COURT OF CHANCERY
OF THE
SAM GLASSCOCK III STATE OF DELAWARE COURT OF CHANCERY COURTHOUSE
VICE CHANCELLOR 34 THE CIRCLE
GEORGETOWN, DELAWARE 19947
Date Submitted: May 8, 2023
Date Decided: August 29, 2023
David E. Ross, Esquire Norman M. Powell, Esquire
Eric D. Selden, Esquire Emily V. Burton, Esquire
A. Gage Whirley, Esquire Lauren Dunkle Fortunato, Esquire
ROSS ARONSTAM & MORITZ LLP Nehama L. Hanoch, Esquire
Hercules Building YOUNG CONAWAY SARGATT &
1313 N. Market Street, Suite 1001 TAYLOR, LLP
Wilmington, Delaware 19801 Rodney Square
1000 N. King Street
Wilmington, Delaware 19801
Stephen Norma, Esquire
Ellis H. Huff, Esquire
POTTER ANDERSON & CORROON LLP
1313 N. Market Street
Hercules Plaza, 6th Floor
Wilmington, Delaware 19801
Re: Paul Capital Advisors, L.L.C., et al. v. Holland, et al., C.A. No.
2022-0167-SG
Dear Counsel:
Alexander’s cutting of the Gordian Knot with a single stroke is a metaphor for
resolving complex litigation that has been worn smooth by overuse, yet it comes
temptingly to mind as I labor to pick oakum from the tangle of contracts and
undertakings by which, here, the Plaintiffs attempted to monetize certain illiquid
assets; my job is made more difficult by the fact that it is unexplained, and not
intuitive, why the parties felt the complexity of the methods employed had merit.
This Letter Opinion is my second opinion concerning that task. The Defendants offer
me a blade to slice this monkey’s fist of contract issues, via their Motions to Dismiss,
addressed below; upon review, however, I must decline.
I will not repeat the statement of the facts set out, in painstaking if still
abbreviated form, in Paul Capital I;1 I adopt that statement of facts here, and address
only briefly the facts necessary to my denial, via this Letter Opinion, of the bulk of
the Defendants’ Motions to Dismiss the remaining allegations of the Second
Amended Complaint (the “SAC”). The liquidation scheme which the parties here
employed involved the use of trusts (the “Exchange Trusts”), to hold the assets to be
monetized, and the resulting sales’ proceeds. In Paul Capital I, I found that the
Plaintiffs were not fiduciary beneficiaries of those Exchange Trusts. They therefore
lacked standing to remove the Trust Advisors to the Exchange Trusts or maintain
breach of fiduciary duty claims.2 That left the contract claims alleged in the SAC
(together with tort claims alleging fraud and promissory estoppel). This Letter
Opinion addresses the various Defendants’ Motions to Dismiss those claims as well
under Rule 12(b)(6).
1
Paul Cap. Advisors, L.L.C., et al. v. Stahl, et al., 2022 WL 3418769, at *4–7 (Del. Ch. Aug. 17,
2022) as corrected (Aug. 25, 2022) (“Paul Capital I”).
2
Id. at *12.
2
The following adumbration of the facts is sufficient, I think, to convey the
complexity of the allegations in the SAC: The Plaintiffs are a Delaware LLC
involved in private equity, and associated partnerships that function as private equity
funds (jointly, “Paul Capital”). Paul Capital holds—or held—investments in other
private equity funds. These investments are termed “Secondaries.” They are
generally illiquid. By 2017, Paul Capital intended to sell these Secondaries for cash.
Paul Capital found a buyer in Defendant Beneficent Company Group
(“BEN”), a Delaware limited partnership. BEN, however, was cash-poor; it
proposed to buy the Paul Capital Secondaries with another illiquid asset, BEN
common units. To advance Paul Capital’s goal of receiving cash, and presumably
for other reasons the parties have not adequately revealed, BEN and Paul Capital
concocted a scheme that is laid out below in simplified form.
The parties agreed that the transactions would be undertaken through a
Delaware LLC, MHT, which is run by Defendant Murray Holland (together with
MHT, the “MHT Defendants”). Paul Capital transferred the secondary assets to
MHT. MHT formed nine trusts, the Exchange Trusts referred to above, and
transferred the Secondaries to these trusts. The Exchange Trusts were controlled by
two Trust Advisors, one of whom was Mr. Holland. The Exchange Trusts in turn
transferred the Secondaries, or rights therein, to the buyer, BEN. In return, BEN
transferred the BEN units to the Exchange Trusts. The parties contemplated an
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auction of the BEN units for cash. MHT was to receive the proceeds, then pay up
to $550 million to Paul Capital, and retaining for itself any amount exceeding this
sum. If, on the other hand, the auction came in under $500 million, BEN was
obligated to pay the difference to Paul Capital, in cash or additional BEN common
units (the Contingent Value Rights (the “CVRs”)). Thus, the parties contemplated
that, post auction, Paul Capital would have at least $500 million and at most $550
million in cash or a combination of cash and CVRs, BEN would have the
Secondaries, and MHT would have an amount contingent on the auction achieving
in excess of $550 million in cash. But that is not what happened.
Instead, the auction resulted in a winning bid, from GWG Holdings, Inc.
(“GWGH”), another company associated with Defendant Holland. But this was not
an all-cash bid. It was composed of $150 million in cash, and GWGH common stock
together with GWGH “L-Bonds.” The stock and bonds were supposedly worth $400
million, making the GWGH bid worth $550 million. Neither the common stock nor
the bonds were liquid assets, however, and thus could not satisfy Paul Capital’s
purpose, to receive cash for the Secondaries.
To address this purpose, MHT and the Exchange Trusts undertook to facilitate
the refinancing of the L-Bonds and sale of the GWGH common stock promptly. On
those terms, and despite the fact that it was exchanging illiquid Paul Capital assets
for illiquid BEN assets, and in turn exchanging those for illiquid GWGH assets, Paul
4
Capital accepted GWGH’s offer as the winner of the auction. The Exchange Trusts
transferred the BEN units to GWGH and received $150 million in cash and the
illiquid GWGH assets in 2018. MHT and the Trusts paid the $150 million cash to
Paul Capital, and retained the GWGH assets, which again, they had undertaken to
convert to cash promptly. This did not happen. GWGH has since gone bankrupt.
This complex scheme, presented in simplified form above, was memorialized
by numerous agreements among the parties. Paul Capital, which asserts that it is a
party or third-party beneficiary to the pertinent contracts, points out that it has
transferred its secondary assets, which it valued at $500 million, to BEN for a return
of only $150 million in cash. It seeks damages for breach of the contracts against
the various entities involved and the advisors of the Exchange Trusts. It also asserts
claims of promissory estoppel and fraud. I address these causes of action, below.
Counts III, IV, VI and VII—The Contract Claims
These counts address the breach of contract actions that the Plaintiffs have
brought under the complex contractual scheme described above. In the SAC, the
Plaintiffs describe the contracts at issue, that they were breached, and that they were
parties or third-party beneficiaries of each. They allege resulting damages. This
states a prima facie case under the notice pleading standard.3 The Defendants
counter with defenses individual to each contract, arguing that the contracts did not
3
Ct. Ch. R. 8(a).
5
include Plaintiffs as intended beneficiaries or otherwise excluded them from seeking
damages. It is true that contractual issues often present fertile ground for motions
on the pleadings because unambiguous contract issues may be resolved as a matter
of law from the face of the agreements.4 Here, by contrast, I am unable to determine
to what extent all the contracts are to be read together, and without an understanding
of the motivation of the particular contractual scheme as it was known to the parties
at the time of contracting, I am unwilling to determine rights under the various
agreements at the pleadings stage.5 While discovery may make these issues ripe for
summary judgment, I decline to dismiss the contract counts.
Finally, the Defendants point out that, with respect to the Trust Agreements,
I have already found that they excluded the Plaintiffs as trust beneficiaries.6 They
argue that it follows that the Plaintiffs cannot be third-party beneficiaries of the Trust
Agreements.7 But this is a non-sequitur. Whether a party is a third-party contractual
beneficiary is dependent on the intent of the parties thereto,8 and that intent is not
necessarily foreclosed by a renunciation of fiduciary duties to the third parties.
4
Allied Cap. Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1030 (Del. Ch. 2006).
5
See Chi. Bridge & Iron Co. N.V. v. Westinghouse Elec. Co. LLC, 166 A.3d 912, 926–27 (Del.
2017) (explaining that an understanding of the business relationship among the parties informs
analysis of the contractual scheme).
6
Paul Capital I, 2022 WL 3418769, at *11.
7
Opening Br. Defs. Supp. Mot. Dismiss 34–35, Dkt. No. 173 (“BEN OB”); Reply Br. Defs.
Supp. Mot. Dismiss 2–7, Dkt. No. 187 (“BEN RB”).
8
Madison Realty P’rs 7, LLC v. Ag ISA, LLC, 2001 WL 406268, at *5 (Del. Ch. Apr. 17, 2001).
6
Count VI and VIII—The Tort Claims
Promissory Estoppel
To state a claim for promissory estoppel, a plaintiff must allege that (i) the
defendant made a promise to the plaintiff; (ii) the defendant reasonably expected the
plaintiff to take, or refrain from taking, action; (iii) the plaintiff acted to his detriment
due to his reasonable reliance on the promise; and (iv) the plaintiff would suffer an
injustice unless the promise is enforced.9 The promise “must be a real promise, not
just mere expressions of expectation, opinion, or assumption.”10 It must also be a
“manifestation of an intention to act or refrain from acting in a specified manner,
conveyed in such a way that another is justified in understanding that a commitment
has been made; a person’s assurance that the person will or will not do something.”11
With respect to the MHT Defendants, Plaintiffs allege that, by emailing the
GWGH Winning Bid Notice to Plaintiffs, the MHT Defendants “promised”
Plaintiffs that (1) “GWGH would make an up-front cash payment of $150 million;”
(2) “GWGH ‘is obligated to seek to refinance its debt with a more favorable credit
facility and/or institutional note within 12 months following issuance[;]’” (3) “‘[a]
nationally recognized bank, such as Credit Suisse, will be engaged to sell the stock
in an orderly manner through one or a series of transactions in 2018, delivering cash
9
Lord v. Souder, 748 A.2d 393, 399 (Del. 2000).
10
Territory of U.S. Virgin Islands v. Goldman, Sachs & Co., 937 A.2d 760, 805 (Del. Ch. 2007).
11
Promise, BLACK’S LAW DICTIONARY (11th ed. 2019).
7
proceeds for the sellers[;]’” and (4) “‘[c]losing is expected to be on or prior to April
30, 2018[.]’”12
Similarly, BEN is alleged to have made the following “promises” by sending
Plaintiffs a “Due Diligence Package”: (1) “that GWGH had ‘obligations’ to
refinance the GWGH L-Bonds within 12 months of the closing of the Auction of the
BEN [ ] Units, and that ‘GWG[H]’s financial models reflect the refinancing
occurring no later than October 2018’;” (2) “that the Trust Advisors of the . . .
Exchange Trusts were similarly ‘obligated to reduce the L-Bonds to cash and
distribute cash proceeds as quickly as practicable[;]’” (3) “that GWGH and the Trust
Advisors, for the benefit of the . . . Exchange Trusts, would agree to negotiate in
good faith the terms of an Orderly Marketing Agreement with a major investment
bank for the orderly marketing and resale of the GWGH common stock; and” (4)
“the GWGH ‘shares will be sold following the expiration of that [six-month] lock-
up per the terms of an orderly marketing agreement[.]’”13
Plaintiffs further allege that the MHT Defendants and BEN both forwarded a
comfort letter from GWGH (the “GWGH Comfort Letter”)14 and later forwarded an
undertakings letter from GWGH (the “GWGH Undertakings Letter” and, together
12
Verified Second Am. Compl. ¶ 336, Dkt. No. 66 (emphases in original) (“SAC”).
13
Id. ¶¶ 341, 343 (emphases in original).
14
Id. ¶ 347.
8
with the GWGH Comfort Letter, the “GWGH Letters”),15 both of which contained
“promises” that Plaintiffs admit were made by GWGH.16 By delivering the GWGH
Winning Bid Notice, the Due Diligence Package, GWGH’s Comfort Letter, and
GWGH’s Undertakings Letter, the Defendants allegedly intended to induce
Plaintiffs to accept the bid made by GWGH.17 Relying on these alleged promises
from the Defendants, Plaintiffs accepted GWGH’s bid even though it did not consist
entirely of cash,18 as Plaintiffs had intended when entering into this complex
contractual scheme. As a result of accepting GWGH’s bid, Plaintiffs allegedly
“suffered and will continue to suffer substantial damages[,]” an “injustice [that] can
only be avoided by enforcing [Defendants’] promises to Plaintiffs.”19
The Defendants counter Plaintiffs’ allegations by arguing the alleged
promises that Plaintiffs attribute to Defendants were made instead by non-party
GWGH.20 Even if the mere act of delivering the documents, which contain GWGH’s
promises, to Plaintiffs was sufficient to allege that the promises contained within are
also attributable to the Defendants, the Defendants argue that Plaintiffs did not
adequately plead reasonable reliance because Plaintiffs were able to, and allegedly
15
Id. ¶ 351.
16
Id. ¶¶ 348, 352.
17
Id. ¶¶ 334, 341, 347, 351.
18
Id. ¶¶ 335, 342, 345, 350, 353.
19
Id. ¶ 354.
20
BEN OB 42–44; BEN RB 23–24; Opening Br. Defs. MHT and Holland Supp. Mot. Dismiss
22–29, Dkt. No. 174 (“MHT Defs.’ OB”); Reply Br. Defs. MHT and Holland Supp. Mot.
Dismiss 20–23, Dkt. No. 185 (“MHT Defs.’ RB”).
9
did, conduct their own due diligence of GWGH and the promises it made.21 Lastly,
the Defendants assert Plaintiffs have suffered no injustice because Plaintiffs have
received, and continue to be entitled to receive, the consideration Plaintiffs agreed
to receive by accepting GWGH’s bid.22
Drawing all reasonable inferences in favor of Plaintiffs, as I must do at the
pleadings stage,23 I conclude that Plaintiffs have sufficiently alleged that the Due
Diligence Package contained promises—that the assets would be sold in a definite
time, for instance—attributable to BEN and meant to encourage Plaintiffs to accept
the GWGH bid, which Plaintiffs did to their detriment.
Plaintiffs, however, have failed to sufficiently allege that the MHT Defendants
made any promises to Plaintiffs. The alleged promises contained in the GWGH
Winning Bid Notice are either attributable directly to GWGH, rather than the MHT
Defendants, or are mere recitations of the material terms of GWGH’s bid.
Communicating the material terms of GWGH’s bid to Plaintiffs is insufficient to
support a claim that the MHT Defendants promised anything to Plaintiffs.
Therefore, Plaintiffs have failed to state a claim for promissory estoppel against the
MHT Defendants with respect to the GWGH Winning Bid Notice.
21
BEN OB 44–45; BEN RB 24–25; MHT Defs.’ OB 29–30; MHT Defs.’ RB 23–25.
22
BEN RB 44; MHT Defs.’ OB 30; MHT Defs.’ RB 25.
23
Orman v. Cullman, 794 A.2d 5, 15 (Del. Ch. 2002).
10
With respect to the GWGH Letters, both of which were allegedly forwarded to
Plaintiffs by BEN and the MHT Defendants, Plaintiffs failed to allege that the
promises contained therein were made by either BEN or the MHT Defendants. In
the SAC, Plaintiffs repeatedly acknowledge that the promises in the GWGH Letters
were made by GWGH.24 In an attempt to enforce GWGH’s promises against BEN
and the MHT Defendants, Plaintiffs consistently state that the GWGH Letters were
forwarded to Plaintiffs by MHT and BEN to induce Plaintiffs into accepting
GWGH’s bid.25 Plaintiffs have failed to allege how merely forwarding the GWGH
Letters, without more, could constitute a “manifestation of an intention to act or
refrain from acting in a specified manner, conveyed in such a way that another is
justified in understanding that a commitment has been made[,]”26 on behalf of BEN
and the MHT Defendants. Therefore, Plaintiffs’ promissory estoppel claim with
respect to the GWGH Letters fails to state a cause of action and must be dismissed.
The Fraud Claims
Common Law Fraud
“To establish a claim for [common law] fraud, a plaintiff must prove (i) a false
representation, (ii) a defendant’s knowledge or belief of its falsity or his reckless
24
See, e.g., SAC ¶¶ 350, 353 (“Plaintiffs would not have accepted GWGH’s bid in the absence
of the promises and representations that GWGH made in the [GWGH Letters] that w[ere]
forwarded by MHT and BEN.”) (emphasis added).
25
See SAC ¶¶ 347, 350–51, 353.
26
Promise, BLACK’S LAW DICTIONARY (11th ed. 2019).
11
indifferent to its truth, (iii) a defendant’s intention to induce action, (iv) reasonable
reliance, and (v) causally related damages.”27
Plaintiffs allege that the Defendants “attempted to extinguish [Plaintiffs’ CVR
Contract] rights by knowingly and falsely inducing [Plaintiffs’] representative on
BEN’s board to sign the Second Amendment to the CVR Contract.”28 To
accomplish this feat, a BEN lawyer, on behalf of BEN, convinced Plaintiffs’
designated BEN board member, David de Weese, to sign the Second Amendment to
the CVR Contract (the “Second Amendment”) by claiming the signature “was
simply a ministerial act” because Plaintiffs had already “approved the terms of the
amendment.”29 Plaintiffs allege, however, that the Second Amendment was
designed “to substantially alter and effectively extinguish [Plaintiffs’] rights under
the . . . CVR Contract[]”30 by changing the contractual “definition of ‘Net Auction
Consideration’” to eliminate BEN’s obligation to ensure Plaintiffs “receive[d] $500
million in cash[.]”31
The BEN defendants assert that Plaintiffs’ fraud claim necessarily fails to state a
claim because the BEN lawyer did not make a misrepresentation to Plaintiffs
27
In re Wayport, Inc. Litig., 76 A.3d 296, 323 (Del. Ch. 2013).
28
SAC ¶ 376.
29
Id. ¶ 380.
30
Id. ¶ 385.
31
Id. ¶¶ 386–87 (emphasis in original).
12
because (1) the statements were not misrepresentations and (2) the statements were
not made to Plaintiffs.32 I consider each assertion in turn.
While BEN claims the statements the BEN lawyer made to de Weese were all
accurate,33 Plaintiffs contend that the BEN lawyer misrepresented (1) the legal effect
of the Second Amendment; (2) that Plaintiffs had already approved the Second
Amendment; and (3) that de Weese’s signature was merely a “ministerial act.”34 At
this stage, I must accept the Plaintiffs’ allegations as true. The BEN defendants
further assert that these statements, even if false, were not made to Plaintiffs because
de Weese was acting solely in his capacity as director on BEN’s board when he
signed the Second Amendment.35 Viewing the facts in the light most favorable to
Plaintiffs, I find that Plaintiffs have sufficiently alleged that, while BEN’s LLC
Agreement eliminated de Weese’s fiduciary duties owed to BEN, de Weese still
owed such duties to Plaintiffs.36 I can reasonably infer that in signing the Second
Amendment, de Weese acted on behalf of his principal, the Plaintiffs, and that the
allegedly false statements induced him to do so.
The MHT Defendants aptly point out that the allegedly false statements upon
which Plaintiffs rest their fraud claim were made only by a BEN lawyer.37 Plaintiffs
32
BEN OB 50–51, 55–57.
33
BEN RB 27–29.
34
SAC ¶¶ 380–84.
35
BEN OB 50–51; BEN RB 25–27.
36
See Pls.’ Answering Br. 73–75; SAC ¶ 211.
37
MHT Defs.’ RB 25; see SAC ¶¶ 375–92.
13
have failed to allege that the MHT Defendants made any false misrepresentations to
Plaintiffs. Therefore, Plaintiffs’ fraud claim with respect to the MHT Defendants
fails on its face to state a claim and must be dismissed.
Equitable Fraud
“A claim for equitable fraud can lie only where the claimant sufficiently pleads
the existence of: (1) a special relationship between the parties or other special
equities, such as some form of fiduciary relationship; or (2) a justification for a
remedy that only equity can afford.”38
Plaintiffs fail to allege that a special relationship exists between them and BEN
or the MHT Defendants. As contractual counterparties, absent unusual
circumstances, Plaintiffs do not share a special relationship with either BEN or the
MHT Defendants for the purposes of equitable fraud.39
Conclusion
With respect to the Contract Claims, Counts III, IV, V, and VII, Defendants’
Motions to Dismiss are DENIED. BEN’s Motion to Dismiss Count VI concerning
the GWGH Letters and BEN’s Motion to Dismiss Count VIII with respect to the
equitable fraud claim are GRANTED. BEN’s Motion to Dismiss Count VI with
38
Zebroski v. Progressive Direct Ins. Co., 2014 WL 2156984, at *7 (Del. Ch. Apr. 30, 2014)
(citation omitted).
39
See Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 144 (Del. Ch. 2009) (explaining
that there exists no special circumstances meriting application of the doctrine of equitable fraud
where the parties “[a]re counterparties who negotiated at arms’ length.”).
14
respect to the Due Diligence Package and Count VIII with respect to the common
law fraud claim are DENIED. The MHT Defendants’ Motion to Dismiss Counts VI
and VIII are GRANTED. The parties should submit an appropriate form of order.
Sincerely,
/s/ Sam Glasscock III
Vice Chancellor
15