NAMA Holdings LLC v. Related WMC LLC, et al., C.A. No. 7934-VCL (November 17, 2014) (Laster, V.C.)

By Joshua Haft and Scott Waxman

In NAMA Holdings, LLC v. Related WMC LLC, The Related Companies, L.P., and WMC Venture, LLC, the plaintiff, NAMA Holdings, LLC (“NAMA”) filed claims against Related WMC LLC (“Related Sub”) for breach of the implied covenant of good faith and fair dealing and against The Related Companies, L.P. (“Related Parent”) and World Market Center Venture, LLC (“WMCV”) for tortious interference with contract. The case originated from a suit filed by Related Sub and WMCV seeking a declaration that they complied with certain of their contractual obligations under the WMCV operating agreement, in which the Delaware Chancery Court granted partial summary judgment in favor of Related Sub and WMCV. In this Memorandum Opinion, the Delaware Chancery Court issued its post-trial decision after a trial on NAMA’s claims for breach of the implied covenant of good faith and fair dealing by Related Sub and tortious interference with contract by Related Parent and WMCV.

The plaintiff’s claims arose out of the development of a retail shopping mall in Las Vegas, Nevada called the World Market Center (the “Center”). In order to develop the Center, Alliance Network, LLC (“Alliance Network”) was formed by Prime Associates Group, LLC, which was owned by Shawn Samson and Jack Kashani, Crescent Nevada Associates, LLC, owned by relatives of Kashani, and NAMA. NAMA contributed 70% of the capital for Alliance Network, but after a dispute over additional needed capital, the project was restructured such that WMCV was formed by Alliance Network and Related Parent, a New York City real estate firm. WMCV had two members, Network World Market Center, LLC, a wholly owned subsidiary of Alliance Network (“Network”), and Related Sub.

Section 12.18(g) of the WMCV operating agreement established a notice procedure and segregated-account mechanism for amounts that were in dispute by members of Alliance Network, under which Related Sub had certain duties with regard to holding and segregating the disputed amounts. Section 12.18(h) of the WMCV operating agreement included provisions stating that Related Sub would not be considered a fiduciary with regard to its duties under Section 12.18(g) and also contained certain purportedly exculpatory provisions for Related Sub’s conduct.

After Alliance Network made a capital call to its members for an additional development phase for the Center, NAMA disputed the capital call as an attempt by Samson and Kashani to force NAMA to sell its interest due to NAMA’s inability to fund 70% of the capital call. NAMA sent a notice pursuant to Section 12.18(g) of the WMCV operating agreement, which resulted in NAMA filing suit to seek specific performance by Related Sub of its obligations under Section 12.18(g). The Delaware Chancery Court approved an order under which Related Sub acknowledged that more than $11 million was deposited in a segregated account (the “Disputed Amounts”) and Related Sub could not release those Disputed Amounts until the dispute over the funds was resolved (the “Segregation Order”).

Subsequently, NAMA was awarded more than $13 million in damages by an arbitral panel, which would have allowed Related Sub to release the Disputed Amounts. However, instead, Related Parent established a quid pro quo with Samson and Kashani under which Related Parent caused Related Sub to release the Disputed Amounts to Samson, without notice to NAMA, in exchange for access to $11 million that was deposited into escrow by Network (the “Network Escrow”) as security for a lease agreement to which Network and Related Parent were parties and that was controlled by Samson and Kashani. Access to the Network Escrow funds enabled Related Parent to fund payments on the lease agreement for which Related Parent was obligated. Prior to this arrangement, Samson and Kashani had refused Related Parent access to the Network Escrow unless Related Parent gave them a personal loan, for which Samson and Kashani could not post collateral, in part because after the arbitral decision in favor of NAMA, Samson and Kashani were not entitled to any of the Disputed Amounts. NAMA objected to the release of the Disputed Amounts by Related Sub, which led to the aforementioned suit by Related Sub and WMCV. After NAMA filed suit, the claims were consolidated with NAMA as plaintiff.

With regard to NAMA’s claim for breach of the implied covenant of good faith and fair dealing by Related Sub, the court explained that there are three elements to such a claim: (i) an implied contractual obligation; (ii) a breach of that obligation; and (iii) damages incurred by the plaintiff. The court also explained that the doctrine of the implied covenant of good faith and fair dealing applies only where there is a contractual gap and the court should only imply terms that the parties would have agreed to during the original negotiations had the parties thought to discuss those matters. The court held that NAMA proved at trial that Related Sub breached the implied covenant by holding the Disputed Amounts after the arbitral decision and for the quid pro quo with Samson under which Related Parent received access to the Network Escrow. The court explained that Related Sub had an implied obligation under Section 12.18 of the WMCV operating agreement to act as a neutral custodian of the Disputed Amounts. In addition, since Related Sub was an agent for the Disputed Amounts, it is not clear that the fiduciary disclaimer in Section 12.18(h) would have been effective since Related Sub was in a limited agency relationship with the Alliance Network members nor were the exculpatory provisions of Section 12.18(h) applicable.

With regard to NAMA’s claim that Related Parent and WMCV tortiously interfered with the implied covenant of good faith and fair dealing in Section 12.18 and the Segregation Order, the court explained that the elements of a tortious interference with contract claim are: “(1) a contract, (2) about which defendant knew and (3) an intentional act that is a significant factor in causing the breach of such contract (4) without justification (5) which causes injury.” The court then explained that all of the elements were met, including that Related Parent knew of the contractual obligation based on the knowledge of an individual who was an officer of both Related Parent and Related Sub and that Related Parent acted intentionally and without justification to interfere with the Segregation Order by causing Related Sub to take action as part of the quid pro quo with Samson. However, the court dismissed NAMA’s claim against WMCV for tortious interference because it was a party to the Segregation Order and thus, could not be liable for tortious interference.

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