IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
INDEPENDENCE REALTY TRUST, INC., )
INDEPENDENCE REALTY OPERATING )
PARTNERSHIP, LP, )
)
Plaintiffs, )
) C.A. No. N20C-07-316 FWW
v. )
)
USA CARRINGTON PARK 20, LLC, )
)
Defendant. )
EDMOND F. BROVELLI, JR., Individually )
and as Trustee of the BROVELLI )
FAMILY TRUST 2A, )
)
Plaintiffs, )
)
v. )
)
INDEPENDENCE REALTY OPERATING )
PARTNERSHIP, LP, a Delaware limited )
partnership; INDEPENDENCE REALTY )
TRUST, INC., a Maryland corporation; )
INDEPENDENCE REALTY ADVISORS, )
LLC, a Delaware limited liability company; )
IRT CARRINGTON APARTMENTS )
OWNER, LLC, a Delaware limited liability )
company, )
)
Defendants. )
Submitted: January 27, 2022
Decided: March 1, 2022
MEMORANDUM OPINION AND ORDER
Upon Defendants’ Motion to Dismiss Plaintiffs’ Complaint Under Del. Super. Ct.
Civ. R. 12(b)(1) &(6) For Lack of Subject Matter Jurisdiction and Failure to State
a Claim
GRANTED in PART and DENIED in PART.
James S. Green, Jr., Esquire, Jared T. Green, Esquire, SEITZ, VAN OGTROP &
GREEN, P.A., 222 Delaware Avenue, Suite 1500, Wilmington, DE 19801,
Attorneys for Plaintiffs Edward F. Brovelli, Jr., Individually, and as Trustee of The
Brovelli Family Trust 2A and Defendant USA CARRINGTON PARK 20, LLC.
Gregory F. Fischer, Esquire, COZEN O’CONNOR, 1201 North Market Street, Ste.
1001, Wilmington, DE 19801; John J. Sullivan, Esquire, COZEN O’CONNOR, 3
WTC, 175 Greenwich Street, 55th Floor, New York, NY 10007, Attorneys for
Defendants Independence Realty Operating Partnership, LP, Independence Realty
Trust, Inc., Independence Realty Advisors, LLC, and IRT Carrington Apartments
Owner, LLC and Plaintiffs Independent Realty Trust, Inc., and Independence Realty
Operating Partnership, LP.
WHARTON, J.
2
I. INTRODUCTION
In July 2020, Independence Realty Trust, Inc. (“IRT”) and Independence
Realty Operating Partnership, LP (“IROP”) brought a declaratory judgment action
in this court against USA Carrington Park 20, LLC (“Carrington”). IRT is a real
estate investment trust (“REIT”) and is IROP’s managing partner. IROP is an
umbrella REIT (“UPREIT”). IRT and IROP sought a declaration that Carrington
was not entitled to compensation for any tax payments Carrington may have been
required to make as a result IROP selling property that Carrington contributed to
IROP to become a limited partner IROP.1 In August 2021, Edmond F. Brovelli, Jr.
(“Brovelli”), Individually and as Trustee of the Brovelli Family Trust 2A (the
“Brovelli Trust”) (collectively the “Plaintiffs”) sued IROP, IRT, Independence
Realty Advisors, LLC, and IRT Carrington Apartments Owner, LLC (collectively
the “Defendants”) in a six-count complaint.2 That complaint alleged a violation of
§ 10(b) of the Exchange Act and Rule 10b-5 (Count I); Breach of Contract (Count
II); Negligent Misrepresentation (Count III); violations of the California
Corporations Code (Counts IV and V); and Indemnification (Count VI).3
1
Compl., D.I. 1 (N20C-07-316 FWW).
2
Compl., D.I. 1 (N21C-08-171 FJJ).
3
Id.
3
Meanwhile, the parties stipulated to a voluntary dismissal without prejudice of an
action Brovelli and the Brovelli Trust had brought against the Defendants in the
United States District Court for the Northern District of California. The two
Delaware cases were consolidated on November 30, 2021 under C.A. No. N20C-07-
316 FWW.4
The Defendants now move to dismiss all counts of the complaint.5 They argue
that; (1) the Plaintiffs lack standing; (2) the allegations improperly group all
Defendants together and only allege conclusions of law, not facts; (3) the fraud and
misrepresentation claims are time barred; (4) the Rule 10b-5 claim cannot be
asserted in state court; (5) the relevant contracts bar the breach of contract claims;
(6) the negligent misrepresentation claim in not justiciable in Superior Court; and
(7) the California securities law claims are deficiently pled.6
Brovelli and the Brovelli Trust do not challenge the Motion to Dismiss (the
“Motion”) as to the Rule 10b-5 count (Count I); the Negligent Misrepresentation
count (Count III); and the California securities law claims (Counts IV and V),
because, they say, they recognize the dispute is primarily contractual and to simplify
the matter.7 In their answer Brovelli and the Brovelli Trust assert that they do have
4
D.I. 16.
5
Mot. to Dismiss, D.I. 19.
6
Id.
7
Pls.’ Ans. Br. in Opp., at 3, D.I. 23.
4
standing to bring their action, the damages they seek not barred by the relevant
contracts because they direct, not consequential, and their remaining claims are well
pled.
Thus distilled, the Motion raises three issues for the Court to decide: (1)
whether Brovelli and the Brovelli Trust have standing to sue; (2) whether the breach
of contract and indemnification claims are contractually barred; and (3) whether the
complaint properly states claims for relief.
II. FACTS AND PROCEDURAL HISTORY
According to the Complaint, on March 3, 2017, IROP entered into a Fifth
Amended and Restated Agreement of Limited Partnership of Independence Realty
Operating Partnership, LP (“Operating Agreement”) with IRT as the general partner,
and IRT Limited Partner, LLC and IRT as limited partners.8 On May 2, 2014, IROP
entered into a Contribution Agreement (Carrington Park – 1801 Champlin Drive,
Little Rock, Arkansas) with several contributors, including USA Carrington Park
20, LLC.9 On January 29, 2015, USA Carrington Park 20, LLC, the Brovelli Trust
and Brovelli entered into a Transfer Agreement whereby USA Carrington Park 20,
LLC (a limited partner of IROP) transferred 100% of its interest in IROP to the
8
Compl., at ⁋ 6.
9
Id., at ⁋ 7.
5
Brovelli Trust.10 The Complaint asserts this agreement acted to substitute the
Brovelli Trust as a limited partner of IROP.11 The Complaint further alleges that the
Defendants represented that the real estate assets used to acquire the interest in IROP
would not be sold for a period of seven years (“the lock-out period”) absent an
Internal Revenue Code § 1031 exchange.12 In 2019, Defendants, without notice
according to the Complaint, sold the underlying assets without a § 1031 exchange
resulting in claimed damages in excess of $750,000.13 Finally, the Complaint alleges
that the Operating Agreement and the Contribution Agreement contractually require
the Defendants to indemnify the Plaintiffs against any breach of a representation of
those agreements, and despite demands for indemnification, Defendants have
refused.14
On July 31, 2020, IRT and IROP initiated litigation when they filed their
declaratory judgment action in this Court.15 Later, on November 13, 2020, Plaintiffs
sued the Defendants in federal court in the Northern District of California.16 That
matter was voluntarily dismissed without prejudice by stipulation subsequent to
10
Id., at ⁋ 8.
11
Id.
12
Id., at ⁋⁋ 10, 24-26.
13
Id., at ⁋⁋ 11, 29.
14
Id., at ⁋ 46.
15
Compl., D.I. 1.
16
App. Defs.’ Mot. to Dismiss at Ex. C., D. I. 19.
6
Defendants moving to dismiss or stay it.17 Plaintiffs then brought their complaint in
Delaware on August 19, 2019.18 That case was consolidated with this one on
November 30, 2021.19 Defendants in the action brought by Brovelli and the Brovelli
Trust moved to dismiss on December 1, 2021.20 Plaintiffs answered on December
30th21 and Defendants replied on January 28th.22
III. THE PARTIES’ CONTENTIONS
Defendants argue that Brovelli and the Brovelli Trust lack standing – the
Brovelli Trust because it is a transferee holder of a security suing under a contract
and securities transaction to which it was never a party, and Brovelli, because not
only was he never a party to the contract, but he never held the security.23 Even if
the Plaintiffs have standing, Defendants contend that the Complaint improperly
aggregates the Defendants in such a way that there are no operative facts alleged
against each Defendant.24 In addition, the terms of the relevant contracts bar
recovery.25 In particular, regarding the claim that Defendants breached the contract
17
Id.
18
Compl., D.I. 1. (N21C-08-171 FJJ).
19
D.I. 16.
20
Defs’. Mot. to Dismiss, D.I. 19.
21
Pl.’s Ans. Br. in Opp, D.I. 23.
22
Defs.’ Reply., D.I. 25.
23
Defs.’ Mot. to Dismiss, at 6-7, D.I. 19.
24
Id., at 8-9.
25
Id., at 14-16.
7
by selling the property before the seven year lock-out period expired, the damages
claimed by Plaintiffs are consequential damages and § 8.10(a) of the Contribution
Agreement absolves the Defendants of liability for any consequential damages.26
Further, the claim that Defendants breached the Operating Agreement because
Defendants did not provide the Plaintiffs with annual or quarterly reports and a
certificate of ownership did not cause Plaintiffs any damages.27
As noted, Plaintiffs have elected not to contest the Motion with respect to the
10b-5 count (Count 1), the Negligent Misrepresentation count (Count III), and the
two California securities counts (Counts IV and V). Plaintiffs, however, do oppose
the Motion with respect to the Breach of Contract and Indemnification counts
(Counts II and VI). They maintain that they have standing to sue for breach of §
8.18 of the Operating Agreement because they acquired all of USA Carrington Park
20, LLC’s interest in the Operating Agreement and UPREIT through the Transfer
Agreement.28 Moreover, Defendants, by the terms of the Operating Agreement
accepted and consented to the transfer and acted in furtherance of the Transfer
Agreement by accepting the Notice of Exchange made by the Brovelli Trust and
recording the Brovelli Trust’s partnership interests in the company’s records.29 They
26
Id.
27
Id.
28
Pls.’ Ans. Br. in Opp, at 9, D.I. 23.
29
Id., at 11.
8
dispute the Defendants’ contention that the tax payment they made as a result of the
sale of the security constituted consequential damages.30 Instead, they argue that
they were damaged directly.31 They also dispute that aggregating the Defendants
for pleading purposes was improper.32 They allege that all Defendants signed the
Operating Agreement and the Contribution Agreement and together breached those
agreements, and therefore that allegation meets Delaware’s relaxed pleading
standard under Superior Court Rule 8.33 Plaintiffs request leave to amend the
Complaint in the event the Court rules against them.
IV. STANDARD OF REVIEW
The Motion seeks relief under Rules 12(b)(1) – lack of subject matter jurisdiction
and 12 (b)(6.) - failure to state a claim. The Rule 12(b)(1) component of the Motion
appears to be moot in light of the Plaintiffs’ decision not to contest dismissal of the
claims to which that part of the Motion is addressed. Under Superior Court Civil
Rule 12(b)(6), dismissal is warranted only if it appears with reasonable certainty that
the nonmoving party would not be entitled to recover under any reasonably
conceivable set of circumstances.34 In ruling on a 12(b)(6) motion, the Court draws
30
Id., at 12-15.
31
Id.
32
Id., at 15-16.
33
Id., at 16.
34
Greenfield for Ford v. Budget of Delaware, Inc., 2017 WL 729769, at *2 (Del.
Super. Ct. Feb. 22, 2017).
9
all reasonable factual inferences in the light most favorable to the opposing party,35
and assumes that all well-pleaded facts in a complaint are true.36 Allegations are
well-pleaded if they place the defendant on notice of the claim.37
The pleading standards governing a motion to dismiss in Delaware are
minimal.38 Delaware is a notice-pleading jurisdiction, and a complaint need only
“give general notice as to the nature of the claim asserted against the defendant in
order to avoid dismissal for failure to state a claim.”39 Although the pleading
threshold in Delaware is low, “[a]llegations that are merely conclusory and lacking
factual basis, however, will not survive a motion to dismiss.”40
V. DISCUSSION
A. Standing.
1. Edmund F. Brovelli, Jr. Individually Lacks Standing.
Defendants argue that Edmund F. Bovelli, Jr. lacks standing to sue because he
was neither a party to any of the relevant contracts, nor did he own any security
35
Id.
36
Brevet Capital Special Opportunities Fund, LP v. Fourth Third, LLC, 2011 WL
3452821, at *6 (Del. Super. Ct. Aug. 5, 2011).
37
Precision Air, Inc. v. Standard Chlorine of Del., Inc., 654 A.2d 403, 406
(Del.1995).
38
See Central Mort. Co. v. Morgan Stanley Mort. Capital Holdings LLC, 27 A.3d
531, 536 (Del. 2011).
39
Nye v. Univ. of Del., 2003 WL 22176412, at *3 (Del. Super. Ct. Sept. 17, 2003);
see also Super. Ct. Civ. R. 8(a)(1).
40
Brevet Capital, 2011 WL 3452821 at *6.
10
interest in IROP. Plaintiffs did not address this argument in their Answer. The Court
has carefully reviewed all of the documents submitted by both parties in connection
with the Motion. Nothing in any of them suggests that Brovelli has an individual
interest in the litigation. Accordingly, the Motion to Dismiss claims brought by
Brovelli in his individual capacity for lack of standing is GRANTED.
2. The Brovelli Family Trust 2A Has Standing.
There can be no dispute that had USA Carrington Park 20, LLC retained its
security interest in IROP, it would have had standing to bring an action against the
Defendants. The Court first looks to the Operating Agreement. Article 11 governs
transfers.41 The term “Transfer” as it relates to Limited Partners refers to when a
Limited Partner “purports to assign all or any part of its Limited Partnership Interest
to another Person, and includes a sale, assignment, gift, pledge, encumbrance,
hypothecation, mortgage, exchange or any other disposition by law or otherwise.”42
The Transfer Agreement contemplates that the Brovelli Trust will become a
“substituted Limited Partner.”43 Under the Operating Agreement, a transferee who
has been admitted as a Substituted Limited Partner “shall have all the rights and
powers and be subject to all the restrictions and liabilities of a Limited Partner under
41
Defs.’ Mot. to Dismiss, at Ex. B, D.I. 19.
42
Id., at § 11.1(a)(i).
43
Pls.’ Ans. Br. in Opp, Ex A, at ⁋⁋ 2-4, D.I. 23.
11
this Agreement.”44 The Complaint alleges that the Bovelli Trust became a
Substituted Limited Partner of IROP.45 The Court takes that allegation as true, as it
must when resolving a Rule 12(b)(6) motion to dismiss. As a Substituted Limited
Partner, the Brovelli Trust has all of the “rights and powers” that USA Carrington
Park 20, LLC had. So, if USA Carrington Park 20, LLC had standing to sue, so does
the Brovelli Trust. The Motion to Dismiss the Brovelli Trust’s claims for lack of
standing is DENIED.
B. Grouping Defendants.
The Complaint identifies four Defendants – IROP, IRT, Independence
Realty Advisors, LLC, and IRT Carrington Apartments Owner, LLC. The
Complaint lists all four Defendants on the cover page and each Defendant is
separately identified in one of the first four paragraphs. Independence Realty
Advisors, LLC and IRT Carrington Apartments Owner, LLC never appear by name
again. Paragraph 7 alleges that IROP is a party to the Contribution Agreement and
Paragraph 6 alleges that IROP and IRT are parties to the Operating Agreement.
Beyond that, the Complaint employs the generic identifier “Defendants” in all of its
substantive allegations.
44
Defs.’ Mot. to Dismiss, Ex. B, at § 11.4(b), D.I. 19.T
45
Compl., at ⁋ 8., D.I. 1.
12
Superior Court Civil Rule 8 does not require much in terms of pleading. A
pleading shall contain “(1) a short and plain statement of the claim showing that the
pleader is entitled to relief and (2) a demand for judgment for the relief to which the
party deems itself entitled.”46 Delaware is a notice-pleading jurisdiction. In order
to pass muster, a complaint need only “give general notice as to the nature of the
claim asserted against the defendant in order to avoid dismissal for failure to state a
claim.”47
Due to the Plaintiffs concession, the Complaint has been winnowed down to
two counts – Breach of Contract and Indemnification based of that alleged breach of
contract. The Complaint does not allege that Independence Realty Advisors, LLC
and/or IRT Carrington Apartments Owner, LLC were parties to any contract. For
that reason, the Complaint does not fairly put them on notice as to the nature of the
claim asserted against them, nor does the Complaint show that the Plaintiffs are
entitled to relief against those two Defendants. The Motion to Dismiss for failure to
state a claim against Independence Realty Advisors, LLC and IRT Carrington
Apartments Owner, LLC is GRANTED.
46
Super. Ct. Civ. R. 8(a).
47
Nye v. Univ. of Del., 2003 WL 22176412, at *3 (Del. Super. Ct. Sept. 17, 2003);
see also Super. Ct. Civ. R. 8(a)(1).
13
In contrast, IROP is a party to the Contribution Agreement and both IROP and
IRT are parties to the Operating agreement. The Complaint alleges that both
agreements were breached.48 It further alleges how the contracts were breached.49
The Indemnification count cites an indemnification agreement in those agreements
which Plaintiffs allege the Defendants failed to honor.50 The Court finds that those
counts sufficiently state claims against IROP and IRT under Rule 8(a) and
Delaware’s notice pleading regime. Both Defendants are on general notice of the
claims against them. The Motion to Dismiss for failure to state a claim against
Defendants IROP and IRT is DENIED.
C. Contractual Bars.
In the Motion, Defendants maintain that the Operating Agreement bars the
type of damages Plaintiffs are seeking. They maintain that the Contribution
Agreement at § 8.10(a) prohibits compensation for speculative, consequential
damages: “In no event under this Section or otherwise shall the Operating
Partnership be liable to Contributors for any speculative or consequential damages.”
In the Defendants’ view tax damages are consequential because they are a
48
Compl., at ⁋ 29, D.I. 1.
49
Id., at ⁋⁋ 23-28.
50
Id., at ⁋⁋ 45-47.
14
consequence of the sale of the property.51 In other words, if the sale was the breach,
the Plaintiffs’ tax liability was the consequence of that breach.
In response, Plaintiffs make two arguments. First, they argue that the
determination of whether damages are direct or consequential is fact intensive and
not appropriate for resolution by a motion to dismiss.52 Second, they argue that, in
any event, the damages they claim are a direct result of Defendants breaching the
contracts.53
Direct damages are those inherent in the breach and are the necessary and
usual result of a defendant’s wrongful act; they flow naturally and necessarily from
the wrong.54 Direct damages compensate the plaintiff for damages that are
conclusively presumed to have been foreseen by the defendant from his wrongful
conduct.55 Consequential damages, on the other hand, are damages that result
naturally but not necessarily from the wrongful act, because they require the
existence of some other contract or relationship.56 The distinction between the two
51
Mot. to Dismiss, at 14-15, D.I. 19.
52
Defs.’ Ans. Br. in Opp., at 12, D.I. 23.
53
Id., at 13-15.
54
Bonanza Restaurant Co. v. Wink, 2012 WL 1415512 , at *3 (Del. Super. Ct. Apr.
17, 2012).
55
Id.
56
Id.
15
types of damages is the degree to which the damages are a foreseeable and highly
probable consequence of the breach.57
The lock-out provision of the Contribution Agreement is central to Plaintiffs’
claims and is found in Section 8.18 of that agreement. It generally precludes sale of
the contributed property for a period of seven years.58 However, the contributed
property may be disposed of prior to the expiration of the lock-out period “if such
disposition qualifies as a like-kind exchange under Section 1031 of the [Internal
Revenue] Code.” Plaintiffs allege that Defendants’ sale of the property before the
lock-out period expired was not a Section 1031 like-kind exchange and constituted
a breach of contract. Both the breach of contract count, and the indemnification
count allege direct damages.59 At this juncture, it is sufficient that Plaintiffs have
alleged direct damages. The degree to which the claimed damages were foreseeable
and their probability as a consequence the breach are questions that require further
factual development before answering. They are not appropriate to resolve now as
a matter of law. As the case proceeds, the Court expects the nature of any alleged
57
Id.
58
Defs.’ Mot. to Dismiss, Ex A, at § 8.18, D.I. 19.
59
Compl., at ⁋⁋ 30, 47.
16
damages to come into sharper focus.60 The Motion to Dismiss based on contractual
bars is DENIED.
D. Unopposed Counts.
Plaintiffs do not oppose the Motion as to Count I (Violation of Section 10b of
the Exchange Act and Rule 10b-5 Promulgated Thereunder Against All Defendants);
Count III (Negligent Misrepresentation Against All Defendants); Count IV
(Violation of California Corporations Code § 25401 and § 25501 Against All
Defendants); and Count V (Violation of California Corporations Code § 25505 and
§ 25504.1 Against All Defendants). Accordingly, the Motion to Dismiss as to those
Counts is GRANTED.
VI. CONCLUSION
For the reasons set forth above, Defendants’ Motion to Dismiss as to Count I
(Violation of Section 10b of the Exchange Act and Rule 10b-5 Promulgated
Thereunder); Count III (Negligent Misrepresentation as to All Defendants); Count
IV (Violation of California Corporations Code § 25401 and § 25501 Against All
Defendants); and Count V (Violation of California Corporations Code § 2505 and
60
See, Blue Cube Spinco LLC v. Dow Chem. Co. 2012 WL 4453460 (Del. Super. Ct.
Sept. 29, 2021); WSFS Fin. Corp. v. Great Am. Ins. Co., 2019 WL 2323839 (Del.
Super. Ct. May 31, 2019).
17
§25504.1 Against All Defendants) is GRANTED. Counts I, III, IV, and V are
DISMISSED WITH PREJUDICE.
The Defendants’ Motion to Dismiss all claims of Plaintiff Edmund F.
Brovelli, Jr. Individually, for lack of standing is GRANTED. All claims of Plaintiff
Edmund F. Brovelli, Jr. Individually are DISMISSED WITH PREJUDICE.
The Motion to Dismiss for failure to state a claim of Defendant Independence
Realty Advisors, LLC and IRT Carrington Apartments Owner, LLC is GRANTED.
All Claims against Defendants Independence Realty Advisors, LLC and IRT
Carrington Apartments Owners, LLC are DISMISSED WITHOUT PREJUDICE.
The Defendants’ Motion to Dismiss Count II (Breach of Contract) and Count
VI (Indemnification) for lack of standing of Edmund F. Brovelli, Jr. as Trustee of
The Brovelli Family Trust 2A and as contractually barred is DENIED.
Edmund F. Brovelli, Jr. as Trustee of The Brovelli Family Trust 2A is granted
leave to file an Amended Complaint within 30 days of the date of this Order. Such
leave is limited to amending the Complaint to state claims against Defendants
Independence Realty Advisors, LLC and IRT Carrington Apartments Owners, LLC.
IT IS SO ORDERED.
/s/ Ferris W. Wharton
Ferris W. Wharton, J.
18