 Compatriot eventually
selected Todd Albert of Colliers International Valuation & Advisory Services, LLC
(“Colliers”) as its appraiser. On October 19, 2016, Van Kirk informed Holtzman,
Borenstein, and Robert Platt, Chief Investment Officer of CCA, of Compatriot’s
decision, pursuant to the MP Holding Operating Agreement.57 In response, Platt
stated that VGRP had selected Flanagan as its appraiser. 58 Platt continued: “As
discussed, we have proposed using the mortgage loan appraisal for the third
appraisal, in lieu of having these two appraisers select a third. If you do not wish to
54 JX 227. 55 JX 223. 56 See JX 229. 57 JX 237. 58 Id.
20 pursue that, then both designated appraisers must be instructed to begin working on
the appointment of the third appraiser.”59 Van Kirk replied: “Using the mortgage
loan appraisal is ok with us.”60 He added: “I looked up Property Valuation Advisors
on the internet and it appears that they are a small company based in Chicago, if my
research is correct. Would you please confirm with them that they have appraised
multifamily in Pittsburgh and give us examples of same?”61 Platt then followed up
with Flanagan: “we need to confirm (part of our agreement with [Compatriot]) that
either you or your affiliates have completed appraisals in Pittsburgh and/or that
Pittsburgh is one of the cities in which your firm specializes in. Do you have some
history here?”62 Flanagan responded shortly thereafter on October 19:
I work in [Pennsylvania] and eastern [Ohio] on a recurring basis and most major Midwestern cities. I’m very familiar with Pittsburgh as I grew up about thirty minutes outside of Pittsburgh. I just appraised a similar apartment complex in Cleveland called The Vue that has similar attributes when compared to [the Apartments].63
Later that day, Platt emailed Compatriot: “We specifically asked Property Valuation
Advisors about their experience in Pittsburgh and they ‘work in [Pennsylvania] and
59 Id. 60 Id. 61 Id. 62 JX 230. 63 Id.
21 eastern [Ohio] on a recurring basis and most major Midwestern cities.’”64
Compatriot did not respond to Platt’s email.
D. The Appraisal Negotiations Break Down
Both Flanagan and Albert began working on their appraisals following VGRP
and Compatriot’s October 19 correspondence. On November 8, 2016, Holliday
Fenoglio Fowler, L.P. (“HFF”), the mortgage broker that the Holtzman and
Compatriot Parties had selected, requested a quote from Albert for an appraisal of
the Apartments.65 Later that day, Clay Cassidy, a Colliers employee who had been
assisting Albert with the Colliers appraisal, informed Albert that a draft of the
appraisal was ready to be reviewed.66 Albert responded that he would review the
appraisal, but also added, “HFF just asked me to bid on this for lending purposes so
there might be some easy $$$ coming your way.”67 On November 9, Nick Matt, a
Senior Managing Director at HFF, spoke with Platt about engaging Colliers. In an
email to two other HFF employees after the call, Matt recounted: “I asked about
Colliers and Compatriot. He [Platt] said that he hasn’t spoken with Compatriot, but
64 JX 237. 65 JX 255. 66 JX 254. 67 Id.
22 he thinks we should engage Colliers.”68 Later that day, HFF engaged Colliers for
the Mortgage Appraisal.69
On November 14, 2016, Albert emailed Koehn, explaining that Colliers was
“updating our appraisal for HFF/Lending” and asked for Koehn’s “permission to use
the same property information that you previously provided us when appraising for
Compatriot.” 70 Koehn provided Compatriot’s approval later that day. 71
On Friday, November 18, 2016, Holtzman notified the Compatriot Parties that
VGRP intended to exercise the VGRP Purchase Right, with a closing date no later
than January 23, 2017. 72 That same day, Van Kirk acknowledged receipt of the
notification, noting that while Compatriot had recently received its appraisal from
Colliers, the appraiser had subsequently retracted the appraisal after “omitt[ing] to
properly consider some information” and would thus be issuing an update the
following week.73 Van Kirk suggested that the parties “should all plan on revealing
the 3 appraisers’ values” the following week.74 Also on November 18, Holtzman
68 JX 256. 69 See id. 70 JX 261. 71 Id. 72 JX 277. 73 Id. 74 Id.
23 responded with a different understanding of where the appraisal process stood,
writing: “We should follow the signed documents. We do not have 3
appraisals. . . . There have not been any changes to our documents. Please do not
represent that there have been.75 Later that day, Van Kirk responded that “[w]e are
following the documents. The documents require three appraisals. I am not
representing that there have been any changes to the documents.” 76
The following week, Van Kirk followed up on the status of the appraisals. On
November 23, 2016, Van Kirk emailed the Holtzman side, stating that the three
appraisals were due within 30 days of the parties selecting their appraisers on
October 19. 77 Van Kirk then asked for the status of VGRP’s appraisal and the
Mortgage Appraisal: “I previously informed everyone that CCI had gotten its
appraisal over a week ago but we still don’t have the appraisal from Holtzman’s
appointed appraiser nor from the third appraiser which we agreed would be by the
mortgage loan appraiser.”78 Later that day, Borenstein responded, “[s]imilar to your
appraiser, our appraiser had discovered discrepancies to be addressed. . . . We were
told that they [the appraiser] hope to have it today. . . . When we have it you’ll be
75 Id. 76 Id. 77 JX 281. 78 Id.
24 the first to know.”79 That evening, VGRP and Compatriot exchanged their
respective appraisals. Flanagan’s appraisal for VGRP valued the Apartments at
$54.6 million.80 Albert’s appraisal for Compatriot came in at $59 million. 81 While
they waited for the third appraisal, Compatriot’s employees attempted to predict the
third appraisal’s valuation among themselves. Later, on November 23, Rowsey
wrote, “[d]o we have our updated appraisal? We were at $59M before any update,”
referring to the third appraisal. 82 After Van Kirk confirmed that there had not yet
been an update, Rowsey wrote: “Ok. So we should be around $57.5M,” to which
Van Kirk responded: “Yes. Unless Holtzman craw fishes on that deal re 3rd
appraiser. But if he does, we can win that battle.”83 Albert’s Mortgage Appraisal
was dated November 29 and valued the Apartments at $59 million. 84 The average
of the appraisals conducted for VGRP, Compatriot, and Freddie Mac was thus
approximately $57.5 million.
79 Id. 80 PTO, III ¶ 25; JX 248 (Flanagan’s appraisal). 81 PTO, III ¶ 24; JX 257 (Albert’s appraisal for Compatriot). 82 JX 282. 83 Id. 84 JX 290.
25 On December 1, 2016, Borenstein emailed Van Kirk asking if the parties
could “wrap up today.” 85 Van Kirk responded, explaining that he was “tied up on
other matters” and Compatriot was “still evaluating the appraisal and appraiser that
produced [Holtzman’s] appraisal.” 86 On December 5, Borenstein followed up,
stressing that the parties needed to “keep this on track” and that “[t]he two appraisers
should be instructed to immediately select a third appraiser, per the [Appraisal
85 JX 315. The Holtzman and Compatriot parties jointly provided the court with this exhibit before trial. The Compatriot Parties also entered an identical exhibit into evidence as JX 314. The Compatriot Parties cited to JX 315 four times in their pre-trial brief, see Dkt. 608 at 20–22, 44 n.37, and three times in their post-trial opening brief, see Dkt. 657 (“Compatriot Op. Br.”) at 14–15. In their post-trial answering brief, the Holtzman Parties cite to JX 315 for the proposition that “Holtzman was willing to close at the average of the three appraisals before this case began.” Dkt. 660 (“Holtzman Ans. Br.”) at 22–23. The Compatriot Parties have objected to the Holtzman Parties’ use of this exhibit in this instance under Delaware Rule of Evidence 408, which generally bars the admission of compromise offers and negotiations, because this communication was part of the parties’ settlement negotiations. DEL. R. EVID. 408. But in their pre-trial brief, the Compatriot Parties cite part of those same settlement negotiations to argue that Borenstein “did not contest an agreement existed to use the mortgage loan appraisal as the third appraisal. Instead, he claimed that VGRP should not be bound by that agreement.” Dkt. 608 at 22. Before trial, the Holtzman Parties argued that, rather than attempting to renege on the prior agreement, they disputed what the terms of that agreement were. See Dkt. 609 at 27 (arguing that “there were never three ‘appraisers’ as required by the Stabilization Procedures. There were only three ‘appraisals.’”). The Compatriot Parties have already used this same exhibit to refute the position that Borenstein (and by extension the Holtzman Parties) took regarding the appraisal process and have thus waived their present objection by previously relying on this exhibit themselves. Cf. In re Shawe & Elting LLC, 2015 WL 4874733, at *28 n.294 (Del. Ch. Aug. 13, 2015) (“Although Shawe objected before trial to the admission of this document under Rule 408 of the Delaware Rules of Evidence, he cited and relied on this document in his opening post-trial brief. . . . Thus, this objection is waived.”), aff’d, 157 A.3d 152 (Del. 2017). 86 JX 315.
26 Schedule].” 87 Alternatively, Borenstein offered that if Compatriot preferred, it could
“make an offer (in writing) and we will respond.” 88 The next day, Van Kirk
responded, questioning of Flanagan’s qualifications:
Compatriot is convinced that we have only two good appraisals for [the Apartments], ours and the one for the lender, both at $59M. Holtzman’s appraisal does not meet the standards set forth in [the Appraisal Schedule] of the [MP Holding Operating Agreement] because it was not by an appraiser who “specializes(s) [sic] in the appraisal of real estate projects similar to the [Apartments] in the region where the [Apartments] are located.” When Rob Platt first named Holtzman’s appraiser, I questioned him in writing about this and he assure [sic] me in writing that the appraiser met this standard. But when we received the appraisal . . . we found that on its face the appraisal states that the appraiser has a temporary practice permit in [Pennsylvania]. One of the conditions to qualify for a temporary practice permit in [Pennsylvania] is that the appraiser cannot have done more than 2 other appraisals in [Pennsylvania] in the last 12 months. Thus, at most, this is only the third [Pennsylvania] appraisal this guy has done in 12 months, and possibly fewer than that. That’s not “specializing” in the Pittsburgh region.89
Van Kirk also questioned the validity of Flanagan’s Pennsylvania temporary practice
permit and Flanagan’s appraisal methodology, describing the appraisal as
“flawed.”90 Van Kirk then argued that after “reform[ing]” Flanagan’s appraisal to
value the Apartments at $57.725 million, the average value of the three appraisals
87 Id. 88 Id. 89 Id. 90 Id.
27 was $58.575 million.91 Van Kirk stated that Holtzman had 48 hours to either buy
the Apartments for $58,575,000, permit Compatriot to purchase the Apartments at
this price, or let the offers expire. 92
On December 8, 2016, Borenstein responded by taking issue with Van Kirk’s
dismissal of Flanagan’s qualifications and his appraisal. Borenstein contended that
Flanagan was “not some shill” and reminded Van Kirk that Flanagan had performed
appraisals for properties jointly owned by VGRP and Compatriot and that Van
Kirk’s team had initially attempted to engage his services for Compatriot’s
appraisal. 93 Borenstein then questioned the validity of the other two appraisals:
When we proposed the idea of using the loan appraisal for the third appraiser, we were unaware that the lender would be using the same appraiser. As it turns out, it is the same two appraisers in the Colliers office and the exact same appraisal. The veracity of this arrangement is clearly problematic. 94
Borenstein offered two possible solutions to this disagreement: (1) the parties could
“immediately instruct the appraisers [to] appoint a third [appraiser], and average the
3 [appraisals] (i.e. $54.6M, $59M and the 3rd)” or (2) calculate the purchase price
as the average of the three appraisals as they stood—at $57.5 million. 95 Borenstein
91 Id. 92 Id. 93 Id. 94 Id. 95 Id.
28 stated that this offer would be available until close of business the next day. Neither
party accepted the other’s offer.
On December 23, 2016, Rowsey, Compatriot’s CEO, emailed a settlement
proposal to Alan Greenberg, Holtzman’s business partner.96 Included in this
proposed settlement was Compatriot’s offer to buy or sell the Apartments for $58.25
million. 97 Greenberg responded the next day, explaining that he needed to modify
the “overall package” for Holtzman to agree to the purchase price, listing the
modified terms in detail.98 Rowsey responded with Compatriot’s counteroffer on
December 29.99 On December 30, Greenberg replied that Holtzman would not agree
to Compatriot’s terms. Greenberg also reminded Rowsey that he believed the parties
had yet to establish a price “determined by three independent appraisers,” and that
“[u]ltimately, a judge will have to decide.” 100 Later that day, Rowsey delivered a
long response. Rowsey explained that Platt, on behalf of Holtzman, had proposed
using the Mortgage Appraisal as the third appraisal, and that Holtzman wanted to
“repudiate” this agreement only after he discovered that the Mortgage Appraisal was
96 Tr. 804:4–808:9 (Greenberg); see JX 335. 97 JX 335. 98 Id. 99 See JX 339. 100 Id.
29 prepared by the same appraiser as Compatriot’s appraisal.101 Rowsey also insisted
that Flanagan was not qualified to serve as an appraiser under the Appraisal
Schedule, and instead, his appraisal should be disqualified. Rowsey thus contended
that the parties should rely on the two Colliers appraisals, which valued the
Apartments at $59 million.102 Rowsey offered to resolve the dispute by reducing the
purchase price by $750,000, acknowledging Greenberg’s statement that “a judge
may ultimately have to decide the issue” and suggesting that “we can both handicap
how that decision is most likely to come out.”103 Rowsey concluded his email by
offering to sell the Apartments for $58.25 million in accordance with the VGRP
Purchase Right terms, including the January 23, 2017 expiration.104 On January 2,
Greenberg updated Rowsey that he had “made no headway at all” with Holtzman.105
Meanwhile, the Holtzman Parties began arranging for another appraisal. On
December 16, 2016, Platt emailed Flanagan explaining that the parties disagreed as
to the value of the Apartments, and that Flanagan and Albert would need to select a
third appraiser pursuant to the Appraisal Schedule.106 On December 19, Flanagan
101 Id. 102 Id. 103 Id. 104 Id. 105 JX 354. 106 JX 321.
30 contacted Albert to select a third appraiser, and on December 30, Flanagan informed
Borenstein that he and Albert had agreed on a third appraiser, Paul Griffith from
Integra Realty Resources, Inc. 107 On January 5, 2017, Holtzman informed
Compatriot that their respective appraisers had agreed on a third appraiser and that
he would be engaging Griffith on behalf of MP Holding. 108 Holtzman continued:
“We reject your groundless objection to our appraisal and we are reserving our right to challenge your appraisal as not independent. With that reservation, we will nevertheless move forward based on the average of the three values (i.e. $54.6M, $59M and the outcome of Griffith’s appraisal). Closing to occur on January 23, 2017.109
Later that day, Compatriot’s Jason Koehn sent an email to Albert: “We are being
told that you collaborated with another appraiser at Property Valuation Solutions to
select another appraiser for the [Apartments] . . . . I know that we never had a
conversation about this so I was wondering if you had any background on this
subject.” 110
The next day, Rowsey responded to Holtzman, contesting his authority to
engage an appraiser to prepare what he characterized as a “fourth appraisal,” which
Rowsey contended was in violation of the Appraisal Schedule. 111 Rowsey closed
107 See JX 330; JX 337. 108 JX 361. 109 Id. 110 JX 362. 111 JX 364.
31 his email, stating: “We expect you to close the transaction on January 23, 2017, in
accordance with the terms of the [MP Holding Operating Agreement].”112 Rowsey
then emailed Griffith, copying Holtzman, Platt, Van Kirk, and Borenstein,
explaining that Holtzman did not have “unilateral authority to commit [MP Holding]
to any contractual arrangement” under the MP Holding Operating Agreement, and
that CCI did not “authorize [MP Holding] to enter into any agreement” with
Griffith. 113 On January 13, 2017, Platt emailed Griffith stating that VGRP wanted
to engage him for an appraisal of the Apartments.114
E. This Action Commences and a Status Quo Order is Entered
On January 17, 2017, six days before the VGRP Purchase Right deadline,
VGRP filed this action against CCI, Compatriot, and VG ECU. 115 VGRP also
moved for a temporary restraining order, allowing it to exercise the VGRP Purchase
Right and close a Section 10.10 Transaction for $59 million, with $4.4 million to be
held in escrow pending the outcome of this litigation.116 On January 20, the parties
stipulated to, and the court granted, an injunctive order, proposed by the Compatriot
Parties, that prohibited a Section 10.10 Transaction prior to 30 days following a final,
112 Id. 113 JX 370. 114 JX 380. 115 See Dkt. 1. 116 Id.
32 non-appealable judgement by the court (the parties refer to this as the “Status Quo
Order”).117 VGRP was required to post a $2 million bond for the Status Quo Order
to go into effect (the “Injunction Bond”).118
F. Holtzman Seeks a Permanent Mortgage
Back in May 2014, the parties obtained a $36.143 million loan for MP
Operating with First Commonwealth Bank to finance the construction of the
Apartments, with Holtzman signing as a guarantor (the “Construction Loan”).119
The terms of the Construction Loan permitted the parties to extend the loan’s
maturity date for three successive one-year periods.120 Holtzman believed that the
Construction Loan would ultimately be replaced by a “permanent loan,” which he
envisioned being the mortgage he pursued with Freddie Mac (the “Permanent
Mortgage”). 121
On October 5, 2016, after the Apartments had reached Stabilization,
Borenstein emailed Van Kirk, informing him that Holtzman was “proceeding with
the loan application” and that Platt could keep Compatriot “in the loop on the
117 Dkt. 12. 118 Id. ¶ 5. 119 See JX 507 at 148–214 (construction loan); JX 66 (guaranty). 120 JX 507 at 151–53. 121 Tr. 11–36 (Holtzman) (describing the difference and between and transition from construction and permanent loans and his expectations as they related to the Apartments).
33 application.” 122 Borenstein also wrote that Holtzman had asked for a final call to see
if the parties “could come to terms on something [they] could agree on and
finalize.”123 In a December 6 email to First Commonwealth Bank, Compatriot’s
Koehn wrote that he “assume[d]” the Construction Loan “should be paid off this
year,” but also acknowledged that it was possible the payment could be delayed until
January because “[t]he refinance would happen simultaneously with the buyout of
our interests,” and Holtzman had until late January to close.124
On January 12, 2017, an analyst from HFF—the mortgage broker—circulated
the final draft of the HFF mortgage loan commitment i.e., the Permanent Mortgage,
via email to Platt, Borenstein, and members of CCA and HFF (the
“Commitment”). 125 On January 18, Platt circulated an executed version of the
Commitment. The attached draft had been signed by Holtzman as an “authorized
representative” of MP Operating and anticipated a closing date on or before January
23, 2017.126 On January 23, Platt authorized HFF to lock the interest rate of the
Permanent Mortgage on behalf of MP Operating.127 No one from the Compatriot
122 JX 208. 123 Id. 124 JX 923. 125 JX 397 at 1–2. 126 Id. at 5–6. 127 JX 424.
34 Parties was included in the correspondence concerning MP Operating’s attainment
of the Permanent Mortgage.
Holtzman, acting on behalf of MP Operating, however, was unable to close
on the Permanent Mortgage by the January 23 deadline as was initially planned.128
On February 20, 2017, Holtzman, acting as MP Operating’s “authorized signatory,”
signed an amendment to extend the Commitment’s required closing date to March
15.129 On March 2, counsel for the Holtzman Parties emailed counsel for the
Compatriot Parties requesting that the Compatriot Parties give their consent for the
Permanent Mortgage, stating that its terms were in compliance with those specified
in Section 6.2(e) of the MP Managing Operating Agreement. 130 On March 6,
counsel for the Compatriot Parties responded, denying the request and stating that
“[a]ny financing for [the Apartments] must be approved by Holtzman and
Compatriot, as required by the [MP Holding Operating Agreement] and the
Redemption Agreement. Compatriot does not approve the financing.” 131 Holtzman,
acting again on behalf of MP Operating, subsequently signed another extension with
HFF, pushing the closing date out until May 24.132
128 See JX 431. 129 JX 464. 130 JX 477. 131 JX 481. 132 JX 484.
35 On March 31, 2017, Compatriot’s Koehn emailed Holtzman’s Platt reminding
him that the parties were required to provide First Commonwealth Bank with written
notice that day if they intended to exercise the Construction Loan’s first extension,
asking “[i]s something forthcoming today from you guys?” 133 Later that day, Platt
responded, stating that a one-year extension “makes no sense” and that the MP
Managing Operating Agreement and Business Plan “call for the [Construction Loan]
to be paid off at [Stabilization].” 134 Platt continued: “The [Construction Loan] is
not permanent financing, and it is time to pay it off. The window of opportunity is
closing, the [Permanent Mortgage] that we proposed is a great loan and consistent
with the [Business Plan] and [MP Managing Operating Agreement].” 135 On April
3, Compatriot’s Paul Rowsey emailed Holtzman and Platt, copying Van Kirk,
Koehn, and additional representatives from the Compatriot Parties, stating that if the
Holtzman Parties did not consent to an extension of the Construction Loan, then
the loan must be repaid by May 5 and we intend to issue capital calls under the applicable LLC documents . . . . If you fail to meet that capital call, Compatriot and its affiliates reserve all rights and remedies, including those under the LLC documents to contribute or loan money to the borrower entity . . . in order to pay off the loan.136
133 JX 498. 134 Id. 135 Id. 136 JX 499.
36 Rowsey then explained that the Permanent Mortgage was “above what we believe
is prudent leverage at this stage of the market cycle” and that, as things stood, “the
only prudent alternative” was to “extend the [Construction Loan’s] maturity while
we work out this dispute.” 137 On April 14, Holtzman responded, countering that his
plan was “prudent, consistent with prior precedent and consistent with best practices
in the . . . industry.”138 He also expressed that the parties “never intended to use the
extension rights in the [Construction Loan] beyond the time needed to complete the
[Apartments]” and that the “extensions [sic] rights are, in effect, ‘insurance’ to carry
us through a period where permanent financing is not available,” whereas there was
presently “an outstanding opportunity for permanent financing.” 139 On April 21,
Rowsey replied, stating that the Compatriot Parties would respond “in the context of
. . . litigation” in lieu of responding any further via email. 140
G. The Pennsylvania Action
On April 18, 2017, LAV—a minority investor in MP Operating and a non-
party to these proceedings—filed an emergency petition in the Court of Common
Pleas of Allegheny County, Pennsylvania (the “Pennsylvania Court”). LAV alleged
137 Id. 138 JX 509. 139 Id. 140 Id.
37 that a “deadlock” had formed between VGRP and CCI and requested that a custodian
be appointed to manage MP Operating (the “Pennsylvania Action”).141 LAV filed
the suit with Holtzman’s encouragement, and he even agreed to pay its
corresponding attorneys’ fees and expenses. 142 On May 2, the Pennsylvania Court
appointed a custodian to MP Operating “to take any and all reasonable and lawful
action necessary to avoid default on existing [MP Operating] debts and
obligations.”143 The custodian extended the Construction Loan maturity date to May
5, 2018 shortly thereafter.144
On February 14, 2018, the Pennsylvania Court appointed a special master (the
“Special Master”), who was “empowered,” in part, “to conduct and conclude a sale
process” for the Apartments. 145 On May 10, the Special Master engaged a broker to
sell the Apartments. 146 In July 2018, both Holtzman affiliate CCA and Compatriot
submitted bids of $58.5 and $58.75 million, respectively; six other interested parties
also submitted bids.147 After the broker and Special Master requested that all bidders
141 JX 507 at 21–35; see also PTO, III ¶ 27. 142 Tr. 115:16–116:13 (Holtzman). 143 JX 525. 144 Dkt. 608 at 34. 145 JX 637; see also PTO, III ¶ 28. 146 JX 747 ¶ 3. 147 Id. ¶¶ 5, 7, 8.
38 submit their best and final offers, CCA increased its offer to $58.75 million.148 On
September 28, 2018, the Special Master recommended to the Pennsylvania Court
that the Apartments be sold to CCA. 149 The Compatriot Parties filed objections to
the Special Master’s recommendation.150 On October 15, 2018, after holding a
hearing on the Compatriot Parties’ objections, the Pennsylvania Court approved the
sale of the Apartments to CCA. 151
Despite having prevailed in the bid process, however, the Holtzman Parties
did not purchase the Apartments. The Holtzman Parties substituted VGRP as the
buyer in place of CCA, and VGRP executed the purchase agreement to acquire the
Apartments for $58.75 million.152 Closing was scheduled to occur on November 19,
2018. 153 VGRP ultimately failed to meet various closing conditions under its Court-
supervised purchase agreement.154 In connection with those failures, the Special
Master found that VGRP had not provided “any assurances or evidence that it
possesse[d] the equity or ha[d] obtained financing sufficient to close the
148 Id. ¶¶ 9, 10. 149 Id. ¶ 12. 150 Id. ¶ 13. 151 Id. ¶ 14. 152 Id. ¶ 15; id., Ex. A § 3(a). 153 JX 747 ¶ 18. 154 Id. ¶¶ 29–35.
39 transaction,” and thus began searching for other potential purchasers.155 On
December 28, CCI offered to purchase the Apartments for $57.5 million, which the
Special Master recommended be approved.156
On April 11, 2019, the Pennsylvania Court entered an order authorizing the
Special Master to execute on behalf of MP Operating a sale of the Apartments to
CCI. 157 The Pennsylvania Court also approved of a distribution schedule proposed
by the Compatriot Parties to distribute the net proceeds from the sale of the
Apartments to LAV and MP Managing.158 But the Pennsylvania Court ordered that
the Special Master “pay the net sales proceeds owing to [MP Managing], including
all amounts currently held by [the Apartments], to the Delaware Chancery Court for
resolution of the disputes and claims between [MP Managing’s] members,” absent
the written consent of both VGRP and the Compatriot Parties.159 The Pennsylvania
Court also authorized the Special Master to retain $2,250,000 of the net sale proceeds
to pay for the Apartments’ “remaining expenses and liabilities,” which is held in an
escrow account. 160 The escrow account had a balance of $2,231,728.49 as of April
155 Id. ¶¶ 36, 37. 156 Id. ¶¶ 38, 40. 157 JX 762 ¶ 3; see also PTO, III ¶ 29. 158 JX 762 ¶ 4 & Ex. B (distribution schedule). 159 Id. ¶ 4. 160 Dkt. 420, Exhibit to Special Master Chiafullo’s Letter – March 24, 2020 Order ¶ 5.
40 9, 2021. On April 22, 2019, the Apartments were sold to CCI. 161 On April 15, 2020,
the Special Master transferred the net sale proceeds owed to MP Managing, which
totaled $16,325,035.44, to the Register in Chancery, where they remain to this
day. 162 On April 21, 2021, in response to an appeal by VGRP, the Superior Court
of Pennsylvania affirmed the Pennsylvania Court’s April 11 order.163
H. This Action Proceeds
While the Pennsylvania Action proceeded, this case moved forward as well.
On June 22, 2020, this court issued a memorandum opinion addressing the parties’
cross-motions for partial summary judgment (the “Summary Judgment Opinion”).
See In re Morrow Park Holding LLC, 2020 WL 3415649 (Del. Ch. June 22, 2020).
The court denied the Holtzman Parties’ motion and denied the Compatriot Parties’
motion in part, determining that (1) there remained general disputes of material fact;
(2) the discovery record had yet to be fully developed, even after the cross motions
had been fully briefed; and (3) trial had been scheduled to take place the following
161 PTO, III ¶ 30. 162 Dkt. 420 (letter from Special Master to the court alerting the court as to the Pennsylvania Court’s order); Dkt. 427 (receipt from Register in Chancery confirming transfer of sale proceeds from Special Master). 163 JX 837; see also PTO, III ¶ 32.
41 month. 164 Id. at *1. 165 The court reasoned that the second and third factors
“warrant[ed] denial of the motions on certain claims and issues so that the Court may
‘inquire more thoroughly into the facts in order to clarify application of the law.’”
Id. (quoting AeroGlobal Cap. Mgmt., LLC v. Cirrus Indus., Inc., 871 A.2d 428, 444
(Del. 2005)).
Throughout these proceedings, the court had twice increased the amount of
the Injunction Bond. First, on October 22, 2018, the court raised the Injunction Bond
to $3.9 million; VGRP subsequently met this obligation.166 Then on May 6, 2020,
the court increased the Injunction Bond by $1,900,135.30.167 On July 27, 2020, the
Holtzman Parties informed the court that they would be unable to satisfy the new
Injunction Bond.168 The court accordingly vacated the Status Quo Order the next
day, ordering the vacatur to be effective as of July 27, 2020.169
A six-day trial was held between June 7 and June 14, 2021, during which the
parties submitted 931 joint exhibits and called 12 witnesses.
164 On June 25, 2020, the parties agreed to postpone the trial. See Dkt. 550. 165 The court granted summary judgment for the Compatriot Parties on the Holtzman Parties’ promissory estoppel and civil conspiracy claims. Morrow Park, 2020 WL 3415649, at *19–20, *21. 166 Dkt. 211 at 19:9–17; Dkt. 207. 167 Dkt. 438 ¶ 29. 168 Dkt. 590. 169 Dkt. 592.
42 II. ANALYSIS
The remaining issues to be resolved in this case all depend on the court’s
interpretation of various agreements between the parties and whether any of those
agreements were breached. “Under Delaware law, the elements of a breach of
contract claim are: 1) a contractual obligation; 2) a breach of that obligation by the
defendant; and 3) a resulting damage to the plaintiff.” H-M Wexford LLC v. Encorp,
Inc., 832 A.2d 129, 140 (Del. Ch. 2003). A party asserting a breach of contract claim
bears the burden of proving a breach by a preponderance of the evidence. Base
Optics Inc. v. Liu, 2015 WL 3491495, at *13 (Del. Ch. May 29, 2015). “Proof by a
preponderance of the evidence means proof that something is more likely than not.
It means that certain evidence, when compared to the evidence opposed to it, has the
more convincing force and makes you believe that something is more likely true
than not.” Del. Exp. Shuttle, Inc. v. Older, 2002 WL 31458243, at *17 (Del. Ch.
Oct. 23, 2002).
A. Did Compatriot Breach the Operating Agreements?
The Holtzman Parties argue that the Compatriot Parties breached both the MP
Holding Operating Agreement and the MP Managing Operating Agreement.
According to the Holtzman Parties, CCI’s failure to comply with the Appraisal
Schedule was a breach of the MP Holding Operating Agreement, and the Compatriot
43 Parties’ refusal to approve the Permanent Mortgage was a breach of the MP
Managing Operating Agreement.
1. Was There a Breach of the MP Holding Operating Agreement?
The Holtzman Parties present three different theories of the Compatriot
Parties’ breach of the MP Holding Operating Agreement’s Appraisal Schedule.
First, they argue that Compatriot’s insistence on using two appraisals created by the
same appraiser, Todd Albert of Colliers, constituted a breach. Second, they contend
that Compatriot breached when it rejected Flanagan’s appraisal. Third, they assert
that Compatriot’s refusal to close on a sale of the Apartments after VGRP offered to
remit the $59 million valuation calculated in both of Albert’s appraisals was also a
breach of the Appraisal Schedule.
a. The Mortgage Appraisal’s Legitimacy
The Holtzman Parties argue that Compatriot “manipulated” the appraisal
process by insisting that its selected appraiser, Todd Albert, be allowed to also
submit the Mortgage Appraisal as the third appraisal contemplated in the Appraisal
Schedule.170 The Appraisal Schedule states that “[n]o appraiser shall have any
personal or financial interest as would disqualify such appraiser from exercising an
170 Dkt. 654 (“Holtzman Op. Br.”) at 20.
44 independent and impartial judgment as to the value of [the Apartments].”171
According to the Holtzman Parties, Albert could not meet the Appraisal Schedule’s
independence qualification when he conducted his second appraisal of the
Apartments, and therefore, the Mortgage Appraisal should not have been considered
as part of the appraisal process.
The Holtzman Parties do not dispute that the same appraisal firm could have
conducted two, independent appraisals; rather, they challenge the ability of an
individual appraiser to be independent when administering a second appraisal of the
same property. Platt testified that this was the Holtzman Parties’ understanding
during the appraisal process negotiations.172 He explained that while the Holtzman
Parties would not have objected to Colliers being the appraisal firm responsible for
administering the two, non-VGRP appraisals, the expectation was that each appraisal
would have been conducted by a different appraiser at the firm. 173 The Holtzman
Parties contend that the language of the Appraisal Schedule corresponds with their
understanding: that three, different, independent, individual appraisers are
171 MP Holding Operating Agreement, Schedule C. 172 Tr. 492:23–493:11 (Platt). 173 Id.; see also id. at 77:4–13 (Holtzman) (“[I]f it would have been a third person, the suggestion that the lender appraisal could be used as a third would make perfect sense. But the fact that it was the same person did not make for three different appraisers.”).
45 required.174 The problem with the Holtzman Parties’ argument is its failure to
consider that neither side adhered to the contractually prescribed appraisal process.
Instead, the parties agreed to modify that process.
The MP Holding Operating Agreement provides for its modification if
approved by both CCI and VGRP.175 This provision is in accordance with “the basic
principle of contract law that the consent of all parties to a contract is necessary to
amend the contract.” In re WeWork Litig., 2020 WL 6375438, at *10 (Del. Ch. Oct.
30, 2020). On October 19, 2016, Platt, acting on behalf of VGRP, emailed Van Kirk,
reminding him that VGRP had “proposed using the mortgage loan appraisal for the
third appraisal, in lieu of having these two appraisers select a third.” 176 Van Kirk
responded that “[u]sing the mortgage loan appraisal is ok with us,” i.e., CCI.177 The
parties agree that this exchange modified the Appraisal Schedule, but disagree as to
the scope of that modification. The Holtzman Parties contend that the Appraisal
Schedule still required three, different, independent, individual appraisers following
174 Holtzman Op. Br. 21. 175 MP Holding Operating Agreement § 15.6; see id. § 5.1. 176 JX 237. 177 Id.
46 the modification, while the Compatriot Parties assert that the modification
extinguished all of those qualifications as applied to the Mortgage Appraisal.178
Delaware adheres to the objective theory of contracts. The objective theory
of contracts requires the court to construe a contract as it would be “‘understood by
an objective, reasonable third party.’” Osborn v. Kemp, 991 A.2d 1153, 1159 (Del.
2010) (quoting NBC Universal v. Paxson Commc’ns Corp., 2005 WL 1038997, at
*5 (Del. Ch. Apr. 29, 2005)); accord Salamone v. Gorman, 106 A.3d 354, 367–68
(Del. 2014). If a contract’s language is clear and unambiguous, the court will give
effect to the plain meaning of the contract’s terms and provisions. Osborn, 991 A.2d
at 1159–60. A contract is ambiguous if the court is able to “reasonably ascribe
multiple and different interpretations to a contract.” Id. at 1160. The “determination
of ambiguity lies within the sole province of the court.” Id. “The primary
consideration in the construction of contract language is to fulfill, to the extent
possible, the reasonable expectations of the parties at the time they contracted.” Bell
Atl. Meridian Sys. v. Octel Commc’ns Corp., 1995 WL 707916, at *5 (Del. Ch. Nov.
28, 1995).
178 Compare Holtzman Op. Br. 21 (“[The Appraisal Schedule] requires three ‘independent’ ‘appraisers’—it does not merely require three different ‘appraisals.’”), with Compatriot Op. Br. 35 (“[The Holtzman Parties’ opening brief] incorrectly assumes [the Appraisal Schedule’s] appraiser requirements apply to the Freddie Mac Appraisal.”).
47 Here, both sides’ interpretations of the scope of the Appraisal Schedule’s
modification are reasonable. The modification did not impose any explicit
limitations on who could conduct the mortgage appraisal. Yet the Appraisal
Schedule contained specific qualifications for each appraiser. It is thus unclear to
what extent the subsequent modification overrode the Appraisal Schedule’s
qualifications for the mortgage appraiser. Therefore, the modification of the
Appraisal Schedule was ambiguous.
“When contractual language is reasonably susceptible to more than one
meaning, all objective extrinsic evidence is considered: the overt statements and
acts of the parties, the business context, prior dealings between the parties, and the
business customs and usage in the industry.” Bell Atl. Meridian Sys., 1995 WL
707916, at *6. A “party seeking judicial enforcement of their interpretation of the
ambiguous language” may prevail by “show[ing] by a preponderance of the
evidence that the other party knew or had reason to know of the meaning they
attached to the language.” Id. (citing Restatement (Second) of Contracts § 201
(1981) and Corbin on Contracts § 543 (1960)); see also Kabakoff v. Zeneca, Inc.,
2020 WL 6781240, at *20 (Del. Ch. Nov. 18, 2020) (observing that the court must
“discern the intended meaning” of the contract “from the preponderance of the
extrinsic evidence” (internal citations omitted)). A court may interpret ambiguous
language “in favor of the non-drafting party or against the interests of the drafting
48 party.” In re Appraisal of Metromedia Int’l Grp., Inc., 971 A.2d 893, 904 n.30 (Del.
Ch. 2009). “The parties’ course of performance under a contract is a powerful
indication of what the correct interpretation of that contract is.” Senior Hous. Cap.,
LLC v. SHP Senior Hous. Fund, LLC, 2013 WL 1955012, at *31 (Del. Ch. May 13,
2013). Consequently, when confronted with ambiguous language, the court may
look to the actions of the parties following the contract’s formation to determine
their original intent. Schwartz v. Centennial Ins. Co., 1980 WL 77940, at *5 (Del.
Ch. Jan. 16, 1980).
The modification to the Appraisal Schedule reflected in the parties’ emails is
devoid of any conditions or qualifications on the use of the Mortgage Appraisal.
Platt’s October 19 email proposed employing a process that the Appraisal Schedule
did not contemplate. This suggests that the parties may have understood that the
qualifications in the Appraisal Schedule governing the appraisers and appraisals did
not apply to the Mortgage Appraisal. Alternatively, the modification may have
served as an addendum to the Appraisal Schedule permitting the selection of the
Mortgage Appraisal rather than having the parties’ appraisers select the third
appraiser, with the Mortgage Appraisal and its corresponding appraiser being subject
to the qualifications in the Appraisal Schedule. Because the language used in the
modification is open-ended, the court examines the parties’ actions following the
modification to determine how broadly they understood its scope to be.
49 The Holtzman Parties’ argument that it was a violation of the parties’
agreement to use Albert’s two appraisals is inconsistent with the Holtzman Parties’
own conduct during the process. The documentary record establishes, and Platt
admitted, that VGRP discussed with HFF the possibility of using Flanagan as the
mortgage appraiser. 179 On October 21, 2016, Platt emailed Nick Matt, a Senior
Managing Director at HFF, asking if HFF had selected its appraiser. 180 Later that
day, Matt responded, “no appraisers selected . . . . I didn’t call your guy yet. Let’s
play out the app and then we can discuss and select the appraiser.” 181 When
confronted with this exchange, Platt testified that his conversation with Matt was not
an attempt to have Flanagan serve as both VGRP and HFF’s appraiser, maintaining
that VGRP would have used another appraiser if Flanagan had been selected by
HFF.182
The Holtzman Parties insist that their conduct is not comparable to
Compatriot’s manipulation of the appraisal process by using both of Albert’s
appraisals. That argument is not credible. The Holtzman Parties cite no evidence
indicating that anyone from Compatriot pushed HFF to select Albert as Platt did with
179 Tr. 493:12–18 (Platt); see also JX 212 (Platt providing Flanagan’s contact information to an HFF representative via an October 6, 2016 email). 180 JX 245. 181 Id. 182 Tr. 494:10–495:14 (Platt); see also id. at 493:12–18 (Platt).
50 respect to Flanagan. At best, the Holtzman Parties assert that Compatriot “was fully
aware that [HFF] was attempting to hire its previously selected appraiser.”183 The
Holtzman Parties cannot point to any provision in either the Appraisal Schedule, the
broader MP Holding Operating Agreement, or any other applicable source of law
that the Compatriot Parties owed the Holtzman Parties any duty to replace Albert as
their appraiser or to ever notify the Holtzman Parties of HFF’s decision.
The parties displayed a mutual understanding of the modified Appraisal
Schedule that permitted HFF to select a third appraiser who could be identical to one
already chosen by VGRP or CCI. The Compatriot Parties were aware of HFF’s
engagement of Colliers and Albert during the appraisal process well in advance of
the delivery of the final appraisals. But there is no evidence that they attempted to
conceal this information or expressed concern in internal communications over the
validity of relying on two appraisals generated by the same appraiser. Either reaction
might otherwise evince an acknowledgement that using Albert for two of the three
appraisals was contrary to the parties’ modification to the Appraisal Schedule. On
the other hand, Platt’s actions on the other side of the process reflect the Holtzman
Parties’ understanding that, pursuant to their modification to the agreement, one
person could perform two of the three appraisals. Indeed, Platt’s encouragement of
183 Holtzman Op. Br. 21.
51 HFF to engage Flanagan demonstrates that VGRP believed that its chosen appraiser
could serve as the mortgage appraiser as well. The Holtzman Parties’ self-serving
testimony that they would have substituted another appraiser for Flanagan if he had
been selected by HFF is not credible. There is no contemporaneous evidence that
the Holtzman Parties had taken steps to identify or select a potential replacement for
Flanagan in the event that HFF were to select him to prepare the Mortgage Appraisal.
The parties’ actions are also consistent with a reasonable reading of the
independence provision in the Appraisal Schedule, regardless of whether it applied
to the Mortgage Appraisal. The parties disagree as to the meaning of the phrase
“independent and impartial judgment” within the sentence of the Appraisal Schedule
that reads: “No appraiser shall have any personal or financial interest as would
disqualify such appraiser from exercising an independent and impartial judgment as
to the value of the [Apartments].”184 Under noscitur a sociis, a canon of construction
meaning “it is known by its associates,”185 an ambiguous contractual term may be
interpreted by the words immediately surrounding it. See AB Stable VIII LLC v.
Maps Hotels & Resorts One LLC, 2020 WL 7024929, at *58 (Del. Ch. Nov. 30,
2020), aff’d, 268 A.3d 198 (Del. 2021). In the Appraisal Schedule, the words
“independent” and “impartial” are immediately preceded by “personal or financial
184 MP Holding Operating Agreement, Schedule C ¶ 2. 185 Noscitur a sociis, BLACK’S LAW DICTIONARY (11th ed. 2019).
52 interest.” The Appraisal Schedule thus only considers personal or financial conflicts
as disqualifying conflicts of interest.
The Holtzman Parties contend that “Colliers could not be independent from
itself because it had just appraised the Property for Compatriot and relied on the
same information it previously obtained from Compatriot to appraise the
[P]roperty.” 186 Neither of these facts warrants disqualification under the Appraisal
Schedule’s independence provision. Furthermore, the Holtzman Parties present no
evidence that Colliers or Albert had any personal or financial interest that would
undermine their independence. Nor is the caselaw that the Holtzman Parties rely on
persuasive.
In Scott v. Arden Farms Co., 28 A.2d 81 (Del. Ch. 1942), dissenting
stockholders to a merger sought an appraisal under the Delaware General
Corporation Law. At that time, the applicable appraisal statute permitted an eligible
dissenting stockholder to “demand an appraisal of his stock by three disinterested
persons, one of whom shall be designated by the stockholder, one by the directors
of the resulting or surviving corporation and the other by the two designated as
aforesaid.” Id. at 83. In Arden Farms, the company objected to the dissenting
stockholders’ chosen appraiser, John L. Davis, on account of him not being
186 Holtzman Op. Br. 22.
53 “‘disinterested’ . . . within the meaning of the statute.” Id. at 84. Davis was a
member of an investment advisory firm that had been previously hired on behalf of
the dissenting stockholders to negotiate with the company for an “acceptable price”
for their stock. Id. Davis had also conveyed advice to a dissenting stockholder that
eventually led to the stockholder voting against the merger. Id. at 85. Following the
merger vote, Davis provided the dissenting stockholder with a “detailed report,”
which included a valuation of the plaintiffs’ stock. Id. Citing the Corpus Juris
Secundum and a case quoting numerous dictionary definitions, the court determined
that “disinterested” “plainly means something more than not having a pecuniary
interest in the controversy; it connotes fair-mindedness, including freedom from
actual or probable bias, prejudice or partiality with relation to the questions to be
determined.” Id. The court then reasoned that although the facts in its case did not
lead to the inevitable conclusion that Davis
would necessarily act unfairly in appraising the stock . . . [,] the risk that his judgment might be influenced, consciously or subconsciously, by his previous conclusions and recommendations, or by a tendency to attempt to justify them, is such that he should not be expected to act with the freedom of mind required.
Id. at 86. Therefore, the court concluded that Davis could not be “disinterested” for
the purpose of the appraisal statute. Id.
Arden Farms is distinguishable. There, the court interpreted a public statute
that had no nearby words to help inform the reader as to the scope of the word
54 “disinterested.” The court thus relied on broad definitions originating from a
multitude of secondary sources to reach its interpretation. Here, however, in
construing a single-use schedule in a private contract, the court is able to depend on
the surrounding language to determine the scope of the phrase “independent and
impartial.” The parties drafted a detailed, albeit imperfect, process to be followed
in the Appraisal Schedule. They later abandoned this carefully negotiated process
with an informal and ambiguous amendment that VGRP initiated and documented
solely in emails. The Holtzman Parties are now attempting to rewrite the Appraisal
Schedule yet again, despite having had this opportunity twice before. “As the . . .
entity in control of the process of articulating the terms” of the modification to the
Appraisal Schedule, “it was incumbent upon [VGRP] to make [its] terms clear.”
Juul Labs, Inc. v. Grove, 238 A.3d 904, 911 (Del. Ch. 2020) (internal quotations
omitted). The Holtzman Parties point to little evidence, apart from their own
witnesses’ testimony, that supports their reading of the Appraisal Schedule. Given
their role in drafting the modification to the Appraisal Schedule, the Holtzman
Parties’ post hoc interpretation of that modification is not credible. The Holtzman
Parties have thus not met their burden of a preponderance of the evidence. Based
on the language of the Appraisal Schedule and the extrinsic evidence that the court
has considered to resolve any ambiguity, the Mortgage Appraisal prepared by
Colliers and Albert was a valid, third appraisal. Therefore, the Compatriot Parties’
55 insistence on using the Mortgage Appraisal as a third appraisal under the Appraisal
Schedule did not constitute a breach.
b. Compatriot’s Objection to Flanagan
The Compatriot Parties contend that Flanagan’s appraisal was invalid because
Flanagan did not “meet the standards set forth in [the Appraisal Schedule].”187
Specifically, Compatriot contends that Flanagan did not “specialize in the appraisal
of real estate projects similar to [the Apartments] in the region where [the
Apartments] are located.” 188 It is undisputed that Compatriot did not raise this
objection until after it received Flanagan’s appraisal, and weeks after Flanagan told
Compatriot that he could not serve as Compatriot’s appraiser because the Holtzman
Parties had contacted him first to serve as their appraiser. The Holtzman Parties
argue that Flanagan was qualified, and that the Compatriot Parties’ objection to
Flanagan was pretextual and made in bad faith. The Holtzman Parties present this
argument as a direct breach of the Appraisal Schedule, 189 but this claim more closely
resembles a breach of the implied covenant of good faith and fair dealing. Rather
than direct the court to a specific obligation that Compatriot failed to fulfill, the
Holtzman Parties argue that Compatriot raised “[c]ontrived [o]bjections” to
187 JX 315. 188 MP Holding Operating Agreement, Schedule C. 189 Holtzman Op. Br. 14–20, 29.
56 “frustrat[e] operation of the three-independent appraiser process.” 190 The Holtzman
Parties raise the implied covenant as a fallback to the extent the court does not hold
that there was a direct breach of the Appraisal Schedule, but fail to explain how any
of their claims would otherwise be viable under an implied covenant theory.191
Every contract governed by Delaware law is subject to the implied covenant
of good faith and fair dealing. Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434,
441–42 (Del. 2005). The implied covenant of good faith and fair dealing “requires
a party in a contractual relationship to refrain from arbitrary or unreasonable conduct
which has the effect of preventing the other party to the contract from receiving the
fruits of the bargain.” Id. at 442 (internal quotations omitted). The implied covenant
is used to “infer contract terms to handle developments or contractual gaps that . . .
neither party anticipated.” Dieckman v. Regency GP LP, 155 A.3d 358, 367 (Del.
2017) (internal quotations omitted). It applies only where a contract “lacks specific
190 Id. at 14. 191 See id. at 30. The entirety of the Holtzman Parties’ implied covenant argument regarding the Appraisal Schedule reads: “The implied covenant of good faith and fair dealing inheres in every contract governed by Delaware law and requires a party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits of the bargain.” June 22, 2020 Mem. Op. at 49 (quotations omitted). Here, as explained throughout, Defendants’ conduct was designed to – and, in fact, did – prevent Holtzman “from receiving the fruits of the bargain.” See Id. [sic] at 52 (discussing application here). Id.
57 language governing an issue and the obligation the court is asked to imply advances,
and does not contradict, the purposes reflected in the express language of the
contract.” All. Data Sys. Corp. v. Blackstone Cap. P’rs V L.P., 963 A.2d 746, 770
(Del. Ch. 2009), aff’d, 976 A.2d 170 (Del. 2009). Thus, the doctrine “ensures that
the parties deal honestly and fairly with each other when addressing gaps in their
agreement.” Glaxo Grp. Ltd. v. DRIT LP, 248 A.3d 911, 919 (Del. 2021).
“Despite the appearance in its name of the terms ‘good faith’ and ‘fair
dealing,’ the covenant does not establish a free-floating requirement that a party act
in some morally commendable sense. Nor does satisfying the implied covenant
necessarily require that a party have acted in subjective good faith.” Allen v. El Paso
Pipeline GP Co., 113 A.3d 167, 182–83 (Del. Ch. 2014), aff’d, 2015 WL 803053
(Del. Feb. 26, 2015) (TABLE); NAMA Hldgs., LLC v. Related WMC LLC, 2014 WL
6436647, at *17 (Del. Ch. Nov. 17, 2014) (“A breach of the implied covenant also
does not necessarily require that a party have acted in bad faith.”). Rather, these
terms connote that a party take actions that are consistent with the agreement and its
purpose. MHS Cap. LLC v. Goggin, 2018 WL 2149718, at *11 (Del. Ch. May 10,
2018). Thus, “[w]hen exercising a discretionary right, a party to the contract must
exercise its discretion reasonably.” Gerber v. Enter. Prods. Hldgs., LLC, 67 A.3d
400, 419 (Del. 2013) (quoting and adopting the reasoning in ASB Allegiance Real
Est. Fund v. Scion Breckenridge Managing Member, LLC, 50 A.3d 434, 440–42
58 (Del. Ch. 2012), rev’d on other grounds, 68 A.3d 665 (Del. 2013)), overruled on
other grounds by Winshall v. Viacom Int’l, Inc., 76 A.3d 808 (Del. 2013). And
consequently, a party’s failure to exercise its contractually granted discretion
reasonably breaches the implied covenant embedded in that agreement. See
Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 146–47 & n.1 (Del. Ch.
2009) (collecting cases). “[T]he elements of an implied covenant claim are those of
a breach of contract claim: a specific implied contractual obligation, a breach of that
obligation by the defendant, and resulting damage to the plaintiff.” NAMA Hldgs.,
2014 WL 6436647, at *16 (internal quotations omitted).
The Holtzman Parties do not identify a gap in the Appraisal Schedule.
Instead, they argue that the Compatriot Parties objected in bad faith to Flanagan’s
qualifications. Although the Appraisal Schedule articulates particular qualifications
for the appraisers, it is silent as to how the parties would ensure that the appraisers
met those qualifications i.e., an objection procedure. The ability of a party to
exercise an objection in this scenario would be inherently discretionary. To avoid a
breach of the implied covenant, such discretion could not be exercised in bad faith.
The court need not invent a detailed objection procedure to fill this apparent gap.
Rather, given the Holtzman Parties’ argument, the relevant inquiry is: if a procedure
to object to an appraiser existed, was the Compatriot Parties’ objection to Flanagan
59 made in bad faith, and if so, did that bad-faith objection damage the Holtzman
Parties?
The Holtzman Parties argue that Flanagan’s appraisal experience met the
Appraisal Schedule’s standards, which required that he “specialize in the appraisal
of real estate projects similar to [the Apartments] in the region where [the
Apartments] are located, shall have no less than five years’ experience in such field
and shall be recognized as ethical and reputable.”192 Flanagan is a member of the
Appraisal Institute, which requires its members to take classes, gain specialized
experience, and write reports to achieve their certification. 193 He has been a principal
at Property Valuation Advisors since 1992, is licensed as a certified general
appraiser in nine states, conducts 400 to 500 appraisals per year, and has conducted
appraisals in all 50 states. 194 Additionally, Flanagan has conducted ten appraisals in
the Pittsburgh metro area. 195 Between four and five of those appraisals occurred
outside of Pittsburgh proper, in his hometown, Youngstown, Ohio, which is about a
192 MP Holding Operating Agreement, Schedule C ¶ 2. 193 Tr. 633:11–634:14 (Flanagan); see also AI Designations, APPRAISAL INSTITUTE, https://www.appraisalinstitute.org/our-designations/ (last visited Aug. 1, 2022). 194 Tr. 634:22–635:12, 637:21–23, 636:7–11 (Flanagan). 195 Id. at 636:12–17 (Flanagan).
60 45 minute drive from the city. 196 Flanagan also testified that he had appraised
“[m]aybe 20” properties in the greater State of Pennsylvania. 197
The Compatriot Parties assert that Flanagan testified that he did not
“specialize in anything” when asked if he “specialized in appraising any type of
property in the northeastern part of the United States.”198 They also note that, before
appraising the Apartments, Flanagan had not conducted an appraisal in Pennsylvania
since 2012.199 Furthermore, the Compatriot Parties contend that the parties
understood the “region” referred to in the Appraisal Schedule to mean the
“Pittsburgh area” and that the above evidence is insufficient to prove that Flanagan
possessed the requisite appraisal experience for that region.200 The Holtzman
Parties, however, argue for a broader reading of “region” that encompasses the entire
Midwest. 201 It is clear from the parties’ arguments that they disagree as to the
meaning of the language in the Appraisal Schedule, specifically the language
concerning the necessary qualifications for a selected appraiser. Therefore, the court
196 Id. at 636:18–637:8 (Flanagan). 197 Id. at 638:6–11 (Flanagan). 198 Id. at 666:16–21 (Flanagan); see also id. at 667:17–21 (Flanagan) (Q. . . . We can agree there is nothing in there that says that you specialize in projects in any particular region in the country. You can agree with that, correct?. A. Correct.). 199 See id. at 665:4–10 (Flanagan). 200 Compatriot Op. Br. 37 (internal quotations omitted). 201 Holtzman Op. Br. 19.
61 must first determine what qualifications the Appraisal Schedule required for a given
appraiser in order to decide whether the Compatriot Parties objected to Flanagan in
bad faith.
If a contract’s language is clear and unambiguous, the court will give effect to
the plain meaning of the contract’s terms and provisions. Osborn, 991 A.2d at 1159–
60. A contract is ambiguous if the court is able to “reasonably ascribe multiple and
different interpretations to a contract.” Id. at 1160. The “determination of ambiguity
lies within the sole province of the court.” Id. “The primary consideration in the
construction of contract language is to fulfill, to the extent possible, the reasonable
expectations of the parties at the time they contracted.” Bell Atl. Meridian Sys., 1995
WL 707916, at *5. The parties do not identify language in the greater MP Holding
Operating Agreement that is similar to the language at issue in the Appraisal
Schedule; nor has the court been able to locate any on its own. And the language at
issue in the Appraisal Schedule is subject to multiple reasonable interpretations, two
of which are promoted by the parties. Therefore, the court may consider extrinsic
evidence when interpreting the meaning of the language at issue in the Appraisal
Schedule.
Because the parties have not defined the contractual terms at issue here, the
court may turn to a dictionary as a reliable source to determine what the parties
intended. Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 738 (Del.
62 2006) (“[D]ictionaries are the customary reference source that a reasonable person
in the position of a party to a contract would use to ascertain the ordinary meaning
of words not defined in the contract.”); accord Tetragon Fin. Grp. Ltd. v. Ripple
Labs Inc., 2021 WL 1053835, at *4 (Del. Ch. Mar. 19, 2021); see also Wenske v.
Blue Bell Creameries, Inc., 2018 WL 3337531, at *10 (Del. Ch. July 6, 2018) (“in
the case of an undefined term [in a contract], the interpreting court may consult the
dictionary, if that is deemed useful, when determining the term’s plain meaning”).
Dictionary definitions of “region” include: “a broad geographic area distinguished
by similar features”202 and “[a] political district or unit, often with its adjacent
lands.”203 Black’s Law Dictionary defines “National Capital Region” as “[t]he
District of Columbia and six nearby counties: Montgomery and Prince George's in
Maryland. and Fairfax, Loudoun, Prince William, and Arlington in Virginia.”204
These definitions indicate that “region,” when used to modify a geographic territory,
encompasses the adjacent areas that share similar features with that territory.
Based on the record and the above dictionary definitions, the Pittsburgh area
is the more reasonable interpretation of the region referenced in the Appraisal
202 Region, MERRIAM-WEBSTER.COM, https://www.merriam- webster.com/dictionary/region (last visited Aug. 1, 2022). 203 Region, THE AM. HERITAGE DICTIONARY OF THE ENGLISH LANGUAGE, https://ahdictionary.com/word/search.html?q=region (last visited Aug. 1, 2022). 204 National Capital Region, BLACK’S LAW DICTIONARY (11th ed. 2019).
63 Schedule. This region includes not just the City of Pittsburgh, but the greater
surrounding area as well. Tellingly, the Compatriot Parties argue that the court use
the Pittsburgh area, not Pittsburgh. Additionally, the parties jointly describe the
Apartments as being located in Pittsburgh. 205 Using the definitions above, the
Pittsburgh region includes like areas surrounding the City. Flanagan’s experience
in the area surrounding Pittsburgh i.e., the Pittsburgh metro area, is accordingly
within the Pittsburgh region.206
Dictionary definitions of “specialize” include: “to concentrate one’s efforts
in a special activity, field, or practice” 207 and “[t]o provide something in particular
or have something as a focus.”208 Flanagan has appraised ten properties in the
Pittsburgh metro area. This is a sufficient concentration of Flanagan’s appraisal
efforts to demonstrate that he specialized in the Pittsburgh region. The Compatriot
Parties do not specify where Flanagan’s qualifications are lacking; nor do they
205 PTO, III ¶ 1. 206 Todd Albert, the Compatriot Parties’ appraiser, relied on data from the “Greater Pittsburgh MSA,” or metropolitan statistical area, when conducting his appraisal. See JX 257 at -0696–0702. Albert testified that this region was chosen for his analysis because it was “the most relevant area,” and agreed that Colliers “typically use[d] the Greater Pittsburgh MSA to define the relevant region.” Albert Oct. 10, 2019 Dep. 111:16–112:11, 113:2–5. 207 Specialize, MERRIAM-WEBSTER.COM, https://www.merriam- webster.com/dictionary/specialize (last visited Aug. 1, 2022). 208 Specialize, THE AM. HERITAGE DICTIONARY OF THE ENGLISH LANGUAGE, https://ahdictionary.com/word/search.html?q=specialize (last visited Aug. 1, 2022).
64 explain what minimum experience he would need to be qualified under the Appraisal
Schedule. Instead, they generally argue that Flanagan “did not specialize in
Pittsburgh-area appraisals,” pointing to his testimony where he admitted that he did
not “specialize in anything.”209 But when asked if he had a “specialty in terms of
appraisals,” Todd Albert, the Compatriot Parties’ appraiser testified that his specialty
was “[c]ommercial real estate,” without specifying a particular region. 210 Indeed, at
his deposition, Albert stated that he was qualified to perform an appraisal in any state
as long as he took the “necessary competency steps” so that he obtained either a
temporary or permanent license to conduct an appraisal in the state in question.211
And despite testifying that he specialized in commercial real estate, Albert later
agreed that he was also “generally qualified to appraise apartment buildings.”212 The
Compatriot Parties agreed, representing to the Holtzman Parties that Albert
“specializes in the appraisal of multifamily projects in the Pittsburgh area” during
the appraisal process. 213 Thus, it appears that the Compatriot Parties did not hold
their own appraiser to the same exacting (yet ambiguous) standard to which they
held Flanagan.
209 Compatriot Op. Br. 37–38; Tr. 666:16–21 (Flanagan). 210 Albert Oct. 10, 2019 Dep. 19:25–20:2. 211 Id. at 31:10–32:5. 212 Id. at 31:6–9. 213 JX 237.
65 The circumstances surrounding the Compatriot Parties’ objection are
similarly dubious. Early in the appraisal process, the Compatriot Parties had initially
sought to engage Flanagan as their own appraiser. Prior to the Compatriot Parties’
inquiry into Flanagan’s availability, he and Property Valuation Advisors had
conducted appraisals for the Village Green entities on 27 separate occasions, most
of which occurred under Compatriot’s ownership. It is thus reasonable to conclude
that the Compatriot Parties were familiar, and satisfied, with both Flanagan and
Property Valuation Advisors’ previous appraisal work. The Compatriot Parties
counter that they merely contacted Flanagan to confirm that he was qualified to be
an appraiser under the Appraisal Schedule.214 But this is belied by the
contemporaneous record evidence. On October 10, 2016, Koehn emailed Flanagan,
with his initial inquiry as to Flanagan’s availability:
we are still partners with [Holtzman] on a couple of new developments that are being completed in Pittsburgh and the methodology for coming up with a price through a 3 appraisal methodology and we have the ability to select one appraiser and we would like to engage your team to complete the appraisal. Please let me know if you have time in the next day or so to discuss and I can give you more of the details. 215
Koehn later testified that, in this email, “I meant that if Mr. Flanagan was available
and met the requirements under [the Appraisal Schedule], that we would like to
214 Compatriot Op. Br. 37 n.29. 215 JX 224.
66 engage him.”216 Mr. Koehn’s testimony, coming almost five years after this email,
is unconvincing. The email does not indicate that Flanagan or his firm’s
qualifications would need to be assessed.
The evidence also points to members of the Compatriot Parties’ harboring no
doubt as to Flanagan and Property Valuation Advisors’s qualifications. At trial,
Koehn testified that he was unacquainted with Flanagan’s previous appraisal
experience and Van Kirk disclaimed knowing of Flanagan altogether at the time
Koehn attempted to engage him.217 Yet, despite their purported lack of familiarity
with Flanagan, the Compatriot Parties expressed conspicuous disappointment at
being unable to retain his services. After Flanagan turned down the proposed
engagement, Van Kirk first emailed Rowsey informing him that “Holtzman already
hired the appraiser we wanted” and that Koehn “was a little worried that this might
happen.”218 Van Kirk emailed Koehn almost immediately after finishing his
correspondence with Rowsey: “Damn. Can you think of any others
[appraisers]?” 219
216 Tr. 1476:8–10 (Koehn). 217 Id. at 1474:19–22 (Koehn); id. at 1229:12–1230:5 (Van Kirk). 218 JX 223. 219 JX 227.
67 The Compatriot Parties also delayed in objecting to Flanagan’s qualifications
only until after receiving his appraisal. Van Kirk questioned Flanagan’s
qualifications when the parties exchanged the names of their respective appraisers
on October 19, 2016. That same day, Platt responded: “We specifically asked
Property Valuation Advisors about their experience in Pittsburgh and they ‘work in
[Pennsylvania] and eastern [Ohio] on a recurring basis and most major Midwestern
cities.’”220 Van Kirk never responded. Only after Van Kirk had time to compare
Flanagan and Albert’s appraisals, which were exchanged on November 23, did he
object—on December 6. In his December 6 email to Borenstein, Van Kirk claimed
that Flanagan’s temporary practice permit to conduct appraisals in Pennsylvania was
insufficient to qualify him as an appraiser under the Appraisal Schedule. Van Kirk
explained that an appraiser “cannot have done more than 2 other appraisals in
[Pennsylvania] in the last 12 months” to obtain a temporary permit, and thus, “at
most, this is only the third [Pennsylvania] appraisal” Flanagan had conducted over
the past year. 221 Van Kirk asserted that Flanagan’s experience did not amount to
“‘specializing’ in the Pittsburgh region.” 222 The Appraisal Schedule does not
contain a permitting requirement for a selected appraiser. Consequently, in the
220 JX 237. 221 JX 315. 222 Id.
68 Summary Judgment Opinion, the court rejected the argument that Flanagan’s
temporary practice permit disqualified him as an eligible appraiser. Morrow Park,
2020 WL 3415649, at *11. To be sure, nothing in the Appraisal Schedule’s language
suggests that an appraiser must have conducted more than three appraisals in the
Pittsburgh region within the previous 12 months in order to have specialized in
appraisals for that given region.
Weighing both the contemporaneous evidence and witness testimony, the
court is convinced that the Compatriot Parties used their discretion to unreasonably
object to Flanagan’s qualifications as an appraiser. The Compatriot Parties had
engaged Flanagan and his firm on 27 previous occasions and had attempted to do so
again for an appraisal of the Apartments. They also expressed genuine
disappointment when they learned that they would be unable to retain his services.
Van Kirk inquired as to Flanagan’s relevant experience early in the appraisal process
and was given a prompt response by the Holtzman Parties. Only after having time
to assess Flanagan’s appraisal did Van Kirk object to his qualifications. Although
Van Kirk did not know that the court would later reject his reasons for objecting to
Flanagan, those reasons still appear contrived at the time they were given. If Van
Kirk believed that the Appraisal Schedule required an appraiser specializing in the
Pittsburgh region to perform a certain number of appraisals over a given period, he
could have made that specific inquiry when initially confirming Flanagan’s
69 qualifications on October 19, 2016. He did not. When Platt forwarded to Compatriot
Flanagan’s response about his experience on October 16, 2016, Compatriot never
responded, thus evidencing its satisfaction with Flanagan’s qualifications under the
Appraisal Schedule. Flanagan was qualified to perform an appraisal of the
Apartments under the Appraisal Schedule. The Compatriot Parties’ objection to
Flanagan’s qualifications as an appraiser was spiteful retribution for the Holtzman
Parties’ having first procured his services before the Compatriot Parties contacted
him and then submitting a bona fide appraisal that came in under the appraised value
submitted by Compatriot’s appraiser. The objection was the product of bad faith.
The Holtzman Parties, however, must also show that they suffered damages
due to the Compatriot Parties’ bad-faith objection to be successful on this implied
covenant theory. The court addresses that issue in Part II.A.1.c below.
c. Compatriot’s Refusal to Close at $59 Million
The Holtzman Parties contend that Compatriot’s refusal to allow VGRP to
exercise the VGRP Purchase Right for $59 million breached the terms of the
Appraisal Schedule. The Compatriot Parties counter that the Holtzman Parties have
not proven that they were willing and able to close at $59 million on or before the
VGRP Purchase Right deadline. According to the Compatriot Parties, that failure
dooms the Holtzman Parties’ breach of contract and implied covenant claims
concerning the VGRP Purchase Right.
70 To exercise the VGRP Purchase Right, VGRP was required to remit the
purchase price, as determined under the Appraisal Schedule, to CCI and Compatriot
in exchange for their respective membership interests in MP Holding. 223 In a
contract requiring simultaneous performance, “each party’s performance is a
‘concurrent condition’ to the other party’s performance.” Lewes Inv. Co. v. Est. of
Graves, 2013 WL 508486, at *12 (Del. Ch. Feb. 12, 2013) (citing Restatement
(First) of Contracts § 251 (1932)), aff’d, 74 A.3d 654 (Del. 2013). Under a
concurrent condition, “each party’s duty to perform is conditioned on the other
party’s performance, or manifested, present ability to perform.” Id. (citing
Restatement (Second) of Contracts § 238 (1981)). To prove a breach of a concurrent
condition, a plaintiff must demonstrate that “the agreed upon exchange would be
carried out immediately” if its counterparty would have performed. Id. (quoting 15
Williston on Contracts § 47:5). Therefore, a plaintiff must first show that it could
render performance to establish such a breach. Id.
VGRP initiated this action and moved for a temporary restraining order six
days before the January 23, 2017 VGRP Purchase Right deadline. In its complaint,
223 MP Holding Operating Agreement § 10.10(b). VGRP would also “be required to provide to [MP Holding] the amount of cash necessary” to trigger a series of transactions that would allow MP Holding to repurchase all outstanding shares of two classes of MP Holding stock held by Village Green Holding’s employees and VG ECU. Id. § 10.10(a), (b); see id. § 3.4(b). Whether VGRP was capable of fulfilling this condition has not been raised by the parties.
71 VGRP contended that both of Albert’s appraisals were invalid224 and requested that
the court order the parties “to close Plaintiff’s purchase of Defendants’ Interests in
the [Apartments] at [sic] $54,600,000 valuation.” 225 Alternatively, VGRP sought an
order requiring the parties to close on a sale of the then-defendants’ interests in the
Apartments to VGRP for $59 million with $4.4 million (which VGRP referred to as
the “disputed portion”) to be held in escrow pending the court’s resolution of the
parties’ claims. 226 VGRP was thus only willing to tender $54.6 million—the value
of the Apartments according to its own appraiser—to close. The purchase price
VGRP was willing to pay is below any purchase price at which the court or the
parties could have conceivably arrived. The Holtzman Parties effectively concede
as much as they no longer challenge the validity of the appraisal that Albert
conducted for Compatriot. Indeed, the Holtzman Parties assert that “Holtzman was
willing to accept both of [Albert’s] appraisals . . . result[ing] in a $57.5 million
valuation.”227 The Holtzman Parties’ current position is consistent with their
representations to Compatriot up until the filing of this action. At no time prior to
224 Dkt. 1, Complaint ¶¶ 51–54. 225 Id. at 22. 226 Dkt. 1, Plaintiff’s Motion for Temporary Restraining Order at 2; Dkt. 1, Compl. at 22. 227 Holtzman Op. Br. 23.
72 this suit did VGRP question the validity of the first appraisal that Albert conducted
for Compatriot.228
The three completed appraisals—Flanagan’s for VGRP and Albert’s for
Compatriot and HFF, respectively—were all valid under the Appraisal Schedule as
modified by the parties. The average valuation of those three appraisals is
approximately $57.5 million. Before this litigation, VGRP never represented to
Compatriot that it should pay less than $57.5 million. But on the eve of the VGRP
Purchase Right deadline, VGRP’s position was that it only needed to tender $54.6
million to purchase the Apartments. The Holtzman Parties have failed to show that
VGRP was willing to render the requisite performance to exercise the VGRP
Purchase Right. Therefore, the Holtzman Parties have not proven any breach of the
MP Holding Operating Agreement.
It likewise follows that the Holtzman Parties cannot prove that they suffered
damages due to Compatriot’s bad-faith rejection of Flanagan’s appraisal. To satisfy
the damages element of a breach of contract claim, “the plaintiff must show both the
existence of damages provable to a reasonable certainty, and that the damages
flowed from the defendant’s violation of the contract.” Base Optics Inc. v. Liu, 2015
228 See JX 315 (Borenstein’s email to Van Kirk presenting two options for the parties to “achieve a prompt and fair resolution”: “Either (i) immediately instruct the appraisers [to] appoint a third [appraiser], and average the 3 [appraisals] (i.e. $54.6M, $59M and the 3rd); or (ii) $57.5M.”).
73 WL 3491495, at *16 (Del. Ch. May 29, 2015) (internal quotations omitted). This
same standard must be met for a claim under the implied covenant as well. See
NAMA Hldgs., 2014 WL 6436647, at *16; Fitzgerald v. Cantor, 1998 WL 842316,
at *1 (Del. Ch. Nov. 10, 1998). In assessing damages, the court considers “how the
positions of the parties would differ in the ‘but-for’ world—i.e., the hypothetical
world that would exist if the Agreement had been fully performed.” eCommerce
Indus., Inc. v. MWA Intel., Inc., 2013 WL 5621678, at *43 (Del. Ch. Sept. 30, 2013).
The Holtzman Parties would be no differently situated today but for
Compatriot’s bad-faith objection to Flanagan’s appraisal. Indeed, the parties’
dispute over the validity of the Mortgage Appraisal is equally pertinent. VGRP
initiated this litigation alleging that the Mortgage Appraisal was invalid, basing the
purchase price in its requested relief on that assumption. The Compatriot Parties’
meritless challenge to the validity of the Mortgage Appraisal under the modified
Appraisal Schedule was just as fatal to the negotiations leading up to this litigation.
VGRP’s intervening actions preempted any contractual violation that may have
resulted from Compatriot’s actions alone. Consequently, the Holtzman Parties
cannot show that any damages that it suffered were caused by Compatriot. The
Holtzman Parties’ breach of contract theory fails on this basis as well.229
229 The Holtzman Parties devote an entire subsection of their briefing to the contention that “Holtzman Was Ready, Willing, and Able to Close.” Holtzman Op. Br. 38. The entirety of their argument, however, is only devoted to proving that Holtzman “could easily have
74 2. Was Compatriot Required to Approve the Permanent Mortgage?
The parties also disagree as to whether the Compatriot Parties were required
to approve the Permanent Mortgage. The Holtzman Parties assert that the
Compatriot Parties were obligated to approve the Permanent Mortgage under the
terms of the MP Managing Operating Agreement. The Holtzman Parties contend
that the Compatriot Parties’ refusal to do so breached the MP Managing Operating
Agreement or, alternatively, the implied covenant of good faith and fair dealing. The
Compatriot Parties contend that no such obligation existed either expressly or
impliedly and, in any event, the Holtzman Parties lack standing to bring these claims.
As to their standing argument, the Compatriot Parties assert that none of the
Holtzman Parties was a signatory to the MP Managing Operating Agreement. 230 The
Compatriot Parties also contend that none of the Holtzman Parties was an intended
third-party beneficiary to the agreement. The Holtzman Parties counter that the
generated” the requisite cash to exercise the VGRP Purchase Right and fails to show that Holtzman and VGRP were willing to close at a purchase price of at least approximately $57.5 million, took any affirmative steps to do so, and made those intentions clear to Compatriot. Id.; see also id. at 38–44. The Holtzman Parties have not shown that “the agreed upon exchange would be carried out immediately,” but for an impediment attributable to Compatriot. See Lewes, 2013 WL 508486, at *12; Restatement (Second) of Contracts § 238 cmt. a (1981) (“Where the performances are to be exchanged simultaneously under an exchange of promises, each party is entitled to refuse to proceed with that simultaneous exchange until he is reasonably assured that the other party will perform at the same time.”). 230 Compatriot Op. Br. 39; MP Managing Operating Agreement at -3527, -3562–63.
75 parties to the MP Managing Operating Agreement intended for Holtzman to be a
third-party beneficiary to that agreement.
“An incidental beneficiary to a contract generally does not have standing
under Delaware law to enforce the terms of an agreement to which it is not a party.”
Lechliter v. Del. Dep’t of Nat. Res. Div. of Parks & Recreation, 2015 WL 7720277,
at *4 (Del. Ch. Nov. 30, 2015) (emphasis in original). On the other hand, “intended
third-party beneficiaries have an enforceable right under contracts conferring a
benefit to them, even though they are not parties to those contracts.” Comrie v.
Enterasys Networks, Inc., 2004 WL 293337, at *2 (Del. Ch. Feb. 17, 2004).
To qualify as a third party beneficiary of a contract, (i) the contracting parties must have intended that the third party beneficiary benefit from the contract, (ii) the benefit must have been intended as a gift or in satisfaction of a pre-existing obligation to that person, and (iii) the intent to benefit the third party must be a material part of the parties’ purpose in entering into the contract.
Madison Realty P’rs 7, LLC v. Ag ISA, LLC, 2001 WL 406268, at *5 (Del. Ch. Apr.
17, 2001).
The Holtzman Parties contend that the second amendment to the MP
Managing Operating Agreement (the “Second Amendment”) conferred third-party
beneficiary status to Holtzman under the original agreement. The Second
Amendment replaced Village Green Holding with MP Holding as one of MP
76 Managing’s two members, the other being Compatriot. 231 The Holtzman Parties
generally point to Paragraph five of the Second Amendment, which they argue is the
basis for Holtzman’s third-party beneficiary status. Paragraph five reads:
This Amendment is binding on and shall inure to the benefit of [MP Managing], the Members and the Manger [sic] and their respective heirs, legal representatives, successors and permitted assigns and all other Persons hereafter holding, having or receiving an interest in [MP Managing], whether as transferees, Substitute Members or otherwise. The terms and provisions of this Agreement are intended solely for the benefit of each party hereto and their respective successors or permitted assigns, and it is not the intention of the parties to confer third-party beneficiary rights upon any other Person.232
Holtzman believed the Second Amendment personally granted him rights under the
MP Managing Operating Agreement. 233 Although the Second Amendment is the
only colorable basis upon which Holtzman can assert standing for this claim, the
Holtzman Parties only address it in their post-trial answering brief. 234 The Holtzman
Parties do not explain what language in Paragraph five confers third-party
beneficiary status on Holtzman. Nor do they reconcile their argument with the last
clause of Paragraph five, which explicitly limits third-party beneficiaries to those
expressly enumerated in that paragraph.
231 JX 133. 232 Id. ¶ 5. 233 Tr. 249:5–250:8 (Holtzman). 234 See Holtzman Ans. Br. 25–26.
77 Neither Holtzman nor any of the other Holtzman Parties was an “heir[], legal
representative[], successor[],” or “permitted assign[ee]” of MP Managing’s
members—MP Holding and Compatriot—or its manager—MP Holding. Similarly,
none of the Holtzman Parties can point to an interest it directly had in MP Managing.
This alone demonstrates that none of the Holtzman Parties was an intended third-
party beneficiary of MP Managing.
As a fallback, and with no further analysis or explanation, the Holtzman
Parties cite In re Delaware Public Schools Litigation, 239 A.3d 451, 510 (Del. Ch.
2020), for the general proposition that “standing is a broad and flexible concept
under Delaware law.” 235 In that case, the NAACP Delaware State Conference of
Branches, the Delawareans for Educational Opportunity, and the City of Wilmington
brought claims against all three Delaware counties, alleging that the counties’ failure
to properly update property valuations was in violation of both the Delaware
Constitution and the Delaware Code. The plaintiffs argued, and proved at trial, that
the counties’ valuation methodology led to an improper reduction in the amount of
property taxes owed, which in turn diminished the funds available for Delaware’s
public schools and unfairly shifted the property tax burden onto some Delaware
235 Id. at 25.
78 residents over others. As its “principal defense,” the counties argued that the
plaintiffs lacked standing to sue. Id. at 509.
The court, however, disagreed, ruling that the plaintiffs had standing to bring
their claims. In a thorough and thoughtful analysis, the court compared the standing
doctrines in state and federal court, explaining that “state court standing doctrine is
appropriately more flexible than federal standing doctrine, because the state courts
play a different and more expansive role than the federal courts.” Id. at 510. In
applying the State’s broader standing doctrine, the court utilized various principles
of standing that have either been abrogated, significantly diminished, or never
recognized in the federal courts. Id. at 517–18 (comparing the broader zone-of-
interests test in state court to that in federal court), 526–27 (recognizing a broader
associational standing doctrine in Delaware), 538–40 (public policy-based
standing).
Here, the Holtzman Parties do not identify any area of Delaware’s more
flexible standing doctrine that would be applicable in their case. Nor do they assert
that this is an appropriate case for the court to exercise its equity jurisdiction and use
its “expansive power, to meet new exigencies and to meet changing needs.” See id.
at 511 (quoting Schoon v. Smith, 953 A.2d 196, 205 n.24, 206 (Del. 2008)) (internal
quotations omitted). Indeed, this is a rather unremarkable and overly litigated
contract dispute that is devoid of any novel or pressing public policy concerns. To
79 recognize the Holtzman Parties’ standing in this instance would promote an
inconsistent and inappropriate expansion of this court’s standing doctrine and ignore
the parties’ heavily negotiated contracts. The court declines to do so.
B. The Alleged Mismanagement of the Holtzman-Controlled Properties
As noted earlier in this Opinion, the Redemption Agreement contemplated a
series of transactions among the parties that would effectuate their separation
through the shifting of their respective membership interests in various joint projects.
Prior to the Redemption Agreement’s execution, Holtzman had been the Chairman
and CEO of Village Green Management, the property management entity for many
of the parties’ properties.236 Both the Redemption and Closing Agreements provided
that, following Holtzman’s departure, Village Green Management would continue
to honor all existing property management agreements with any Holtzman-
Controlled Properties and continue to serve as the property manager for those
properties for at least 180 days.237
The Holtzman Parties argue that the Compatriot Parties breached three
obligations under either the Redemption or Closing Agreements pertaining to the
management of the Holtzman-Controlled Properties. First, the Holtzman Parties
236 Tr. 46:19–47:11 (Holtzman). 237 Redemption Agreement § 1.3(a); Closing Agreement ¶ 2.
80 assert that the Compatriot Parties failed to adhere to budgets outlined in management
agreements for Holtzman-Controlled Properties and managed by Village Green
Management. Second, the Holtzman Parties contend that Village Green Holding
breached the Closing Agreement by treating Holtzman-Controlled Properties
differently than other third-party clients. Third, the Holtzman Parties allege that the
Compatriot Parties failed to maintain staffing continuity at Holtzman-Controlled
Properties in violation of the Redemption Agreement.
1. Budget Adherence
The Holtzman Parties contend that Village Green Management exceeded
budgets that were agreed upon for Holtzman-Controlled Properties. Specifically,
the Holtzman Parties point to the expenses for 20 Holtzman-Controlled Properties
that exceeded those that were either budgeted or approved (“Budget Variances”).
Budget Variances were documented in an expense approval form tracker (the “EAF
Tracker”). 238 Michael Schilling, who worked in the property management arm of
Village Green Holding maintained the EAF Tracker. 239 According to Schilling,
Village Green Management would submit an internal expense approval form to the
owners of a property, if its upcoming management expenses would result in a Budget
238 See JX 821, Ex. B-1 (chart detailing expenses that exceeded those budgeted); Tr. 888:20–889:17 (Schilling) (“EAF is expense approval form. It’s an internal form that Village Green used to request above-budget expenses from ownership groups.”). 239 Tr. 889:15–17 (Schilling).
81 Variance.240 If an expense approval form was approved, Schilling would log those
Budget Variances in the EAF Tracker. 241 Additionally, along with each Budget
Variance, Schilling would record the date of approval, a description of what was
approved, and a specific account code relating back to line items in the budget and
financial statements. 242 According to the Holtzman Parties, these Budget Variances
violated the Closing Agreement, which reads: “No services will be performed and
no fees will be incurred or charged other than as pursuant to written agreements and
fee schedules attached thereto (and/or schedules as may be mutually agreed upon)
and pursuant to written authorizations and procedures as set forth in the management
agreements.”243
The Compatriot Parties counter that the Holtzman Parties lack standing to
bring this claim directly against any of the Compatriot Parties. 244 The properties that
incurred the Budget Variances are owned by entities that are not parties to this action.
None of the Holtzman Parties are parties to any of the operating agreements for the
LLCs controlling the properties where they allege Budget Variances occurred.245
240 Id. at 889:12–14 (Schilling). 241 Id. at 889:21–890:6 (Schilling). 242 Id. (Schilling); see also JX 608 (EAF Tracker). 243 Closing Agreement ¶ 2; see Holtzman Op. Br. 49–51. 244 See Dkt. 250 ¶¶ 221–26 (bringing direct claim for breach of the Closing Agreement). 245 Tr. 1039:16–22 (Frazee); e.g., JX 23 (operating agreement for Ann Arbor City Apartments LLC); JX 51 (operating agreement for Gold Coast City Apartments LLC).
82 Instead, the Holtzman Parties control entities—not named in this action—that are
members of those LLCs.
The question of direct versus derivative standing turns on two questions: “(1)
who suffered the alleged harm (the corporation or the suing stockholders,
individually); and (2) who would receive the benefit of any recovery or other remedy
(the corporation or the stockholders, individually)?” Tooley v. Donaldson, Lufkin &
Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004). The court may utilize caselaw
governing the distinction between direct and derivative corporate suits when
assessing that distinction in the analogous context of an LLC. Kelly v. Blum, 2010
WL 629850, at *9 (Del. Ch. Feb. 24, 2010).
The Compatriot Parties contend that even assuming arguendo that Village
Green Management did cause the Budget Variances, any resultant harm would have
first flowed to the respective LLCs where the Budget Variances occurred, and only
indirectly to the members of those LLCs. Consequently, it would be the LLCs that
would first receive any recovery following a successful action against Village Green
Management, not the members. The Holtzman Parties’ expert’s report confirms that
the Holtzman Parties’ claim is derivative. It shows a “Grand Total” of $1,831,122
in Budget Variances, but only $336,114 flowing to the “Holtzman Interests.”246
JX 821, Ex. B-1; see Tr. 1042:15–16 (Frazee) (“Line 24 on [Exhibit] B-1 reflects the 246
damages for the Holtzman interests.”).
83 “[C]laims of mismanagement resulting in a decrease in the value of corporate stock
are derivative in nature.” Feldman v. Cutaia, 951 A.2d 727, 734–35 (Del. 2008);
see also Kramer v. W. Pac. Indus., Inc., 546 A.2d 348, 353 (Del. 1988) (“actions
charging mismanagement which depress the value of stock allege a wrong to the
corporation; i.e., the stockholders collectively, to be enforced by a derivative action”
(internal quotations and alterations omitted)). The Holtzman Parties’ allegations of
mismanagement of the 20 LLCs would similarly lead to a “direct wrong to the [LLC]
that is indirectly experienced by all [members].” Kramer, 546 A.2d at 353 (internal
quotations omitted).
The Holtzman Parties counter that they have standing to sue directly under
the Closing Agreement.247 Under their theory, the Closing Agreement was a promise
made by the Compatriot Parties directly to the Holtzman Parties to comply with
preexisting obligations under the operating agreements of the 20 LLCs. The
Holtzman Parties contend that their claim for breach of the Closing Agreement is a
direct claim, even if they could bring identical derivative claims under the operating
agreements for the 20 LLCs that had Budget Variances.
This argument, however, ignores the nature of the claim. The Closing
Agreement does not alter the relationship between the Holtzman Parties and the
247 Holtzman Ans. Br. 42–45.
84 Compatriot Parties regarding a claim for mismanagement of the 20 LLCs. Indeed,
the Holtzman Parties argue that the Closing Agreement was an “affirmation” of the
Compatriot Parties’ preexisting obligations.248 Whether any alleged
mismanagement of the 20 LLCs occurred before or after the Closing Agreement’s
execution would not change who suffered any harm or who would be entitled to
damages following a successful claim. Based on the Holtzman Parties’ reasoning,
parties may contractually manufacture direct claims where only derivative standing
previously existed. The Holtzman Parties do not cite any authority for this
proposition, and the court declines to accept it here. Because this claim is derivative
and the Holtzman Parties do not contend that they have met the pleading standards
for a derivative claim, see 6 Del. C. § 18-1003, the Holtzman Parties have not met
their burden.249
2. The Treatment of Holtzman-Controlled Properties
The Holtzman Parties also assert that Village Green Management managed
Holtzman-Controlled Properties differently than the other properties under its
248 Id. at 43–44. 249 The Holtzman Parties again argue that “standing is broad and flexibly applied,” citing In re Delaware Public Schools Litigation, 239 A.3d 451, 510 (Del. Ch. 2020). Holtzman Ans. Br. 42. As stated above, the Holtzman Parties do not explain why the court should adopt a more “flexible” approach to standing in this case, and they cite no authority where the court has adopted a more flexible standing doctrine under similar circumstances. See supra II.A.2. The court will not labor to construct an argument for the Holtzman Parties here.
85 management, in violation of the Closing Agreement. The relevant provision in the
Closing Agreement reads: “[Village Green Holding] company subsidiaries
personnel will treat [Holtzman] and his controlled entities in the same manner as
[Village Green Holding] company subsidiaries treat all other third party clients.”250
The Holtzman Parties argue that Village Green Management violated its own
internal policies and procedures manual (the “Manual”) when managing the
Holtzman-Controlled Properties, pointing to two particular sections of the
Manual. 251 First, they contend that the Manual mandates that Village Green
Management employees adhere to budgets in the management agreements that the
company signs with the property owners.252 The Holtzman Parties argue that the
Budget Variances violated this provision of the Manual. Second, they direct the
court to another section of the Manual that states: “Village Green managed
communities are among the most beautifully landscaped and well-maintained
communities anywhere. . . . Any deficiency that affects curb appeal must be
corrected immediately.” 253 The Holtzman Parties present evidence of neglect and
the accumulation of piles of trash at a Holtzman-Controlled Property under the
250 Closing Agreement ¶ 2. 251 See JX 842. 252 Holtzman Op. Br. 51–52; see JX 842 at 150–53. 253 JX 842 at 208; see Holtzman Op. Br. 52.
86 supervision of Village Green Management. 254 Additionally, Diane Batayeh, CEO
of Village Green Holding, testified that, following the execution of the Closing
Agreement, she could not recall any non-Holtzman-Controlled Properties for which
Village Green Management violated its Manual while it managed Holtzman-
Controlled Properties. 255
As an initial matter, the Holtzman Parties have failed to show how they have
standing to directly assert this claim.256 Assuming arguendo that Holtzman-
Controlled Properties were treated differently than non-Holtzman-Controlled
Properties, the Holtzman Parties have failed to show how damages emanating from
this form of a breach of the Closing Agreement would be distinct from those flowing
from alleged mismanagement. And in their damages calculation, the Holtzman
Parties do not distinguish between the damages flowing from these two claims as
well.257 All of the Holtzman-Controlled Properties at issue are not directly owned
by the Holtzman Parties. Here, the Holtzman Parties contend that Village Green
254 JX 589; Tr. 876:13–877:5 (Schilling) (“Village Green didn't maintain the trash chute. Trash piled up. And rather than dispose of it, they filled mechanical rooms, you know, to chest height with trash that, subsequently, [CCA] had to take charge of disposing of and pay a vendor, I think, almost $10,000 to take care of, because they were ignoring problems.”). 255 Tr. 1456:24–1457:4 (Batayeh). 256 See Dkt. 250 ¶¶ 221–26 (bringing direct claim for breach of the Closing Agreement). 257 See Holtzman Op. Br. 54–64.
87 Management failed to manage the Holtzman-Controlled Properties akin to how it
managed other properties under its supervision and in accordance with the Manual,
i.e., mismanagement. The alleged harms would have thus been inflicted upon the
entities that directly own the Holtzman-Controlled Properties, and any awarded
damages would first flow to those entities as with the Budget Variances claim.258
The Holtzman Parties lack standing to assert this claim.
The Holtzman Parties have also failed to prove this claim by a preponderance
of the evidence. The evidence confirms instances in which Village Green
Management may not have complied with the Manual in its management of at least
some Holtzman-Controlled Properties, but there is scant support for the proposition
that the Holtzman-Controlled Properties were treated differently. Indeed, the only
evidence that the Holtzman Parties cite for this proposition is Batayeh’s testimony,
which was a short answer in the negative to the question: “Can you tell the Court
about any non-Holtzman clients as to which Village Green violated any of the
policies we’ve discussed [from the Manual] from June 2016 through 2018.”259 The
Holtzman Parties do not provide any other evidence showing how Village Green
Management managed non-Holtzman-Controlled Properties. Recognizing the
shaky footing on which their argument stands, the Holtzman Parties assert that this
258 See II.B.1 supra. 259 Tr. 1456:24–1457:4 (Batayeh).
88 single line of testimony “raises a strong inference that [the Compatriot Parties]
treated Holtzman differently than they did other clients.”260 After over five years of
litigation and extensive discovery, the Holtzman Parties are expected to prove this
claim by a preponderance of the evidence. Batayeh’s testimony alone is insufficient
to prove that Village Green Management managed non-Holtzman-Controlled
Properties differently than how the Holtzman-Controlled Properties were
managed. 261
3. Staffing Continuity
The Redemption Agreement obligated Village Green Holding to staff the
Holtzman-Controlled Properties that its subsidiaries managed with “substantially the
same . . . personnel” following the date that the Closing Agreement became
effective.262 The Holtzman Parties allege that Village Green Management
“pervasively failed to maintain staffing continuity as promised, diverting staff to
[non-Holtzman-Controlled Properties] or employing inexperienced employees” in
260 Holtzman Op. Br. 52. 261 The Holtzman Parties also argue that Village Green Management specifically mismanaged the Central West End City Apartments, a Holtzman-Controlled Property. Holtzman Op. Br. 53–54. But that argument fails for the same reasons as their general claim regarding mismanagement of the other Holtzman-Controlled Properties. The Holtzman Parties have improperly alleged a direct instead of a derivative claim. Additionally, the Holtzman Parties do not develop a theory of liability for this claim. Assuming the theory of liability is identical to the general mismanagement claim above, the Holtzman Parties have similarly failed to meet their burden. 262 Redemption Agreement § 1.3(a); see id. § 2.1; Closing Agreement ¶ 1.
89 violation of the Redemption Agreement.263 The Holtzman Parties point to testimony
given by Michael Schilling, who worked in the property management arm of Village
Green Holding, where he described how the level of staffing and oversight at
Holtzman-Controlled Properties “substantially changed” after June 2016.264
Specifically, Schilling recounted how various properties were understaffed
compared to the level of budgeted staffing; “were missing staff for periods of time,
sometimes extended periods of time”; and had been allocated “untrained or
underqualified staff” in exchange for staff that had been “trained and tenured.”265
According to Schilling, “[p]rior to the transition of ownership, the properties were
staffed to budget. If there ever was a staff turnover, it was immediately filled.”266
The Holtzman Parties also cite correspondence between themselves and
representatives from the Compatriot Parties documenting instances where the
Holtzman Parties complain that Village Green Management had failed to adequately
staff Holtzman-Controlled Properties with property managers and other staff that
had previously helped manage the properties. 267 The Holtzman Parties contend that
263 Holtzman Op. Br. 52. 264 Tr. 864:8–17 (Schilling). 265 Id. at 865:1–11 (Schilling); see also id. at 865:22–866:5 (Schilling) (providing additional examples). 266 Id. at 867:11–13 (Schilling). 267 JX 513; JX 526; JX 623.
90 the insufficient staffing was detrimental to both the properties’ financial
performance and resident satisfaction. 268
These allegations similarly fail to demonstrate that the Holtzman Parties have
standing like the other mismanagement claims above.269 If a lack of adequate
staffing did in fact lead to any damages, those damages would have been incurred
by the properties themselves and flow to their respective LLC owners, none of which
are named in this action. Thus, like the other mismanagement claims, this claim is
derivative, but has been incorrectly brought as a direct claim.
The Holtzman Parties have also unsuccessfully connected inadequate staffing
with any Holtzman-Controlled Property’s underperformance. The Holtzman Parties
point to three pieces of evidence, which, even when considered together, fail to meet
the preponderance of the evidence standard. First, they point to a September 8, 2017
email from Jonathan Sherman, an Assistant Director at CCA, to Bob Gleason of
Village Green Holding. 270 In that email, Sherman complains about the performance
of one Holtzman-Controlled Property, Mill District City Apartments. Specifically,
he attributes the property’s lackluster income and net operating income to its below-
target occupancy. Additionally, he states that the low level of occupancy “has
268 Holtzman Op. Br. 52–53. 269 See supra II.B.1 & II.B.2. 270 See JX 593.
91 hindered the partnerships [sic] ability to refinance the mortgage.”271 Sherman
expresses that the property is “in serious need of both a marketing and facilities
presence” considering that “competitors continue to outpace us with higher rents and
occupancies” despite the property’s rents being “less than new product and [its]
location superior.”272 Sherman notes, however, that “Village Green has been unable
to supply the property with a consistent Marketing Director or Regional Facilities
Director.”273 In this email, Sherman indicates that adequate staffing would likely
help remedy the property’s poor occupancy and performance.
The Sherman email is hearsay. Although the Compatriot Parties did not press
this objection in their post-trial briefs, the email lacks persuasive force. The
Holtzman Parties do not offer the primary sources or data that is the basis of the
arguments being made in Sherman’s email. At best, the email only purports to
describe the effects that inadequate staffing had on one Holtzman-Controlled
Property. The Holtzman Parties do not point to any persuasive evidence that would
support their argument across any of the other Holtzman-Controlled Properties.
Second, in their opening brief, the Holtzman Parties cite to a 53-page resident
satisfaction survey from 2016 for the proposition that inadequate staffing led to a
271 Id. 272 Id. 273 Id.
92 decrease in resident satisfaction without any further elaboration. 274 While a
summary of the survey’s results across all properties shows that three resident
satisfaction metrics had fallen year-over-year, all three metrics were still considered
to be within the highest level of performance, labeled “outstanding.” 275 The firm
conducting the survey speaks highly of those property managers and owners who
achieve such a rating: “The management team should be commended for providing
excellence in service, while the Building Owner is to be applauded for providing the
resources necessary to keep the property in outstanding condition and market-
competitive.”276 Given the dearth of corroborating evidence and the overall
continued strong resident satisfaction that the survey demonstrates, the court remains
unconvinced that the survey proves that the Compatriot Parties breached the
Redemption Agreement. In their answering brief, the Holtzman Parties tacitly
acknowledge that a decline in resident satisfaction “does not establish a breach,” but
contend that it nevertheless is “further evidence of a breach” and constitutes
“circumstantial evidence of a decline in services.”277 But the Holtzman Parties have
produced virtually no other admissible evidence.
274 Holtzman Op. Br. 53; see JX 902. 275 JX 902 at -6154. 276 Id. at -6201. 277 Holtzman Ans. Br. 48.
93 Third, the Holtzman Parties cite to Holtzman’s answer to a question during
trial, asking if there was “an impact on the performance” of Holtzman-Controlled
Properties due to their management following the execution of the Redemption
Agreement. 278 Holtzman responded that there was a “downward trend” in customer
satisfaction surveys, cash flow, and expenses, although “the economy was very
strong at that time.”279 This self-serving testimony is insufficient, even when
assessed in tandem with the satisfaction survey, to prove that a lack of staffing
continuity caused this “downward trend.” This testimony also fails to specify that
the alleged property mismanagement was caused in part by a lack of staffing
continuity.
C. Accrual of the Preferred Returns
The parties dispute the accrual of the Preferred Returns. The Holtzman Parties
contend that the Preferred Returns’ accrual should have ended in January 2017 for
the Compatriot Parties. 280 Referring the court to the arguments in its pretrial brief,281
the Holtzman Parties argue that the Compatriot Parties should not be allowed to
benefit from their “misconduct” that allowed the Preferred Returns to continue to
278 Tr. 65:3–5 (Holtzman). 279 Id. at 65:8–12 (Holtzman). 280 Holtzman Op. Br. 37, 56 n.11. 281 Id. at 36–37.
94 accrue past January 2017.282 According to the Holtzman Parties, but for this
“misconduct,” a sale of the Apartments would have been consummated in January
2017 and the Preferred Returns would have stopped accruing. Therefore, the
Holtzman Parties assert that the Preferred Returns should stop accruing to the extent
they would only benefit the Compatriot Parties, while the remainder of the Preferred
Returns may continue to accrue. The Compatriot Parties counter that the Preferred
Returns never stopped accruing. They assert that the Preferred Returns only cease
accruing if either MP Managing and MP Holding are dissolved or their respective
assets are distributed.283
These two agreements provide little guidance regarding the timing of a
distribution of the Apartments’ sale proceeds which generate the Preferred Returns.
The MP Managing Operating Agreement states that “Net proceeds from Capital
Transactions shall be distributed as soon as possible following the Capital
Transaction in question.”284 There is no analogous provision, however, in the MP
Holding Operating Agreement.285 The agreements do not otherwise explicitly state
when their respective Preferred Return ceases to accrue. Indeed, the only means by
282 Dkt. 609 at 48. 283 Compatriot Op. Br. 70. 284 MP Managing Operating Agreement, amend. I § 5.2. 285 See MP Holding Operating Agreement § 4.3(d) (Distribution Priority Protocols for Net Proceeds From MP Apartments and/or Morrow Park LLC Capital Transactions).
95 which an accrual of the Preferred Returns could be halted is as the Compatriot Parties
contend—through a distribution of the underlying funds or dissolution of the entities
themselves. As of today, neither event has occurred, and accordingly, the Preferred
Returns continue to accrue.
The Holtzman Parties argue that if the court holds that the Preferred Returns
continue to accrue past January 2017, the Compatriot Parties will be allowed to
benefit from their “misconduct” and breach of the agreements. The Holtzman
Parties, however, have failed to prove their claims for a breach of contract or the
implied covenant. In fact, after over five years of litigation, the Holtzman Parties
failed to demonstrate that they had standing to bring their claims under the MP
Managing Operating Agreement altogether. 286 The Compatriot Parties raised this
issue during the summary judgment stage of these proceedings. 287 Without any
further support, the Holtzman Parties responded that “the close interrelationship of
the different entities established Holtzman as a third-party beneficiary.”288 The
dearth of the parties’ briefing on this issue forced the court to defer on the Holtzman
Parties’ standing in the Summary Judgment Opinion. Morrow Park, 2020 WL
3415649, at *21–22. The Compatriot Parties raised this issue again during pre-trial
286 See supra II.A.2. 287 Dkt. 328 at 56–57. 288 Dkt. 344 at 59.
96 briefing. 289 Although the pre-trial briefs were exchanged on the same day, the
Holtzman Parties did not address their standing, despite the court’s indication that it
planned to revisit the issue post-trial. And following the trial, even though the court
had made clear that the parties should more fully address the standing issue, the
Holtzman Parties only cursorily addressed standing in their answering brief, largely
relying on Holtzman’s self-serving testimony and rehashing the same unsupported
assertion in their pre-trial brief: that “the close interrelationship of the different
entities establishes Holtzman as a third-party beneficiary.”290 Rather than affording
this deficiency the attention it deserved, the Holtzman Parties devoted their time to
drafting a 65-page opening brief that provides the court with little guidance as to
what claims remain and why they are entitled to their requested relief. 291
The Holtzman Parties’ strategic maneuvering outside of this jurisdiction has
also influenced this outcome. LAV filed the Pennsylvania Action only after
289 See Dkt. 608 at 53. 290 Holtzman Ans. Br. 26. 291 Indeed, despite this case’s complexity, the litany of issues to be resolved, and the overall length of their brief, the Holtzman Parties cite only eight cases from this jurisdiction— none of which were decided in the past decade—in their opening brief. Holtzman Op. Br. iii. And during post-trial argument, when discussing their claim for breach of the MP Managing Operating Agreement, the Holtzman Parties continued to dodge the issue of standing. Hrg. 35:16–24 (“Compatriot has argued that that wasn’t a breach because Holtzman lacked standing to bring the claim. First of all, even if it’s not an independent breach, it does show, again, pressure. It does show, again, a continuation of the bare- knuckle business dispute on the part of Compatriot. THE COURT: Mr. Kaye, there is no claim for bare-knuckle pressure. ATTORNEY KAYE: No.”).
97 Holtzman encouraged it to do so along with agreeing to pay its attorneys’ fees and
expenses. 292 The Pennsylvania Action precipitated the sale of the Apartments even
though the Status Quo Order—which was limited to the transfer of interests in the
entities that owned the Apartments, not the Apartments themselves—remained in
effect. Initially, the Pennsylvania litigation gambit presented the Holtzman Parties
with the opportunity they had sought from the beginning—to purchase the
Apartments outright. They prevailed in the bidding process and executed an
agreement to purchase the Apartments for $58.75 million. But the Holtzman Parties
did not live up to the terms of the agreement, leading the Special Master to conclude
that they could not provide “any assurances or evidence” that they “possesse[d] the
equity or ha[d] obtained the financing sufficient to close the transaction.” 293 The
Pennsylvania Court agreed. It was only then that CCI was able to step in and
purchase the Apartments once the Holtzman Parties failed to demonstrate that they
had the necessary funds (as in January 2017 294) and meet various other closing
conditions.
The Holtzman Parties complain that the Compatriot Parties were
improvidently granted ownership of the Apartments while simultaneously
292 Tr. 115:16–116:13 (Holtzman). 293 JX 747 ¶ 36, 37. 294 See supra II.A.1.c.
98 benefitting from the Preferred Returns’ continued accrual. These conditions would
not exist, however, but for the Holtzman Parties’ actions. Unsatisfied with the
proceedings in this forum, the Holtzman Parties attempted to circumvent the Status
Quo Order by encouraging parallel litigation in the Pennsylvania Court. That
attempt, though, ultimately failed, and they came away in a more precarious position
than before. Now the Holtzman Parties return to this court invoking equity to avoid
their contractual commitments. The agreements at issue were heavily negotiated
between sophisticated parties. Delaware law, which the parties chose to govern their
agreements, “is more contractarian than that of many other states” and “parties’
contractual choices are respected.” GRT, Inc. v. Marathon GTF Tech., Ltd., 2011
WL 2682898, at *12 (Del. Ch. July 11, 2011). “The value of contracts is based on
certainty and enforceability. The promiscuous employment of equity to amend
contracts to make them ‘fair’ or ‘reasonable’ would be fatal to those qualities.”
RoundPoint Mortg. Servicing Corp. v. Freedom Mortg. Corp., 2020 WL 4199957,
at *7 (Del. Ch. July 22, 2020). This court need not twist itself in knots to avoid a
purported inequitable result when a party fails to prove a breach of an agreement as
the Holtzman Parties were unsuccessful in doing here. In this case, neither party can
claim ownership over the moral high ground.
The Compatriot Parties have submitted a spreadsheet, reflecting their
proposed flow of funds of the sale proceeds from the sale of the Apartments based
99 on the relevant agreements (the “Compatriot Waterfall”). 295 The Holtzman Parties
rely on the Compatriot Waterfall and do not dispute its accuracy apart from its
calculation of the Preferred Returns, which the court has now resolved.296 The
parties are accordingly directed to confer over whether any further modification of
the Compatriot Waterfall is necessary in light of the court’s ruling above and submit
a form of order for the distribution of the Apartments’ sale proceeds that remain with
the Register in Chancery.
III. CONCLUSION
The parties in this case began with a thoughtful series of heavily negotiated
agreements detailing the process governing their complicated business divorce. But
impatience with the processes detailed in those agreements coupled with mutual
animus quickly derailed that careful planning. For the reasons stated herein, the
court leaves the parties as they are and directs them to confer and submit a form of
final order consistent with this Opinion, including the details as specified at the
conclusion of II.C above.
295 See JX 873. 296 Holtzman Op. Br. 55 (“There is not a substantive disagreement over the waterfall formulae.”) (citing Tr. 513:10–13 (Platt) as reflecting the substantive disagreement between the parties regarding the Compatriot Waterfall (“Q. But you understand that there’s a dispute in this matter about when that preferred return should have stopped accruing? A. That’s correct, yes.”)); Holtzman Ans. Br. 38 (“there was no substantive disagreement between the parties about the waterfall models”).
Related
Cite This Page — Counsel Stack
In re Morrow Park Holding LLC, Counsel Stack Legal Research, https://law.counselstack.com/opinion/in-re-morrow-park-holding-llc-delch-2022.