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Kurlander v. Kaplan

United States District Court, M.D. Florida, Tampa Division

August 21, 2019

PHILIP KURLANDER, M.D. and BAKER HILL HOLDING, a New York limited liability company, Plaintiffs,
v.
ROBERT R KAPLAN, ROBERT R. KAPLAN, JR., LEO KIELY, SCOTT MUSIL, BILL FIELDS, and HC GOVERNMENT REALTY TRUST, INC., a Maryland Corporation, Defendants.

          ORDER

          WILLIAM F. JUNG UNITED STATES DISTRICT JUDGE

         This matter comes to the Court on Defendants' Motions to Dismiss Plaintiff's Complaint from Robert R. Kaplan and Robert R. Kaplan, Jr. (collectively “the Kaplans”), Leo Kiely, Scott Musil, and Bill Fields (collectively, the “Independent Directors”), and HC Government Realty Trust, Inc. (“HC REIT”). Dkts. 31, 32, 33. Plaintiff has filed oppositions in response, Dkts. 42, 43, 44, to which Defendants have replied, Dkts. 48, 49, 50. The Court took extensive argument from counsel at a hearing on these matters on August 7, 2019. The Court abstains on Count I under the Burford doctrine, and grants the motions to dismiss on Counts II and III without prejudice.

         BACKGROUND

         For purposes of this order, the Court accepts as true the facts alleged in the Complaint. Dkt. 1. In 2010, Edwin Stanton formed a company, later called Holmwood Capital, LLC, (“Holmwood Capital”) to invest in real estate. Id. ¶¶ 19. Thereafter, Stanton reached out to his attorney and friend, Mr. Kaplan Jr., to discuss the company. Id. ¶ 20. It was agreed that Mr. Kaplan Jr. and his father, Mr. Kaplan, both members of the law firm Kaplan Voekler Cunningham & Frank, PLC (“Law Firm”) would invest nominal funds and legal services for the venture. Id. ¶¶ 20-22.

         To seek additional funding for the company, Kaplan introduced Holmwood Capital to Dr. Kurlander, a surgeon and citizen of New York. Dkt. 1 ¶ 1, 22. Dr. Kurlander also owns and controls Plaintiff Baker-Hill, a New York limited liability company. Id. ¶ 2. On May 25, 2012, Plaintiffs provided mezzanine financing as a lender and, at the end of 2012, became equity investors in Holmwood Capital with 63% ownership. Id. ¶¶ 22-23.

         Over the next several years, Holmwood Capital acquired seven commercial properties. Id. ¶ 28. Meanwhile, the Kaplans, Mr. Stanton (through his company, Stanton Holdings), and Plaintiffs formed an independent management company called Holmwood Capital Advisors, LLC (“HC Advisors”), with each owning 25%. Id. ¶ 29. The Kaplans continued to perform related legal work, including the preparation of organizational documents for Holmwood Capital and HC Advisors. Id. ¶¶ 27, 30.

         The Kaplans “insisted” that to obtain additional financing a new entity should be formed to take advantage of “Regulation A, ” which allows for small business entities to raise capital without the restrictions of publicly listed companies. Id. ¶ 31. Dr. Kurlander, Mr. Stanton, and the Kaplans and Law Firm thus formed HC Holdings and HC REIT, which was initially held about equally by each of the Kaplans, Mr. Stanton, and Dr. Kurlander. Id. ¶ 32. HC REIT was the general partner of the operating partnership, HC Holdings, with Holmwood Portfolio Holdings, LLC and Holmwood Capital, LLC as limited partners. Id. ¶ 33. HC REIT is a Maryland corporation.

         Though Mr. Stanton and Plaintiffs had expressed concerns about losing control, they ultimately agreed with the Kaplans for HC REIT to have a board of directors with four independent directors and Mr. Kaplan, Dr. Kurlander, and Mr. Stanton. Id. ¶¶ 34-35. The Kaplans represented the independent directors would respect the preexisting management agreement between HC REIT and HC Advisors. Id. ¶ 35. Mr. Stanton also served HC REIT as the chief executive officer, Mr. Kaplan, Jr. as the president, Mr. Kaplan as the secretary, and Dr. Kurlander as the treasurer. Id.

         HC Advisors continued to search for funding and, through BB&T Capital Markets, the Kaplans were introduced to the Hale Partnership. Id. ¶ 39. The Kaplans negotiated with the Hale Partnership, which culminated in the Hale Package. Id. ¶ 39. Instead of bringing the proposal to HC Advisors, the Kaplans presented the Hale Package to the HC REIT Board in August 2018. Id. ¶ 40. Plaintiffs submitted an alternative capital proposal, the “Baker Hill Package.” Id. ¶ 41. With one director having resigned, a deadlock between the packages was reached. Id. ¶ 12.

         To proceed with his investment, the Hale Partnership agreed to redeem the equity interests of the Plaintiffs and Mr. Stanton, which in January 2019 was agreed upon subject to an independent investment bank's fairness opinion of the proposed redemption price. Id. ¶ 44. The fairness opinion resulted in a lower repurchase price, and Plaintiffs and Mr. Stanton declined to proceed with the deal. Id. ¶¶ 46-47.

         On March 5, 2019, Elizabeth Watson, the former CFO of HC REIT, sent to Mr. Kaplan, Jr. a memorandum that she had prepared. Id. ¶ 50. That memorandum explained the unfavorable terms of the Hale Package. Id. Though Mr. Kaplan, Jr. did not forward the memorandum to the Board, on March 11, 2019 Defendant Musil did. Id. ¶ 50. The next day at 10:43 a.m., Mr. Kaplan provided notice of a board meeting set for 11:15 a.m. the following day. Id. ¶ 51. This was about thirty-two minutes more than the minimum required by the organizational documents. Id. Also on March 12, 2019, Mr. Kaplan disseminated a 121-page agenda of the meeting which included terms and conditions that constituted the Hale Package. Id. ¶ 52-53.

         All directors, except Dr. Kurlander who is a medical doctor and was performing surgery, attended the March 13 meeting. Id. ¶ 55. Mr. Stanton requested a continuance, which was denied. Id. ¶ 56. The HC REIT Board then approved, by a four to one margin, the items for consideration, which “paved the way for the Hale Package and all that goes with it, ” with Mr. Stanton being the only dissenter. Id. ¶ 57. This meant mezzanine financing at an interest rate of 14%, additional money invested in 10% Series B Cumulative Convertible Preferred Stock, money invested as common stock, and the potential for additional investments. Dkt. 1-3. The Series B Preferred Stock was made on parity with the Series A preferred stock with respect to dividends and other distribution rights. Dkt. 1-4 at 2. Mr. Stanton and Dr. Kurlander were removed as officers of HC REIT. Dkt. 1-5 at 28; Dkt. 1-7 at 2-3; Dkt. 1 ¶ 53(e) & (f). On March 14, 2019, Mr. Kaplan, Jr. notified Mr. Stanton that the management contract between HC REIT and HC Advisors would not be renewed, “which such nonrenewal shall take effect on March 31, 2020.” Dkt. 1-7 at 2.

         Plaintiffs bring three counts against Defendants. In Count I, Plaintiffs petition for dissolution of the HC REIT under § 3-414 of the Maryland Code. Count II is for breach of fiduciary duty against the Independent Directors and the Kaplans (collectively the “Board Defendants”). Count III seeks declaratory judgment.

         LEGAL STANDARD

         To survive a Rule 12(b)(6) motion to dismiss, a plaintiff must plead sufficient facts to state a claim that is “plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation omitted). When considering a Rule 12(b)(6) motion, the court accepts all factual allegations of the complaint as true and construes them in the light most favorable to the plaintiff. Pielage v. McConnell, 516 F.3d 1282, 1284 (11th Cir. 2008) (citation omitted). Courts should limit their “consideration to the well-pleaded factual allegations, documents central to or referenced in the complaint, and matters judicially noticed.” La Grasta v. First Union Sec., Inc., 358 F.3d 840, 845 (11th Cir. 2004) (citations omitted).

         DISCUSSION

         I. Choice-of-Law

         A federal court sitting in diversity must apply the choice-of-law rules of the state in which it sits. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487 (1941). Under Florida's choice-of-law principles, the law of the state of incorporation governs the liabilities of the officers or directors of a corporation. International Ins. Co. v. Johns, 874 F.2d 1447 (11th Cir. ...


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