United States District Court, M.D. Florida, Tampa Division
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,
ROBERT R. KAPLAN, an individual, ROBERT R. KAPLAN, JR., an individual, and KAPLAN VOEKLER CUNNINGHAM & FRANK PLC, a Virginia professional limited liability, Defendants.
WILLIAM F. JUNG UNITED STATES DISTRICT JUDGE
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.
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. 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 ...