In Terramar Retail Centers, LLC v. Marion #2-Seaport Trust U/A/D/ June 21, 2002, Civil Action No. 12875-VCL (Del. Ch. May 22, 2019), Terramar Retail Centers, LLC (“Terramar”), the manager and 50% member of Seaport Village Operating Company, LLC, a Delaware limited liability company (the “Company”), filed an action, seeking a declaration that it may dissolve the Company and sell its assets, and that Terramar appropriately determined the allocation of the sale proceeds. The Delaware Court of Chancery held that Terramar appropriately exercised its dissolution right under the Company’s operating agreement, because the fair market value and purchase price proposed by Terramar reflected its honest opinion and Terramar did not negotiate in bad faith. The Court further held that Terramar’s waterfall determination was correct because a settlement release and the statute of limitations barred the counterclaims raised, and Terramar did not breach its contractual obligations or fiduciary duties. The Court ruled in favor of Terramar on all claims, supporting Terramar’s ability to dissolve the Company, sell its assets, and distribute the proceeds in accordance with Terramar’s allocation of the sale proceeds.
This dispute concerns Seaport Village, a shopping center in San Diego, California (the “Development”). Seaport Village was developed by San Diego Sea Port Village, Ltd. (“Limited”). After defaulting on its initial loan, Limited engaged Cohen, a real estate professional, to refinance such loan in exchange for the right to receive 50% of Limited’s cash flow. A number of years later, the Development needed additional capital. Terramar, a real estate development company, agreed to provide $7 million in financing. At that time, Cohen, Limited, and Terramar formed Seaport Village Operating Company, LLC, a manager-managed limited liability company. Terramar served as the Company’s manager. Terramar received 50% of the Company’s limited liability company interests and Cohen and Limited each received 25%. Cohen created the Marion #2-Seaport Trust (the “Trust”) to hold his interest.
To govern the internal business affairs of the Company, the Trust, Limited, and Terramar entered into an operating agreement (the “LLC Agreement”). The LLC Agreement allowed Terramar, as manager, to make capital calls in the event that the Company was unable to secure third-party financing. The LLC Agreement also provided Terramar with the right to request that the other members purchase its interest at fair market value at any time after a specific date (the “Put Right”). If the other members did not purchase Terramar’s interest within six months after exercise of the Put Right, Terramar could dissolve the Company. In a dissolution, Terramar could sell “all of the property and assets of the Company… on such terms and conditions as shall be determined by [Terramar] in its sole and absolute discretion.”
From 2010 to 2015, the Company’s repeated efforts to secure favorable third-party financing for the Development were unsuccessful. To meet the Company’s financing needs, Terramar loaned the Company $20.1 million and $16.3 million in 2010 and 2015, respectively. By 2015, Terramar determined that the Company was no longer an attractive investment and exercised the Put Right. Using multiple third-party appraisers, Terramar determined that the fair market value of the Company was approximately $42.9 million (the “Fair Market Value”). Based on this valuation Terramar determined a purchase price for the Company of approximately $55.4 million (the “Purchase Price”) and a waterfall of approximately $47.8 million (the “Waterfall”). Both the Trust and Limited disputed these figures. After Limited and the Trust failed to purchase Terramar’s limited liability company interest, Terramar exercised its dissolution right and filed this action in the Court of Chancery, seeking a declaration that Terramar had the right to dissolve the Company and sell its assets.
In responding to Terramar’s suit, the Trust argued that (1) Terramar breached the LLC Agreement by improperly initiating the dissolution procedure; (2) the Waterfall should be adjusted because Terramar breached its contractual obligations and fiduciary duties; and (3) the Purchase Price was incorrect because Terramar committed misconduct with respect to its operation of the Company and was therefore liable under the doctrines of unclean hands, equitable estoppel, and the implied covenant of good faith and fair dealing.
First, in arguing that Terramar breached the LLC Agreement by improperly initiating the dissolution procedure by failing to disclose all information within its control and misrepresenting the fair market value of the Company and the Purchase Price, the Trust claimed that Terramar withheld financial information necessary for the Trust to decide whether to buy Terramar’s limited liability company interest. The Court reviewed the dissolution procedure in the LLC Agreement and the evidence supporting the Fair Market Value. The Court held that Terramar did not expressly breach the dissolution clause because Terramar credibly demonstrated that $42.9 million was Terramar’s actual opinion as to the fair market value of the Company by providing corroborative third-party appraisals and a third-party bid. The Court further determined that, although Terramar did not share the underlying computations of the Fair Market Value, the Trust failed to show that Terramar intentionally overstated the fair market value of the Company. Accordingly, the Court rejected the Trust’s claim that Terramar breached its fiduciary duty to fully disclose all information within its own control when seeking action from the other members. Based on this finding, the Court also rejected the Trust’s similar claims with respect to the Purchase Price.
In connection with the Trust’s claim that Terramar breached the LLC Agreement by improperly initiating the dissolution procedure, the Trust argued Terramar had wrongfully insisted that Limited and the Trust jointly purchase Terramar’s limited liability company interest, refused to cooperate with the Trust in obtaining capital from a third party, and that Terramar negotiated in bad faith. The Court held that Terramar properly required a joint offer by the Trust and Limited to purchase Terramar’s limited liability company interest because the plain language of the LLC Agreement required this result. The Court next determined that the failure of the parties to negotiate was the result of the Trust’s lack of cooperation rather than Terramar’s breach of its obligation to negotiate in good faith. Finally, the Court held that Terramar did not negotiate the Fair Market Value and Waterfall in bad faith because (i) the Trust refused to sign a non-disclosure agreement with respect to the information underlying the Fair Market Value calculation; and (ii) the Trust had access to information that would enable it to confirm the Waterfall computation.
Second, though the Trust did not dispute the Waterfall calculation itself, the Trust argued that the Waterfall should be adjusted because Terramar breached contractual obligations and fiduciary duties prior to 2015. The Court rejected such claims and held that they were time-barred by the statute of limitations and subject to a prior settlement among the parties. The Court rejected the Trust’s arguments that (i) the prior settlement only released the ability to assert the claims offensively, rather than as affirmative defenses; and (ii) that the Trust’s time-barred claims were not subject to the statute of limitations when raised as affirmative defenses. The Court also rejected the Trust’s allegations of unclean hands and equitable estoppel for the foregoing reasons.
Third, for the claims relating to the Purchase Price, the Court rejected the Trust’s arguments that Terramar acted improperly by (i) abandoning its efforts to extend a lease; (ii) sabotaging negotiations with lenders; and (iii) collecting unauthorized fees from the Company. The Court found that the Port of San Diego’s long-term goals for the Seaport Village waterfront resulted in the Port’s rejection of the Company’s requested lease extension, and not a lack of effort by Terramar. The Court also found that this rejection was the primary reason the Company failed to obtain third-party financing. Because the Trust’s assertions were “conclusory speculations,” the Court also rejected claims that Terramar collected excessive compensation from the Company for management services. Finally, the Court declined to provide the Trust relief under the implied contractual covenant of good faith and fair dealing because it found that the express language of the LLC Agreement would allow Terramar to invoke the dissolution and Put Right without violating good faith and fair dealing.
For the foregoing reasons, the Court held that Terramar had the right to dissolve the Company and sell its assets pursuant to the LLC Agreement.