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Kurlander v. Kaplan

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

December 12, 2019

PHILIP KURLANDER, M.D., an individual BAKER HILL HOLDING, LLC, a New York limited liability company, EDWIN M. STANTON, an individual, and STANTON HOLDINGS, LLC, a Delaware limited liability company, Plaintiffs,
v.
ROBERT R. KAPLAN, an individual, ROBERT R. KAPLAN, JR., an individual, and KAPLAN VOEKLER CUNNINGHAM & FRANK PLC, a Virginia professional limited liability, Defendants.

          ORDER

          WILLIAM F. JUNG UNITED STATES DISTRICT JUDGE

         Plaintiffs Philip Kurlander (“Kurlander”), Baker Hill Holdings, LLC (“Baker Hill”), Edwin M. Stanton (“Stanton”), and Stanton Holdings, LLC (“Stanton Holdings”), sue Defendants, Robert R. Kaplan (“Kaplan”), Robert R. Kaplan, Jr. (“Kaplan Jr.”), and the law firm of Kaplan, Voekler, Cunningham & Frank, PLC (the “Kaplan firm”) for legal malpractice, breach of fiduciary duty, fraud, fraud in the inducement, civil conspiracy to defraud, negligent misrepresentation, fraudulent omission, and constructive fraud. (Dkt. 43). Before the Court are Defendants' motions to dismiss (Dkts. 44, 45) the Amended Complaint, Plaintiffs' responses in opposition (Dkts. 48, 49), and Defendants' replies (Dkts. 50, 51). For the reasons that follow, Defendants' motions (Dkts. 44, 45) are granted in part and denied in part.

         BACKGROUND

         For purposes of this motion, the Court accepts the factual allegations in the Amended Complaint as true. Plaintiff Kurlander and his spouse are citizens of New York and are the sole two members of Baker Hill, a limited liability company with its principal place of business in the State of New York. (Dkt. 43 ¶¶ 1-2). Plaintiff Stanton is a Florida citizen and the sole member of Stanton Holdings, a Delaware limited liability company with its principal place of business in Florida.[1] Id. ¶¶ 3-4. Defendants Kaplan and Kaplan Jr. (collectively “the Kaplans”) are father and son who are lawyers and citizens of Virginia. Id. ¶¶ 5-6. The Kaplan firm is a limited liability law firm with its principal place of business and citizenship in Virginia. Id. ¶ 6. The Kaplans have ownership interests in business entities in Florida and have listed their personal addresses as being in the State of Florida in documents associated with these corporate holdings. Id. ¶ 5. The Kaplans are principals in the Kaplan Firm. Id. ¶ 6. The various professionals of the Kaplan firm have placed telephone calls to Florida, sent emails that arrived in Florida, mailed documents to Florida, sent and received wires from Florida, and immersed themselves in business entities in Florida. Id.

         Stanton and Kurlander are intelligent and accomplished individuals. Id. ¶ 13. Kurlander is an anesthesiologist whose medical practical consumes most of his time, but he is also a sophisticated investor. Id. Stanton has a Master's in Business Administration and previously worked with a large private real estate investment company where he developed skills, contacts, and significant relationships related to commercial real estate transactions. Id. ¶ 14. Neither Stanton nor Kurlander have any legal training. Id. ¶ 13. After being a part of a larger organization, Stanton branched off with co-workers and cofounded SRS Investments (“SRS”), a private equity real estate investment firm based in Sarasota, Florida. Id. ¶ 15. During the early stages of SRS's existence, Stanton met Kaplan Jr. and his then law partner Chris Hoctor, who were partners in a predecessor firm to the Kaplan Firm. Id. ¶ 16. Stanton and Kaplan Jr. became social friends. Id.

         Under Stanton's leadership and business acumen, SRS was successful in completing numerous real estate acquisitions and developed an emerging reputation in the industry. Id. ¶ 17. Although Stanton initially rejected Kaplan Jr.'s advances to provide legal work for SRS, eventually Stanton acquiesced and he moved SRS's real estate and securities work to Kaplan Jr. and the Hoctor Kaplan (HK) law firm. Id. Kaplan engaged in an attorneys' fee arrangement that was undocumented, unwritten, and unsigned. Id. Stanton trusted Kaplan Jr., and nothing about an undocumented representation relationship appeared to Stanton to be inappropriate. Id. ¶ 18. At no time did Kaplan Jr. ever disclose the existence or possibility of a conflict in the representation. Id. From 2006 until the filing of the Complaint, Kaplan Jr. and his firm acted as the exclusive real estate, corporate, and securities attorneys for Stanton and his various Florida-based entities. Id. ¶ 19. For a four-year period during this time frame, Stanton lived in Chicago, and Kaplan Jr. served as his counsel for all personal and business matters. Id. at 6 n.5.

         During this time, Stanton considered the Kaplans and their respective firm to be his “go to” attorneys. Id. ¶ 20. Because the Kaplans' billing practices were extremely aggressive compared to Stanton's prior California law firm, the Kaplans offered to resolve the fee sensitivity issue by proposing “split profit deals” in which Kaplans would provide legal services in exchange for a share of the profits. Id. ¶ 20. To accomplish this arrangement, EMS-CHI was formed as a special purpose equity (“SPE”) to acquire an asset as part of this undocumented venture between Stanton and the Kaplans. Id. Stanton and the Kaplans verbally agreed that Stanton would source acquisitions and acquire financing and the Kaplans would provide all legal services in exchange for an equal share of the profits when the properties were sold. Id. Plaintiffs allege this agreement was not documented in writing. Id.

         At the end of 2009, Kaplan Jr. began involving his father in his representation of Stanton and his entities. Id. ¶ 21. The elder Kaplan holds himself out as an experienced securities lawyer. Id. In 2012, Stanton needed both capital and legal representation. Id. ¶ 22. To assist with the financing, the Kaplans involved their client Kurlander who had ample access to capital. Id. The Kaplans continued to offer their legal representation in exchange for a share of the profits. Id. A second property was acquired with traditional financing and a loan provided by Kurlander. Id. The Kaplans represented all parties in the transaction. Id. Kurlander converted his loan into equity and committed additional equity to the growth of the portfolio. Id. The EMS-CHI entity changed to Holmwood Capital. Id.

         Holmwood Capital was a Delaware company with its principal place of business in Sarasota, Florida. Id. ¶ 23. Kaplan drafted an operating agreement that attempted to formalize the relative equity positions of Stanton, Kurlander, and the Kaplans. Id. Kaplan provided all of the legal advice and drafting, never advising Plaintiffs to seek independent counsel. Id. At this point in time, Stanton had a trusted attorney-client relationship with Kaplan Jr. for nearly five years. Id.

         A third SPE was formed to acquire a third property, with the Plaintiffs being represented by the Defendants. Id. ¶ 24. The representation was undocumented, and again, according to Plaintiffs, the Kaplans did not disclose any potential conflict of interest. Id. As time passed, Plaintiffs and Defendants became involved in a business that involved a conglomerate of business entities, all operating as a single common venture (“the Venture”). Id. ¶ 25. The real estate acquisitions Stanton sourced were all commercial real estate properties subject to long-term leases with federal government tenants. Id.

         In 2014 Defendants convinced Plaintiffs to transform the structure of Holmwood Capital to that of a real estate investment trust (REIT). Id. ¶ 26. Defendants also advised Plaintiffs that the management of the REIT should be handled by a separate entity. Id. ¶ 27. Plaintiffs acquiesced and Holmwood Capital Advisors LLC (“HCA”) was formed in July 2014, with Stanton, Kurlander, Kaplan, and Kaplan Jr. (collectively “the Partners”) each having a 25% share Id. All corporate documents were drafted by the Kaplans. Id. By the end of 2015, Holmwood Capital had a seven-property portfolio. Id. ¶ 28.

         Throughout this time, Defendants held themselves out as securities experts, having played a significant role in the enactment of certain legislation involving Regulation “A”. Id. ¶ 29. The Kaplans recommended that a new entity be formed for purposes of taking advantage of Regulation “A” to raise capital. Id. As explained by the Kaplans, qualification of an offering under Tier II of Regulation “A” enables small business entities to raise capital without the full burden of being a publicly listed company. Id. To that end, two new entities were formed-HC Government Realty Trust, Inc. (“HC REIT”) and HC Government Realty Holdings, L.P. (“HC Holdings”). Id. ¶ 30. HC REIT and Holmwood Capital owned and controlled HC Holdings. Id. As structured by the Kaplans, HC REIT was the general partner of the operating partnership, HC Holdings, with its limited partners Holmwood Portfolio Holdings LLC (“Holmwood Portfolio”) and Holmwood Capital. Id. ¶ 31. Kurlander agreed to the formation of HC Holdings and HC REIT with the understanding that his fifty percent interest would provide him with significant voting control. Id. ¶ 32. However, Kurlander's equity interest stemming from his 80% control of Holmwood Capital was non-voting and converted to “OP Units, ” the effect of which was he lost control because of the conversion that the Kaplans counseled him to agree to. Id.

         The Kaplans also advised Kurlander and Stanton that a board of directors was necessary, including a majority of the board being independent. Id. ¶ 33. Stanton and Kurlander hesitantly agreed, with Kurlander, Kaplan and Stanton serving as directors of HC REIT along with four independent directors. Id. ¶ 34. Independent directors were primarily sourced by the Kaplans. Id. As leadership of HC REIT, Stanton was elected chief executive officer, Kaplan Jr. appointed himself president, Kaplan was secretary, and Kurlander was treasurer. Id.

         On November 7, 2016, the Securities and Exchange Commission (“SEC”) approved the qualification of the HC REIT's Reg “A” securities offering. Id. ¶ 35. HC REIT thereafter began marketing the sale of its common stock securities. Id. ¶ 36. All legal advice provided by the Kaplans to the Plaintiffs was oral, and Plaintiffs allege that at no point did the Defendants ever provide an invoice, engagement letter, or other document memorializing the representation relationship. Id. ¶ 38. Defendants received more than $500, 000 in attorneys' fees associated with their legal counseling in the creation of Holmwood Capital, HC REIT, and HC Holdings. Id. ¶ 37.

         When HC REIT was first formed, Kaplan Jr. represented he had the experience, background, and contacts to head up the equity-raising component. Id. ¶ 40. Given Kaplan Jr.'s shortfalls in this area, the Plaintiffs agreed it was necessary for HC REIT to hire an independent third-party consultant to locate and negotiate broker-dealer relationships that were needed to grow the Venture. Id. ¶ 41. Within twelve months, the Kaplans began counseling the Plaintiffs that Reg “A” was a “dead end” and an institutional investor was the way to go. Id. ¶¶ 41-42. Plaintiffs expressed interest in investing additional capital into HCA in exchange for additional equity, but they learned that the organizational documents included an anti-dilution policy that precluded dilution of the Kaplans' interests. Id. ¶ 42.

         The Kaplans sought an institutional investor and ultimately negotiated a deal with a set of investors led by Steve Hale. Id. ¶ 43. The Kaplans put down a “good faith” deposit with their own personal funds for a deal with the Hale Partnership in order to acquire the “Hale Package” and the Hale Partnership's interest in assuming control over the Venture, which Plaintiffs opposed. Id. The Kaplans called a meeting of the HC REIT Board to discuss the Hale Package. Kurlander had submitted, through Stanton, an alternative capital proposal referred to as the “Baker Hill Package.” Id. ¶ 45. The HC REIT Board was deadlocked regarding the Hale Package versus the Baker Hill Package. Id. ¶ 48. Given the deadlock, Kurlander and Stanton entered into separate negotiations with Hale, ultimately agreeing to the “Agreed Hale Package.” Id. ¶ 49.

         An investment bank was engaged to render the fairness opinion and purportedly an initial fairness opinion resulted in a share price significantly below the agreed repurchase share price of $9.10. Id. ¶ 51. Stanton and Kurlander rejected the proposed reduced share price. Id. ¶ 53. A lengthy memorandum prepared by Elizabeth Watson, the former CFO of HC REIT (the “Watson Memorandum”) explains in detail why the Hale Package is not favorable for HC REIT or for common stockholders and was forwarded to the HC REIT ...


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