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Scion Dwight Managing v. Dwight Lofts Holdings

May 17, 2012

SCION DWIGHT MANAGING MEMBER LLC, AN ILLINOIS LIMITED LIABILITY COMPANY, PLAINTIFF,
v.
DWIGHT LOFTS HOLDINGS, LLC, A DELAWARE LIMITED LIABILITY COMPANY, DEFENDANT.



The opinion of the court was delivered by: Judge Ronald A. Guzman

MEMORANDUM OPINION AND ORDER

Scion Dwight Managing Member LLC ("Scion" ) has sued Dwight Lofts Holdings, LLC for, among other things, breach of contract, and defendant has countersued plaintiff for reformation. The case is before the Court on Scion's Federal Rule of Civil Procedure ("Rule") 56 motion for summary judgment as to these two claims. For the reasons set forth below, the Court denies the motion.

Facts

Between late 2006 and 2008, Scion and various investment funds advised by ASB Capital Management, LLC (collectively "ASB" or "Fund") entered into five real estate joint ventures in the form of LLCs called University Crossing, Millennium, Breckenridge, 2040 Lofts and defendant Dwight Lofts Holdings, LLC. (Def.'s LR 56.1(b)(3)(B) Stmt. ¶¶ 1, 4-5.) Robert ("Rob") Bronstein, a principal and president of Scion, and his brother Eric Bronstein, a principal of and in-house counsel for Scion, negotiated the ventures on behalf of Scion. (Id. ¶ 7.) Keyvan Arjomand, then a representative of ASB, attorneys Cara Nelson and Barbara Trachtenberg of DLA Piper, the law firm that represented ASB, and Robert Bellinger, president of ASB, negotiated the ventures on behalf of ASB. (Id.)

The LLC Agreement for the first venture, University Crossing: (1) names Scion as the managing or venture member and ASB as the investor or fund member; (2) states that ASB will pay Scion an acquisition fee of $150,000.00 when the venture obtains title to the real estate; (3) a Scion affiliate will manage the property and be paid a fee for doing so equal to five percent basis points of the real estate's purchase price; and (4) beginning a year after the purchase, ASB has an absolute right to buy from Scion and Scion has an absolute right to sell to ASB Scion's interest in the venture ("put/call provision"). (See Barnett Aff., Ex. G, University Crossing LLC Agreement, Preamble, §§ 1.1, 5.4, 5.6.2, 6.4.) The Agreement also contains a Sale Proceeds Waterfall Provision, which states that the proceeds of a sale or refinancing will be distributed so that each member's invested capital is returned before Scion is paid a promote percentage, i.e., a percentage of the proceeds in excess of its interest in the venture, as follows:

First, among the Members in proportion to the Unrecovered Voluntary Additional Capital Contributions of each of the Members at such time, until such time as each Member's Unrecovered Voluntary Additional Capital Contribution has been reduced to zero;

Second, among the Members, in proportion to the Unrecovered 8% Preferred Return Amounts of the Members at such time, until such time as each Member's Unrecovered 8% Preferred Return Amount has been reduced to zero;

Third, among the Members in proportion to the Invested Capital of the Members at such time, until such time as each Member's Invested Capital has been reduced to zero;

Fourth, (x) the Remaining Percentage to the Members in proportion to their respective Percentage Interests at such time, and (y) the Promote Percentage to Venture Partner. (Id. § 4.2 ("Sale Proceeds Waterfall" or "Provision").)

During negotiations for the second venture, Millennium, ASB wanted to reduce the property management fee and eliminate the acquisition fee, neither of which Scion wanted to do. (See Pl.'s LR 56.1(a) Stmt., Ex. 9, Emails from Arjomand to E. & R. Bronstein & from R. Bronstein to Arjomand (Mar. 7, 2007); id., Email from R. Bronstein to Arjomand (Mar. 8, 2007); id., Ex. 8, Email from Nelson to E. & R. Bronstein (Mar. 7, 2007); id., Email from E. Bronstein to Nelson (Mar. 8, 2007).) On March 21, 2007, Arjomand suggested a possible solution:

. . . [M]y sense is that . . . Robert [Bellinger, president of ASB] is ok with . . . an acquisition fee . . . [but is] stuck on the say $150K as a max acquisition fee, . . . [and] struggles with the portion of the upfront fee that Scion needs to put its people to work on a new project, etc.; however, if you're open to it we might be able to address [sic] potentially through a higher property management fee and/or promote structure on deals. My sense is that the couple hundred thousand on Millennium that will go to Scion to cover costs, etc [sic] upfront . . . , Robert [Bellinger] would feel more comfortable paying you a higher property management fee and/or promote instead. (Id., Ex. 10, Email from Arjomand to E. & R. Bronstein (Mar. 21, 2007).)

Based on this suggestion, Rob Bronstein proposed that the Sale Proceeds Waterfall in future LLC Agreements contain two levels of promote rather than the single level that appeared in the University Crossing Agreement. Specifically, Rob "propose[d] . . . for all future projects except where [the parties] mutually agree on alternate terms" that Scion would: (1) "receive an acquisition fee calculated as .075% of the purchase price [of the real estate] , capped at $150,000 and paid at the time of closing;" (2) "be paid a property management fee calculated as 5.0% of the gross project revenue on the first 250 units of any single project, and 4.0% of revenue on all units above 250"; and (3) "continue to co-invest 0.5% of required equity . . . with the ASB Fund, earning pari passu returns up to a threshold of 8.0% annual cumulative return[,] [o]nce the 8.0% return has been achieved, Scion [would] receive 25% of proceeds (75% to the Fund) until the Fund realizes a 12.0% cumulative return, above which Scion [would] receive 50% of proceeds (50% to the Fund)." (See Barnett Aff., Ex. S, Mem. from R. Bronstein to Bellinger & Arjomand (Mar. 30, 2007).) Rob's proposal says nothing about the order in which sale proceeds would be distributed under the new provision, i.e., whether invested capital would be returned before or after payment of one or both levels of promote. (Id.)

On April 6, 2007, the parties executed the Millennium LLC Agreement. (See id., Ex. O, Millennium LLC Agreement.) The Millennium Agreement contains the same provisions as the University Crossing Agreement, including the Sale Proceeds Waterfall, but increases Scion's acquisition fee from $150,000.00 to $400,000.00. (See id., Preamble, §§ 1.1, 4.2, 5.4, 5.6.2, 6.4.)

On April 24, 2007, Rob Bronstein emailed ASB president Bellinger the following: I have spoken to Keyvan who relayed your JV terms, and think we are very close to finalizing this.

In terms of the acquisition fee (0.75% of the purchase price not to exceed $150,000), we are in agreement. The same is true for the management fee (5% of the first 500 beds ...


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