Bay Center Apartment Owner, Llc. v. Emery Bay Pki, LLC

2009 WL 1124451 (Del. Ch. 2009)

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Nature of the Case

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Facts

Bay Center (P) and PKI formed Emery Bay Member, LLC (D) and designated PKI as the managing member. D's LLC Agreement” gave PKI considerable power and authority to manage the affairs of D. PKI made an initial capital contribution of $3,215,200, and P contributed $1,000,000. P through a separate purchase agreement referenced in the LLC Agreement, sold the property to Emery Bay North, LLC an LLC solely owned by D. In exchange for the Property, P executed an unsecured installment note for the principal amount of $28 million, in favor of P. Under the terms of the Note, D was required to pay on a monthly basis, all “Available Cash” or “Net Capital Transaction Proceeds.” PKI was required by the LLC Agreement to cause EB North to obtain the A&D Loan. PKI applied for and obtained the A&D Loan for $110 million from Fremont Investment & Loan (“Fremont”) on behalf of EB North. If D needed any future capital contributions, as determined in the reasonable discretion of P or PKI, then PKI was to make an additional contribution. If PKI failed to make the additional contribution, P could advance the funds and then elect to either adjust the percentage interests of each member accordingly or receive a 25% return on the advanced funds. The D agreement referred to a separate Development Management Agreement. PKI was required under the D Agreement to cause EB North to enter into the Development Management Agreement with the Development Manager, which was defined as “PKI or an Affiliate of PKI, in its capacity as development manager of the Real Property pursuant to the Development Management agreement, or such other Person engaged to provide such services as may be specified in the Development Management Agreement or as selected by the Managing Member.” The entity with primary responsibility for the success of the Project, the Development Manager, was an entity that was not a contractual partner of P. PKI selected a Nevis-controlled entity, ETI, rather than PKI itself, to be the Development Manager. Accordingly, EB North and ETI executed the Development Management Agreement, with Nevis signing on behalf of both companies. Bay Center, Emery Bay, and PKI were not parties to the Development Management Agreement. The project immediately encountered problems stemming from mismanagement and poor financial performance. D defaulted on a construction loan it had obtained from a third-party bank. Nevis, the owner of PKI, personally guaranteed the loan. P alleges that Ds secretly renegotiated the Loan on several occasions, resulting in the diversion of cash flow from the Project that was earmarked to repay an unsecured note from D held by P. By renegotiating the Loan in this way, Nevis avoided triggering his Personal Guarantee, and PKI avoided capital calls. PKI is the only defendant who was a party to the Agreement. P, therefore, seeks to expand its remedial options by bringing claims for breach of the contractually implied covenant of good faith and fair dealing, breach of fiduciary duty, common law fraud, and aiding and abetting. Ds move to dismiss all of P’s claims except those based on breach of contract.