Court Opinion

ID: 4695938
Source: CourtListenerOpinion
Date Created: 2021-06-16 14:02:45.000641+00
Date Added: 2024-06-11T08:05:37.960502
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

SEHOY ENERGY LP, DEAN                     )
KETCHAM, and HAVEN REAL                   )
ESTATE FOCUS FUND, LP,                    )
                                          )
                   Plaintiffs,            )
       v.                                 ) C.A. No. 12387-VCG
                                          )
                                          )
ALBERT ADRIANI, HAVEN REAL                )
ESTATE GROUP, LLC, HAVEN                  )
CHICAGO, LP, HAVEN PROPERTY               )
MANAGEMENT, LLC, HAVEN NNN                )
INVESTMENTS LLC, and ELBOW                )
GREASE JANITORIAL SERVICE,                )
INC.,                                     )
                                          )
                   Defendants.            )

                         MEMORANDUM OPINION

                      Date Submitted: February 18, 2021
                        Date Decided: June 16, 2021

John P. DiTomo and Miranda N. Gilbert, of MORRIS NICHOLS, ARSHT &
TUNNELL LLP, Wilmington, Delaware, Attorneys for Plaintiffs Sehoy Energy LP,
Dean Ketcham, and Haven Real Estate Focus Fund, LP.

Elizabeth S. Fenton, of SAUL EWING ARNSTEIN & LEHR LLP, Wilmington,
Delaware, Attorneys for Defendants Albert Adriani, Haven Real Estate Group, LLC,
Haven Chicago, LP, Haven Property Management, LLC, Haven NNN Investments
LLC, and Elbow Grease Janitorial Service, Inc.

GLASSCOCK, Vice Chancellor
       This brief post-trial decision involves a rather carelessly made seven-figure

investment into a carelessly run investment fund. Unsurprisingly, the investment

fared poorly. Carelessness with one’s own property is no tort, but fraud is, and the

method used by the Individual Defendant, Albert Adriani, to induce the investment

was fraudulent.

       In short, the Defendant promised the principals of Plaintiff Sehoy Energy LP,

a family-run investment vehicle, that he would invest its money in publicly traded

securities. Instead, he intended to, and did, use the money to extend poorly secured

loans to a personal friend, who had plans to open “Tilted Kilt” franchises.1 Adriani

had heavily invested his own money in this scheme and was anxious that it succeed;

the result was a classic example of good money chasing bad. The Plaintiffs invested

in Adriani’s fund under false pretenses and seek, inter alia, rescissory damages.

       The Defendant has an MBA from one of the country’s finest universities and

was an experienced hedge-fund manager before venturing out on his own. He points

out that he has lost all his own funds in addition to the Plaintiffs’, that he is now

making a living driving a truck, and he asks for equitable consideration due to the

straitened conditions he now endures. I believe that Adrianni got in over his head

and made a series of bad decisions that he hoped would make him, and his clients,

1
 These appear to be faux-Celtic versions of the more widely known “Hooters” restaurants. See
generally Tilted Kilt Home Page, tiltedkilt.com (last visited June 15, 2021).

                                             1
whole. But fraud is poor ground on which to build an appeal to equity. The Plaintiffs

are entitled to rescissory damages, together with interest thereon. A recitation of the

facts, which are largely uncontested, and a brief explanation of my reasoning,

follows.

                                     I. BACKGROUND

       The facts in this post-trial memorandum opinion are either stipulated to in the

parties’ pre-trial and post-trial stipulations or were proven by a preponderance of

evidence at trial.2

       A. The Parties and Relevant Non-Parties

       Defendant Albert Adriani (“Adriani”) is an experienced hedge-fund and

portfolio manager. 3 He received both his MBA and his BA in Finance with honors

from the University of Chicago.4 He has worked as a chartered financial analyst for

several well-known institutions and for several years.5 The other defendants in this

case are all entities affiliated with Adriani; he either owns them outright or owns

significant interests in them. 6 Adriani has petitioned for personal relief under

Chapter 7 of the Bankruptcy Code.7

2
  Where the facts are drawn from exhibits jointly submitted at trial, they are referred to according
to the numbers provided on the parties’ joint exhibit list and with page numbers derived from the
stamp on each JX page (“JX __, at ___”).
3
  Joint Statement of Facts ¶ 1, Dkt. No. 218 [hereinafter “Stip.”].
4
  Id.
5
  Id.
6
  Id. ¶¶ 2–6.
7
  Id. ¶ 1.

                                                 2
         Defendant Haven Real Estate Group LLC (“Haven REG”) is an Illinois

limited company that Adriani founded in 2009.8 Adriani is the sole member and

100% owner of Haven REG; and Adriani has testified that he views himself and

Haven REG interchangeably. 9 Haven REG is the general partner of Plaintiff Haven

Real Estate Focus Fund, L.P. 10 Like Adriani, Haven REG has also petitioned for

relief under Chapter 7 of the Bankruptcy Code. 11

         Defendant Haven Property Management LLC (“Haven PM”) is an Illinois

limited liability company that Adriani and non-party Kazi Hassan (“Hassan”)

founded in 2012.12 Initially, Adriani and Hassan each owned 47.5%, with Adriani’s

fiancé Ellen Jackson owning 5%.13 Adriani now owns 100% of Haven PM—and,

like Adriani, Haven PM has also petitioned for relief under Chapter 7 of the

Bankruptcy Code. 14 Haven PM is the general partner of Defendant Haven Chicago

LP. 15

         Defendant Haven Chicago LP (“Haven Chicago”) is a Delaware limited

partnership that Adriani and non-party Kazi Hassan (“Hassan”) founded in 2012.16

8
  Id. ¶ 2.
9
  Id.
10
   Id.
11
   Id.
12
   Id. ¶ 4.
13
   Id.
14
   Id.
15
   Id.
16
   Id. ¶ 3.

                                         3
Haven Chicago was formed to invest in distressed residential real estate properties

in Chicago that were owned by Hassan. 17 Haven Chicago has seven limited partners,

“comprised principally of Adriani’s friends and family.” 18 Through their ownership

of Haven PM, Haven Chicago’s general partner, Adriani and Hassan jointly

controlled Haven Chicago. 19 And, like Adrinai and the other Haven entities, Haven

Chicago has also petitioned for relief under Chapter 7 of the Bankruptcy Code. 20

        Defendant Haven NNN Investments LLC (“Haven NNN”) is a New

Hampshire limited liability company that Adriani formed in 2015.21 Adriani owns

50% of Haven NNN; the remainder is held by two other individuals, Lynn Lewis

and Nora Coers.22 Haven NNN has, like the other Defendants, petitioned for relief

under Chapter 7 of the Bankruptcy Code.23

        Defendant Elbow Grease Janitorial Services, Inc. (“Elbow Grease”) is an

Illinois corporation that provides commercial janitorial services. 24 It, too, has

petitioned for Chapter 7 relief. Adriani purchased Elbow Grease in 2015 and is its

sole owner.

17
   Id.
18
   Id.
19
   Id.
20
   Id.
21
   Id. ¶ 5.
22
   Id.
23
   Id.
24
   Id. ¶ 6.

                                         4
        Plaintiff Haven Real Estate Focus Fund, L.P., (“Focus Fund”) is a Delaware

limited partnership that Adriani formed in 2011. It is managed by its general partner,

Haven REG, which, as mentioned, is owned and controlled by Adriani. 25

        Plaintiff Sehoy Energy LP (“Sehoy”) is a Delaware limited partnership that

invested in and was a limited partner in Plaintiff Focus Fund. Sehoy is a portfolio

company within Sehoy Investments, a family concern, 26 and was established “for

exploration and drilling in the oil and gas space.”27 It is owned by a group of family

members, including Calisle Dean (“Dean”), Dean’s brother Warren Dean, Dean’s

sister Leatrice Elliman, and Plaintiff Dean Ketcham (“Ketcham”). 28 Dean, as

Sehoy’s managing partner, makes all final investment decisions for Sehoy and

testified on Sehoy’s behalf at trial.29

        Plaintiff Ketcham is Dean’s first cousin and a limited partner in Sehoy. 30 He

also directly invested in and was a limited partner in Focus Fund.31 Ketcham did not

testify at trial; the parties have agreed that Sehoy’s testimony will bind and apply

with equal force to Ketcham.32

25
   Id.
26
   Id. ¶¶ 7–8.
27
   Id. ¶ 8.
28
   Id.
29
   Id.
30
   Id. ¶ 9.
31
   Id.
32
   Id.

                                           5
       Non-party Kazi Hassan is an individual and Adriani’s acquaintance of over

10 years. For a time, he was a managing member of Haven PM and owned 47.5%

of that company.

       B. Factual Background

                  1. Adriani and Focus Fund’s involvement with Hassan prior to the
                  Plaintiffs’ investment

       Adriani began investing with Hassan, whom he considered a close friend, in

2012, in order to recoup an approximately $1 million loss from an investment

Adriani had made in a company called China Agritech.33 Adriani’s investment with

Hassan began with loans from entities Adriani owned, including Haven REG and

Haven Chicago.34 From 2012 onward, Haven REG loaned Hassan approximately

$1.2 million, 35 whereas Haven Chicago loaned Hassan over $1 million.36

Particularly relevant to this opinion, Adriani also caused Plaintiff Focus Fund to

make two loans to Hassan in 2012. 37

       The first of these loans is represented by a $225,000 note (“Note 1”), dated

September 20, 2012, with a maturity date of December 20, 2012, and made out to

an entity owned by Hassan.38 As security for this loan, the note lists a piece of

33
   Id. ¶ 22–23.
34
   Id. ¶ 23–24.
35
   Id. ¶ 23.
36
   Id. ¶ 24.
37
   Id. ¶ 25.
38
   Id. ¶ 26.

                                             6
property located in Chicago, Illinois.39 The second loan, which is represented by a

$125,000 note (“Note 2”), is dated October 23, 2012, was notarized in February

2012, and has a maturity date of December 23, 2012.40 It is made out to the same

Hassan entity as Note 1. 41 At trial, Adriani testified that he did not request diligence

materials from Hassan nor did he investigate the financial conditions of the Hassan

entity to which Focus Fund loaned money.42

       By December 2012, around the maturity dates of both notes, the amount of

the   loans—$350,000—represented            25%    of   Focus   Fund’s    assets   under

management. 43 Both loans went into default, as did some loans made by Haven

REG and Haven Chicago to other Hassan entities. 44

                  2. Sehoy expresses interest and Adriani provides materials

       In early 2013, Plaintiff Sehoy began exploring various investments in publicly

traded, managed funds, in an attempt to divest from oil and gas.45 To do so, Sehoy

worked with Toby Elliman, a hedge-fund industry veteran who is also married to

one of Sehoy’s owners. 46 Elliman, who learned of Focus Fund through a third-party

service that provides research and analytics on market participants in publicly traded

39
   Id.
40
   Id. ¶ 27.
41
   Id.
42
   Id. ¶ 31.
43
   Id. ¶ 30.
44
   Id. ¶ 32.
45
   Id. ¶ 33–34.
46
   Id. ¶ 35.

                                              7
securities funds, brought Focus Fund to Sehoy’s attention.47 At trial, Dean testified

that Focus Fund appeared to be an attractive investment opportunity because of its

smaller size and because of Adriani’s pedigree.48

        Sehoy and Adriani began discussing a potential investment by Sehoy in Focus

Fund starting in January 2013.49 Between January and March of that year, Adriani

provided the Plaintiffs with written promotional materials for Focus Fund. 50 The

materials included a Private Placement Memorandum (“PPM”), 51 Focus Fund’s

Limited Partnership Agreement (“LPA”), 52 a pitch book (“Pitch Book”),53 audited

returns that tracked the performance of Adriani’s self-managed IRA accounts

(“Audited Returns”),54 and a one-pager (“One-Pager”).55 After review of these

materials, I find as a matter of fact that they provided that Focus Fund’s purpose was

to invest in publicly traded securities.

        The Audited Returns consist of two audited returns that were prepared to track

the investment performance of stocks held in Adriani’s IRA account between 2009

and 2011. 56 The parties have stipulated that both the audited returns showed that

47
   Id. ¶ 35.
48
   Id. ¶ 36.
49
   Id. ¶ 37.
50
   Id.
51
   JX 020.
52
   JX 004.
53
   JX 051.
54
   JX 064.
55
   JX 730.
56
   Stip. ¶ 38.

                                           8
Adriani’s IRA account only contained publicly traded securities at the time.57

Further, “Adriani testified that if investors were to rely on the information contained

in the audited returns, they would know that the holdings in the account were

publicly traded stocks.” 58

       The One-Pager describes Focus Fund’s investment strategy as investing

       opportunistically across all areas of the real estate securities universe.
       Public market investments such as common stocks, options, preferred
       stock, fixed income, and convertible securities are considered indirect
       real estate investments. Long and short indirect positions may be
       established through selling options. Covered option writing may be
       used to enhance returns and reduce risk.59

It shows Focus Fund’s audited returns for the period between 2009 through 2011, as

well as investment results for 2012. 60 The results were benchmarked to the IYR

ETF and the S&P 500—indices for publicly traded securities. 61

       The Pitch Book, which was prepared by Adriani, describes Focus Fund’s

investment strategy as investment in “REITs and Real Estate Related Securities.”62

It also provides that Focus Fund “invests opportunistically across all areas of the real

estate securities universe” and that “[p]ublic market investments such as common

stocks, options, preferred stock, fixed income and convertible securities are

57
   Id. ¶¶ 39–40.
58
   Id. ¶ 41.
59
   Id. ¶ 42.
60
   Id. ¶¶ 43–44.
61
   Id. ¶ 45.
62
   Id. ¶¶ 47–49.

                                           9
candidates for investment.” 63 The Pitch Book also notes that taking long and short

positions was part of Focus Fund’s strategy—a strategy that Adriani testified was a

reference to a trading strategy used in investing in public securities.64 Finally, the

Pitch Book highlights historical investments in several publicly traded real estate

companies and also refers to publicly traded real estate stock indices, such as the

IYR ETF, as a benchmark.65 Dean testified that the Plaintiffs understood the

investment philosophy, reflected in the Pitch Book, was that Focus Fund would

invest in public markets and securities—and that such a strategy fit the Plaintiffs’

wishes.66

        The PPM describes Focus Fund’s purpose as:

        A pooled investment vehicle. The Partnership [Focus Fund] was
        formed to pool investment funds of its investors . . . for the purpose of
        active and speculative trading . . . in publicly traded real estate securities
        listed on the U.S. stock exchanges. 67

At trial, Adriani testified that he agreed that investors were entitled to rely on the

PPM. 68 Dean testified that the Plaintiffs did indeed rely on the PPM and understood

Focus Fund’s purpose to be as stated in the PPM—that is, that Focus Fund’s purpose

was to invest in publicly traded real estate securities. 69 Finally, Adriani also testified

63
   Id. ¶ 50.
64
   Id. ¶ 51.
65
   Id. ¶ 54.
66
   Id. ¶ 57.
67
   Id. ¶ 60.
68
   Id. ¶ 61.
69
   Id.

                                             10
that, at the time the Plaintiffs were considering investing in Focus Fund, he told them

that he intended to execute the strategies stated in the PPM.70

       Finally, the LPA, at Section 1.03, describes Focus Fund as:

       a fund through which the assets of its Partners may be utilized for the
       purpose of active and speculative trading in publicly traded real estate
       securities listed on the U.S. stock exchanges. The Partnership invests
       opportunistically across all areas of the real estate securities universe.
       Public market investments such as common stocks, options, preferred
       stock, fixed income, and convertible securities are considered indirect
       real estate investments. Long and short indirect positions may be
       established through selling options. Covered option writing may be
       used to enhance returns and reduce risk. The Partnership shall not trade
       in commodities or futures contracts unless such activities are managed
       by an entity that is registered as a commodity pool operator with the
       Commodities Futures Trading Commission and is a member of the
       National Futures Association, unless such entity is exempt from such
       registration and membership requirements.71

The LPA provides that the General Partner of Focus Fund “shall invest the funds of

the Partnership from time to time as the General Partner deems appropriate in

accordance with the purposes set forth in Section 1.03 . . . .”72 While Section 3.02

of the LPA provides the General Partner with “sole and absolute discretion” in

allocating all of the Partnership’s assets, Adriani agreed that the General Partner did

not have the discretion to change Focus Fund’s purpose. 73           The parties have

70
   Id.
71
   Id. ¶ 65.
72
   Id. ¶ 66 (emphasis added).
73
   Id. ¶¶ 62, 66.

                                          11
stipulated that the Plaintiffs reviewed and relied upon the LPA in making their

investment decision.

        While the negotiations with the Plaintiffs over their potential investment were

ongoing, Focus Fund accepted two more notes from Hassan entities. 74 The first, a

February 20, 2013 note (“Note 3”), was exchanged for an informal agreement by

Adriani to roll over Notes 1 and 2—which, as the reader will recall, were for

$350,000.75 Focus Fund’s balance sheet records Note 3 as at a cost of $350,000; the

note was issued by another Hassan entity.76 Note 3 described the rolled over amount

as a business loan; however, Adriani testified that he did not receive solicitation

materials from Hassan nor did he investigate the credit worthiness of Hassan or his

entities when rolling Notes 1 and 2 into new loans.77

        The second note, dated March 20, 2013 (“Note 4”), is in the amount of

$300,000, is issued by the same Hassan entity that issued Note 3, and also describes

the loan as a business loan. 78 Accordingly, by the end of March, Focus Fund’s loan

portfolio consisted of $650,000—an amount that represented 43% of Focus Fund’s

assets under management at the time.79

74
   Id. ¶ 68.
75
   Id. ¶ 69.
76
   Id.
77
   Id. ¶ 70.
78
   Id. ¶ 71.
79
   Id. ¶ 72.

                                          12
        At trial, Adriani testified that he did not tell the Plaintiffs or the other investors

that there were $650,000 in loans outstanding prior to their investment.80 He also

testified that he did not inform any potential investors, including the Plaintiffs, that

$350,000 of those $650,000 were for loans that were originally due in December,

2012. 81 None of the promotional materials—such as the Pitch Book and the PPM—

disclosed the outstanding loans or the fact that making loans was part of Focus

Fund’s then-existing investment strategy.82

                3. The Plaintiffs’ Investment with Focus Fund

        Prior to investing—and unaware, at the time, of Focus Fund’s loans to Hassan

entities—the Plaintiffs requested and received two changes to Focus Fund’s

governing documents. 83 First, the Plaintiffs sought an addendum to Focus Fund’s

LPA that, among other things, reduced the General Partner’s management fee from

1.50% to 0.75%,84 reduced the General Partner’s performance allocation from 20%

to 10%,85 amended the limited partner capital account withdrawal procedure,86 and

amended the LPA to allow Sehoy and Ketcham to withdraw the entirety of their

partnership interest at any time. 87

80
   Id. ¶ 73.
81
   Id.
82
   Id. ¶ 74.
83
   Id. ¶ 75; see id. ¶¶ 73–74.
84
   Id. ¶ 76.
85
   Id. ¶ 77.
86
   Id. ¶ 78.
87
   Id. ¶ 80.

                                              13
       Second, the Plaintiffs requested that Adriani remove language in the PPM that

provided for reimbursement of the General Partner’s:

       professional and other advisory and consulting expenses and travel
       expenses incurred in connection with investment due diligence,
       monitoring or the assertion of rights or pursuit of remedies (including,
       without limitation, pursuant to bankruptcy or other legal proceedings,
       or the participation in informal committees of creditors or other security
       holders of an issuer). 88

In its stead, the parties inserted the language “(D) INTENTIONALLY

OMITTED.”89

       Sehoy invested $1.18 million in Focus Fund in April 2013, following receipt

and review of the PPM, LPA, Pitch Book, Audited Returns, and the One-Pager, and

after negotiating the amendments to the LPA and PPM.90 Ketcham purchased his

$500,000 interest in Focus Fund in May 2013.91

               4. Post-investment

       Three days after Sehoy’s investment in April 2013, Adriani caused Focus

Fund to make three additional loans, of $200,000 each, to Hassan. 92 Around the time

when Ketcham invested, Adriani caused Focus Fund to roll over two outstanding

loans to Hassan; these loans were in the amounts of $150,000 and $250,000. 93 And

88
   Id. ¶ 82.
89
   Id.
90
   Id. ¶¶ 84–85.
91
   Id. ¶ 86.
92
   Id. ¶ 88.
93
   Id.

                                          14
in June, Focus Fund provided Hassan $250,000 in additional loans.94 Within three

months of the Plaintiffs’ investment, Focus Fund’s outstanding loans to Hassan or

his entities ballooned from $650,000 (representing 43% of Focus Fund’s assets

under management) 95 to $1.9 million (representing 50% of Focus Fund’s assets

under management).96 Focus Fund’s statement of operations for June 2013 reflected

$126,000 of total note interest as a return for Focus Fund.97 Hassan did not,

however, pay any interest on the loans.98 Focus Fund’s portfolio of loans to Hassan

continued to grow throughout 2013; by the end of the year, Focus Fund’s outstanding

loans to Hassan and his entities exceeded $3 million, inclusive of principal and

unpaid interest—an amount that represented more than 83% of Focus Fund’s assets

under management. 99 This amount included Notes 1 and 2, which Hassan never

repaid and which Focus Fund rolled over into new loans.100                       Focus Fund’s

communications with its investors, at the time, did not disclose the status of the loans

and communications throughout the year continued to treat the loans as performing

assets, despite none of the loans being repaid by the maturity date. 101

94
   Id. ¶ 89.
95
   Id. ¶ 72.
96
   Id. ¶ 89. Although the loan amount tripled, I note that the percentage of assets increased only
marginally—due to the size of the Plaintiffs’ investment in Focus Fund. In other words, the
Plaintiffs’ investments funded incremental credit extended to Hassan.
97
   Id.
98
   Id.
99
   Id. ¶ 90.
100
    Id.
101
    Id. ¶ 92; see id. ¶ 94.

                                               15
       The Plaintiffs received Focus Fund’s K-1 tax returns for 2013 in or around

June 2014.102 At that time, Dean noticed a “high ratio of interest income to

dividends” which came as a surprise.103 Dean reached out to Elliman, who reached

out to Adriani via email on June 5, 2014 to inquire why there was so much interest

income. 104 Adriani admitted that that was due to “hard money loans” in Focus

Fund’s portfolio.105 When Elliman asked what hard money loans were, Adriani

responded that they were loans “secured by hard assets, such as real estate.”106 At a

conference call requested by Elliman to discuss the high proportion of interest

income, the Plaintiffs informed Adriani that they wanted him to get out of the loans

because the Fund’s focus was not supposed to be hard money loans and such loans

had become too significant a portion of the portfolio. 107 Adriani testified at trial that

he agreed to the Plaintiffs’ request.108

               5. The situation spirals

       Despite that agreement, Adriani and his entities were unable or unwilling to

get out of the loans to Hassan and, indeed, continued to attempt to finance him. On

June 30, 2014, Haven Chicago bundled all loans previously made by that entity to

102
    Id. ¶ 102.
103
    Id. ¶ 103.
104
    Id. ¶¶ 103–04.
105
    Id. ¶ 104; JX 205.
106
    JX 205.
107
    Stip. ¶¶ 105–07.
108
    Id. ¶ 107.

                                           16
Hassan into a new balloon loan totaling $1,276,878. 109 The balloon loan was secured

by Hassan’s interest in Haven Chicago. 110 Hassan’s interest in Haven Chicago was

also the security for Focus Fund’s Note 4.111 The security did not dissuade Hassan

from borrowing from Adriani, however, nor did it seem to dissuade Adriani from

attempting to find more money for Hassan. In July and August 2014, Adriani and

Hassan began soliciting new investments for Haven Chicago, seeking to raise funds

to purchase one of Hassan’s entities.112 That entity owned development rights for

the Titled Kilt franchise in Central Illinois and “the plan was to then develop and

build out Tilted Kilt franchise restaurants . . . .” 113 Adriani explained the plan as a

“related party transaction, as we [Haven Chicago] are purchasing these assets from

Kazi [Hassan].”114

       On September 1, 2014, Adriani caused Focus Fund to roll over all of the

fund’s loans to Hassan and made an additional loan to Hassan in the amount of

$220,000.115 After that last loan, Hassan owed Focus Fund over $4.3 million,

inclusive of accrued but unpaid interest.116 Hassan had not, at the time, paid back

any portion of the loans dating back to Note 1, which was issued in September

109
    Id. ¶ 108.
110
    Id. ¶ 109–10.
111
    Id. ¶ 110–11.
112
    Id. ¶ 112–13.
113
    Id. ¶ 113.
114
    Id. ¶ 115.
115
    Id. ¶ 125.
116
    Id. ¶ 123.

                                          17
2012. 117 At trial, Adriani confirmed (1) that he continued making loans to Hassan

between 2012 and 2014 even though Hassan never made any payment on the Focus

Fund loans; (2) that he rolled old loans into new loans without receiving financial

information into whether Hassan’s projects were a credit risk; (3) that he never asked

Hassan or his entities to furnish diligence materials; (4) that he never investigated

the financial conditions of the Hassan entities he made loans to, and (5) that he never

tracked the use of the loan proceeds after the loans were made. 118 Hassan did not

repay the rolled over loan from Focus Fund totaling $4.3 million by the maturity

date of December 13, 2014.119 Adriani testified at trial that Hassan asked him to

remain silent regarding the failure to repay, and Adriani did so. 120 Adriani did not

seek to impair the loan at that time, nor did he seek legal advice regarding

impairment.121

        Adriani did, however, hire an attorney, Scott Lucas, to review Focus Fund’s

notes and to prepare documentation for Hassan’s loans.122 Lucas determined that

Focus Fund needed different documentation with respect to the loans to Hassan and

prepared a demand promissory note dated February 15, 2015 for the outstanding

117
    Id.
118
    Id. ¶ 124.
119
    Id. ¶ 129.
120
    Id. ¶ 130.
121
    Id.
122
    Id. ¶ 131

                                          18
loans, totaling $4,389,735.35 (the “Promissory Note”).123 Hassan and Adriani

executed the Promissory Note, 124 which Adriani personally had recorded on Focus

Fund’s July 2015 balance sheet as a performing asset 125—and Hassan promptly

defaulted in March 2015.126 Hassan agreed to a consent judgment in May 2015 and

Adriani obtained a consent judgment in the Circuit Court for Cook County, Illinois

on July 17, 2015.127 Meanwhile, Adriani continued to report to the Plaintiffs about

Focus Fund’s performance without mentioning the status of the Hassan loans. 128

               6. The situation unravels

       In December 2015, one of Focus Fund’s investors requested a withdrawal of

her investment in Focus Fund.129 On December 10, 2015, Adriani sent an email to

Lucas requesting advice that said “[o]ne of the small investors in my hedge fund has

request [sic] a full redemption of her investment. Therefore, I must now tell

everybody the situation.”130 On December 15, 2015, Adriani sent a letter to Focus

Fund’s investors, essentially coming clean. The letter informed investors that “a

significant asset of Haven Real Estate Focus Fund has become substantially

impaired” and that Focus Fund “cannot make any further distributions at this

123
    Id. ¶ 133.
124
    Id. ¶ 134.
125
    Id. ¶ 140.
126
    Id. ¶ 138.
127
    Id. ¶¶ 138–39; JX 384.
128
    See id. ¶¶ 141–48.
129
    Id. ¶ 152.
130
    Id. ¶ 153; JX 450.

                                           19
time.” 131 It further detailed that Focus Fund had, over the course of four years, issued

loans totaling almost $4.4 million to Hassan and his entities to finance the acquisition

and buildout of franchise restaurants.132 However, the letter disclosed that Hassan

had “performed as agreed, but notified [Adriani] he would not be able to make

upcoming payments in early 2015.” 133 At trial, Adriani confirmed that Hassan had

not repaid any of Focus Fund’s notes by their maturity date.134

       In the December 15, 2015 letter, Adriani told investors that the legal fees

expended in trying to recover against Hassan for the loan default were being paid

from his own assets.135 Adriani also told investors that he will “not receive anything

on [his] investments until each of the limited partners are repaid their basis in full”

and that he “personally ha[d] an additional $1.2 million debt outside of the Fund

owed by Mr. Hassan.” 136 That debt, per the letter, would be “contribute[d] to the

Fund, and any portion of the recovery allocable to that separate debt will first go to

the limited partners of the Fund until they recover their basis in full.”137 According

to the letter, “each of the limited partners come first, ahead of [Adriani], period.”138

131
    Stip. ¶ 155–56; JX 453.
132
    Stip. ¶ 157; JX 453.
133
    JX 453.
134
    Stip. ¶ 157.
135
    Id. ¶ 160; JX 453.
136
    JX 453.
137
    Id.
138
    Id.

                                           20
At trial, Adriani testified that this $1.2 million debt was a reference to Haven REG’s

loans to Hassan, and that he was using Haven REG interchangeably with himself.139

       On April 15, 2016, an asset of a Hassan entity was sold and $1,000,000 was

disbursed to Haven Chicago.140 The Plaintiffs moved to intervene in the proceedings

to stop the sale until the parties could determine the appropriate allocation of the sale

proceeds; Focus Fund, Haven REG, and Haven Chicago opposed. 141 The sale

proceeds were allocated for distribution to Haven REG, Haven Chicago, and Focus

Fund as part of citation proceedings before the Circuit Court of Cook County,

Illinois;142 the eventual allocation of the $986,438.74 net proceeds was $682,570.45

to Focus Fund, $120,048.53 to Haven Chicago, and $183,819.76 to Haven REG.143

This allocation, per Adriani’s trial testimony, was intended to be pro rata based on

the value of the parties’ respective loans to Hassan.144 On May 13, 2016, Lucas

emailed Adriani to inform him that he was sending the checks of the proceeds to

each of the plaintiff entities—with one caveat: he would withhold $50,000 of the

proceeds to Focus Fund as an “Advanced Payment Retainer” for “future litigation

for the Haven Focus Fund.” 145 At trial, Adriani confirmed that the $50,000 was

139
    Stip. ¶ 161.
140
    JX 564; Stip. ¶ 166.
141
    Stip. ¶ 167.
142
    Id. ¶ 167–68.
143
    Id. ¶ 168.
144
    Id.
145
    Id. ¶ 169.

                                           21
intended to cover legal fees expended on attempting to recover loan amounts against

Hassan.146

       Sometime in either late 2015 or early 2016, Adriani contributed Haven REG’s

$1.2 million note to Hassan—the debt he had previously told investors in the

December 15 letter that was his personal debt—to Focus Fund with a 75%

markdown.147 Accordingly, Adriani attributed only a $300,000 value to the $1.2

million debt.148 At trial, Adriani confirmed that Haven REG’s “capital account was

increased by $300,000, after the [Haven REG] note was contributed to Focus

Fund.”149 When Adriani requested Lucas’ assistance with the “substantiation of the

75% write down” as it related to preparing Focus Fund’s K-1 tax returns, Lucas

responded that his guess was that the note was “worthless.” 150

              7. The involvement of the other entity defendants

       During discovery, the Plaintiffs discovered that Adriani and Haven REG made

withdrawals from their Focus Fund capital accounts amounting to $152,988 in 2014

and over $ 1million in 2015. 151          Correspondence between Adriani and Lucas

indicated that he treated his and Haven REG’s capital account activity

146
    Id. ¶ 170.
147
    Id. ¶ 171–72.
148
    Id. ¶ 172.
149
    Id.
150
    Id. ¶ 174–75.
151
    Id. ¶¶ 181–82 (citing JX 379 and JX 622).

                                                22
interchangeably.152 Some of these withdrawals were made on behalf of or in

connection with the needs of other Adriani entities or for Adriani’s own benefit.

       For example, on February 18, 2015, Adriani purchased Defendant Elbow

Grease for $275,000. At trial, Adriani testified that he needed money from his Focus

Fund capital account to purchase Elbow Grease and an email dated February 25,

2015 shows that Adriani listed his Focus Fund capital account as proof of funds for

the Elbow Grease purchase.153 Elbow Grease was not acquired on Focus Fund’s

behalf; Adriani described the Elbow Grease transaction as necessary, explaining to

his fiancée via text that “I have to do janitorial business. It’s my job back up.”154

That view was confirmed at trial. 155

       Further, it appears that some of the loans Focus Fund made to Hassan were in

excess of what Hassan requested—and Adriani would instruct Hassan to pay the

overage to Adriani’s personal Haven REG account. 156 Adriani testified at trial that

similar transactions—in which Adriani caused Focus Fund to issue loans to Hassan

and Hassan would kick back a portion of the loans to pay either Adriani or Haven

REG—occurred two or three times. 157

152
    Id. ¶ 183.
153
    Id. ¶ 184.
154
    Id. ¶ 185.
155
    Id.
156
    Id. ¶ 190 (quoting JX 403).
157
    Id. ¶ 196.

                                         23
       In October and November of 2015, Adriani withdrew a total of $60,000 “in

connection with Haven NNN.”158 In January 2016, Adriani withdrew another

$45,000 for Haven NNN’s redevelopment costs. 159

       C. Procedural History

       The Plaintiffs filed their Verified Complaint against Adriani, Haven REG, and

Haven Chicago on May 27, 2016, alleging breach of contract, breach of fiduciary

duty, fraud, fraud in the inducement, and unjust enrichment. 160 After much back and

forth, a third amended complaint was filed on June 9, 2020. 161 Trial was held over

three days at the end of July, 2020 and post-trial argument was held on February 18,

2021. This is my post-trial decision.

                                     II. ANALYSIS

       The Third Amended Complaint contains eight counts against six different

defendants. 162 Count I alleges breach of contract against Adriani and Haven REG.163

Count II alleges breach of fiduciary duty against the same.164 Count III alleges

aiding and abetting a breach of fiduciary duty against Haven Chicago and Haven

158
    Id. ¶ 187.
159
    Id.
160
    Verified Compl., Dkt. No. 1.
161
    Verified Third Am. and Supplemented Compl., Dkt. No 179 [hereinafter “Compl.”].
162
    Compl. ¶¶ 188–242.
163
    Id. ¶¶ 188–194.
164
    Id. ¶¶ 195–201.

                                            24
PM. 165 Count IV alleges fraud against Adriani and Haven REG; 166 Count V alleges

fraud in the inducement167 and Count VI adds a claim of breach of the implied

covenant of good faith and fair dealing against the same parties.168 Count VII seeks

declaratory judgment and accounting against Adriani and Haven REG for

wrongfully advanced legal fees.169 Finally, Count VIII alleges fraudulent transfer

against Haven REG, Adriani, Haven Chicago, Haven NNN, and Elbow Grease.170

As redress for these claims, the Plaintiffs seek declaratory judgment, rescissory or

compensatory damages, attorneys’ fees, and affirmative injunctive relief ensuring

both (a) their ability to recover not only from Adriani but also his entities and (b) the

primacy of their recovery over Adriani’s with regards to proceeds obtained from

Hassan.171

       In summary, as to Adriani and Haven REG, the Plaintiffs allege breach of

contract, breach of the implied covenant, breach of fiduciary duty, fraud, and fraud

in the inducement. Against Haven Chicago and Haven PM, they allege aiding and

abetting a breach of fiduciary duty. And they allege fraudulent transfer against

Adriani, Haven REG, Haven Chicago, Haven NNN, and Elbow Grease. They seek

165
    Id. ¶¶ 202–208.
166
    Id. ¶¶ 209–216.
167
    Id. ¶¶ 217–222.
168
    Id. ¶¶ 223–231.
169
    Id. ¶¶ 232–236.
170
    Id. ¶¶ 237–242.
171
    Id. at Relief Requested ¶¶ a–k.

                                           25
monetary relief and injunctive measures to aid in that recovery. Given, however,

that Adriani is the sole individual defendant—and therefore the defendant who

caused the remaining defendants to allegedly breach duties, aid and abet breaches of

duty, or fraudulently transfer funds—in this Memorandum Opinion, I address only

the counts as they go to Adriani. The parties should meet and confer as to what

remains of this matter given my findings, and, to the extent that the Plaintiffs seek

judgment against the Defendant entities, whether entry of such judgment is opposed.

       The operative complaint alleges that Adriani: (a) breached the LPA; (b)

breached the implied covenant of good faith and fair dealing; (c) breached his

fiduciary duties when operating Focus Fund through its general partner; (d)

defrauded the Plaintiffs; (e) fraudulently induced the Plaintiffs to invest in Focus

Fund; and (f) fraudulently transferred funds from Focus Fund to other entities he

owned. Although many of these claims go to the same actions, at least three of them

(the breach of contract claim, the implied covenant claim, and the fiduciary duty

claim) rest on interpretation of Focus Fund’s LPA.172 That contract—or rather the

circumstances in which it was formed—is itself the subject of Count V’s fraud in the

inducement charge. Accordingly, I resolve that count first.

172
   As a limited partnership, Focus Fund is owed fiduciary duties by the general partner and its
controller to the extent governed by its limited partnership agreement. 6 Del. C. § 17-01101(f).

                                              26
      A. Adriani fraudulently induced the Plaintiffs into investing in Focus Fund.

      The five elements of fraudulent inducement are:

      (1) a false representation of material fact; (2) the defendant’s
      knowledge of or belief as to the falsity of the representation or the
      defendant’s reckless indifference to the truth of the representation; (3)
      the defendant’s intent to induce the plaintiff to act or refrain from
      acting; (4) the plaintiff’s action or inaction taken in justifiable reliance
      upon the representation; and (5) damages to the plaintiff as a result of
      such reliance. 173

Based upon the evidence of record, I find that Adriani has satisfied all five elements.

First, Adriani provided the Plaintiffs with solicitation materials—the PPM, Pitch

Book, LPA, One-Pager, and the Audited Returns—which represented that Focus

Fund’s investment strategy and purpose was centered on investment in publicly

traded securities. Second, Adriani knew this was false because, at the time those

solicitation materials were provided, he had already caused Focus Fund to lend a

substantial portion of Focus Fund’s assets under management to Hassan, he

continued to make loans while the Plaintiffs conducted diligence, and he made more

loans right after the Plaintiffs’ investment; Adriani, I find, used the Plaintiffs’

investment for that hidden purpose. Third, Adriani intended the Plaintiffs to invest

in Focus Fund, and misrepresented the Fund’s purpose in pursuit of that goal.

Fourth, the Plaintiffs’ investment was made in justifiable reliance upon the

173
   CSH Theatres, LLC v. Nederlander of San Francisco Assocs., 2015 WL 1839684, at *21 (Del.
Ch. Apr. 21, 2015), aff’d sub nom. In re Shorenstein Hays-Nederlander Theatres LLC Appeals,
213 A.3d 39 (Del. 2019).

                                            27
representation that Focus Fund’s purpose was to invest in publicly traded securities.

And fifth, the Plaintiffs have suffered damages through the mismanagement of their

investment.

       The Defendants disagree that these facts should lead to liability. They point

out that the LPA and the purchase agreement (which the Plaintiffs entered into to

purchase their interests in Focus Fund) 174 constitute the parties’ entire agreement,

and that the solicitation materials—including the Pitch Book, the PPM, and the

Audited Records—have no bearing on those contracts.175 The Defendants note that

the LPA provided the General Partner broad discretion to allocate assets, purchase

assets, and otherwise manage Focus Fund, and even the solicitation materials

contained disclaimers against reliance.176

       All of the Defendants’ arguments rely on the agreement between the parties—

i.e., the LPA and the purchase agreement. Consequently, all three arguments are

vulnerable to the Plaintiffs’ point that the Plaintiffs were fraudulently induced into

entering into an agreement with Focus Fund in the first place.

       The Defendants are correct that Delaware courts do not allow a plaintiff to

“‘bootstrap’ a claim of breach of contract into a claim of fraud merely by alleging

174
    Compl., Ex. I.
175
    DF OB 19.
176
    Id.

                                         28
that a contracting party never intended to perform its obligations.”177 “Stated

differently, a plaintiff cannot state a claim for fraud simply by adding the term

‘fraudulently induced’ to a complaint that states a claim for breach of contract, or by

alleging that the defendant never intended to abide by the agreement at issue when

the parties entered into it.”178 That is not, however, what occurred here. Adriani did

not enter into the LPA and purchase agreement with the Plaintiffs solely with the

alleged intent to breach the agreements in the future. Rather, he was already loaning

Focus Fund’s money to Hassan—to the tune of a quarter of Focus Fund’s assets

under management 179—when he presented the Plaintiffs with information about

Focus Fund that was rendered incorrect by those existing loans. These actions,

which were taken prior to the Plaintiffs’ investment, mean the fraudulent

inducement claim can stand on its own without the breach of contract claim—i.e.,

even if Adriani had made no further loans to Hassan after the Plaintiffs’ investment.

       That such a fraudulent inducement claim can stand apart from a breach of

contract claim is supported by precedent. “A claim for rescission or rescissory

damages separates a fraudulent inducement claim from breach-of-contract

177
    CSH Theatres, LLC v. Nederlander of San Francisco Assocs., 2015 WL 1839684, at *22 (Del.
Ch. Apr. 21, 2015), aff’d sub nom. In re Shorenstein Hays-Nederlander Theatres LLC Appeals,
213 A.3d 39 (Del. 2019).
178
    Osram Sylvania Inc. v. Townsend Ventures, LLC, 2013 WL 6199554, at *16 (Del. Ch. Nov. 19,
2013).
179
    Stip. ¶ 30.

                                             29
damages.”180 That is because fraudulent inducement renders a contract voidable, at

the election of the innocent party.181 Breach of contract does not. The Plaintiffs

here seek “rescissory or compensatory damages.”182 Their claim for fraudulent

inducement does not rely on the breach of contract claim.

       To be clear, Adriani had already loaned 25% of Focus Fund’s assets to Hassan

by the time the Plaintiffs expressed interest in Focus Fund—and such notes are,

obviously, not publicly traded securities. He then provided several solicitation

materials to the Plaintiffs that indicated that Focus Fund’s purpose was to invest in

publicly traded securities. That information was false, and the Plaintiffs have

adequately shown that they relied upon it in making their investment with Focus

Fund. Adriani provided those materials—and the false information about Focus

Fund’s purpose being to invest in publicly traded securities—in order to persuade

the Plaintiffs to invest with Focus Fund. He used those funds, in part, to immediately

extend more credit to Hassan. Focus Fund has now declared bankruptcy, having

funneled the Plaintiffs’ investment into Hassan’s ventures. The Plaintiffs have been

damaged, due to their justifiable reliance on Adriani’s false representations as to the

purpose of Focus Fund. They are entitled to rescissory damages against Adriani or

180
    CLP Toxicology, Inc. v. Casla Bio Holdings LLC, 2020 WL 3564622, at *18 (Del. Ch. June 29,
2020); Novipax Holdings LLC v. Sealed Air Corp., 2017 WL 5713307, at *5 n.2 (Del. Super. Ct.
Nov. 28, 2017).
181
    Lincoln Nat. Life Ins. Co. v. Joseph Schlanger 2006 Ins. Tr., 28 A.3d 436, 441 (Del. 2011).
182
    Compl. at Relief Requested ¶ j.

                                              30
compensatory damages should they so elect. Given the speculative nature of benefit-

of-the-bargain damages in this case, however, rescissory damages are the

appropriate remedy. 183

                                      III. CONCLUSION

       I find that Adriani fraudulently induced the Plaintiffs to invest in Focus Fund.

The Plaintiffs are entitled to rescissory damages, in the amount of the value of their

investments, with interest calculated at the legal rate running from the time their

investments were made. The parties should confer and inform the Court as to what

issues, if any, remain outstanding, and to what extent the other Defendant entities

should be subject to judgment.

183
    The Plaintiffs levied other viable claims against Adriani, including breach of contract, breach
of fiduciary duty, and breach of the implied covenant. Because I find that the Plaintiffs are entitled
to rescissory damages for fraudulent inducement, I need not reach a determination as to these other
claims. Carlyle Inv. Mgmt., L.L.C. v. Moonmouth Co. S.A., 2018 WL 5045716, at *2 (Del. Ch.
June 28, 2018) (“[W]hen a party is induced to enter a contract through fraud[,] [s]uch a plaintiff
has a choice between money damages or rescission[, which are] inconsistent remedies because
they are contradictory to one another.” (internal quotation marks omitted)).

                                                 31