CHANCERY COURT GRANTS MOTION FOR PRELIMINARY INJUNCTION REGARDING ENFORCEMENT OF FORUM SELECTION CLAUSE

By: Scott Waxman and Greyson Blue

In Village Green Holding, LLC, et al. v. Jonathan Holtzman, et al., Vice Chancellor Tamika Montgomery-Reeves granted plaintiff Village Green Holding, LLC’s (“Village Green”) motion for preliminary injunction regarding the enforcement of a forum selection clause and defendant Jonathan Holtzman’s (“Holtzman”) attempt to litigate a dispute in a separate forum. In rendering its decision, the Court illustrated the circumstances under which it will enjoin litigation that is pending in an alternate forum pursuant to a contract’s forum selection clause.

Plaintiffs and Defendants are in the midst of breaking up a complex web of businesses. Engaged primarily in the development and management of multifamily housing, the parties created a series of holding companies and subsidiaries with varying management roles and ownership interests. After business relations between the parties deteriorated, they entered into a redemption agreement to effectuate a separation. Central to this dispute are the parties’ respective rights under the redemption agreement and their rights under a separate operating agreement that controls each party’s obligations with respect to a subsidiary holding company.

Driving the present dispute is both parties’ desire to own a certain property. Via a chain of holding companies, the parties possess interests in a large apartment building in Pittsburgh, Pennsylvania (the “Property”). Under the terms of the redemption agreement, Holtzman (through his associated companies) secured the right to purchase Village Green’s (and its associated companies’) interests in the holding companies that directly and indirectly own the Property (the “Property Holding Companies”), subject to certain conditions. The redemption agreement also provided that if Holtzman failed to exercise his rights within a specified time frame, Village Green (and its associated companies) would become entitled to purchase Holtzman’s (and his associated companies’) interests in the Property Holding Companies. The operating agreement for one of the holding companies also includes provisions establishing Holtzman’s (through his associated companies’) rights to purchase Village Green’s (and its associated companies’) interests in the Property Holding Companies, again subject to certain conditions. Both the redemption agreement and the operating agreement include forum selection clauses; the agreements require that all actions arising out of or related to the agreements be litigated exclusively in the United States District Court for the District of Delaware or either any Delaware State Court (for the redemption agreement) or the Delaware Court of Chancery (for the operating agreement).

Following disagreement over the conditions required for Holtzman to exercise his purchase option under the operating agreement, Holtzman filed suit to compel Village Green to close on the deal. Denying Holtzman’s request, the Court of Chancery instead issued an order that (i) prevented either party from transferring its rights without the consent of the other party; (ii) prevented either parties’ rights under the operating agreement from expiring during the pendency of the case; and (iii) required Holtzman to post a bond pursuant to the Rules of the Court of Chancery. As a result of the dispute, a third-party with a minority interest in the holding company that directly owns 100 percent of the Property filed an action in Pennsylvania seeking dissolution of the holding company. The Pennsylvania court subsequently ordered a sale of the property.

Pursuant to the sales procedures of the Pennsylvania court, both parties were entitled to bid on the Property. When both parties did in fact bid on the Property, Holtzman filed a motion with the Pennsylvania court seeking to modify the sale order and announced his intent to bring a new action in Pennsylvania on the basis that the operating agreement gave him a priority purchase right. In response, Village Green brought this suit in the Delaware Court of Chancery seeking to enjoin Holtzman from further pursuing the sale order motion and filing any new action in Pennsylvania. Village Green also sought an order directing Holtzman to withdraw the sale order motion.

Vice Chancellor Montgomery-Reeves granted Village Green’s motion for preliminary injunction. In approving Village Green’s request, the Court recognized that the forum selection clauses at issue fell within the Court’s jurisdiction because the focus of the dispute was on the rights of the parties under the operating agreement and the redemption agreement. Though the holding company that directly owns the Property also has a forum selection clause in its operating agreement that specifies Pennsylvania as the proper forum for disputes, the Court held that the redemption agreement and the operating agreement at issue concern parent companies. More aptly, the parties’ rights were construed as concerning the parent companies as opposed to the Property or the holding company that directly owns the Property itself. The Court noted that the parties’ separate entities possess separate property interests and that the rights afforded to each individual entity have no impact on the rights of the other entities. Deciding that requiring Village Green to litigate its rights outside of the contracted forum would constitute irreparable harm and that the balance of equities tilted in favor of Village Green, the Court enjoined the Pennsylvania action and prevented Holtzman from bringing the additional claim.

Village Green Holding, LLC, et al. v. Jonathan Holtzman, et al., C.A. No. 2018-0631-TMR (Del. Ch. Oct. 5, 2018)

Leave a Reply

Copyright © 2017, K&L Gates LLP. All Rights Reserved.