IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
SEHOY ENERGY LP, DEAN ) KETCHAM, and HAVEN REAL ) ESTATE FOCUS FUND, LP, ) ) Plaintiffs, ) v. ) C.A. No. 12387-VCG ) ) ALBERT ADRIANI, HAVEN REAL ) ESTATE GROUP, LLC, HAVEN ) CHICAGO, LP, HAVEN PROPERTY ) MANAGEMENT, LLC, HAVEN NNN ) INVESTMENTS LLC, and ELBOW ) GREASE JANITORIAL SERVICE, ) INC., ) ) Defendants. )
MEMORANDUM OPINION
Date Submitted: February 18, 2021 Date Decided: June 16, 2021
John P. DiTomo and Miranda N. Gilbert, of MORRIS NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware, Attorneys for Plaintiffs Sehoy Energy LP, Dean Ketcham, and Haven Real Estate Focus Fund, LP.
Elizabeth S. Fenton, of SAUL EWING ARNSTEIN & LEHR LLP, Wilmington, Delaware, Attorneys for Defendants Albert Adriani, Haven Real Estate Group, LLC, Haven Chicago, LP, Haven Property Management, LLC, Haven NNN Investments LLC, and Elbow Grease Janitorial Service, Inc.
GLASSCOCK, Vice Chancellor This brief post-trial decision involves a rather carelessly made seven-figure
investment into a carelessly run investment fund. Unsurprisingly, the investment
fared poorly. Carelessness with one’s own property is no tort, but fraud is, and the
method used by the Individual Defendant, Albert Adriani, to induce the investment
was fraudulent.
In short, the Defendant promised the principals of Plaintiff Sehoy Energy LP,
a family-run investment vehicle, that he would invest its money in publicly traded
securities. Instead, he intended to, and did, use the money to extend poorly secured
loans to a personal friend, who had plans to open “Tilted Kilt” franchises.1 Adriani
had heavily invested his own money in this scheme and was anxious that it succeed;
the result was a classic example of good money chasing bad. The Plaintiffs invested
in Adriani’s fund under false pretenses and seek, inter alia, rescissory damages.
The Defendant has an MBA from one of the country’s finest universities and
was an experienced hedge-fund manager before venturing out on his own. He points
out that he has lost all his own funds in addition to the Plaintiffs’, that he is now
making a living driving a truck, and he asks for equitable consideration due to the
straitened conditions he now endures. I believe that Adrianni got in over his head
and made a series of bad decisions that he hoped would make him, and his clients,
1 These appear to be faux-Celtic versions of the more widely known “Hooters” restaurants. See generally Tilted Kilt Home Page, tiltedkilt.com (last visited June 15, 2021).
1 whole. But fraud is poor ground on which to build an appeal to equity. The Plaintiffs
are entitled to rescissory damages, together with interest thereon. A recitation of the
facts, which are largely uncontested, and a brief explanation of my reasoning,
follows.
I. BACKGROUND
The facts in this post-trial memorandum opinion are either stipulated to in the
parties’ pre-trial and post-trial stipulations or were proven by a preponderance of
evidence at trial.2
A. The Parties and Relevant Non-Parties
Defendant Albert Adriani (“Adriani”) is an experienced hedge-fund and
portfolio manager. 3 He received both his MBA and his BA in Finance with honors
from the University of Chicago.4 He has worked as a chartered financial analyst for
several well-known institutions and for several years.5 The other defendants in this
case are all entities affiliated with Adriani; he either owns them outright or owns
significant interests in them. 6 Adriani has petitioned for personal relief under
Chapter 7 of the Bankruptcy Code.7
2 Where the facts are drawn from exhibits jointly submitted at trial, they are referred to according to the numbers provided on the parties’ joint exhibit list and with page numbers derived from the stamp on each JX page (“JX __, at ___”). 3 Joint Statement of Facts ¶ 1, Dkt. No. 218 [hereinafter “Stip.”]. 4 Id. 5 Id. 6 Id. ¶¶ 2–6. 7 Id. ¶ 1.
2 Defendant Haven Real Estate Group LLC (“Haven REG”) is an Illinois
limited company that Adriani founded in 2009.8 Adriani is the sole member and
100% owner of Haven REG; and Adriani has testified that he views himself and
Haven REG interchangeably. 9 Haven REG is the general partner of Plaintiff Haven
Real Estate Focus Fund, L.P. 10 Like Adriani, Haven REG has also petitioned for
relief under Chapter 7 of the Bankruptcy Code. 11
Defendant Haven Property Management LLC (“Haven PM”) is an Illinois
limited liability company that Adriani and non-party Kazi Hassan (“Hassan”)
founded in 2012.12 Initially, Adriani and Hassan each owned 47.5%, with Adriani’s
fiancé Ellen Jackson owning 5%.13 Adriani now owns 100% of Haven PM—and,
like Adriani, Haven PM has also petitioned for relief under Chapter 7 of the
Bankruptcy Code. 14 Haven PM is the general partner of Defendant Haven Chicago
LP. 15
Defendant Haven Chicago LP (“Haven Chicago”) is a Delaware limited
partnership that Adriani and non-party Kazi Hassan (“Hassan”) founded in 2012.16
8 Id. ¶ 2. 9 Id. 10 Id. 11 Id. 12 Id. ¶ 4. 13 Id. 14 Id. 15 Id. 16 Id. ¶ 3.
3 Haven Chicago was formed to invest in distressed residential real estate properties
in Chicago that were owned by Hassan. 17 Haven Chicago has seven limited partners,
“comprised principally of Adriani’s friends and family.” 18 Through their ownership
of Haven PM, Haven Chicago’s general partner, Adriani and Hassan jointly
controlled Haven Chicago. 19 And, like Adrinai and the other Haven entities, Haven
Chicago has also petitioned for relief under Chapter 7 of the Bankruptcy Code. 20
Defendant Haven NNN Investments LLC (“Haven NNN”) is a New
Hampshire limited liability company that Adriani formed in 2015.21 Adriani owns
50% of Haven NNN; the remainder is held by two other individuals, Lynn Lewis
and Nora Coers.22 Haven NNN has, like the other Defendants, petitioned for relief
under Chapter 7 of the Bankruptcy Code.23
Defendant Elbow Grease Janitorial Services, Inc. (“Elbow Grease”) is an
Illinois corporation that provides commercial janitorial services. 24 It, too, has
petitioned for Chapter 7 relief. Adriani purchased Elbow Grease in 2015 and is its
sole owner.
17 Id. 18 Id. 19 Id. 20 Id. 21 Id. ¶ 5. 22 Id. 23 Id. 24 Id. ¶ 6.
4 Plaintiff Haven Real Estate Focus Fund, L.P., (“Focus Fund”) is a Delaware
limited partnership that Adriani formed in 2011. It is managed by its general partner,
Haven REG, which, as mentioned, is owned and controlled by Adriani. 25
Plaintiff Sehoy Energy LP (“Sehoy”) is a Delaware limited partnership that
invested in and was a limited partner in Plaintiff Focus Fund. Sehoy is a portfolio
company within Sehoy Investments, a family concern, 26 and was established “for
exploration and drilling in the oil and gas space.”27 It is owned by a group of family
members, including Calisle Dean (“Dean”), Dean’s brother Warren Dean, Dean’s
sister Leatrice Elliman, and Plaintiff Dean Ketcham (“Ketcham”). 28 Dean, as
Sehoy’s managing partner, makes all final investment decisions for Sehoy and
testified on Sehoy’s behalf at trial.29
Plaintiff Ketcham is Dean’s first cousin and a limited partner in Sehoy. 30 He
also directly invested in and was a limited partner in Focus Fund.31 Ketcham did not
testify at trial; the parties have agreed that Sehoy’s testimony will bind and apply
with equal force to Ketcham.32
25 Id. 26 Id. ¶¶ 7–8. 27 Id. ¶ 8. 28 Id. 29 Id. 30 Id. ¶ 9. 31 Id. 32 Id.
5 Non-party Kazi Hassan is an individual and Adriani’s acquaintance of over
10 years. For a time, he was a managing member of Haven PM and owned 47.5%
of that company.
B. Factual Background
1. Adriani and Focus Fund’s involvement with Hassan prior to the Plaintiffs’ investment
Adriani began investing with Hassan, whom he considered a close friend, in
2012, in order to recoup an approximately $1 million loss from an investment
Adriani had made in a company called China Agritech.33 Adriani’s investment with
Hassan began with loans from entities Adriani owned, including Haven REG and
Haven Chicago.34 From 2012 onward, Haven REG loaned Hassan approximately
$1.2 million, 35 whereas Haven Chicago loaned Hassan over $1 million.36
Particularly relevant to this opinion, Adriani also caused Plaintiff Focus Fund to
make two loans to Hassan in 2012. 37
The first of these loans is represented by a $225,000 note (“Note 1”), dated
September 20, 2012, with a maturity date of December 20, 2012, and made out to
an entity owned by Hassan.38 As security for this loan, the note lists a piece of
33 Id. ¶ 22–23. 34 Id. ¶ 23–24. 35 Id. ¶ 23. 36 Id. ¶ 24. 37 Id. ¶ 25. 38 Id. ¶ 26.
6 property located in Chicago, Illinois.39 The second loan, which is represented by a
$125,000 note (“Note 2”), is dated October 23, 2012, was notarized in February
2012, and has a maturity date of December 23, 2012.40 It is made out to the same
Hassan entity as Note 1. 41 At trial, Adriani testified that he did not request diligence
materials from Hassan nor did he investigate the financial conditions of the Hassan
entity to which Focus Fund loaned money.42
By December 2012, around the maturity dates of both notes, the amount of
the loans—$350,000—represented 25% of Focus Fund’s assets under
management. 43 Both loans went into default, as did some loans made by Haven
REG and Haven Chicago to other Hassan entities. 44
2. Sehoy expresses interest and Adriani provides materials
In early 2013, Plaintiff Sehoy began exploring various investments in publicly
traded, managed funds, in an attempt to divest from oil and gas.45 To do so, Sehoy
worked with Toby Elliman, a hedge-fund industry veteran who is also married to
one of Sehoy’s owners. 46 Elliman, who learned of Focus Fund through a third-party
service that provides research and analytics on market participants in publicly traded
39 Id. 40 Id. ¶ 27. 41 Id. 42 Id. ¶ 31. 43 Id. ¶ 30. 44 Id. ¶ 32. 45 Id. ¶ 33–34. 46 Id. ¶ 35.
7 securities funds, brought Focus Fund to Sehoy’s attention.47 At trial, Dean testified
that Focus Fund appeared to be an attractive investment opportunity because of its
smaller size and because of Adriani’s pedigree.48
Sehoy and Adriani began discussing a potential investment by Sehoy in Focus
Fund starting in January 2013.49 Between January and March of that year, Adriani
provided the Plaintiffs with written promotional materials for Focus Fund. 50 The
materials included a Private Placement Memorandum (“PPM”), 51 Focus Fund’s
Limited Partnership Agreement (“LPA”), 52 a pitch book (“Pitch Book”),53 audited
returns that tracked the performance of Adriani’s self-managed IRA accounts
(“Audited Returns”),54 and a one-pager (“One-Pager”).55 After review of these
materials, I find as a matter of fact that they provided that Focus Fund’s purpose was
to invest in publicly traded securities.
The Audited Returns consist of two audited returns that were prepared to track
the investment performance of stocks held in Adriani’s IRA account between 2009
and 2011. 56 The parties have stipulated that both the audited returns showed that
47 Id. ¶ 35. 48 Id. ¶ 36. 49 Id. ¶ 37. 50 Id. 51 JX 020. 52 JX 004. 53 JX 051. 54 JX 064. 55 JX 730. 56 Stip. ¶ 38.
8 Adriani’s IRA account only contained publicly traded securities at the time.57
Further, “Adriani testified that if investors were to rely on the information contained
in the audited returns, they would know that the holdings in the account were
publicly traded stocks.” 58
The One-Pager describes Focus Fund’s investment strategy as investing
opportunistically across all areas of the real estate securities universe. Public market investments such as common stocks, options, preferred stock, fixed income, and convertible securities are considered indirect real estate investments. Long and short indirect positions may be established through selling options. Covered option writing may be used to enhance returns and reduce risk.59
It shows Focus Fund’s audited returns for the period between 2009 through 2011, as
well as investment results for 2012. 60 The results were benchmarked to the IYR
ETF and the S&P 500—indices for publicly traded securities. 61
The Pitch Book, which was prepared by Adriani, describes Focus Fund’s
investment strategy as investment in “REITs and Real Estate Related Securities.”62
It also provides that Focus Fund “invests opportunistically across all areas of the real
estate securities universe” and that “[p]ublic market investments such as common
stocks, options, preferred stock, fixed income and convertible securities are
57 Id. ¶¶ 39–40. 58 Id. ¶ 41. 59 Id. ¶ 42. 60 Id. ¶¶ 43–44. 61 Id. ¶ 45. 62 Id. ¶¶ 47–49.
9 candidates for investment.” 63 The Pitch Book also notes that taking long and short
positions was part of Focus Fund’s strategy—a strategy that Adriani testified was a
reference to a trading strategy used in investing in public securities.64 Finally, the
Pitch Book highlights historical investments in several publicly traded real estate
companies and also refers to publicly traded real estate stock indices, such as the
IYR ETF, as a benchmark.65 Dean testified that the Plaintiffs understood the
investment philosophy, reflected in the Pitch Book, was that Focus Fund would
invest in public markets and securities—and that such a strategy fit the Plaintiffs’
wishes.66
The PPM describes Focus Fund’s purpose as:
A pooled investment vehicle. The Partnership [Focus Fund] was formed to pool investment funds of its investors . . . for the purpose of active and speculative trading . . . in publicly traded real estate securities listed on the U.S. stock exchanges. 67
At trial, Adriani testified that he agreed that investors were entitled to rely on the
PPM. 68 Dean testified that the Plaintiffs did indeed rely on the PPM and understood
Focus Fund’s purpose to be as stated in the PPM—that is, that Focus Fund’s purpose
was to invest in publicly traded real estate securities. 69 Finally, Adriani also testified
63 Id. ¶ 50. 64 Id. ¶ 51. 65 Id. ¶ 54. 66 Id. ¶ 57. 67 Id. ¶ 60. 68 Id. ¶ 61. 69 Id.
10 that, at the time the Plaintiffs were considering investing in Focus Fund, he told them
that he intended to execute the strategies stated in the PPM.70
Finally, the LPA, at Section 1.03, describes Focus Fund as:
a fund through which the assets of its Partners may be utilized for the purpose of active and speculative trading in publicly traded real estate securities listed on the U.S. stock exchanges. The Partnership invests opportunistically across all areas of the real estate securities universe. Public market investments such as common stocks, options, preferred stock, fixed income, and convertible securities are considered indirect real estate investments. Long and short indirect positions may be established through selling options. Covered option writing may be used to enhance returns and reduce risk. The Partnership shall not trade in commodities or futures contracts unless such activities are managed by an entity that is registered as a commodity pool operator with the Commodities Futures Trading Commission and is a member of the National Futures Association, unless such entity is exempt from such registration and membership requirements.71
The LPA provides that the General Partner of Focus Fund “shall invest the funds of
the Partnership from time to time as the General Partner deems appropriate in
accordance with the purposes set forth in Section 1.03 . . . .”72 While Section 3.02
of the LPA provides the General Partner with “sole and absolute discretion” in
allocating all of the Partnership’s assets, Adriani agreed that the General Partner did
not have the discretion to change Focus Fund’s purpose. 73 The parties have
70 Id. 71 Id. ¶ 65. 72 Id. ¶ 66 (emphasis added). 73 Id. ¶¶ 62, 66.
11 stipulated that the Plaintiffs reviewed and relied upon the LPA in making their
investment decision.
While the negotiations with the Plaintiffs over their potential investment were
ongoing, Focus Fund accepted two more notes from Hassan entities. 74 The first, a
February 20, 2013 note (“Note 3”), was exchanged for an informal agreement by
Adriani to roll over Notes 1 and 2—which, as the reader will recall, were for
$350,000.75 Focus Fund’s balance sheet records Note 3 as at a cost of $350,000; the
note was issued by another Hassan entity.76 Note 3 described the rolled over amount
as a business loan; however, Adriani testified that he did not receive solicitation
materials from Hassan nor did he investigate the credit worthiness of Hassan or his
entities when rolling Notes 1 and 2 into new loans.77
The second note, dated March 20, 2013 (“Note 4”), is in the amount of
$300,000, is issued by the same Hassan entity that issued Note 3, and also describes
the loan as a business loan. 78 Accordingly, by the end of March, Focus Fund’s loan
portfolio consisted of $650,000—an amount that represented 43% of Focus Fund’s
assets under management at the time.79
74 Id. ¶ 68. 75 Id. ¶ 69. 76 Id. 77 Id. ¶ 70. 78 Id. ¶ 71. 79 Id. ¶ 72.
12 At trial, Adriani testified that he did not tell the Plaintiffs or the other investors
that there were $650,000 in loans outstanding prior to their investment.80 He also
testified that he did not inform any potential investors, including the Plaintiffs, that
$350,000 of those $650,000 were for loans that were originally due in December,
2012. 81 None of the promotional materials—such as the Pitch Book and the PPM—
disclosed the outstanding loans or the fact that making loans was part of Focus
Fund’s then-existing investment strategy.82
3. The Plaintiffs’ Investment with Focus Fund
Prior to investing—and unaware, at the time, of Focus Fund’s loans to Hassan
entities—the Plaintiffs requested and received two changes to Focus Fund’s
governing documents. 83 First, the Plaintiffs sought an addendum to Focus Fund’s
LPA that, among other things, reduced the General Partner’s management fee from
1.50% to 0.75%,84 reduced the General Partner’s performance allocation from 20%
to 10%,85 amended the limited partner capital account withdrawal procedure,86 and
amended the LPA to allow Sehoy and Ketcham to withdraw the entirety of their
partnership interest at any time. 87
80 Id. ¶ 73. 81 Id. 82 Id. ¶ 74. 83 Id. ¶ 75; see id. ¶¶ 73–74. 84 Id. ¶ 76. 85 Id. ¶ 77. 86 Id. ¶ 78. 87 Id. ¶ 80.
13 Second, the Plaintiffs requested that Adriani remove language in the PPM that
provided for reimbursement of the General Partner’s:
professional and other advisory and consulting expenses and travel expenses incurred in connection with investment due diligence, monitoring or the assertion of rights or pursuit of remedies (including, without limitation, pursuant to bankruptcy or other legal proceedings, or the participation in informal committees of creditors or other security holders of an issuer). 88
In its stead, the parties inserted the language “(D) INTENTIONALLY
OMITTED.”89
Sehoy invested $1.18 million in Focus Fund in April 2013, following receipt
and review of the PPM, LPA, Pitch Book, Audited Returns, and the One-Pager, and
after negotiating the amendments to the LPA and PPM.90 Ketcham purchased his
$500,000 interest in Focus Fund in May 2013.91
4. Post-investment
Three days after Sehoy’s investment in April 2013, Adriani caused Focus
Fund to make three additional loans, of $200,000 each, to Hassan. 92 Around the time
when Ketcham invested, Adriani caused Focus Fund to roll over two outstanding
loans to Hassan; these loans were in the amounts of $150,000 and $250,000. 93 And
88 Id. ¶ 82. 89 Id. 90 Id. ¶¶ 84–85. 91 Id. ¶ 86. 92 Id. ¶ 88. 93 Id.
14 in June, Focus Fund provided Hassan $250,000 in additional loans.94 Within three
months of the Plaintiffs’ investment, Focus Fund’s outstanding loans to Hassan or
his entities ballooned from $650,000 (representing 43% of Focus Fund’s assets
under management) 95 to $1.9 million (representing 50% of Focus Fund’s assets
under management).96 Focus Fund’s statement of operations for June 2013 reflected
$126,000 of total note interest as a return for Focus Fund.97 Hassan did not,
however, pay any interest on the loans.98 Focus Fund’s portfolio of loans to Hassan
continued to grow throughout 2013; by the end of the year, Focus Fund’s outstanding
loans to Hassan and his entities exceeded $3 million, inclusive of principal and
unpaid interest—an amount that represented more than 83% of Focus Fund’s assets
under management. 99 This amount included Notes 1 and 2, which Hassan never
repaid and which Focus Fund rolled over into new loans.100 Focus Fund’s
communications with its investors, at the time, did not disclose the status of the loans
and communications throughout the year continued to treat the loans as performing
assets, despite none of the loans being repaid by the maturity date. 101
94 Id. ¶ 89. 95 Id. ¶ 72. 96 Id. ¶ 89. Although the loan amount tripled, I note that the percentage of assets increased only marginally—due to the size of the Plaintiffs’ investment in Focus Fund. In other words, the Plaintiffs’ investments funded incremental credit extended to Hassan. 97 Id. 98 Id. 99 Id. ¶ 90. 100 Id. 101 Id. ¶ 92; see id. ¶ 94.
15 The Plaintiffs received Focus Fund’s K-1 tax returns for 2013 in or around
June 2014.102 At that time, Dean noticed a “high ratio of interest income to
dividends” which came as a surprise.103 Dean reached out to Elliman, who reached
out to Adriani via email on June 5, 2014 to inquire why there was so much interest
income. 104 Adriani admitted that that was due to “hard money loans” in Focus
Fund’s portfolio.105 When Elliman asked what hard money loans were, Adriani
responded that they were loans “secured by hard assets, such as real estate.”106 At a
conference call requested by Elliman to discuss the high proportion of interest
income, the Plaintiffs informed Adriani that they wanted him to get out of the loans
because the Fund’s focus was not supposed to be hard money loans and such loans
had become too significant a portion of the portfolio. 107 Adriani testified at trial that
he agreed to the Plaintiffs’ request.108
5. The situation spirals
Despite that agreement, Adriani and his entities were unable or unwilling to
get out of the loans to Hassan and, indeed, continued to attempt to finance him. On
June 30, 2014, Haven Chicago bundled all loans previously made by that entity to
102 Id. ¶ 102. 103 Id. ¶ 103. 104 Id. ¶¶ 103–04. 105 Id. ¶ 104; JX 205. 106 JX 205. 107 Stip. ¶¶ 105–07. 108 Id. ¶ 107.
16 Hassan into a new balloon loan totaling $1,276,878. 109 The balloon loan was secured
by Hassan’s interest in Haven Chicago. 110 Hassan’s interest in Haven Chicago was
also the security for Focus Fund’s Note 4.111 The security did not dissuade Hassan
from borrowing from Adriani, however, nor did it seem to dissuade Adriani from
attempting to find more money for Hassan. In July and August 2014, Adriani and
Hassan began soliciting new investments for Haven Chicago, seeking to raise funds
to purchase one of Hassan’s entities.112 That entity owned development rights for
the Titled Kilt franchise in Central Illinois and “the plan was to then develop and
build out Tilted Kilt franchise restaurants . . . .” 113 Adriani explained the plan as a
“related party transaction, as we [Haven Chicago] are purchasing these assets from
Kazi [Hassan].”114
On September 1, 2014, Adriani caused Focus Fund to roll over all of the
fund’s loans to Hassan and made an additional loan to Hassan in the amount of
$220,000.115 After that last loan, Hassan owed Focus Fund over $4.3 million,
inclusive of accrued but unpaid interest.116 Hassan had not, at the time, paid back
any portion of the loans dating back to Note 1, which was issued in September
109 Id. ¶ 108. 110 Id. ¶ 109–10. 111 Id. ¶ 110–11. 112 Id. ¶ 112–13. 113 Id. ¶ 113. 114 Id. ¶ 115. 115 Id. ¶ 125. 116 Id. ¶ 123.
17 2012. 117 At trial, Adriani confirmed (1) that he continued making loans to Hassan
between 2012 and 2014 even though Hassan never made any payment on the Focus
Fund loans; (2) that he rolled old loans into new loans without receiving financial
information into whether Hassan’s projects were a credit risk; (3) that he never asked
Hassan or his entities to furnish diligence materials; (4) that he never investigated
the financial conditions of the Hassan entities he made loans to, and (5) that he never
tracked the use of the loan proceeds after the loans were made. 118 Hassan did not
repay the rolled over loan from Focus Fund totaling $4.3 million by the maturity
date of December 13, 2014.119 Adriani testified at trial that Hassan asked him to
remain silent regarding the failure to repay, and Adriani did so. 120 Adriani did not
seek to impair the loan at that time, nor did he seek legal advice regarding
impairment.121
Adriani did, however, hire an attorney, Scott Lucas, to review Focus Fund’s
notes and to prepare documentation for Hassan’s loans.122 Lucas determined that
Focus Fund needed different documentation with respect to the loans to Hassan and
prepared a demand promissory note dated February 15, 2015 for the outstanding
117 Id. 118 Id. ¶ 124. 119 Id. ¶ 129. 120 Id. ¶ 130. 121 Id. 122 Id. ¶ 131
18 loans, totaling $4,389,735.35 (the “Promissory Note”).123 Hassan and Adriani
executed the Promissory Note, 124 which Adriani personally had recorded on Focus
Fund’s July 2015 balance sheet as a performing asset 125—and Hassan promptly
defaulted in March 2015.126 Hassan agreed to a consent judgment in May 2015 and
Adriani obtained a consent judgment in the Circuit Court for Cook County, Illinois
on July 17, 2015.127 Meanwhile, Adriani continued to report to the Plaintiffs about
Focus Fund’s performance without mentioning the status of the Hassan loans. 128
6. The situation unravels
In December 2015, one of Focus Fund’s investors requested a withdrawal of
her investment in Focus Fund.129 On December 10, 2015, Adriani sent an email to
Lucas requesting advice that said “[o]ne of the small investors in my hedge fund has
request [sic] a full redemption of her investment. Therefore, I must now tell
everybody the situation.”130 On December 15, 2015, Adriani sent a letter to Focus
Fund’s investors, essentially coming clean. The letter informed investors that “a
significant asset of Haven Real Estate Focus Fund has become substantially
impaired” and that Focus Fund “cannot make any further distributions at this
123 Id. ¶ 133. 124 Id. ¶ 134. 125 Id. ¶ 140. 126 Id. ¶ 138. 127 Id. ¶¶ 138–39; JX 384. 128 See id. ¶¶ 141–48. 129 Id. ¶ 152. 130 Id. ¶ 153; JX 450.
19 time.” 131 It further detailed that Focus Fund had, over the course of four years, issued
loans totaling almost $4.4 million to Hassan and his entities to finance the acquisition
and buildout of franchise restaurants.132 However, the letter disclosed that Hassan
had “performed as agreed, but notified [Adriani] he would not be able to make
upcoming payments in early 2015.” 133 At trial, Adriani confirmed that Hassan had
not repaid any of Focus Fund’s notes by their maturity date.134
In the December 15, 2015 letter, Adriani told investors that the legal fees
expended in trying to recover against Hassan for the loan default were being paid
from his own assets.135 Adriani also told investors that he will “not receive anything
on [his] investments until each of the limited partners are repaid their basis in full”
and that he “personally ha[d] an additional $1.2 million debt outside of the Fund
owed by Mr. Hassan.” 136 That debt, per the letter, would be “contribute[d] to the
Fund, and any portion of the recovery allocable to that separate debt will first go to
the limited partners of the Fund until they recover their basis in full.”137 According
to the letter, “each of the limited partners come first, ahead of [Adriani], period.”138
131 Stip. ¶ 155–56; JX 453. 132 Stip. ¶ 157; JX 453. 133 JX 453. 134 Stip. ¶ 157. 135 Id. ¶ 160; JX 453. 136 JX 453. 137 Id. 138 Id.
20 At trial, Adriani testified that this $1.2 million debt was a reference to Haven REG’s
loans to Hassan, and that he was using Haven REG interchangeably with himself.139
On April 15, 2016, an asset of a Hassan entity was sold and $1,000,000 was
disbursed to Haven Chicago.140 The Plaintiffs moved to intervene in the proceedings
to stop the sale until the parties could determine the appropriate allocation of the sale
proceeds; Focus Fund, Haven REG, and Haven Chicago opposed. 141 The sale
proceeds were allocated for distribution to Haven REG, Haven Chicago, and Focus
Fund as part of citation proceedings before the Circuit Court of Cook County,
Illinois;142 the eventual allocation of the $986,438.74 net proceeds was $682,570.45
to Focus Fund, $120,048.53 to Haven Chicago, and $183,819.76 to Haven REG.143
This allocation, per Adriani’s trial testimony, was intended to be pro rata based on
the value of the parties’ respective loans to Hassan.144 On May 13, 2016, Lucas
emailed Adriani to inform him that he was sending the checks of the proceeds to
each of the plaintiff entities—with one caveat: he would withhold $50,000 of the
proceeds to Focus Fund as an “Advanced Payment Retainer” for “future litigation
for the Haven Focus Fund.” 145 At trial, Adriani confirmed that the $50,000 was
139 Stip. ¶ 161. 140 JX 564; Stip. ¶ 166. 141 Stip. ¶ 167. 142 Id. ¶ 167–68. 143 Id. ¶ 168. 144 Id. 145 Id. ¶ 169.
21 intended to cover legal fees expended on attempting to recover loan amounts against
Hassan.146
Sometime in either late 2015 or early 2016, Adriani contributed Haven REG’s
$1.2 million note to Hassan—the debt he had previously told investors in the
December 15 letter that was his personal debt—to Focus Fund with a 75%
markdown.147 Accordingly, Adriani attributed only a $300,000 value to the $1.2
million debt.148 At trial, Adriani confirmed that Haven REG’s “capital account was
increased by $300,000, after the [Haven REG] note was contributed to Focus
Fund.”149 When Adriani requested Lucas’ assistance with the “substantiation of the
75% write down” as it related to preparing Focus Fund’s K-1 tax returns, Lucas
responded that his guess was that the note was “worthless.” 150
7. The involvement of the other entity defendants
During discovery, the Plaintiffs discovered that Adriani and Haven REG made
withdrawals from their Focus Fund capital accounts amounting to $152,988 in 2014
and over $ 1million in 2015. 151 Correspondence between Adriani and Lucas
indicated that he treated his and Haven REG’s capital account activity
146 Id. ¶ 170. 147 Id. ¶ 171–72. 148 Id. ¶ 172. 149 Id. 150 Id. ¶ 174–75. 151 Id. ¶¶ 181–82 (citing JX 379 and JX 622).
22 interchangeably.152 Some of these withdrawals were made on behalf of or in
connection with the needs of other Adriani entities or for Adriani’s own benefit.
For example, on February 18, 2015, Adriani purchased Defendant Elbow
Grease for $275,000. At trial, Adriani testified that he needed money from his Focus
Fund capital account to purchase Elbow Grease and an email dated February 25,
2015 shows that Adriani listed his Focus Fund capital account as proof of funds for
the Elbow Grease purchase.153 Elbow Grease was not acquired on Focus Fund’s
behalf; Adriani described the Elbow Grease transaction as necessary, explaining to
his fiancée via text that “I have to do janitorial business. It’s my job back up.”154
That view was confirmed at trial. 155
Further, it appears that some of the loans Focus Fund made to Hassan were in
excess of what Hassan requested—and Adriani would instruct Hassan to pay the
overage to Adriani’s personal Haven REG account. 156 Adriani testified at trial that
similar transactions—in which Adriani caused Focus Fund to issue loans to Hassan
and Hassan would kick back a portion of the loans to pay either Adriani or Haven
REG—occurred two or three times. 157
152 Id. ¶ 183. 153 Id. ¶ 184. 154 Id. ¶ 185. 155 Id. 156 Id. ¶ 190 (quoting JX 403). 157 Id. ¶ 196.
23 In October and November of 2015, Adriani withdrew a total of $60,000 “in
connection with Haven NNN.”158 In January 2016, Adriani withdrew another
$45,000 for Haven NNN’s redevelopment costs. 159
C. Procedural History
The Plaintiffs filed their Verified Complaint against Adriani, Haven REG, and
Haven Chicago on May 27, 2016, alleging breach of contract, breach of fiduciary
duty, fraud, fraud in the inducement, and unjust enrichment. 160 After much back and
forth, a third amended complaint was filed on June 9, 2020. 161 Trial was held over
three days at the end of July, 2020 and post-trial argument was held on February 18,
2021. This is my post-trial decision.
II. ANALYSIS
The Third Amended Complaint contains eight counts against six different
defendants. 162 Count I alleges breach of contract against Adriani and Haven REG.163
Count II alleges breach of fiduciary duty against the same.164 Count III alleges
aiding and abetting a breach of fiduciary duty against Haven Chicago and Haven
158 Id. ¶ 187. 159 Id. 160 Verified Compl., Dkt. No. 1. 161 Verified Third Am. and Supplemented Compl., Dkt. No 179 [hereinafter “Compl.”]. 162 Compl. ¶¶ 188–242. 163 Id. ¶¶ 188–194. 164 Id. ¶¶ 195–201.
24 PM. 165 Count IV alleges fraud against Adriani and Haven REG; 166 Count V alleges
fraud in the inducement167 and Count VI adds a claim of breach of the implied
covenant of good faith and fair dealing against the same parties.168 Count VII seeks
declaratory judgment and accounting against Adriani and Haven REG for
wrongfully advanced legal fees.169 Finally, Count VIII alleges fraudulent transfer
against Haven REG, Adriani, Haven Chicago, Haven NNN, and Elbow Grease.170
As redress for these claims, the Plaintiffs seek declaratory judgment, rescissory or
compensatory damages, attorneys’ fees, and affirmative injunctive relief ensuring
both (a) their ability to recover not only from Adriani but also his entities and (b) the
primacy of their recovery over Adriani’s with regards to proceeds obtained from
Hassan.171
In summary, as to Adriani and Haven REG, the Plaintiffs allege breach of
contract, breach of the implied covenant, breach of fiduciary duty, fraud, and fraud
in the inducement. Against Haven Chicago and Haven PM, they allege aiding and
abetting a breach of fiduciary duty. And they allege fraudulent transfer against
Adriani, Haven REG, Haven Chicago, Haven NNN, and Elbow Grease. They seek
165 Id. ¶¶ 202–208. 166 Id. ¶¶ 209–216. 167 Id. ¶¶ 217–222. 168 Id. ¶¶ 223–231. 169 Id. ¶¶ 232–236. 170 Id. ¶¶ 237–242. 171 Id. at Relief Requested ¶¶ a–k.
25 monetary relief and injunctive measures to aid in that recovery. Given, however,
that Adriani is the sole individual defendant—and therefore the defendant who
caused the remaining defendants to allegedly breach duties, aid and abet breaches of
duty, or fraudulently transfer funds—in this Memorandum Opinion, I address only
the counts as they go to Adriani. The parties should meet and confer as to what
remains of this matter given my findings, and, to the extent that the Plaintiffs seek
judgment against the Defendant entities, whether entry of such judgment is opposed.
The operative complaint alleges that Adriani: (a) breached the LPA; (b)
breached the implied covenant of good faith and fair dealing; (c) breached his
fiduciary duties when operating Focus Fund through its general partner; (d)
defrauded the Plaintiffs; (e) fraudulently induced the Plaintiffs to invest in Focus
Fund; and (f) fraudulently transferred funds from Focus Fund to other entities he
owned. Although many of these claims go to the same actions, at least three of them
(the breach of contract claim, the implied covenant claim, and the fiduciary duty
claim) rest on interpretation of Focus Fund’s LPA.172 That contract—or rather the
circumstances in which it was formed—is itself the subject of Count V’s fraud in the
inducement charge. Accordingly, I resolve that count first.
172 As a limited partnership, Focus Fund is owed fiduciary duties by the general partner and its controller to the extent governed by its limited partnership agreement. 6 Del. C. § 17-01101(f).
26 A. Adriani fraudulently induced the Plaintiffs into investing in Focus Fund.
The five elements of fraudulent inducement are:
(1) a false representation of material fact; (2) the defendant’s knowledge of or belief as to the falsity of the representation or the defendant’s reckless indifference to the truth of the representation; (3) the defendant’s intent to induce the plaintiff to act or refrain from acting; (4) the plaintiff’s action or inaction taken in justifiable reliance upon the representation; and (5) damages to the plaintiff as a result of such reliance. 173
Based upon the evidence of record, I find that Adriani has satisfied all five elements.
First, Adriani provided the Plaintiffs with solicitation materials—the PPM, Pitch
Book, LPA, One-Pager, and the Audited Returns—which represented that Focus
Fund’s investment strategy and purpose was centered on investment in publicly
traded securities. Second, Adriani knew this was false because, at the time those
solicitation materials were provided, he had already caused Focus Fund to lend a
substantial portion of Focus Fund’s assets under management to Hassan, he
continued to make loans while the Plaintiffs conducted diligence, and he made more
loans right after the Plaintiffs’ investment; Adriani, I find, used the Plaintiffs’
investment for that hidden purpose. Third, Adriani intended the Plaintiffs to invest
in Focus Fund, and misrepresented the Fund’s purpose in pursuit of that goal.
Fourth, the Plaintiffs’ investment was made in justifiable reliance upon the
173 CSH Theatres, LLC v. Nederlander of San Francisco Assocs., 2015 WL 1839684, at *21 (Del. Ch. Apr. 21, 2015), aff’d sub nom. In re Shorenstein Hays-Nederlander Theatres LLC Appeals, 213 A.3d 39 (Del. 2019).
27 representation that Focus Fund’s purpose was to invest in publicly traded securities.
And fifth, the Plaintiffs have suffered damages through the mismanagement of their
investment.
The Defendants disagree that these facts should lead to liability. They point
out that the LPA and the purchase agreement (which the Plaintiffs entered into to
purchase their interests in Focus Fund) 174 constitute the parties’ entire agreement,
and that the solicitation materials—including the Pitch Book, the PPM, and the
Audited Records—have no bearing on those contracts.175 The Defendants note that
the LPA provided the General Partner broad discretion to allocate assets, purchase
assets, and otherwise manage Focus Fund, and even the solicitation materials
contained disclaimers against reliance.176
All of the Defendants’ arguments rely on the agreement between the parties—
i.e., the LPA and the purchase agreement. Consequently, all three arguments are
vulnerable to the Plaintiffs’ point that the Plaintiffs were fraudulently induced into
entering into an agreement with Focus Fund in the first place.
The Defendants are correct that Delaware courts do not allow a plaintiff to
“‘bootstrap’ a claim of breach of contract into a claim of fraud merely by alleging
174 Compl., Ex. I. 175 DF OB 19. 176 Id.
28 that a contracting party never intended to perform its obligations.”177 “Stated
differently, a plaintiff cannot state a claim for fraud simply by adding the term
‘fraudulently induced’ to a complaint that states a claim for breach of contract, or by
alleging that the defendant never intended to abide by the agreement at issue when
the parties entered into it.”178 That is not, however, what occurred here. Adriani did
not enter into the LPA and purchase agreement with the Plaintiffs solely with the
alleged intent to breach the agreements in the future. Rather, he was already loaning
Focus Fund’s money to Hassan—to the tune of a quarter of Focus Fund’s assets
under management 179—when he presented the Plaintiffs with information about
Focus Fund that was rendered incorrect by those existing loans. These actions,
which were taken prior to the Plaintiffs’ investment, mean the fraudulent
inducement claim can stand on its own without the breach of contract claim—i.e.,
even if Adriani had made no further loans to Hassan after the Plaintiffs’ investment.
That such a fraudulent inducement claim can stand apart from a breach of
contract claim is supported by precedent. “A claim for rescission or rescissory
damages separates a fraudulent inducement claim from breach-of-contract
177 CSH Theatres, LLC v. Nederlander of San Francisco Assocs., 2015 WL 1839684, at *22 (Del. Ch. Apr. 21, 2015), aff’d sub nom. In re Shorenstein Hays-Nederlander Theatres LLC Appeals, 213 A.3d 39 (Del. 2019). 178 Osram Sylvania Inc. v. Townsend Ventures, LLC, 2013 WL 6199554, at *16 (Del. Ch. Nov. 19, 2013). 179 Stip. ¶ 30.
29 damages.”180 That is because fraudulent inducement renders a contract voidable, at
the election of the innocent party.181 Breach of contract does not. The Plaintiffs
here seek “rescissory or compensatory damages.”182 Their claim for fraudulent
inducement does not rely on the breach of contract claim.
To be clear, Adriani had already loaned 25% of Focus Fund’s assets to Hassan
by the time the Plaintiffs expressed interest in Focus Fund—and such notes are,
obviously, not publicly traded securities. He then provided several solicitation
materials to the Plaintiffs that indicated that Focus Fund’s purpose was to invest in
publicly traded securities. That information was false, and the Plaintiffs have
adequately shown that they relied upon it in making their investment with Focus
Fund. Adriani provided those materials—and the false information about Focus
Fund’s purpose being to invest in publicly traded securities—in order to persuade
the Plaintiffs to invest with Focus Fund. He used those funds, in part, to immediately
extend more credit to Hassan. Focus Fund has now declared bankruptcy, having
funneled the Plaintiffs’ investment into Hassan’s ventures. The Plaintiffs have been
damaged, due to their justifiable reliance on Adriani’s false representations as to the
purpose of Focus Fund. They are entitled to rescissory damages against Adriani or
180 CLP Toxicology, Inc. v. Casla Bio Holdings LLC, 2020 WL 3564622, at *18 (Del. Ch. June 29, 2020); Novipax Holdings LLC v. Sealed Air Corp., 2017 WL 5713307, at *5 n.2 (Del. Super. Ct. Nov. 28, 2017). 181 Lincoln Nat. Life Ins. Co. v. Joseph Schlanger 2006 Ins. Tr., 28 A.3d 436, 441 (Del. 2011). 182 Compl. at Relief Requested ¶ j.
30 compensatory damages should they so elect. Given the speculative nature of benefit-
of-the-bargain damages in this case, however, rescissory damages are the
appropriate remedy. 183
III. CONCLUSION
I find that Adriani fraudulently induced the Plaintiffs to invest in Focus Fund.
The Plaintiffs are entitled to rescissory damages, in the amount of the value of their
investments, with interest calculated at the legal rate running from the time their
investments were made. The parties should confer and inform the Court as to what
issues, if any, remain outstanding, and to what extent the other Defendant entities
should be subject to judgment.
183 The Plaintiffs levied other viable claims against Adriani, including breach of contract, breach of fiduciary duty, and breach of the implied covenant. Because I find that the Plaintiffs are entitled to rescissory damages for fraudulent inducement, I need not reach a determination as to these other claims. Carlyle Inv. Mgmt., L.L.C. v. Moonmouth Co. S.A., 2018 WL 5045716, at *2 (Del. Ch. June 28, 2018) (“[W]hen a party is induced to enter a contract through fraud[,] [s]uch a plaintiff has a choice between money damages or rescission[, which are] inconsistent remedies because they are contradictory to one another.” (internal quotation marks omitted)).