Independence Realty Trust, Inc. v. USA Carrington Park 20, LLC

• Court: Superior Court of Delaware
• Decided: March 1, 2022
• Docket: N20C-07-316 FWW
• Status: Published

Opinion

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE

INDEPENDENCE REALTY TRUST, INC., ) INDEPENDENCE REALTY OPERATING ) PARTNERSHIP, LP, ) ) Plaintiffs, ) ) C.A. No. N20C-07-316 FWW v. ) ) USA CARRINGTON PARK 20, LLC, ) ) Defendant. )

EDMOND F. BROVELLI, JR., Individually ) and as Trustee of the BROVELLI ) FAMILY TRUST 2A, ) ) Plaintiffs, ) ) v. ) ) INDEPENDENCE REALTY OPERATING ) PARTNERSHIP, LP, a Delaware limited ) partnership; INDEPENDENCE REALTY ) TRUST, INC., a Maryland corporation; ) INDEPENDENCE REALTY ADVISORS, ) LLC, a Delaware limited liability company; ) IRT CARRINGTON APARTMENTS ) OWNER, LLC, a Delaware limited liability ) company, ) ) Defendants. ) Submitted: January 27, 2022 Decided: March 1, 2022

MEMORANDUM OPINION AND ORDER

Upon Defendants’ Motion to Dismiss Plaintiffs’ Complaint Under Del. Super. Ct. Civ. R. 12(b)(1) &(6) For Lack of Subject Matter Jurisdiction and Failure to State a Claim

GRANTED in PART and DENIED in PART.

James S. Green, Jr., Esquire, Jared T. Green, Esquire, SEITZ, VAN OGTROP & GREEN, P.A., 222 Delaware Avenue, Suite 1500, Wilmington, DE 19801, Attorneys for Plaintiffs Edward F. Brovelli, Jr., Individually, and as Trustee of The Brovelli Family Trust 2A and Defendant USA CARRINGTON PARK 20, LLC.

Gregory F. Fischer, Esquire, COZEN O’CONNOR, 1201 North Market Street, Ste. 1001, Wilmington, DE 19801; John J. Sullivan, Esquire, COZEN O’CONNOR, 3 WTC, 175 Greenwich Street, 55th Floor, New York, NY 10007, Attorneys for Defendants Independence Realty Operating Partnership, LP, Independence Realty Trust, Inc., Independence Realty Advisors, LLC, and IRT Carrington Apartments Owner, LLC and Plaintiffs Independent Realty Trust, Inc., and Independence Realty Operating Partnership, LP.

WHARTON, J.

2 I. INTRODUCTION

In July 2020, Independence Realty Trust, Inc. (“IRT”) and Independence

Realty Operating Partnership, LP (“IROP”) brought a declaratory judgment action

in this court against USA Carrington Park 20, LLC (“Carrington”). IRT is a real

estate investment trust (“REIT”) and is IROP’s managing partner. IROP is an

umbrella REIT (“UPREIT”). IRT and IROP sought a declaration that Carrington

was not entitled to compensation for any tax payments Carrington may have been

required to make as a result IROP selling property that Carrington contributed to

IROP to become a limited partner IROP.1 In August 2021, Edmond F. Brovelli, Jr.

(“Brovelli”), Individually and as Trustee of the Brovelli Family Trust 2A (the

“Brovelli Trust”) (collectively the “Plaintiffs”) sued IROP, IRT, Independence

Realty Advisors, LLC, and IRT Carrington Apartments Owner, LLC (collectively

the “Defendants”) in a six-count complaint.2 That complaint alleged a violation of

§ 10(b) of the Exchange Act and Rule 10b-5 (Count I); Breach of Contract (Count

II); Negligent Misrepresentation (Count III); violations of the California

Corporations Code (Counts IV and V); and Indemnification (Count VI).3

1 Compl., D.I. 1 (N20C-07-316 FWW). 2 Compl., D.I. 1 (N21C-08-171 FJJ). 3 Id. 3 Meanwhile, the parties stipulated to a voluntary dismissal without prejudice of an

action Brovelli and the Brovelli Trust had brought against the Defendants in the

United States District Court for the Northern District of California. The two

Delaware cases were consolidated on November 30, 2021 under C.A. No. N20C-07-

316 FWW.4

The Defendants now move to dismiss all counts of the complaint.5 They argue

that; (1) the Plaintiffs lack standing; (2) the allegations improperly group all

Defendants together and only allege conclusions of law, not facts; (3) the fraud and

misrepresentation claims are time barred; (4) the Rule 10b-5 claim cannot be

asserted in state court; (5) the relevant contracts bar the breach of contract claims;

(6) the negligent misrepresentation claim in not justiciable in Superior Court; and

(7) the California securities law claims are deficiently pled.6

Brovelli and the Brovelli Trust do not challenge the Motion to Dismiss (the

“Motion”) as to the Rule 10b-5 count (Count I); the Negligent Misrepresentation

count (Count III); and the California securities law claims (Counts IV and V),

because, they say, they recognize the dispute is primarily contractual and to simplify

the matter.7 In their answer Brovelli and the Brovelli Trust assert that they do have

4 D.I. 16. 5 Mot. to Dismiss, D.I. 19. 6 Id. 7 Pls.’ Ans. Br. in Opp., at 3, D.I. 23. 4 standing to bring their action, the damages they seek not barred by the relevant

contracts because they direct, not consequential, and their remaining claims are well

pled.

Thus distilled, the Motion raises three issues for the Court to decide: (1)

whether Brovelli and the Brovelli Trust have standing to sue; (2) whether the breach

of contract and indemnification claims are contractually barred; and (3) whether the

complaint properly states claims for relief.

II. FACTS AND PROCEDURAL HISTORY

According to the Complaint, on March 3, 2017, IROP entered into a Fifth

Amended and Restated Agreement of Limited Partnership of Independence Realty

Operating Partnership, LP (“Operating Agreement”) with IRT as the general partner,

and IRT Limited Partner, LLC and IRT as limited partners.8 On May 2, 2014, IROP

entered into a Contribution Agreement (Carrington Park – 1801 Champlin Drive,

Little Rock, Arkansas) with several contributors, including USA Carrington Park

20, LLC.9 On January 29, 2015, USA Carrington Park 20, LLC, the Brovelli Trust

and Brovelli entered into a Transfer Agreement whereby USA Carrington Park 20,

LLC (a limited partner of IROP) transferred 100% of its interest in IROP to the

8 Compl., at ⁋ 6. 9 Id., at ⁋ 7. 5 Brovelli Trust.10 The Complaint asserts this agreement acted to substitute the

Brovelli Trust as a limited partner of IROP.11 The Complaint further alleges that the

Defendants represented that the real estate assets used to acquire the interest in IROP

would not be sold for a period of seven years (“the lock-out period”) absent an

Internal Revenue Code § 1031 exchange.12 In 2019, Defendants, without notice

according to the Complaint, sold the underlying assets without a § 1031 exchange

resulting in claimed damages in excess of $750,000.13 Finally, the Complaint alleges

that the Operating Agreement and the Contribution Agreement contractually require

the Defendants to indemnify the Plaintiffs against any breach of a representation of

those agreements, and despite demands for indemnification, Defendants have

refused.14

On July 31, 2020, IRT and IROP initiated litigation when they filed their

declaratory judgment action in this Court.15 Later, on November 13, 2020, Plaintiffs

sued the Defendants in federal court in the Northern District of California.16 That

matter was voluntarily dismissed without prejudice by stipulation subsequent to

10 Id., at ⁋ 8. 11 Id. 12 Id., at ⁋⁋ 10, 24-26. 13 Id., at ⁋⁋ 11, 29. 14 Id., at ⁋ 46. 15 Compl., D.I. 1. 16 App. Defs.’ Mot. to Dismiss at Ex. C., D. I. 19. 6 Defendants moving to dismiss or stay it.17 Plaintiffs then brought their complaint in

Delaware on August 19, 2019.18 That case was consolidated with this one on

November 30, 2021.19 Defendants in the action brought by Brovelli and the Brovelli

Trust moved to dismiss on December 1, 2021.20 Plaintiffs answered on December

30th21 and Defendants replied on January 28th.22

III. THE PARTIES’ CONTENTIONS

Defendants argue that Brovelli and the Brovelli Trust lack standing – the

Brovelli Trust because it is a transferee holder of a security suing under a contract

and securities transaction to which it was never a party, and Brovelli, because not

only was he never a party to the contract, but he never held the security.23 Even if

the Plaintiffs have standing, Defendants contend that the Complaint improperly

aggregates the Defendants in such a way that there are no operative facts alleged

against each Defendant.24 In addition, the terms of the relevant contracts bar

recovery.25 In particular, regarding the claim that Defendants breached the contract

17 Id. 18 Compl., D.I. 1. (N21C-08-171 FJJ). 19 D.I. 16. 20 Defs’. Mot. to Dismiss, D.I. 19. 21 Pl.’s Ans. Br. in Opp, D.I. 23. 22 Defs.’ Reply., D.I. 25. 23 Defs.’ Mot. to Dismiss, at 6-7, D.I. 19. 24 Id., at 8-9. 25 Id., at 14-16. 7 by selling the property before the seven year lock-out period expired, the damages

claimed by Plaintiffs are consequential damages and § 8.10(a) of the Contribution

Agreement absolves the Defendants of liability for any consequential damages.26

Further, the claim that Defendants breached the Operating Agreement because

Defendants did not provide the Plaintiffs with annual or quarterly reports and a

certificate of ownership did not cause Plaintiffs any damages.27

As noted, Plaintiffs have elected not to contest the Motion with respect to the

10b-5 count (Count 1), the Negligent Misrepresentation count (Count III), and the

two California securities counts (Counts IV and V). Plaintiffs, however, do oppose

the Motion with respect to the Breach of Contract and Indemnification counts

(Counts II and VI). They maintain that they have standing to sue for breach of §

8.18 of the Operating Agreement because they acquired all of USA Carrington Park

20, LLC’s interest in the Operating Agreement and UPREIT through the Transfer

Agreement.28 Moreover, Defendants, by the terms of the Operating Agreement

accepted and consented to the transfer and acted in furtherance of the Transfer

Agreement by accepting the Notice of Exchange made by the Brovelli Trust and

recording the Brovelli Trust’s partnership interests in the company’s records.29 They

26 Id. 27 Id. 28 Pls.’ Ans. Br. in Opp, at 9, D.I. 23. 29 Id., at 11. 8 dispute the Defendants’ contention that the tax payment they made as a result of the

sale of the security constituted consequential damages.30 Instead, they argue that

they were damaged directly.31 They also dispute that aggregating the Defendants

for pleading purposes was improper.32 They allege that all Defendants signed the

Operating Agreement and the Contribution Agreement and together breached those

agreements, and therefore that allegation meets Delaware’s relaxed pleading

standard under Superior Court Rule 8.33 Plaintiffs request leave to amend the

Complaint in the event the Court rules against them.

IV. STANDARD OF REVIEW

The Motion seeks relief under Rules 12(b)(1) – lack of subject matter jurisdiction

and 12 (b)(6.) - failure to state a claim. The Rule 12(b)(1) component of the Motion

appears to be moot in light of the Plaintiffs’ decision not to contest dismissal of the

claims to which that part of the Motion is addressed. Under Superior Court Civil

Rule 12(b)(6), dismissal is warranted only if it appears with reasonable certainty that

the nonmoving party would not be entitled to recover under any reasonably

conceivable set of circumstances.34 In ruling on a 12(b)(6) motion, the Court draws

30 Id., at 12-15. 31 Id. 32 Id., at 15-16. 33 Id., at 16. 34 Greenfield for Ford v. Budget of Delaware, Inc., 2017 WL 729769, at *2 (Del. Super. Ct. Feb. 22, 2017). 9 all reasonable factual inferences in the light most favorable to the opposing party,35

and assumes that all well-pleaded facts in a complaint are true.36 Allegations are

well-pleaded if they place the defendant on notice of the claim.37

The pleading standards governing a motion to dismiss in Delaware are

minimal.38 Delaware is a notice-pleading jurisdiction, and a complaint need only

“give general notice as to the nature of the claim asserted against the defendant in

order to avoid dismissal for failure to state a claim.”39 Although the pleading

threshold in Delaware is low, “[a]llegations that are merely conclusory and lacking

factual basis, however, will not survive a motion to dismiss.”40

V. DISCUSSION

A. Standing.

1. Edmund F. Brovelli, Jr. Individually Lacks Standing.

Defendants argue that Edmund F. Bovelli, Jr. lacks standing to sue because he

was neither a party to any of the relevant contracts, nor did he own any security

35 Id. 36 Brevet Capital Special Opportunities Fund, LP v. Fourth Third, LLC, 2011 WL 3452821, at *6 (Del. Super. Ct. Aug. 5, 2011). 37 Precision Air, Inc. v. Standard Chlorine of Del., Inc., 654 A.2d 403, 406 (Del.1995). 38 See Central Mort. Co. v. Morgan Stanley Mort. Capital Holdings LLC, 27 A.3d 531, 536 (Del. 2011). 39 Nye v. Univ. of Del., 2003 WL 22176412, at *3 (Del. Super. Ct. Sept. 17, 2003); see also Super. Ct. Civ. R. 8(a)(1). 40 Brevet Capital, 2011 WL 3452821 at *6. 10 interest in IROP. Plaintiffs did not address this argument in their Answer. The Court

has carefully reviewed all of the documents submitted by both parties in connection

with the Motion. Nothing in any of them suggests that Brovelli has an individual

interest in the litigation. Accordingly, the Motion to Dismiss claims brought by

Brovelli in his individual capacity for lack of standing is GRANTED.

2. The Brovelli Family Trust 2A Has Standing.

There can be no dispute that had USA Carrington Park 20, LLC retained its

security interest in IROP, it would have had standing to bring an action against the

Defendants. The Court first looks to the Operating Agreement. Article 11 governs

transfers.41 The term “Transfer” as it relates to Limited Partners refers to when a

Limited Partner “purports to assign all or any part of its Limited Partnership Interest

to another Person, and includes a sale, assignment, gift, pledge, encumbrance,

hypothecation, mortgage, exchange or any other disposition by law or otherwise.”42

The Transfer Agreement contemplates that the Brovelli Trust will become a

“substituted Limited Partner.”43 Under the Operating Agreement, a transferee who

has been admitted as a Substituted Limited Partner “shall have all the rights and

powers and be subject to all the restrictions and liabilities of a Limited Partner under

41 Defs.’ Mot. to Dismiss, at Ex. B, D.I. 19. 42 Id., at § 11.1(a)(i). 43 Pls.’ Ans. Br. in Opp, Ex A, at ⁋⁋ 2-4, D.I. 23. 11 this Agreement.”44 The Complaint alleges that the Bovelli Trust became a

Substituted Limited Partner of IROP.45 The Court takes that allegation as true, as it

must when resolving a Rule 12(b)(6) motion to dismiss. As a Substituted Limited

Partner, the Brovelli Trust has all of the “rights and powers” that USA Carrington

Park 20, LLC had. So, if USA Carrington Park 20, LLC had standing to sue, so does

the Brovelli Trust. The Motion to Dismiss the Brovelli Trust’s claims for lack of

standing is DENIED.

B. Grouping Defendants.

The Complaint identifies four Defendants – IROP, IRT, Independence

Realty Advisors, LLC, and IRT Carrington Apartments Owner, LLC. The

Complaint lists all four Defendants on the cover page and each Defendant is

separately identified in one of the first four paragraphs. Independence Realty

Advisors, LLC and IRT Carrington Apartments Owner, LLC never appear by name

again. Paragraph 7 alleges that IROP is a party to the Contribution Agreement and

Paragraph 6 alleges that IROP and IRT are parties to the Operating Agreement.

Beyond that, the Complaint employs the generic identifier “Defendants” in all of its

substantive allegations.

44 Defs.’ Mot. to Dismiss, Ex. B, at § 11.4(b), D.I. 19.T 45 Compl., at ⁋ 8., D.I. 1. 12 Superior Court Civil Rule 8 does not require much in terms of pleading. A

pleading shall contain “(1) a short and plain statement of the claim showing that the

pleader is entitled to relief and (2) a demand for judgment for the relief to which the

party deems itself entitled.”46 Delaware is a notice-pleading jurisdiction. In order

to pass muster, a complaint need only “give general notice as to the nature of the

claim asserted against the defendant in order to avoid dismissal for failure to state a

claim.”47

Due to the Plaintiffs concession, the Complaint has been winnowed down to

two counts – Breach of Contract and Indemnification based of that alleged breach of

contract. The Complaint does not allege that Independence Realty Advisors, LLC

and/or IRT Carrington Apartments Owner, LLC were parties to any contract. For

that reason, the Complaint does not fairly put them on notice as to the nature of the

claim asserted against them, nor does the Complaint show that the Plaintiffs are

entitled to relief against those two Defendants. The Motion to Dismiss for failure to

state a claim against Independence Realty Advisors, LLC and IRT Carrington

Apartments Owner, LLC is GRANTED.

46 Super. Ct. Civ. R. 8(a). 47 Nye v. Univ. of Del., 2003 WL 22176412, at *3 (Del. Super. Ct. Sept. 17, 2003); see also Super. Ct. Civ. R. 8(a)(1). 13 In contrast, IROP is a party to the Contribution Agreement and both IROP and

IRT are parties to the Operating agreement. The Complaint alleges that both

agreements were breached.48 It further alleges how the contracts were breached.49

The Indemnification count cites an indemnification agreement in those agreements

which Plaintiffs allege the Defendants failed to honor.50 The Court finds that those

counts sufficiently state claims against IROP and IRT under Rule 8(a) and

Delaware’s notice pleading regime. Both Defendants are on general notice of the

claims against them. The Motion to Dismiss for failure to state a claim against

Defendants IROP and IRT is DENIED.

C. Contractual Bars.

In the Motion, Defendants maintain that the Operating Agreement bars the

type of damages Plaintiffs are seeking. They maintain that the Contribution

Agreement at § 8.10(a) prohibits compensation for speculative, consequential

damages: “In no event under this Section or otherwise shall the Operating

Partnership be liable to Contributors for any speculative or consequential damages.”

In the Defendants’ view tax damages are consequential because they are a

48 Compl., at ⁋ 29, D.I. 1. 49 Id., at ⁋⁋ 23-28. 50 Id., at ⁋⁋ 45-47. 14 consequence of the sale of the property.51 In other words, if the sale was the breach,

the Plaintiffs’ tax liability was the consequence of that breach.

In response, Plaintiffs make two arguments. First, they argue that the

determination of whether damages are direct or consequential is fact intensive and

not appropriate for resolution by a motion to dismiss.52 Second, they argue that, in

any event, the damages they claim are a direct result of Defendants breaching the

contracts.53

Direct damages are those inherent in the breach and are the necessary and

usual result of a defendant’s wrongful act; they flow naturally and necessarily from

the wrong.54 Direct damages compensate the plaintiff for damages that are

conclusively presumed to have been foreseen by the defendant from his wrongful

conduct.55 Consequential damages, on the other hand, are damages that result

naturally but not necessarily from the wrongful act, because they require the

existence of some other contract or relationship.56 The distinction between the two

51 Mot. to Dismiss, at 14-15, D.I. 19. 52 Defs.’ Ans. Br. in Opp., at 12, D.I. 23. 53 Id., at 13-15. 54 Bonanza Restaurant Co. v. Wink, 2012 WL 1415512 , at *3 (Del. Super. Ct. Apr. 17, 2012). 55 Id. 56 Id. 15 types of damages is the degree to which the damages are a foreseeable and highly

probable consequence of the breach.57

The lock-out provision of the Contribution Agreement is central to Plaintiffs’

claims and is found in Section 8.18 of that agreement. It generally precludes sale of

the contributed property for a period of seven years.58 However, the contributed

property may be disposed of prior to the expiration of the lock-out period “if such

disposition qualifies as a like-kind exchange under Section 1031 of the [Internal

Revenue] Code.” Plaintiffs allege that Defendants’ sale of the property before the

lock-out period expired was not a Section 1031 like-kind exchange and constituted

a breach of contract. Both the breach of contract count, and the indemnification

count allege direct damages.59 At this juncture, it is sufficient that Plaintiffs have

alleged direct damages. The degree to which the claimed damages were foreseeable

and their probability as a consequence the breach are questions that require further

factual development before answering. They are not appropriate to resolve now as

a matter of law. As the case proceeds, the Court expects the nature of any alleged

57 Id. 58 Defs.’ Mot. to Dismiss, Ex A, at § 8.18, D.I. 19. 59 Compl., at ⁋⁋ 30, 47. 16 damages to come into sharper focus.60 The Motion to Dismiss based on contractual

bars is DENIED.

D. Unopposed Counts.

Plaintiffs do not oppose the Motion as to Count I (Violation of Section 10b of

the Exchange Act and Rule 10b-5 Promulgated Thereunder Against All Defendants);

Count III (Negligent Misrepresentation Against All Defendants); Count IV

(Violation of California Corporations Code § 25401 and § 25501 Against All

Defendants); and Count V (Violation of California Corporations Code § 25505 and

§ 25504.1 Against All Defendants). Accordingly, the Motion to Dismiss as to those

Counts is GRANTED.

VI. CONCLUSION

For the reasons set forth above, Defendants’ Motion to Dismiss as to Count I

(Violation of Section 10b of the Exchange Act and Rule 10b-5 Promulgated

Thereunder); Count III (Negligent Misrepresentation as to All Defendants); Count

IV (Violation of California Corporations Code § 25401 and § 25501 Against All

Defendants); and Count V (Violation of California Corporations Code § 2505 and

60 See, Blue Cube Spinco LLC v. Dow Chem. Co. 2012 WL 4453460 (Del. Super. Ct. Sept. 29, 2021); WSFS Fin. Corp. v. Great Am. Ins. Co., 2019 WL 2323839 (Del. Super. Ct. May 31, 2019). 17 §25504.1 Against All Defendants) is GRANTED. Counts I, III, IV, and V are

DISMISSED WITH PREJUDICE.

The Defendants’ Motion to Dismiss all claims of Plaintiff Edmund F.

Brovelli, Jr. Individually, for lack of standing is GRANTED. All claims of Plaintiff

Edmund F. Brovelli, Jr. Individually are DISMISSED WITH PREJUDICE.

The Motion to Dismiss for failure to state a claim of Defendant Independence

Realty Advisors, LLC and IRT Carrington Apartments Owner, LLC is GRANTED.

All Claims against Defendants Independence Realty Advisors, LLC and IRT

Carrington Apartments Owners, LLC are DISMISSED WITHOUT PREJUDICE.

The Defendants’ Motion to Dismiss Count II (Breach of Contract) and Count

VI (Indemnification) for lack of standing of Edmund F. Brovelli, Jr. as Trustee of

The Brovelli Family Trust 2A and as contractually barred is DENIED.

Edmund F. Brovelli, Jr. as Trustee of The Brovelli Family Trust 2A is granted

leave to file an Amended Complaint within 30 days of the date of this Order. Such

leave is limited to amending the Complaint to state claims against Defendants

Independence Realty Advisors, LLC and IRT Carrington Apartments Owners, LLC.

IT IS SO ORDERED.

/s/ Ferris W. Wharton Ferris W. Wharton, J.