Opinion
600381/08.
Decided June 8, 2010.
Douglas H. Flaum, Esq, Israel David, Esq. and Adam M. Harris, Esq. of Fried, Frank, Harris, Shriver Jacobson LLP for Defendants Quadra Realty Trust, Inc.; Robert L. Glauber, Thomas F. McDevitt, Robert H. Mundheim, Ronald M. Stuart and Lawrence A. Weinbach; Barry G. Sher, Esq., Kevin C. Logue, Esq. and Asa R. Danes, Esq. for Defendants Hypo Real Estate Capital Corp.; and Lawrence P. Kolker, Esq. and Malcom T. Brown, Esq., of Wolf Haldenstein Adler Freeman Herz, LLP for Plaintiff, Attorneys on the matter are.
Plaintiff moves to vacate the judgment entered on August 27, 2009 (the "Judgment"), and seeks leave to renew the decision and order of this court, entered on July 22, 2009, dismissing the complaint (the "Decision"). The Judgment completely disposed of this matter, Plaintiff did not appeal the Judgment and the time to appeal has expired.
Background
The underlying facts are fully set forth in this court's Decision, and will not be repeated except as is necessary for clarification.
Briefly, plaintiff's claims in this shareholder class action were for breach of fiduciary duty, abuse of control and mismanagement. Plaintiff's claims arose out of the sale of defendant Quadra Realty Trust, Inc. ("Quadra") to a Quadra affiliate, Hypo Real Estate Capital Corp. ("HRECC") through a tender offer and merger (the "Merger"). Plaintiff claimed that HRECC, Quadra's majority shareholder, forced plaintiff and other minority shareholders out for inadequate consideration in the January 2008 cash-out merger (the "Merger"), in a manner designed to further HRECC's own financial interests. Plaintiff claimed that the price the minority shareholders received was a significant discount to Quadra's book value from September 2007, four months before the Merger; that the price was arrived at through a flawed process; that the Merger terms discouraged competing offers; and that Quadra's Board of Directors should have considered liquidating the company rather than merging. Plaintiff further claimed that the Quadra Board failed to exercise control over Quadra until it was in a financial crisis and then acceded to HRECC's wishes in order to obtain protection for their breaches of fiduciary duties.
Plaintiff now seeks to reopen this action based on a recently issued decision from the Maryland Court of Appeals. Plaintiff urges that the Maryland Court has changed the standing grounds upon which this matter was previously dismissed, and this court should now determine the matter on its merits.
Analysis
Plaintiff commenced this action in February 2008, asserting both direct and derivative claims against Quadra and all of Quadra's directors. Affirmation of Lawrence P. Kolker in Support of Motion to Vacate Judgment and for Leave to Renew Decision and Order ("Kolker Moving Aff."), Ex. B, Decision at 8. In June 2008, the defendants moved to dismiss for lack of direct and derivative standing, for failure to state a claim and based on documentary evidence, pursuant to CPLR 3211 (a)(1), (3) and (7). In the Decision, this court granted defendants' motion to dismiss, finding that plaintiff lacked both direct and derivative standing under both Maryland Code, Corporations and Associations § 2-405.1 and case law. On August 27, 2009, the Judgment was entered and served upon plaintiff with Notice of Entry. Affirmation of Adam M. Harris ("Harris Aff."), Ex. E. Plaintiff noticed no appeal. Kolker Moving Aff., ¶ 14; Harris Aff., ¶ 9. The Decision became a final and non-appealable judgment on October 1, 2009.
On November 12, 2009, in Shenker v. Laureate Education, Inc., 411 Md. 317, 983 A.2d 408 (Ct. App. 2009), the Maryland Court of Appeals held that a shareholder may bring a direct action against corporate directors where the directors are negotiating the share price to be received in a cash-out merger transaction. The Maryland high court's decision changed previous common law holding that shareholders did not have standing to pursue such direct claims against directors.
Plaintiff filed the instant motion in December 2009. Plaintiff argues that the Shenker decision, decided after this case was no longer pending, warrants vacating the Judgment and granting plaintiff leave to renew the motions to dismiss.
The motion to vacate is denied. This court's Decision was properly decided under Maryland law, and the court will not revisit it based on a later shift in Maryland decisional law. However, even if this court were to exercise its discretion to vacate the Judgment and examine the merits of the complaint, the court would again dismiss the action for failure to state a cause of action.
CPLR 2221Contrary to plaintiff's contention, CPLR 2221(e), regarding motions to renew, does not apply here. Once a decision and order of the court has been reduced to a final judgment and the time to appeal has expired, CPLR 2221(e) is not the proper vehicle to address that final judgment. See Maddux v. Schur , 53 AD3d 738 , 739 (3d Dep't 2008); Curry v. Vertex Restoration Corp., 252 AD2d 360 (1st Dep't 1998); Weinstein, Korn Miller, NY Civ. Prac. § 2221.01 (2d ed. 2009). A motion to renew would only be proper if the case were still pending when a change in decisional law occurred. Once the case has gone to judgment and the time to appeal has expired, to permit a change in decisional law to change the result in the case would upset the finality of judgments. See Matter of Huie, 20 NY2d 568, 572 (1967); see generally Carmody-Wait NY Prac. § 890 (2d ed. 2008); see also Daniels v. Millar Elevator Indus., Inc. , 44 AD3d 895 , 895-896 (2d Dep't 2007); Glicksman v. Board of Educ., 278 AD2d 364, 366 (2d Dep't 2000). As the Court of Appeals has stated "[w]hile this result might at times seem harsh, there must be an end to lawsuits and the time to take an appeal cannot forever be extended." Matter of Huie, 20 NY2d at 572. Thus, absent circumstances such as those set forth in CPLR 5015, "a determination of a court from which no appeal has been taken ought to remain inviolate." Id.
Plaintiff's reliance upon Luna v. Port Auth. of NY and N.J. , 21 AD3d 324 , 326 (1st Dep't 2005) is misplaced. The appeal in Luna was still pending when the plaintiff was moving to renew. Similarly, Ramos v. City of New York , 61 AD3d 51 (1st Dep't 2009) is distinguishable as it involved newly discovered facts regarding plaintiff's previous criminal conviction, the appeal of which was pending during the initial summary judgment motion. In addition, plaintiff Ramos was unaware that the summary judgment motion was made. Unlike the instant case, Ramos did not involve a change in decisional law regarding a particular precedent relied upon in the original decision.
CPLR 5015In apparent recognition of plaintiff's lack of supporting case law, plaintiff here has alternatively argued that the Judgment should be vacated under CPLR 5015. The circumstances enumerated in CPLR 5015, however, do not apply to the present case. See 10 Weinstein, Korn Miller, NY Civ. Prac § 5015.11 (2d ed. 2007) (stating that CPLR 5015(a)(5) does not authorize vacating judgment because of subsequent change in rule of law unless the earlier decision has res judicata or collateral estoppel effect on the judgment; see also Jericho Union Free School Dist. No. 15, Town of Oyster Bay v. Board of Assessors of the County of Nassau, 131 AD2d 482, 483 (2d Dep't 1987) (same)). Plaintiff has not shown otherwise. Inherent Power of the Court
While the court has the inherent power in the exercise of its control over its judgments to open a judgment upon the application of a party for sufficient reason and in furtherance of justice, this court declines to exercise such power in the circumstances of this case. See Matter of Huie, 20 NY2d at 572 (absent circumstances set forth in CPLR 5015, court determination from which no appeal was taken will not be changed based simply on change in applicable rule of law); cf. McMahon v. City of New York, 105 AD2d 101 (1st Dep't 1984) (court exercises inherent power, stating that at the time the new case law in a companion case was rendered, the present case was still in the direct appeal process, and that it could not let a judgment stand which should never have been rendered); see also 10 Weinstein, Korn Miller § 5015.12 ("[j]udgments have not been set aside merely to take account of a change in the applicable rule of law that occurs after the rendition of the original judgment"). Were the court to exercise its inherent authority and examine the merits of the defendants' original motions to dismiss, Plaintiff's claims continue to fail to state a cause of action and are insufficient based upon the pleadings and documentary evidence.
Plaintiff's Complaint Fails to State a Cause of Action
First, to the extent that the plaintiff alleges that the director defendants breached their duties in managing the company before the cash-out merger process was undertaken, those allegations are insufficient. In Maryland, corporate directors must perform their duties in good faith, in a manner the director reasonably believes to be in the best interests of the corporation and with the care an ordinarily prudent person in a like position would use under similar circumstances. See Maryland Code, Corporations and Associations § 2-405.1(a). Maryland has codified its "business judgment rule" in section 2-405.1(e) of the Maryland Code, pursuant to which directors' actions are presumed to fulfill their duties. Therefore, to posit a cause of action against directors, a plaintiff must rebut the statutory presumption of performance by alleging facts showing the directors' failure to fulfill their duties, that is, that the directors acted fraudulently or in bad faith. See Werbowsky v. Collomb, 362 Md. 581, 618-619, 766 A.2d 123 (Ct. App. 2001); see Black v. Fox Hills North Community Assn., Inc., 90 Md. App. 75, 82, 599 A.2d 1228, 1231 (Ct. Spec. App.), cert denied 326 Md. 177 (Ct. App. 1992); Mona v. Mona Elec. Group, Inc., 176 Md. App. 672, 695-696, 934 A.2d 450 (Ct. Spec. App. 2007).
Here, plaintiff's conclusory allegation that the directors mismanaged Quadra from its Initial Public Offering in February 2007 until they determined to sell Quadra are insufficient to rebut the presumption that the directors fulfilled their duties. Plaintiff's hindsight allegation that the directors should have predicted the continued deterioration of the credit markets and should have rushed to liquidate the company simply second-guesses the economy and the directors' actions in managing the company. Plaintiff fails to overcome the presumption of proper actions by the directors.
Second, Plaintiff's claims regarding Quadra's relationship with HRECC are refuted by the Prospectus, which disclosed that HRECC was contributing assets to the company. See Affirmation of David Wei in Support of Motion by the Independent Directors to Dismiss the Amended Complaint, June 6, 2008 ("Wei Aff."), Ex. 4.
Third, Plaintiff's claims regarding defendant's failure to disclose Quadra's financial condition in its 10-Q filings in August and November 2007 are directly refuted by the 10-Q filings themselves. Those filings clearly and repeatedly indicate that, at the time, the widening of credit spreads "ha[d] continued to negatively impact all areas of the debt capital markets including . . . commercial real estate finance." The filings further state that the increasing volatility in the financing markets had resulted in "a significant widening of the credit spreads" on commercial real estate collateralized debt obligations ("CDOs"), causing a reduction of liquidity, credit spreads increasing and the fair value of the loans decreasing. Wei Aff., Ex. 9, Form 10-Q for Quarter Ended September 30, 2007, at 16, 20, 22, 27. These filings further warned that the Quadra Board was exploring acceptable financing alternatives, but that given the current state of the credit markets, "we may be unsuccessful in procuring alternative financing," id. at 22, and that Quadra "may be required to further adjust our business plan." Id. at 26, 37.
Even under a heightened scrutiny that may be applicable once the sale of Quadra became inevitable, see Shenker, 411 Md. at 338-339, 983 A.2d at 420-421, the facts as alleged in the complaint, and as demonstrated in the documentary evidence submitted, fail to demonstrate that defendants breached their obligation to search for the best value reasonably available to its shareholders. Id. While the board may be required to get the best short-term price for stockholders in a sale of control, not every change in control must involve "a heated bidding contest.'" Jasinover v. Rouse Co., No. 13-C-04-59594, 2004 WL 3135516, * 8-10 (Md. Cir. Ct. 2004), (citation omitted) (discussing " Revlon duties" from Revlon, Inc. v. MacAndrews Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), which require directors to attempt to secure best merger terms available after determining that company will be sold).
A board may fulfill its duty by entering into merger with a single bidder, then testing the transaction with a post-agreement market check, as occurred here. Id. at *10; see also Foster v. Town and Country Trust, No. 24-C-06-001442, 2006 WL 991000 (Md. Cir. Ct. 2006) (trustees of real estate investment trust not required to engage in pre-agreement market check if agreement permitted post-agreement market check). Moreover, it has been recognized that, as the corporate decision-making body, the board of directors is best equipped to make the business and financial considerations in investigating and selecting the best value reasonably available, and it need only make a reasonable decision, not a perfect one. Jasinover, 2004 WL 3135516, *8-10; see Paramount Communications Inc. v. QVC Network Inc., 637 A.2d 34, 45-46 (Del. Supr. 1994).
Here, the plaintiff himself pleads that a Special Committee of Independent Directors was appointed to explore alternatives regarding Quadra's liquidity problems and make recommendations to the Quadra Board. This committee met ten times. The Independent Directors (defendants Robert F. Glauber, Robert H. Mundheim, Thomas F. McDevitt, Ronald M. Stuart and Lawrence A. Weinbach), three of whom made up the Special Committee, met an additional six times in the eight-week period between November 19, 2007, and January 17, 2008. Amended Complaint, ¶¶ 83-104; see Wei Aff., Ex. 11, Schedule 14D-9 at 14-24. The Special Committee engaged Bass, Berry Sims PLC, as legal counsel, and Blackstone Advisory Services L.P., as its financial advisor, for information, advice and a fairness opinion in its evaluation of its strategic alternatives. The Maryland Code expressly provides that directors may rely upon information, opinions, and reports prepared by such experts. Maryland Code, Corporations and Associations § 2-405.1(b)(1)(ii). Blackstone actively solicited interest from 25 potential third-party purchasers, but received only one potential offer at a price of $9 per share, $2 below the merger price and consisting entirely of the common stock of the prospective buyer. Wei Aff., Ex. 13, March 12, 2008 Schedule 14D-9, at 3; Wei Aff., Ex. 11 at 17, 20. This was the directors' pre-agreement market check, with the survey of possible buyers, using the advice and assistance of independent experts.
The Special Committee considered conducting an auction of Quadra but determined that it would subject Quadra's business to disruptions and risks. The Special Committee also considered liquidating the company, but determined that it was not a feasible option due to Quadra's substantial short-term obligations, its inability to access the CDO market and the lack of available affordable financing. See Wei Aff., Ex. 13 at 6-7; Wei Aff., Ex. 11 at 24.
Plaintiff's complaint reflects the many factors considered by the director defendants in deciding to approve the merger, including: that Quadra's business model was not sustainable due to the closure of the CDO market and the higher long term cost of capital; that a liquidation carried a high risk of failing to produce cash quickly enough to repay the Wachovia loan; that the disruption of the credit markets resulted in a 50% drop in Quadra's trading price from the time of the IPO, and had last closed above the $11 per share merger price on July 27, 2007; and that the merger price was a 38% to 42% premium to the average closing price of Quadra's stock for the 60 days prior to the merger announcement. Amended Complaint, ¶ 104; see Wei Aff., Ex. 13 at 4-6. In addition, the deal was consummated with a "fiduciary out" provision which allowed Quadra to terminate the agreement and accept a superior bid from another buyer, and HRECC was obligated to take all action necessary to consummate a superior proposal. Wei Aff., Ex. 11 at 26; see Amended Complaint, ¶¶ 92, 94. The Independent Director defendants were also able to negotiate for a 30-day "go-shop" provision, which enabled Quadra to actively seek out better offers for 30 days following execution of the merger agreement. Wei Aff., Ex. 11 at 25. These post-agreement market checks, together with the other steps taken by the director defendants, were sufficient under Maryland law. The fact that there was a deal protection measure, providing for termination fees, is balanced by the post-agreement market checks. As defendants correctly argue, a termination fee in the range of two to four percent, as here, has been recognized as acceptable. See Jasinover, 2004 WL 3135516, supra.
With respect to the September 2007 book value of $14 per share, to which plaintiff points as proof that the director defendants breached their fiduciary duties by obtaining insufficient value for the company, Quadra's Schedule 14D-9 filing of March 12, 2008, specifically states that the Special Committee considered the relationship of the offer value to the book value per share, "but believed that the book value per share was not a proper measure of fair value due to the changes in market interest rates and marketability of assets of the nature held by [Quadra], which changes would result in a decrease in the fair value of those assets below their book value." Wei Aff., Ex. 13 at 7. In addition, the significant problems in the credit markets and the unavailability of CDOs for financing, reported repeatedly in Quadra's Form 10Qs, and well-known in the financial world, make the book value of September 2007 a suspect measure of the price that could be obtained in the sale of the company.
The court has considered the parties' remaining arguments and finds them to be without merit.
Accordingly, it is
ORDERED that plaintiff's motion to renew and vacate is denied.
This constitutes the decision and order of the court.