In re Morrow Park Holding LLC

Docket NumberC. A. 2017-0036-PAF
Decision Date01 August 2022
CourtCourt of Chancery of Delaware

Date Submitted: January 18, 2022

Brian E. Farnan, Michael J. Farnan, FARNAN LLP, Wilmington Delaware; Attorneys for Plaintiffs and Counterclaim Defendants Jonathan Holtzman, Village Green Residential Properties, L.L.C., and VGM Clearing, LLC, and Counterclaim Defendant City Club Apartments, LLC.

Richard P. Rollo, Travis S. Hunter, Angela Lam, Nicole M Henry, John T. Miraglia, RICHARDS, LAYTON & FINGER, P.A. Wilmington, Delaware; Alan S. Loewinsohn, Kerry Schonwald, LOEWINSOHN DEARY SIMON RAY LLP, Dallas, Texas; Attorneys for Defendants and Counterclaim Plaintiffs CCI Historic, Inc., Compatriot Capital Inc., VG ECU Holdings, LLC, Village Green Holding, LLC, and Village Green Management Company, LLC.


This is the latest chapter of a business divorce among real estate developers. One side is referred to as the Holtzman Parties and the other as the Compatriot Parties. To accomplish their separation, the parties established limited liability companies with operating agreements governing the continued operation and subsequent division of their jointly owned assets. One of those assets was the Morrow Park City Apartments in Pittsburgh, Pennsylvania (the "Apartments" or the "Property"). The agreements provided for the development and financing of the Apartments and contemplated that one of the two developers would acquire the Apartments from the other after they had been substantially completed and occupied.

Despite having negotiated detailed agreements governing the process of their divorce, the parties deviated from the deal terms, leading to further complications, subterfuge, and chiseling. In 2016, one of the developers, Village Green Residential Properties, L.L.C. ("VGRP"-one of the Holtzman Parties), sought to exercise its right to acquire the Apartments by purchasing the interests of two of the Compatriot Parties. The parties' contract specified a process for setting the purchase price, but the parties ignored it. Disagreements over the valuation process ensued, culminating in VGRP filing this action. The initial complaint sought specific performance and an injunction to enforce VGRP's purchase right. The court entered an injunction, conditioned on a bond, essentially maintaining the status quo until a final judgment as to the purchase price.

Since then, the disputes multiplied. This litigation has expanded with the addition of new parties, claims, counterclaims, and third-party claims. There has also been related litigation in this court and elsewhere. Most notably, during the course of this action, the Holtzman Parties encouraged a minority investor to file suit in Pennsylvania. That litigation led to a court-ordered sale of the Apartments to the Compatriot Parties. A portion of the sale proceeds from that transaction has been deposited with this court to apportion in this case.

The parties tried this case over several days via Zoom. The court is tasked with deciding several claims and issues, including among others: (1) did either side breach the agreement governing the sale of the entity that owned the Apartments?; (2) did the Compatriot Parties violate the implied covenant of good faith and fair dealing?; (3) did any of the Compatriot Parties violate an agreement providing for its management of properties owned by the Holtzman Parties or their affiliates?; and (4) how should the proceeds from the sale of the Apartments be allocated? The court concludes that both sides failed to comply with the terms of their agreement governing the sale of the Apartments, but the Holtzman Parties have failed to establish damages. The Holtzman parties also lack standing to assert other claims and otherwise failed to establish breaches of their agreements. Thus, the court leaves the parties where they are following the court-ordered sale of the Apartments to the Compatriot Parties. Finally, the court accepts the Compatriot Parties' interpretation and calculation of the accrual of preferred returns under the parties' agreements, and the proceeds from the sale of the Apartments must be distributed accordingly.


The following recitation reflects the facts as the court finds them after trial.[1]

A. The Parties and the Ownership Structure of the Morrow Park City Apartments

The Plaintiffs are Jonathan Holtzman and certain affiliated companies: Plaintiff VGRP and Plaintiff VGM Clearing, LLC ("VGM Clearing"). They, along with Counterclaim Defendant City Club Apartments, Inc. ("CCA"), another Holtzman affiliate, are the "Holtzman Parties."[2]

The Defendants and Counterclaim Plaintiffs consist of CCI Historic, Inc. ("CCI"); VG ECU Holdings, LLC ("VG ECU"); Compatriot Capital, Inc. ("Compatriot"); Village Green Holding, LLC ("Village Green Holding"); and Village Green Management Company, LLC ("Village Green Management" and collectively with CCI, VG ECU, Compatriot, and Village Green Holding, the "Compatriot Parties"). CCI and Compatriot are Delaware corporations;[3] VG ECU, Village Green Holding, and Village Green Management are Delaware limited liability companies.[4]

In 2011, Compatriot acquired a 50% interest in Village Green Holding, a property-holding entity that was previously under the sole control of Holtzman Parties VGM Clearing and VGRP.[5] Previously, Holtzman had used the entities under his control to develop and manage multifamily housing properties. By 2016, the relationship between the parties had deteriorated, and they decided to part ways. To effectuate their separation, Village Green Holding, VGM Clearing, VGRP, CCI, VG ECU, and Holtzman entered into a "Redemption Agreement," dated February 1, 2016, which contemplated a series of transactions adjusting the parties' interests in their various joint projects.[6] Among those contemplated transactions was a plan to create two "New Companies" to control two then-unfinished properties: Morrow Park City Apartments and Southside Works City Apartments.[7] The Apartments were wholly owned through Morrow Park City Apartments, LLC ("MP Operating").[8] VG Morrow Park Capital LLC ("MP Managing") held a majority interest in MP Operating.[9] Non-party L.A.V. Associates, LP ("LAV") held a minority stake in MP Operating as well.[10] The owners of LAV previously owned the land underlying the Apartments, and they contributed this land to the project in exchange for an equity stake in MP Operating.[11] The parties to the Redemption Agreement eventually assigned the whole interest in MP Managing to the "New Company," Morrow Park Holding, LLC ("MP Holding").[12]

The following chart reflects the chain of entities that controlled the Apartments as of January 2017:

(Image Omitted)

B. The Relevant Agreements

This dispute centers on the parties' respective contractual rights and obligations under the limited liability company agreements of MP Holding (the "MP Holding Operating Agreement"), MP Managing (the "MP Managing Operating Agreement"), and agreements that were later executed in connection with those two agreements. The relevant provisions from each agreement are expounded upon below.

1. The MP Holding Operating Agreement

Under the Redemption Agreement, CCI and Holtzman initially agreed to be co-managing members with mutual decision rights for the Apartments.[13] Holtzman would later be provided with the opportunity to purchase CCI's interest in the Property, upon the Apartments being "substantially completed" and attaining at least a 93% occupancy rate for at least 45 days, otherwise known as "Stabilization" (the "VGRP Purchase Right").[14] This was later reiterated in the MP Holding Operating Agreement, dated May 31, 2016:

VGRP Purchase Right. From and after the date of this Agreement and upon the occurrence of Stabilization with respect to the apartment project owned and operated by [MP Operating], VGRP shall have the first right to purchase from CCI and Compatriot, as applicable, and such Persons shall have the obligation to sell to VGRP, the entirety of both of (i) CCI's Membership Interests in the Company and (ii) Compatriot's membership interest in [MP Managing] on the terms hereinafter provided in this Section 10.10. For purposes of this Agreement, "Stabilization" shall be defined as (x) [the Apartments] having been substantially completed (subject only to punch list items that do not directly limit occupancy of units) and (y) such apartments having been at least 93% leased and occupied for at least 45 days. The property manager of such apartments, designated as such by the Co-Managing Members, shall send prompt written notice to the Members at such time as Stabilization shall have occurred with respect to [the Apartments] (the "Notice of Stabilization"). VGRP must notify CCI in writing not later than 60 days after its receipt of the Notice of Stabilization whether or not it intends to exercise its purchase rights under this Section 10.10(a).[15]

The agreement provides CCI with a similar, secondary right to purchase VGRP's interest in MP Holding in the event that "VGRP determines not to so exercise such purchase rights, or it fails to timely provide the written notice referenced in Section 10.10(a)" (the "CCI Purchase Right").[16] The possible exercise of the VGRP Purchase Right or the CCI Purchase Right is sometimes referred to herein as a "Section 10.10 Transaction."

The MP Holding Operating Agreement also provides that upon either party's exercise of its respective purchase right, the purchaser shall pay an amount based on an "Appraised Value" of the Apartments.[17] Schedule C to the agreement dictates the process the parties must use to determine the Appraised Value (the "Appraisal...

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