Opinion ID: 2805193
Heading Depth: 3
Heading Rank: 1

Heading: The LLC Agreement

Text: In 1989, Bruce Roch, Jr., founded the predecessor to Safeguard, LLC, a self-storage company headquartered in New Orleans. Soon after the company’s founding, Jack Chaney joined Roch and helped build the company. Roch and Chaney formed and became members in various Delaware LLCs— Plaintiffs-Appellants BCR Safeguard Holding, LLC (“BCR”), JAC Safeguard Holding, LLC (“JAC”), and Safeguard Development Group II, LLC 2 Case: 14-31068 Document: 00513064630 Page: 3 Date Filed: 06/02/2015 No. 14-31068 (“Mountainside”) (collectively, the “BCR Parties” or “Appellants”)—which collectively owned Safeguard. In May 2005, Defendant-Appellee Morgan Stanley Real Estate Advisor, Inc. (“Morgan Stanley”) entered into an agreement to invest in Safeguard through a holding company, Defendant-Appellee PPF Safeguard, LLC (“PPF”) (collectively, the “Morgan Stanley Appellees”). 1 Effective May 31, 2005, PPF and the BCR Parties entered into the Amended and Restated Limited Liability Company Agreement of Safeguard Storage Properties, LLC (the “LLC Agreement”). Pursuant to the LLC Agreement, PPF purchased an approximately 94% interest in Safeguard, with the BCR Parties maintaining an approximately 6% interest. Roch served as Safeguard’s CEO and Chaney served as Safeguard’s COO until mid-2009. Safeguard also had a four-person Management Committee, which under the LLC Agreement was required to include two members designated by BCR (Roch and Chaney) and two members designated by Morgan Stanley (John Kessler and Appellee Scott Brown). BCR was designated the “Administrative Member” of Safeguard and was thus “in charge of all day-to-day operations,” having “the sole and exclusive right, power, authority and discretion to conduct the business and affairs of [Safeguard] . . . and to do all things necessary to carry on the business of [Safeguard].” However, “Major Decisions”—including the decision to bring suit in matters in excess of $250,000—could only be made with unanimous approval of the Management Committee. The LLC Agreement also contains a “waterfall” provision for the distribution of Safeguard’s proceeds to its members. Under that provision, the BCR Parties were entitled to receive proceeds disproportionately high in relation to their equity interest in Safeguard. Appellants allege that the effect 1 PPF is managed by Morgan Stanley, which is PPF’s sole advisor. 3 Case: 14-31068 Document: 00513064630 Page: 4 Date Filed: 06/02/2015 No. 14-31068 of the provision is that 60% of the net proceeds from any distribution event (in excess of certain priority loans made by PPF) would be distributable pro rata to all Safeguard members, but 40% of such proceeds would be distributed solely to the BCR Parties. 2. Hurricane Katrina and the Insurance Litigation Given PPF’s interest in Safeguard, Morgan Stanley agreed to obtain insurance coverage for Safeguard under its property and business interruption insurance program. Certain underwriters associated with Lloyd’s of London (the “Lloyd’s Appellees”) were among over a dozen insurers that participated in the program. In August 2005, due to Hurricane Katrina, Safeguard’s business headquarters suffered millions of dollars in real and personal property damage. Appellants allege that this damage also caused business interruption losses totaling in excess of $350 million, and that such losses were covered under the excess insurance policies provided by the Lloyd’s Appellees. Pursuant to a decision of the Management Committee, Safeguard delegated to Morgan Stanley the role of negotiating the insurance claims with the insurers. In August 2007, as the deadline for filing Katrina-related Louisiana insurance lawsuits approached, Appellants learned that Morgan Stanley had made little to no progress in pursuing Safeguard’s claims. After a dispute within the Management Committee—including the BCR Parties’ threat of a lawsuit against the Morgan Stanley Appellees—the Committee unanimously approved the filing of a lawsuit against the insurers (the “Insurance Litigation”). Appellants allege, however, that Morgan Stanley “did not want to pursue Safeguard’s insurance claim, either through settlement or litigation, in any meaningful way,” given that (1) Morgan Stanley had no equity interest in Safeguard and would gain no direct proceeds from any insurance recovery; and (2) a large recovery could “jeopardize Morgan Stanley’s ability to renew participation in the insurance program” by its insurers “or, at a minimum, 4 Case: 14-31068 Document: 00513064630 Page: 5 Date Filed: 06/02/2015 No. 14-31068 greatly increase the future cost of Morgan Stanley’s coverage.” Appellants also allege that Brown “disregarded any conflicts of interest between Safeguard, PPF, and Morgan Stanley” and “always acted to protect Morgan Stanley’s interests, in violation of the duties he owed to all of the members of Safeguard.” Appellants further allege that the Lloyd’s Appellees took advantage of this conflict of interest by pressuring Morgan Stanley to pursue the Insurance Litigation less aggressively. Appellants support this allegation by referencing various communications between AON (Morgan Stanley’s insurance broker), Lloyd’s, and Morgan Stanley. Appellants allege that, through these communications, Morgan Stanley “comfort[ed] the Insurers that they did not need to engage in serious consideration of settlement of Safeguard’s claims at amounts that reflected the value of Safeguard’s business interruption[] claims” and assured the insurers that “they could count on the litigation being protracted and delayed through Morgan Stanley’s machinations until it could gain full control of Safeguard.” Appellants were particularly concerned that Morgan Stanley was not aggressively pursuing an approximately $350 million business interruption claim for lost revenues. On December 23, 2009, the trial court in the Insurance Litigation granted the insurers’ motion for partial summary judgment, dismissing the lost business opportunity claim as too speculative as a matter of law. The trial court also determined that Safeguard could only recover for damages incurred during a limited recovery period provided for in the insurance policy. On appeal, the Louisiana Fourth Circuit Court of Appeal (the “Louisiana Court of Appeal”) reinstated the lost business opportunity claim, determining that “genuine issues of material fact exist as to whether Safeguard incurred a loss of business opportunities.” Safeguard Storage Props., L.L.C. v. Donahue Favret Contractors, Inc., 60 So. 3d 110, 121 (La. Ct. 5 Case: 14-31068 Document: 00513064630 Page: 6 Date Filed: 06/02/2015 No. 14-31068 App. 2011). The court affirmed, however, the trial court’s ruling limiting the coverage period. Id. at 123. In October 2012, the parties settled the Insurance Litigation. Under the Settlement and Release Agreement (“Settlement Agreement”), Safeguard released the insurers from “all past, present or future claims alleged or that could have been alleged or claimed in the [Insurance Litigation].” 3. The Sale of Appellants’ Interest in Safeguard The LLC Agreement contains a Buy/Sell provision under which “either PPF or the BCR parties . . . had the right to issue a Buy/Sell ‘Offer Notice’ declaring the intention to either purchase or sell their interest in Safeguard from or to the other for . . . the cumulative, aggregate amount that the Notified Party or the Notifying Party, as applicable, would be entitled to receive if the Company were sold for an all-cash price.” During a 70-day “Election Period,” the party receiving the “Offer Notice” may choose to either become the “Purchasing Member” or the “Non-Purchasing Member.” In other words, the party receiving the notice may choose to either sell its interest in Safeguard or purchase the portion of Safeguard which it did not already own. A failure to make an election “is deemed an election to be the Non-Purchasing Member.” PPF issued a Buy/Sell Offer Notice to Appellants on May 14, 2009—after the initiation, but before the settlement, of the Insurance Litigation. Appellants allege that Morgan Stanley, through PPF, sought to purchase Appellants’ interest in Safeguard in order to: (1) control the Insurance Litigation and reduce the insurers’ liability, thus protecting Morgan Stanley’s business relationships with the insurers; and (2) allow Morgan Stanley to refinance its line of credit. Appellants had until July 24, 2009 to elect whether to become a Non-Purchasing Member or a Purchasing Member. According to Appellants, Morgan Stanley knew Appellants would be practically impeded from becoming Purchasing Members: 6 Case: 14-31068 Document: 00513064630 Page: 7 Date Filed: 06/02/2015 No. 14-31068 Morgan Stanley knew that, in order to buy out PPF’s almost 95% share of Safeguard, the BCR parties would have to raise almost 19 times the amount that PPF would have to pay to buy out the BCR parties. On top of that, under the terms of the LLC Agreement, the BCR parties would have to find a lender to assume the approximately $290 million of Safeguard debt held by Prime [(PPF’s sole member)], something that PPF would not have to do if it bought the BCR parties’ interests. Doing either of those things was made even more difficult because Morgan Stanley had delayed and impeded Safeguard’s effective prosecution of the Insurance Litigation. Had Morgan Stanley not taken bad faith actions to undermine Safeguard’s aggressive pursuit of the Insurance Litigation, the proceeds from timely settlement or resolution of the Insurance Litigation would have been available through waterfall distribution to the BCR parties to use as funds to respond to the buy/sell [notice] as a “Purchasing Member.” Instead, Morgan Stanley’s actions undermined and weakened Safeguard’s claims and therefore the BCR parties’ financial position. Appellants also allege that the Morgan Stanley Appellees hindered their ability to raise sufficient capital to become Purchasing Members by, inter alia, initiating the Delaware litigation discussed below. 2 Appellants failed to make an election by July 24, 2009, and were thus deemed Non-Purchasing Members. 3 4. The Louisiana & Delaware Actions On May 7, 2009, Appellants brought an action in the Civil District Court for the Parish of Orleans against PPF and Morgan Stanley (the “Louisiana Action”), in anticipation of PPF’s invocation of the Buy/Sell provision. In that 2 Appellants further allege that, during the Election Period, Morgan Stanley (through PPF and Brown) “issued capital calls beyond the scope of those allowed by the Safeguard LLC Agreement, issued information and data requests to BCR of a burdensome nature and also beyond the scope of those provided for in the LLC Agreement, and dramatically increased the frequency of called Management Committee meetings.” 3 The total purchase price is not alleged in the Amended Complaint. However, the record indicates that the BCR Parties accepted at least $10 million in exchange for their interest in Safeguard. 7 Case: 14-31068 Document: 00513064630 Page: 8 Date Filed: 06/02/2015 No. 14-31068 case, Appellants alleged, inter alia, that Morgan Stanley and PPF had taken action “to undermine Safeguard’s position in the Insurance Litigation and destroy the value of that litigation.” On July 29, 2010, the court dismissed Appellants’ claims without prejudice on the basis that those claims were premature. The Louisiana Court of Appeal affirmed the dismissal, determining that the BCR Parties’ claims—which were premised on a diminution of Safeguard’s insurance recovery—would not accrue until the resolution of the Insurance Litigation. On May 14, 2010, PPF filed a lawsuit against the BCR Parties in the Delaware Chancery Court (the “Delaware I Action”), seeking “a determination that PPF had the right and ability to exercise the Buy/Sell provision . . . and, further, that the Total Purchase Price established in the Offer Notice was proper under the LLC Agreement.” 4 PPF alleged that the BCR Parties “embarked on a course of conduct designed to frustrate” PPF’s right to invoke the provision, including “their conduct and their claim for damages in the tactically-filed Louisiana Action.” On March 14, 2011, by agreement of the parties, the Delaware Chancery Court entered a Stipulated Judgment that “[PPF’s] invocation of the Buy/Sell provision of the LLC Agreement on May 14, 2009 was proper” and “[PPF] acted appropriately in setting the Total Purchase Price in the Buy/Sell transaction.” 5