Leonard Grunstein, Jack Dwyer, & Capital Funding Grp., Inc. v. Ronald E. Silva, Pearl Senior Care, LLC

• Decision Date: 05 September 2014
• Docket Number: C.A. No. 3932-VCN
• Parties: LEONARD GRUNSTEIN, JACK DWYER, and CAPITAL FUNDING GROUP, INC., Plaintiffs, v. RONALD E. SILVA, PEARL SENIOR CARE, LLC, PSC SUB, LLC, GEARY PROPERTY HOLDINGS, LLC, FILLMORE CAPITAL PARTNERS, LLC, FILLMORE STRATEGIC INVESTORS, LLC, DRUMM INVESTORS, LLC, and FILLMORE STRATEGIC MANAGEMENT, LLC, Defendants.
• Court: Court of Chancery of Delaware

LEONARD GRUNSTEIN, JACK DWYER,and CAPITAL FUNDING GROUP, INC., Plaintiffs, v. RONALD E. SILVA, PEARL SENIOR CARE, LLC, PSC SUB, LLC,GEARY PROPERTY HOLDINGS, LLC, FILLMORE CAPITAL PARTNERS, LLC,FILLMORE STRATEGIC INVESTORS, LLC, DRUMM INVESTORS, LLC,and FILLMORE STRATEGIC MANAGEMENT, LLC, Defendants.

C.A. No. 3932-VCN

COURT OF CHANCERY OF THE STATE OF DELAWARE

Date Submitted: March 14, 2014

September 5, 2014

MEMORANDUM OPINION

Arthur L. Dent, Esquire, Ryan T. Costa, Esquire, and Gerard M. Clodomir, Esquire of Potter Anderson & Corroon LLP, Wilmington, Delaware; Martin Stein, Esquire of Heller Horowitz & Feit, P.C., New York, New York; Ron S. Kaufman, Esquire and Sara M. McDuffie, Esquire of Fenigstein & Kaufman, Los Angeles, California; and Daniel P. Moylan, Esquire and Christine C. Carey, Esquire of Venable LLP, Towson, Maryland, Attorneys for Plaintiffs.

Bruce E. Jameson, Esquire and Laina M. Herbert, Esquire of Prickett, Jones & Elliott, P.A., Wilmington, Delaware; Joseph F. Donley, Esquire of Dechert LLP, New York, New York; and H. Joseph Escher III, Esquire and Lily Anna North, Esquire of Dechert LLP, San Francisco, California, Attorneys for Defendants.

NOBLE, Vice Chancellor

In early 2005, two sophisticated businessmen teamed up to acquire a $2 billion nursing home company.By trade, one was a lawyer; the other arranges loans insured by the United States Department of Housing and Urban Development("HUD").Each had substantial business experience in acquiring or financing healthcare companies.They pitched their business plan to the nursing home company's CEO, obtained commitments for debt financing, and submitted several proposals to acquire the company.However, they lacked a committed equity source willing to fund $350 million.

Based on a recommendation, they asked an investor relatively new to the nursing home industry if he would be capable of raising $350 million in equity from his investment sources—two pension funds.The investor agreed to do so.They allegedly had some understanding that the lawyer and the investor would be fifty-fifty partners, while the financier (or loan broker) would have the right to do the HUD refinancing of the commercial mortgage backed securities ("CMBS") issued as part of the debt financing for the transaction.They also enlisted another person (and his company) to do the financing of the CMBS loans.Although the four participants attempted to document certain aspects of their relationship, they proceeded to acquire the nursing home company without a written agreement defining their relationship.

Having made the highest bid, the lawyer and his affiliated entities entered into a merger agreement to acquire the nursing home company.The financier put up the required $7 million deposit after the investor was unable to do so.A few days later, a third party made a topping bid.Although the acquiring entities were entitled to receive a breakup fee if the nursing home company accepted the superior offer, the foursome agreed to submit a higher bid, which was accepted and memorialized in an amendment to the merger agreement.

As a condition to the revised merger agreement, the acquiring entities were required to provide a $53 million deposit or letter of credit and an equity commitment letter by late September 2005.Because the investor and the lawyer were unable to do so by the deadline, they renegotiated the terms of the merger agreement to give them more time to obtain a firm equity source.As part of the second amendment to the merger agreement, the financier put up an additional $3 million deposit.Nonetheless, the four participants agreed to share equally in the $10 million deposit and several million dollars in expenses that had already been incurred.

Over the course of the next several months, the foursome worked together in their respective roles to acquire the nursing home company.The financier underwrote nearly 275 facilities to support the CMBS financing and in preparation for the HUD refinancing that the participants anticipated would occur post-closing.The investor continued to solicit his institutional equity sources and work on completing the transaction.The lawyer negotiated the merger agreement and the subsequent revisions to it, and assisted in ensuring that the transaction was consummated.Finally, the investor obtained the $350 million equity commitment from one of his equity sources.

Because of some negative publicity arising from the lawyer's prior business dealings, the lawyer and the investor chose to change the acquiring entities, which were associated with the lawyer, to three shell companies controlled by the investor.This modification transferred legal control of the transaction from the lawyer to the investor, but it did not alter their relationship.As the acquisition proceeded to closing, the four participants continued to work together toward their common endeavor.However, when the transaction closed, the investor refused to recognize the lawyer as a fifty-fifty partner in the transaction and the financier's right to refinance the CMBS debt.Despite the substantial time and effort expended by the financier, he obtained from the transaction only reimbursement for the deposit.The investor paid for some of the lawyer's legal fees and separately paid fees to an investment banking firm in which the lawyer held a significant stake, but the lawyer asserts that he received no compensation for his business time expended in acquiring the nursing home company.Having little, if anything, to show for their efforts, the financier and the lawyer filed suit againstthe investor claiming, among other things, that he breached both an oral partnership agreement and an oral contract to do the HUD financing.

This case presents a number of perplexing factual questions.Why would sophisticated businessmen proceed jointly to acquire a billion dollar company without a written agreement defining their relationship?Why did the participants attempt to document certain aspects of their relationship and not others?How much weight should be accorded to the fact that they attempted to document their rights and obligations based upon their collaboration but ultimately never completed this task?Why did the lawyer transfer legal control of the transaction to the investor if they did not have a partnership agreement?And why did the financier spend months underwriting 275 facilities if he did not have an oral (or written) agreement with the investor to do the HUD financing?

This case also highlights the tension that may arise between conventional business practices employed to manifest assent and the equitable doctrines that may be implicated in their absence.If these parties worked together based on a broad understanding, is the willingness of certain persons to collaborate without a firm commitment a voluntary act taken in self-interest or an unjust enrichment benefiting their collaborators who ultimately stopped working with them?Who should be responsible for making clear that the parties did or did not agree that they were contractually obligated to one another?

In resolving the plaintiffs' claims, the Court ultimately must rely on an assessment of the credibility of the parties to determine what, if anything, the parties agreed were the terms of their relationship.This is so because the parties did not memorialize their relationship, as one might expect in the context of a transaction worth more than one billion dollars.Although the parties present some evidence from contemporaneous documents and third parties, successfully contextualizing this evidence depends on the explanations provided by the litigants themselves.As might be imagined, each party-witness in a transaction of this magnitude has a sizeable financial interest in the outcome of the litigation.The plaintiffs could even gain some amount of control over a billion dollar enterprise.The Court's assessment of the litigants' testimony was that it was somewhat lacking in reliability: the parties generally appeared to say what needed to be said to support their position.

However, certain post-trial events have also been brought to the Court's attention and further weigh on the Court's assessment of credibility.Specifically, the lawyer in this case pled guilty to a charge of perjury in another civil proceeding in New York.A perjury conviction arising from a civil suit is an unusual occurrence.It is an event which must be stated at the outset of the opinion because the conclusion which flows from this conviction colors all of the lawyer's testimony, although chronologically it is one of the most recent relevant factualdevelopments in this proceeding.As explained in the reasoning which follows, because the Court must rely on the lawyer's testimony to find in his favor, it concludes that he has not met his burden of proof in demonstrating his entitlement to relief.Based on the totality of circumstances and for the reasons that follow, the financier is also not entitled to relief.

I.INTRODUCTION

PlaintiffsLeonard Grunstein("Grunstein"), Jack Dwyer("Dwyer"), and Capital Funding Group, Inc.("CFG")(collectively, the "Plaintiffs") bring various causes of action against DefendantsRonald E. Silva("Silva"), Fillmore Capital Partners, LLC("Fillmore" or "FCP"), Fillmore Strategic Investors, LLC("FSI"), and their affiliated entities¹(collectively, the "Defendants"), relating to the acquisition and taking private of Beverly Enterprises, Inc.("Beverly").In March 2006, certain entities associated with Fillmore—Pearl Senior Care, Inc.("Pearl"), PSC Sub, Inc., and Geary Property Holdings, LLC("Geary")—acquired Beverly for $12.50 per share (the "merger").

The Plaintiffs have asserted claims for breach of an oral partnership agreement, promissory estoppel, breach of contract, unjust enrichment, and fraud.The Plaintiffs' primary claim is that Grunstein, Dwyer, Silva, and Richard M. Lerner("Lerner"), then an...