IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
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`C.A. No. 2018-0840-SG
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`PUBLIC VERSION FILED:
`March 19, 2019
`
`GMF ELCM FUND L.P., GMF ELCM
`LLC, GMF ELCM REGENCY I LLC
`and GMF ELCM REGENCY II LLC,
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`Plaintiffs,
`
`v.
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`ELCM HCRE GP LLC, ELCM
`SPONSOR I HOLDCO LLC, ELCM
`PARTNERS, LLC, ELCM ASSET
`MANAGER HOLDCO LLC and
`ANDREW WHITE,
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`Defendants,
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`-and-
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`EAST LAKE CAPITAL
`MANAGEMENT LLC, ELCM
`HEALTHCARE REAL ESTATE
`FUND LP, ELCM SPONSOR I LLC
`and GMF RSL BUYER LLC,
`
`Nominal Defendants.
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`MOTION FOR EXPEDITED PROCEEDINGS
`ON PLAINTIFFS’ CLAIM FOR DISSOLUTION
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`Plaintiffs GMF ELCM Fund L.P., GMF ELCM LLC, GMF ELCM Regency
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`I LLC and GMF ELCM Regency II LLC (collectively, “GMF”) hereby
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`respectfully move this Court for an order expediting their petition for judicial
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`dissolution of ELCM Healthcare Real Estate Fund LP (“HCRE”) under 6 Del. C.
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`EFiled: Mar 19 2019 04:17PM EDT
`Transaction ID 63082386
`Case No. 2018-0840-SG
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`C.A. No. 2018-0840-SG
`
`PUBLIC VERSION FILED:
`March 19, 2019
`
`GMF ELCM FUND L.P., GMF ELCM
`LLC, GMF ELCM REGENCY I LLC
`and GMF ELCM REGENCY II LLC,
`
`Plaintiffs,
`
`v.
`
`ELCM HCRE GP LLC, ELCM
`SPONSOR I HOLDCO LLC, ELCM
`PARTNERS, LLC, ELCM ASSET
`MANAGER HOLDCO LLC and
`ANDREW WHITE,
`
`Defendants,
`
`-and-
`
`EAST LAKE CAPITAL
`MANAGEMENT LLC, ELCM
`HEALTHCARE REAL ESTATE
`FUND LP, ELCM SPONSOR I LLC
`and GMF RSL BUYER LLC,
`
`Nominal Defendants.
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`MOTION FOR EXPEDITED PROCEEDINGS
`ON PLAINTIFFS’ CLAIM FOR DISSOLUTION
`
`Plaintiffs GMF ELCM Fund L.P., GMF ELCM LLC, GMF ELCM Regency
`
`I LLC and GMF ELCM Regency II LLC (collectively, “GMF”) hereby
`
`respectfully move this Court for an order expediting their petition for judicial
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`dissolution of ELCM Healthcare Real Estate Fund LP (“HCRE”) under 6 Del. C.
`
`EFiled: Mar 19 2019 04:17PM EDT
`Transaction ID 63082386
`Case No. 2018-0840-SG
`
`
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`
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`§ 17-802 and appointment of a liquidating trustee under 6 Del. C. § 17-803, or, in
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`the alternative, dissolution of HCRE and appointment of a receiver to administer
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`the winding up of its assets under this Court’s equitable powers at common law.
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`The grounds for this motion are as follows.
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`1.
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`In
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`their Verified Amended Complaint (“Am. Compl.”), filed
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`contemporaneously herewith, GMF seeks judicial dissolution of HCRE under
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`6 Del. C. § 17-802 and appointment of a liquidating trustee under 6 Del. C. § 17-
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`803, or, in the alternative, dissolution of HCRE and appointment of a receiver to
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`administer the winding up of its assets under this Court’s equitable powers at
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`common law. See Am. Compl. ¶¶ 126-33.1 Delaware courts will order dissolution
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`in “situations in which the [entity’s] management has become so dysfunctional or
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`its business purpose so thwarted that it is no longer practicable to operate the
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`business, such as in the case of a voting deadlock or where the defined purpose of
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`the entity has become impossible to fulfill.” In re Arrow Invs. Advisors, LLC,
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`2009 WL 1101682 at *2-3 (Del. Ch. Apr. 23, 2009) (reasoning that dissolution
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`1 GMF believes that bases for dissolving HCRE apply equally to ELCM Sponsor I
`LLC (“Sponsor I”) and GMF RSL Buyer LLC (“RSL Buyer”). However, the LLC
`agreements governing Sponsor I and RSL Buyer restrict GMF’s ability to petition
`this Court for judicial dissolution of those entities, although those agreements,
`nevertheless, expressly contemplate an order of dissolution under the LLC Act.
`See Am. Compl. ¶ 133 n.19.
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`2
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`would be warranted when, for example, petitioner shows that “the perpetuation of
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`the entity . . . [is] obviously futile and would not result in business success”).
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`2.
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`Based on the evidentiary record amassed to date, on which GMF is
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`prepared to rest, including proceedings before this Court post-dating the close of
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`evidence on GMF’s motion for a receiver pendente lite, it has become abundantly
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`clear that Defendants’ management of HCRE has become so dysfunctional and
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`Defendants’ underlying misconduct so egregious that dissolution of HCRE is not
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`only warranted, but, unfortunately, has become the only tenable option. As of
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`November 1, 2018, fewer than three weeks before the commencement of this
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`action, there were nine facilities (including six that are owned by HCRE) under
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`Defendants’ operational control. Defendants have since relinquished operational
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`control over three of the four facilities in Vermont (all owned by HCRE) to a
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`permanent receiver after a Vermont court found “clear and convincing” evidence
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`of, among other things, “imminent danger of serious physical or mental harm to
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`residents.” JX 408 at 25-27. The State is currently seeking to place the fourth
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`Vermont facility (also owned by HCRE) into permanent receivership. Defendants’
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`gross mismanagement has also extended to HCRE’s remaining two facilities in
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`Oklahoma, from which Mr. White, on information and belief, is siphoning funds
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`into entities he controls and in which GMF has no interest. Moreover, as the Court
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`knows, Mr. White has repeatedly sought to frustrate the efforts of the interim
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`3
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`receiver pendente lite over HCRE (and the other Nominal Defendants), William B.
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`Chandler III, who, as a result of Mr. White’s stymying of the interim receivership,
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`has sought to resign. What is more, given Mr. Chandler’s alarming experience as
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`interim receiver pendente lite, coupled with what appear to be substantial liquidity
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`concerns at HCRE and the other Nominal Defendants, it has become increasingly
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`unlikely that a successor receiver can and will be identified. In sum, HCRE, like
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`the other Nominal Defendants, is in a complete and utter state of paralysis, and
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`dissolution is the only tenable option to prevent its further destruction by
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`Defendants.
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`3.
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`As corroborated by the substantial record evidence already before this
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`Court, Defendants’ gross mismanagement and malfeasance, with Mr. White at the
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`helm, has irreparably harmed HCRE to the unavoidable point that it can no longer
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`operate in accordance with its stated purpose, namely “making real estate and real
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`estate-related investments related to senior housing,” “managing, supervising,
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`renovating, repositioning, developing, redeveloping, holding for investment and
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`otherwise dealing with and disposing of such investments,” and “engaging in such
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`other activities related, incidental or ancillary thereto.” JX 332 § 1.3. Given
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`Defendants’ loss of operational control over the Vermont facilities as a result of
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`Defendants’ gross mismanagement of HCRE, and with no end in sight to
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`4
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`Defendants’ other malfeasance, the business can no longer operate in accordance
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`with its purpose and must be dissolved promptly.
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`4. Moreover, the doctrine of equitable dissolution may be invoked in
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`“situations involving egregious misconduct in the exercise of one’s fiduciary
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`responsibilities.” In re Shawe & Elting LLC, 2015 WL 4874733, at *33 (Del. Ch.
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`Aug. 13, 2015), aff’d sub nom. Shawe v. Elting, 157 A.3d 152 (Del. 2017); see also
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`Arrow, 2009 WL 1101682 at *4 (in “rare” instances, underlying breaches of
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`fiduciary duty may “rise to such a level that the appropriate remedy for them is the
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`termination of the corporate existence itself”). Mr. White’s record of gross
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`mismanagement of the Nominal Defendants merits dissolution of HCRE. Indeed,
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`the record evidence conclusively establishes that Defendants, for months on end,
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`failed to: (i) invoice residents or deposit their rent checks; (ii) maintain properly
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`functional banking facilities; (iii) timely pay, among others, critical vendors and
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`utilities; (iv) timely pay employees, resulting in attrition and, in turn, dangerously
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`understaffed facilities; (v) refund monies owed to residents, as often contractually
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`and/or legally required; or (vi) maintain funds in lockbox accounts as required by
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`the terms of the mortgage on the Vermont facilities, resulting in the debt being
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`referred to a special servicer, the declaration of a default, and the acceleration of
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`the remaining approximately $24 million outstanding on the loan; or (vii) comply
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`with state licensing requirements or even respond to state regulators or judicial
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`5
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`officers as required, leading to adverse action by state authorities. GMF
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`respectfully submits that the evidence already before this Court is sufficient to
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`establish Defendants’ repeated, albeit inexplicable, breaches of contractual and
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`fiduciary duties with respect to the management of HCRE (and the other Nominal
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`Defendants) such that a decree of dissolution is both appropriate and necessary.
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`5.
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`“Delaware courts are always receptive to expediting any type of
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`litigation in the interests of affording justice to the parties.” Box v. Box, 697 A.2d
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`395, 399 (Del. 1997). “Actions seeking the appointment of a custodian or the
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`dissolution of an entity are said to be summary proceedings,” Friendly Ghost
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`Enters., LLC v. McWilliams, 2007 2198767, at *2 n.6 (Del. Ch. July 27, 2007),
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`and should “be scheduled for an expedited trial without the usual showings
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`required to obtain expedition in other matters.” Donald J. Wolfe, Jr. & Michael
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`A. Pittenger, Corporate and Commercial Practice in the Delaware Court of
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`Chancery § 4.10[a], at 4-52 (2018).
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`6.
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`This Court will grant expedited proceedings when the plaintiff has
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`(1) “articulated a sufficiently colorable claim” and (2) “shown a sufficient
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`possibility of a threatened irreparable injury.” Icahn Partners LP v. Amylin
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`Pharm., Inc., 2012 WL 1526814, at *3 (Del. Ch. Apr. 20, 2012) (quoting
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`Giammargo v. Snapple Beverage Corp., 1994 WL 672698, at *2 (Del. Ch. Nov.
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`15, 1994)). In applying this standard, the Court “traditionally has acted with a
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`6
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`certain solicitude for plaintiffs” and “has followed the practice of erring on the
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`side of more [expedited proceedings] rather than fewer.” Giammargo, 1994 WL
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`672698, at *2.
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`7.
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`GMF’s request to expedite its petition for dissolution of HCRE and
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`appointment of a liquidating trustee plainly meets this standard. On the colorable
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`claim requirement, GMF respectfully refers the Court to Paragraph 11 and Count
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`VII of its Verified Amended Complaint. On the threatened irreparable injury
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`requirement, this Court has already concluded that “investors in these entities run
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`a substantial risk of irreparable harm, because the business and its goodwill are
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`certainly endangered.” Jan. 30, 2019 Tr. at 177:18-22. For additional detail,
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`GMF respectfully refers the Court to pages 4-16 of its Post-Evidentiary Hearing
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`Brief in Support of Plaintiffs’ Motion to Appoint a Receiver Pendente Lite
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`(Dkt. #93).
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`8.
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`Given the dire circumstances surrounding this action and the
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`imminent threat of dissipation of additional value and irreparable harm that HCRE
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`faces, GMF respectfully moves this Court for expedited proceedings on
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`dissolution as soon as practicable for the Court. The parties have developed a
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`substantial evidentiary record in this action which can and should be used for
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`purposes of evaluating GMF’s entitlement to dissolution. To minimize any
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`further burden on the Court, GMF is prepared to rest on this substantial record.
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`7
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`GMF hopes that Defendants, who have had ample opportunities to offer evidence
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`in defense of GMF’s claims, will do the same.
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`9.
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`If, however, Defendants claim to require additional discovery, prior to
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`a further hearing or trial on GMF’s petition for dissolution of HCRE and
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`appointment of a liquidating trustee, that discovery should be limited and
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`narrowly-tailored to discrete issues, which Defendants should be ordered to
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`specify at this time, as each additional day that passes puts HCRE in even greater
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`jeopardy. Particularly given the availability of the record developed to date, any
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`supplemental proceedings following discovery should be limited in duration.
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`CONCLUSION
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`10.
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`For the above reasons, and as detailed in GMF’s Verified Amended
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`Complaint, Motion to Appoint a Receiver Pendente Lite (Dkt. #1), Pre-
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`Evidentiary Hearing Brief (Dkt. #64), Post-Evidentiary Hearing Brief (Dkt. #93),
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`and as corroborated by the substantial record already developed in this action,
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`GMF respectfully requests that this Court enter the order submitted herewith
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`expediting proceedings and setting a trial for dissolution as soon as reasonably
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`practical given the Court’s schedule.
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`8
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`
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`Of Counsel:
`
`Joshua S. Amsel
`Matthew R. Friedenberg
`WEIL, GOTSHAL & MANGES LLP
`767 Fifth Avenue
`New York, New York 10153
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`ROSS ARONSTAM & MORITZ LLP
`
`/s/ David E. Ross
`David E. Ross (Bar No. 5228)
`Bradley R. Aronstam (Bar No. 5129)
`100 S. West Street, Suite 400
`Wilmington, Delaware 19801
`(302) 576-1600
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`Attorneys for Plaintiffs GMF ELCM
`Fund L.P., GMF ELCM LLC, GMF
`ELCM Regency I LLC and GMF
`ELCM Regency II LLC
`
`Dated: March 12, 2019
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`Words: 1,639
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`PUBLIC VERSION FILED:
`March 19, 2019
`
`9
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`
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