A&J Capital, Inc. v. Law Office of Krug and LA Metropolis Condo I, LLC

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
A&J CAPITAL, INC., :
:
Plaintiff, :
:
v. : C.A. No. 2018-0240-JRS
:
LAW OFFICE OF KRUG, :
:
Defendant, :
:
and :
:
LA METROPOLIS CONDO I, LLC, :
a Delaware limited liability company, :
:
Nominal Defendant. :
MEMORANDUM OPINION
Date Submitted: October 30, 2018
Date Decided: January 29, 2019
Kurt M. Heyman, Esquire, Melissa N. Donimirski, Esquire and Elizabeth A. DeFelice,
Esquire of Heyman Enerio Gattuso & Hirzel LLP, Wilmington, Delaware, Attorneys for
Plaintiff.
Stephen B. Brauerman, Esquire and Sara E. Bussiere, Esquire of Bayard, P.A.,
Wilmington, Delaware and Craig H. Marcus, Esquire of Glaser Weil Fink Howard Avchen
& Shapiro LLP, Los Angeles, California, Attorneys for Defendant.
SLIGHTS, Vice Chancellor
A dispute over the management of a Delaware limited liability company has
sparked allegations of conspiracy, forged documents and perjured testimony. The
company, nominal defendant, LA Metropolis Condo I, LLC (“LAMC” or the
“Company”), was formed to raise investment capital under a federal government
program whereby the government offers favorable immigration treatment in
exchange for qualified foreign investments in new commercial enterprises in the
United States. The members of the Company are two hundred Chinese nationals
who collectively contributed $100 million to be invested in a construction loan for
the development of residential and commercial space in downtown Los Angeles.
The loan was extended to Greenland LA Metropolis Development I, LLC (including
its affiliates, collectively, “Greenland”). The plaintiff, A&J Capital, Inc. (“A&J” or
“Plaintiff”), was engaged to serve as Class B Manager of the Company in exchange
for a management fee. It is alleged that Greenland became displeased with A&J and
then colluded with certain members of the Company to trump up reasons to have
A&J removed as manager. That removal occurred in March 2018.
The Company’s operating agreement and the management agreement by
which A&J was engaged both provide that the Class B Manager may be removed
only for “cause.” In its complaint, A&J alleges that no such cause existed, that
certain members were cajoled by Greenland into voting to remove A&J so that
Greenland could extract concessions from the Company, and that defendant, Law
1
Office of Krug (“Krug” or “Defendant”), acted as the facilitator of the plot
improperly to remove A&J and now occupies the role of Class B Manager without
authority.
At least as to the management agreement, the “for cause” removal provision
was a protection for which A&J bargained and gave consideration. “For cause”
removal provisions are not aspirational, nor do they allow the principal to remove
the agent on a whimsy and then manufacture “cause” after-the-fact to justify the
removal. Nevertheless, the majority of the members of LAMC, influenced by
Greenland and guided by Krug, apparently viewed their removal rights differently.
As explained in this post-trial Memorandum Opinion, I am satisfied from the
preponderance of the evidence that these members removed A&J without cause and
then formulated after-the-fact explanations for removal that are neither credible nor
adequate under the operative agreements to justify their actions. Accordingly, as
requested, A&J is entitled to declarations pursuant to 6 Del. C. §§ 18-110 and 18-
111 that it was improperly removed as Class B Manager and that it must be reinstated
to that position immediately with all of its rights and obligations under the operative
agreements restored.
2
I. BACKGROUND
The Court held a two-day trial during which it received over 400 trial exhibits
and heard live testimony from six witnesses. I have drawn the facts from the
stipulations of fact entered in advance of trial, the testimony and exhibits presented
during trial and from reasonable inferences that flow from that evidence.1 To the
extent I have relied upon evidence to which an objection was raised but not resolved
at trial, I will explain the bases for my decision to admit that evidence before I
discuss it.
A. The Parties and Relevant Non-Parties
Plaintiff, A&J, is a financial services and advisory firm incorporated and
based in California.2 It is the designated Class B Manager of LAMC and also
manages ten other companies that operate under the EB-5 Immigrant Investor Visa
Program (“EB-5”).3 Qingfu “Frank” Xu is A&J’s founder and President.4 Alex
1
Citations will be in the following format: “PTO ¶ __” shall refer to stipulated facts in the
pre-trial order; “Trial Tr. __ ([Name])” shall refer to witness testimony from the trial
transcript; “JX__” shall refer to trial exhibits using the JX-based page numbers generated
for trial; “[Name] Dep. __” shall refer to witness testimony from a deposition transcript
lodged with the Court for trial.
2
PTO ¶ 1; Trial. Tr. 13 (Verba).
3
PTO ¶ 8; Trial. Tr. 19 (Verba). As explained below, EB-5 is the federal immigration
program that prompted LAMC’s creation and defined its purpose.
4
PTO ¶ 8.
3
Verba is A&J’s Senior Vice President and in charge of LAMC’s day-to-day
operations.5
Defendant, Krug, is a single-person, unincorporated law firm based in
California that is operated by James Krug.6 Krug was appointed as the interim
Class B Manager following A&J’s purported removal.7
Nominal Defendant, LAMC, is a Delaware LLC principally based in
California that formed in April 2014 to raise immigrant investor capital under the
EB-5 visa program.8 As noted, the investment capital was used to provide a
$100 million construction loan to Greenland for the development of the first phase
of a multi-phase real estate project.9
Non-party, Greenland, is a Delaware LLC and an affiliate of one of the largest
state-owned real estate developers in China.10 Greenland was in charge of
developing a 38-story residential tower in downtown Los Angeles (the “Project”)
5
Trial. Tr. 13, 90 (Verba), 236 (Xu).
6
PTO ¶ 2.
7
PTO ¶ 25.
8
PTO ¶¶ 3, 4, 6.
9
PTO ¶ 7.
10
JX 12-0022.
4
and received the EB-5 construction loan from the Company to fund the
development.11
Non-party, Henry Global Consulting Group (“Henry Global”), is a Chinese
company that solicits investments for EB-5 projects and was responsible for securing
investments in the Company.12 Henry Global is a strategic partner of A&J and is
involved with each of the EB-5 companies managed by A&J.13 Henry Global’s
owner’s sister is married to Mr. Xu, A&J’s founder and President.14
B. The Company and the Project
In 1990, Congress enacted EB-5 to permit foreign nationals to become lawful
permanent residents of the United States (or “green card” holders) by making a
threshold investment in a “new commercial enterprise” (“NCE”) that creates or
preserves at least ten jobs for U.S. workers.15 In addition to meeting numerous
requirements imposed by EB-5 regulations, the foreign national must serve as
limited partner of the NCE or as an investor in an entity that makes a loan to a NCE.16
11
PTO ¶ 7; JX 12-0048.
12
Trial Tr. 20 (Verba).
13
PTO ¶ 8.
14
Id.
15
PTO ¶ 4.
16
PTO ¶ 5.
5
The foreign national’s investment must be maintained in the NCE and must remain
“at risk” while the United States Citizenship and Immigration Service (“USCIS”)
processes the application for permanent residency, a process that can take as long as
ten years.17
In late 2013, Mr. Xu was introduced to Ifei Chang, then-CEO of Greenland
USA, to discuss an EB-5 investment in the Project.18 When Ms. Chang expressed
interest, Mr. Xu introduced her to A&J’s strategic partner, Henry Global.19 By late
summer of 2014, Greenland, Henry Global and A&J had agreed to structure the EB-
5 investment as a Delaware LLC that would extend a $100 million construction loan
to Greenland with a 2.2% rate of return to mature after five years.20 As Henry Global
prepared to market the investment to Chinese citizens, Greenland named Home
Paradise Investment Center, LLC (“Home Paradise”) to be the “Regional Center”
17
PTO ¶ 4. To comply with EB-5 regulations, the investors’ capital must remain in a state
where there is a risk of loss and potential for gain. See USCIS Policy Manual 0.2(A)(2),
https://www.uscis.gov/policymanual/HTML/PolicyManual-Volume6-PartG-
Chapter2.html.
18
Trial. Tr. 233 (Xu).
19
Id.
20
Trial Tr. 21–23 (Verba), 233 (Xu).
6
for the Project.21 It also named Urban Harmony, a wholly owned subsidiary of Home
Paradise, as the Company’s Class A Manager.22
C. The Disclosure Document and Agreements
Four documents are particularly important in determining the validity of
A&J’s removal: the Private Placement Memorandum (“PPM”) (a disclosure
document from Greenland to potential investors),23 the Operating Agreement
(a contract between Urban Harmony and the investors),24 the Management
Agreement (a contract between the Company, A&J and the investors)25 and the
Distribution Services Agreement (“DSA”) (a contract between the Company and
Henry Global).26
21
Trial Tr. 22 (Verba). The Regional Center is in charge of the investment offering and
assists investors in providing information to USCIS regarding the NCE’s job creations and
expenditures of funds so that USCIS can ensure compliance with EB-5 rules and
regulations before processing the investors’ residency petitions. Trial Tr. 27 (Verba);
JX12-0043.
22
Trial Tr. 21 (Verba). As explained below, the Class A Manager was to ensure
compliance with immigration rules and regulations while the Class B Manager was to
manage the day-to-day operations of the Company.
23
JX 12.
24
JX 10.
25
JX 8.
26
JX 16.
7
1. The PPM
On July 11, 2014, Henry Global and Home Paradise issued a PPM to
prospective EB-5 investors that described the Project and the terms of the investment
offering.27 The PPM explains that upon payment of a $500,000 “Subscription Price”
and a $45,000 “Administration Fee,” each EB-5 investor will receive a “Class B
Unit” and will become a “Class B Member of the Company” (a “Member”).28 By
the terms of the offering, Class B Members together own 100% of the Class B
membership interests in the Company.29
The $100 million loan funded by the Members’ Subscription Price bears an
interest rate of 2.2% with 1.8% payable in cash and 0.4% accrued annually. 30 The
PPM discloses that Members can expect to receive 1.0% total interest on the loan
(or 0.2% per year payable in five years at the loan’s maturity date).31 Given the low
interest return, the PPM makes clear that the primary benefit of the Members’
investment is participation in the EB-5 program and resulting reward of permanent
27
JX 12.
28
JX 12-0003–04. The Class A Manager, Urban Harmony, is the only Class A Member
and holds one Class A Unit of the Company, which “entitles the Class A Member to no
rights except for the right to vote on replacement of Managers.” JX 10-0003.
29
JX 12-0004.
30
JX 12-0027.
31
Id.
8
residency in the United States.32 In this regard, the PPM states that “the Loan may
not be prepaid prior to the Maturity Date unless (i) all Class B Members receive final
adjudication of their respective Form I-829 Petition . . . and (ii) no rights or economic
interests of any Class B Member will otherwise be adversely affected.”33
The PPM contemplates that a Class A Manager and Class B Manager will
administer the Company.34 Although the PPM states that the Class B Manager will
be elected by majority vote of the Class B Members, it presupposes that A&J will
be appointed as Class B Manager and lists A&J’s contact information.35 The PPM
also advises investors that the Class A and Class B Managers may be removed only
32
JX 12-0005 (“The Offering has been structured with the intent that each Class B Member,
by subscribing for a Class B Unit and becoming a member of the Company, will have made
an investment that qualifies as the investment component required for an I-526 Immigrant
Petition by Alien Entrepreneur (“I-526 Petition”) that entitles the Class B Member to seek
permanent United States residency and, ultimately, to apply for U.S. citizenship . . . .”)
(emphasis in original); JX 12-0026 (“Subscriber Investment Objective: To provide
financing for the Project in the form of a loan (i.e., the Loan) to Developer in the form and
manner allowing for an investment in the Company to be a “qualifying investment” under
the EB-5 Program.”) (emphasis in original).
33
JX 12-0027. The I-829 application shows that the NCE has created qualified jobs. Trial
Tr. 85 (Verba).
34
JX 12-0002, 31. In addition to Class A and Class B Managers, the PPM provides for the
services of “oversea/offshore finders and agents to seek potential investors in the Company
(each a “Program Locator”) and document processors to process immigration paperwork
and assist[] with their immigration paperwork for those investors (each, a
“Processor”) . . . .” JX 12-0035 (emphasis in original).
35
JX 12-0032–33.
9
“by majority vote of the Class B Members for gross negligence, intentional
misconduct, fraud or deceit.”36
As disclosed in the PPM, each person or entity that performs a role described
in the PPM—Class A Manager, Class B Manager, Program Locator and Processor—
is to be paid a fee for their services. The Class A Manger is to receive a management
fee of $4,000 per Class B Member plus 0.1% per year of the outstanding loan
balance.37 The Class B Manger is to receive 0.4% per year of the outstanding loan
amount.38 There is no explicit fee disclosed for the Program Locator and Processor,
but the PPM states “that the Company may pay a fee to compensate firms and
individuals for those [Program Locator and Processor] services.”39
The PPM also discloses the permitted and prohibited sources of payment for
so-called Manager Fees:
All of the Administration Fees are paid to Program Locators and
Processors for capital raising and document processing and to the
Class A Manager and Regional Center as payment for their fees . . . .
None of such fees shall be paid out of the Subscription Price or
investment in the Membership Interests of the Company. 40
36
JX 12-0032, 35.
37
JX 12-0032.
38
JX 12-0034.
39
JX 12-0035.
40
Id.
10
....
The Company will pay out of the Administration Fee and interest
income all ordinary administrative and operating expenses . . . as well
as payments to Managers and other third party service providers for
servicing the Loan, assisting with the Offering, and providing
immigration services to the Company, Subscribers, and Class B
Members.41
2. The Operating Agreement
As previewed in the PPM, the duties of the Class A and Class B Mangers are
set forth in an Operating Agreement that became effective on the same day the PPM
was issued.42 Under Section 5.3(d)(i) of the Operating Agreement, the Class A
Manager is responsible for maintaining the Company’s compliance with USCIS
rules and regulations and communicating with USCIS about those matters.43 Under
Section 5.3(d)(ii), the Class B Manager is responsible for the day-to-day
administration of the Company, which includes, among other responsibilities,
managing investment of Company funds, negotiating, amending and/or
41
JX 12-0042. The PPM also explicitly prohibits the Class A Manager’s fee from being
paid out of the Subscription Price (JX 12-0032 (“None of such fees will be paid from the
Subscription Price, but may be paid from the Administration Fee paid by a Class B
Member.”)), and provides that the Class B Manager’s fee will be “paid directly by the
Company via interest proceeds” (JX 12-0034).
42
PTO ¶ 13; Trial Tr. 28, 60–61 (Verba).
43
JX 10-0014.
11
supplementing the terms of any loans made by the Company and entering into any
agreement deemed appropriate for any beneficial purpose of the Company.44
The appointment and removal of the Class B Manager is governed by
Section 4.8 of the Operating Agreement, which provides:
The Class B Members, by Majority Vote,45 shall have the sole and
exclusive right to approve or disapprove of the following . . . f) Subject
to 5.3, appointment, reappointment and removal as applicable of any
Manager.46
Section 5.3, in turn, permits the Class B Members to remove the Class A and Class B
Managers only for “gross negligence, intentional misconduct, fraud or deceit, as
more fully set forth in the Management Agreement.”47
3. The Management Agreement
On or about the same day the Operating Agreement became effective, the
Company, A&J and the Class B Members entered a Management Agreement that
states more specifically the terms by which A&J would serve as the Class B Manager
44
JX 10-0015.
45
The Operating Agreement defines “Majority Vote” as “Class B Members who, at the
time in question, have Percentage Interests aggregating more than fifty percent (50%) of
all Percentage Interests held by all Class B Members.” JX 10-0004.
46
JX 10-0010–11.
47
JX 10-0014.
12
of the Company.48 The Management Agreement reiterates previous disclosures that
A&J would receive an annual management fee equal to 0.4% of the outstanding loan.
Section 6(a) of the Management Agreement, however, provides that the Members
and A&J may agree to modify A&J’s compensation: “The Management Fee shall
from time to time be reviewed and modified as may be mutually agreed upon by the
Company and the Class B Manager, subject to any approval rights of the Members
pursuant to Section 4.8 and 5.11 of the Operating Agreement.”49
Section 12(b) of the Management Agreement repeats the removal standard
stated in the PPM and Operating Agreement:
The Class B Manager may be removed by Majority Vote (as defined in
the Operating Agreement) of the Class B Members for gross
negligence, intentional misconduct, fraud or deceit; provided that in
any of such events as specified in this Section 12(b), without limiting
any of their respective rights and remedies, the Members shall be
48
PTO ¶ 15; Trial Tr. 28, 60–61 (Verba). The Class B Members joined the Management
Agreement by entering a Joinder Agreement executed on the same day they made their
investment in the Company. Trial Tr. 60–61 (Verba). The Management Agreement
defines “Joined Members” to be “[t]hose persons . . . who have joined as a party to this
Agreement . . . by entering into a Joinder Agreement . . . and whose details are contained
in each respective Joinder Agreement,” and “Joinder Agreement” is defined as “the Joinder
Agreement to this [Management] Agreement in the form as attached hereto.” JX 8-0002–
03.
49
JX 8-0006. Section 4.8 of the Operating Agreement states that “each Class B Member
may take part in the management of the Company by (a) exercising that Class B Member’s
voting rights as set forth in this Agreement . . . .” JX 10-0010. Section 5.11 of the
Operating Agreement states that “Each Manager shall be entitled to remuneration for
services provided to the Company and other benefits in accordance with the terms hereof
and the Management Agreement, provided such agreement shall have been approved by
the Members in accordance with Section 4.8 hereof . . . .” JX 10-0019.
13
entitled to exercise their respective powers under the Operating
Agreement to appoint a new Class B Manager and to cause the
Company to issue written notice of termination to the Class B Manager
hereunder.50
4. The DSA
In August 2014, the Company executed a Distributor Services Agreement that
names Henry Global as a “Distributor” responsible for recruiting EB-5 investors
from China.51 Under the DSA, Henry Global agrees to
(i) comply with and/or assist EB-5 Investors with the compliance of
information requests of all competent authorities regarding Distributor
and/or EB-5 investors, (ii) liaise with and/or procure consents from EB-
5 Investors in relation to the Project, and (iii) provide other reasonable
incidental assistance to the Lender, Borrower or EB-5 Investors.52
In exchange for these services, the Company agrees to pay Henry Global $41,000
from the proceeds of each investor’s Administration Fee, 1.3% of the outstanding
loan amount on a calendar quarter basis and 1% of the outstanding loan amount at
maturity.53
50
JX 8-0010.
51
JX 16.
52
JX 16-0002.
53
Id. On November 9, 2015, the DSA was terminated (JX 23) and a new, substantially
identical, DSA was executed with a different Henry Global entity (JX 24).
14
In sum, the agreements allocate the entities’ and investors’ shares of the 2.2%
interest on the loan as follows: 0.2% per year to the Class B Members;54 0.4% per
year to the Class B Manager;55 0.1% per year to the Class A Manager;56 and 1.5%
per year to Henry Global.57 Under the same agreements, of the $45,000
Administration Fee, $4,000 is allocated to the Class A Manager 58 and $41,000 is
allocated to Henry Global.59
D. The Company’s Financial Statements and the Resignation of the Class A
Manager
The loan to Greenland was executed on August 28, 2014.60 For each fiscal
year of the loan, A&J directed an accounting firm to review the Company’s
unaudited financial statements.61 From 2014 through 2016, A&J sent the written
product of the accounting firm’s reviews and the firm’s notes to Henry Global for
54
JX 12-0027.
55
JX 12-0034, JX 8-0006.
56
JX 12-0032.
57
JX 16-0002.
58
JX 12-0032.
59
JX 16-0002.
60
JX 14.
61
Trial Tr. 43–44, 46 (Verba); JX 20, JX 32, JX 36.
15
dissemination to the Members.62 The balance sheet and statement of cash flows
always included line item payments to Henry Global and a “related party.”63 In
addition to explaining that the “related party” is Urban Harmony, which receives a
portion of the Administration Fee, the notes state that the Company is required to
pay Henry Global “1.3% of the outstanding Note amount on a calendar quarter basis
upon receipt of payment from the Developer and 1% of the outstanding Note amount
during the term of the Note upon receipt of payment from the Developer at the
Maturity . . . of the Note.”64 Although Henry Global distributed copies of the
financial statements to the Members per A&J’s direction, it apparently did not
distribute the pages of notes that referenced the payments to Henry Global.65
In September 2017, the U.S. Securities and Exchange Commission brought
an enforcement action against the principal of Home Paradise, his wife and several
62
Trial Tr. 46–47 (Verba).
63
See, e.g., JX 32-004, JX 32-0007.
64
See, e.g., JX 32-0011.
65
Trial Tr. 297–303 (Wang). Zhu Wang, one of two Members to appear at trial, testified
that she did not receive the 2015 financial statements from Henry Global until 2017, but
she did not suggest that statements for the remaining years were untimely. Trial Tr. 297
(Wang). She also testified that she did not receive pages eight and nine of the 2015
statements or page nine of the 2016 statements. Trial Tr. 298–303 (Wang); see also JX 30,
JX 38 (financial statements that Ms. Wang received from Henry Global). Kangni Sun, the
other Member to appear, similarly testified that she did not receive the last pages of the
2015 and 2016 financial statements. Trial Tr. 337–38 (Sun); see also JX 31, JX 39
(financial statements that Ms. Sun received from Henry Global).
16
of the principal’s companies, including Home Paradise.66 A&J notified the Class B
Members of the suit and, soon after, Urban Harmony (a subsidiary of Home
Paradise) resigned from its role as Class A Manager.67 A&J was concerned that the
suit may also lead to Home Paradise’s termination as the Regional Center.68 Fearing
the potential negative impact of Home Paradise’s separation from LAMC on the
Members’ pending immigration petitions, A&J sought to engage more directly with
investors and provide assurances of their EB-5 status.69 As part of this effort, A&J
sent the 2017 financial reviews with the attached notes directly to the Members
instead of relying on Henry Global to distribute them.70 A&J did not receive any
inquiries from the Members regarding the financial statements or the payments to
Henry Global.71
66
PTO ¶ 19. The suit alleged that the couple had defrauded EB-5 investors in two projects
unrelated to the Company or the Project. Id.
67
Id. The Company did not name a replacement Class A Manager. Id.
68
Trial Tr. 47 (Verba).
69
Id.
70
Trial Tr. 46–47 (Verba); JX 224.
71
Trial Tr. 50 (Verba), 315–316 (Wang), 357 (Sun).
17
E. The Events Leading to A&J’s Removal as Manager
Once the Project was substantially completed, funds from the sale of
individual condominium units were released to an account in Greenland’s name for
the benefit of the Company (the “Pledge Account”).72 Greenland and the Company
entered a pledge agreement to ensure that Greenland would not use the money in the
Pledge Account without A&J’s approval or for purposes other than those permitted
by the loan agreement.73 Greenland, however, considered the proceeds from the
condominium sales to belong to it as borrower since it had not yet paid those funds
to the Company.74 It became frustrated over time that the sales proceeds were
essentially locked up in escrow within the Pledge Account and that the funds could
not be deployed either to pay down the loan or to advance other Greenland interests.
To make matters worse from its perspective, Greenland had to pay interest to the
Company on those funds since they were not being committed to pay down the
loan.75
72
Trial Tr. 64–65 (Verba).
73
Trial Tr. 64 (Verba).
74
Wu Dep. 34. Chao Wu is an Executive Vice President of Greenland U.S.A. and the
General Manager of Greenland’s Los Angeles and San Francisco Offices. Id. 12.
75
Trial Tr. 65–66 (Verba).
18
Around May or June 2017, Greenland’s CFO, Jian Zhang, approached Mr. Xu
with an offer to repay the loan before its maturity date, with the implicit
understanding that freed capital could be redeployed as a loan to fund another
Greenland project.76 Mr. Xu pointed out that the money in the Pledge Account, then
$55 million, was growing quickly and could exceed the principal of the loan by the
end of the year, meaning the Members’ investment would no longer be “at risk” as
required by EB-5 regulations.77 Although the loan agreement explicitly prohibited
prepayment, A&J and Greenland developed a prepayment plan to avoid the potential
overflow of the Pledge Account.78
In September 2017, A&J provided the first drafts of amendments to the loan
agreement, which noted that “Borrower has requested the right to prepay the Loan
in accordance with certain conditions, as more fully set forth in the Note.”79 On
October 19, 2017, Greenland provided counter-drafts that made certain changes but
76
Trial Tr. 67 (Verba), 235 (Xu); Zhang Dep. 26, 40–41.
77
Trial Tr. 67, 106 (Verba), 235 (Xu). The concern was that once Greenland had reserved
enough funds to meet or exceed the principal amount of the loan, the loan could be deemed
paid in full and the Members’ investments could be deemed no longer “at risk.”
78
Trial Tr. 69 (Verba).
79
JX 50-0003.
19
did not modify the “Borrower has requested . . .” language.80 The Fourth
Amendment to the Loan Agreement memorialized the final prepayment proposal.81
As part of the prepayment plan, A&J and Greenland negotiated a $1 million
prepayment fee to A&J.82 A&J believed it had engaged in substantial additional
work prior to the negotiations for prepayment as a result of Greenland’s repeated
changes to the Project’s budget and the process for draw requests.83 A&J also
maintained that additional compensation was warranted for its participation in
prepayment negotiations and the pending redeployment process.84 It estimated that
redeployment could take up to two years and that, if prepayment occurred, it would
forego $1.6 million in management fees that it would otherwise receive by the
maturity of the loan.85 Given that prepayment of the loan would allow Greenland to
80
JX 53.
81
JX 50.
82
Trial Tr. 87 (Verba).
83
Id.
84
Id.
85
Trial Tr. 69–73, 76–77, 86–87 (Verba). If the loan were prepaid four years before its
maturity date, A&J would lose out on annual compensation of $400,000 per year or 0.4%
multiplied by the outstanding loan amount. Trial Tr. 72–73 (Verba). A&J expected that it
would take two to three months after the prepayment to identify a new investment
opportunity, three to four months to negotiate the terms of the new loan, and 18 to 24
months to reach full deployment in the case of another construction loan. Trial Tr. 76–77
(Verba). A&J would not receive full compensation on the new loan until the full amount
20
keep $8 to $9 million in unpaid interest, Greenland agreed to pay A&J directly so
that Members would be unaffected by the prepayment fee.86 Of the $1 million fee,
$200,000 would go to the Company.87 The remaining $800,000 would go to A&J
for:
time and expense incurred to date in amending the Loan Documents,
underwriting and negotiating closing documents in connection with the
Senior Loan, research and analysis into matters including EB-5
Program Laws compliance and securities compliance for Lender
investors in connection with prepayment of the Loan, and processing,
underwriting, closing and administration of any replacement
investment using prepaid amounts of Loan principal required by EB-5
Program Laws[.]88
A&J advised the Members of the prepayment proposal in a memorandum
dated October 26, 2017, which explained that prepayment was necessary to “cure
[a] potential immigration violation” and “salvage the immigration status of most if
not all of the Class B Members.”89 The following day, A&J presented the proposed
plan for the Members’ approval with a Notice to Class B Members and Request for
of the loan was disbursed. Trial Tr. 78 (Verba). Thus, A&J concluded that repayment of
the loan would likely set back its compensation for at least two years.
86
Trial Tr. 65–66 (Verba), 235 (Xu); Zhang Dep. 56.
87
JX 50-0023–24.
88
Id.
89
JX 54.
21
Consent to Prepayment (the “Prepayment Notice”).90 The Prepayment Notice
explained that A&J requested $800,000 from Greenland (not the Members) “for
services rendered in connection with the Prepayment, including, without limitation:
 Negotiating with the Borrower the terms of the Fourth Loan
Amendment;
 Negotiating prior amendments to the Loan Agreement and other
ancillary documentation related thereto;
 Negotiating inter-creditor terms with the secured lender;
 Preparing documentation and conducting research with respect
to preserving the collateral securing the Loan for the benefit of
the Class B Members;
 Assisting developer to organize the construction supporting
documents and related costs categories to comply with the
regulation requirements of USCIS and US security laws;
 Coordinating execution of legal documents related to the
Company;
 Continued oversight of the Company and investment
management during the interim period between repayment of the
loan; and
 Identifying opportunities for redeployment of capital.”91
The Prepayment Notice does not address the anticipated length of time required for
redeployment of the Company’s capital or the $1.6 million in lost management fees
as a basis to justify the prepayment fee. In addition to explaining the terms of the
prepayment plan, the Prepayment Notice solicited the Members’ approval and
disclosed that A&J would consider a Member’s abstention from voting as a vote in
90
JX 56.
91
JX 56-0002.
22
favor of the prepayment plan.92 A&J hoped that this structure would expedite the
implementation of the prepayment plan given the concern that the Pledge Account
would soon exceed the Members’ investments.93
Before the voting deadline of November 30, 2017, Greenland became
concerned that A&J would not commit the redeployed investment funds to
Greenland on favorable terms once the original loan was repaid.94 With these
concerns in mind, Greenland’s support for the prepayment plan evaporated. Without
A&J’s knowledge, Greenland contacted certain Members of the Company directly
and advised them that A&J was pushing for prepayment of the loan while Greenland
opposed it.95 Ultimately, 135 Members returned votes rejecting the proposed
prepayment.96 Of those 135 Members, ten are employees of Greenland or have
family members who are employees of Greenland.97 And, as among the 135 no
92
JX 56-0004.
93
Trial Tr. 106 (Verba).
94
Wu Dep. 85. Mr. Wu testified that he believed A&J sought repayment to then negotiate
an increased interest rate on subsequent projects financed by the reinvested money. Id.
95
Wu Dep. 44–45, 85; JX 106, JX 107, JX 116–17; Trial Tr. 109 (Verba).
96
JX 280.
97
Pl.’s Post-Trial Opening Br. (“POB”) (D.I. 169), Ex. 1 (D.I. 170) (Revised
Demonstrative 2).
23
votes, emails transmitting 102 of those votes were copied to Liming Wang, the
husband of Member Zhu Wang.98
On November 20, 2017, Krug, who had previously been retained by certain
Members to perform an analysis of the at-risk nature of the Pledge Account funds,99
sent two demand letters to A&J opposing the prepayment plan and requesting a list
of Members.100 Neither letter mentioned the prepayment fee. The Company rejected
Krug’s demand for the Member list and neither Krug nor any Member elected to
pursue an action to enforce inspection rights.101
98
Trial Tr. 469 (Krug); JX 278–80. Zhu Wang testified that the email address
ldgytwh@qq.com does not belong to her husband, but she could not recall his email
address. Trial Tr. 319, 324 (Wang). Ms. Sun, whose husband is the director of technology
for Greenland, testified during deposition that the email did belong to Liming Wang but
recanted that testimony during trial. Trial Tr. 351–52 (Sun); Sun Dep. 37–38. Neither Zhu
Wang nor Ms. Sun proved to be credible trial witnesses, as revealed in their demeanor and
the substance of their testimony, and this is but one illustration of testimony that simply
was not believable. A&J has moved to strike the Zhu Wang and Sun trial testimony as
patently false and the product of improper witness coaching. POB 29 n.16. That motion
is denied. As for the substantive question of whether Liming Wang was copied on the
transmittal emails at issue, the credible evidence reveals that he was. From that evidence,
I am satisfied that Liming Wang facilitated if not encouraged the vast majority of the no
votes from Members on the prepayment proposal.
99
Trial Tr. 435 (Krug).
100
JX 74, JX 75.
101
JX 93; Krug Dep. 63.
24
F. Krug Purports to Remove and Replace A&J on Behalf of the Members
On December 8, 2017, after the prepayment plan had been rejected, A&J and
Henry Global held a meeting in Beijing with the Members.102 The attendees did not
discuss the prepayment fee, but they did discuss concerns regarding the resignation
of Urban Harmony as well as prepayment of the loan and redeployment of the
Members’ investment.103 Notwithstanding the evidence that Greenland had initiated
the prepayment discussions, one attendee—Liming Wang—complained that A&J
had requested prepayment of the loan (apparently to advance its own interests) and
criticized the structure of the vote on the prepayment plan.104 After the meeting,
Greenland contacted A&J and the two agreed to recommend a new proposal that
would allow Greenland to cash out $55 million of its equity, thereby reducing the
collateral of the loan and providing funds that Greenland could freely use for other
projects.105 The new proposal did not include a prepayment fee.106
102
Trial Tr. 110 (Verba). Greenland did not attend the meeting. Id.
103
Trial Tr. 110–11 (Verba).
104
Trial Tr. 113–14 (Verba).
105
Trial Tr. 116 (Verba).
106
Trial Tr. 117 (Verba).
25
A&J notified the Members of the new proposal and structured the vote so that
only votes in favor of the plan counted as affirmative votes.107 Roughly a dozen
Members delivered votes opposing the new proposal, but during the voting period,
91 Members emailed the Company asking A&J to cancel the vote and release
$15.08 million to Greenland unconditionally.108 Of these emails, 75 were copied to
Liming Wang.109
On or about February 26, 2018, Krug drafted a Notice to Class B Members
and Request for Vote and a Notice of Election (the “Removal Ballot”).110 The
Members were asked to vote on the following proposals: “Remove A&J Capital
Investment, Inc. as the Class B Manger? Yes. No.” and “Elect Law Office of Krug
as the interim Class B Manager? Yes. No.”111 The Removal Ballot did not identify
a basis for removal, either in any prefatory statement or in the solicitation, but it did
note the Members’ rights to remove the Class B Manager under Sections 5.3(c)(ii)
and 12 of the Operating and Management Agreements, respectively.112 The
107
Trial Tr. 116–17 (Verba).
108
Trial Tr. 117–18 (Verba).
109
JX 278–80.
110
Trial Tr. 467–68 (Krug); Krug Dep. 126–27.
111
See, e.g., JX 321.
112
Id.
26
Removal Ballot also instructed Members to return their votes via email to Krug and
to copy Liming Wang.113 Krug sent the Removal Ballot to Liming Wang, who, as
liaison between the Members and Krug, forwarded the ballots to Members.114 Krug
received 105 emails with votes to remove A&J and appoint the Law Office of Krug
as interim manager.115 Of the 105 Members who voted to remove A&J, 11 are
employees of Greenland or have family members who are employed by
Greenland.116
On March 14, 2018, A&J received written notice that it had been removed as
Class B Manager and replaced by Krug (the “Removal Notice”).117 The Removal
Notice specifically states that “[a] majority of the Class B members have, in writing,
voted to remove A & J [] as the Class B Manager,” but it does not identify a basis
113
Id.
114
Trial Tr. 455, 471, 474 (Krug). Liming Wang did not appear for trial and it is not clear
from other evidence the extent to which he had direct communications with Members
regarding the Removal Ballot. It is unfortunate that Mr. Wang’s testimony was not
presented to the Court given his critical role in transmitting Removal Ballots to and from
Members and his apparently close association with Krug, a party to the case.
115
Trial Tr. 471–72 (Krug). As explained below, A&J presented the testimony of a
document authentication expert to raise questions regarding the authenticity of several of
the Removal Ballots, some of which, on their face, appeared either to be altered or to
contain signatures copied and pasted from other documents.
116
POB, Ex. 1.
117
JX 141.
27
for removal or the details of the Class B Member vote effectuating the removal.118
Two weeks after sending the Removal Notice to A&J, and again on April 2 and April
3, 2018, Krug sent notices confirming the results of the removal vote to the email
addresses from which Krug had received votes in favor of removing A&J.119 He did
not receive any replies questioning the results or his notices.120
G. Procedural History
On April 3, 2018, A&J filed its Verified Complaint for Injunctive Relief
pursuant to Sections 18-110 and 18-111 of the Delaware Limited Liability Company
Act seeking a declaration that A&J was improperly removed as Class B Manager of
the Company.121 A&J simultaneously filed a Motion for Order to Maintain Status
Quo and a Motion for Expedited Proceedings. After two hearings, the Court entered
a status quo order on May 9, 2018, providing that A&J would remain as Manager
pending resolution of the action.122 On May 2, 2018, Krug filed its Answer and
Counterclaims. The following day, A&J moved for summary judgment on the
grounds that the Members were required as a matter of law to provide A&J with
118
Id.
119
Trial Tr. 475–79 (Krug); JX 174, JX 200, JX 206.
120
Trial Tr. 475–79 (Krug).
121
6 Del. C. §§ 18-110 and 18-111.
122
D.I. 29.
28
notice of their intent to remove the Class B Manager prior to the Member vote, an
explanation of the grounds for removal and an opportunity to respond to the notice.
On July 18, 2018, after oral argument, the Court denied summary judgment upon
holding that neither Delaware law nor the Company’s agreements require pre-
removal notice.123 Expedited discovery followed. Trial proceedings concluded on
October 30, 2018, and the matter was submitted for decision that day.
II. ANALYSIS
A&J initiated this action under 6 Del. C. § 18-110, which provides, in part:
Upon application of any member or manager, the Court of Chancery
may hear and determine the validity of any . . . election, appointment,
removal . . . of a manager of a limited liability company, and the right
of any person to become or continue to be a manager of a limited
liability company, and, in case the right to serve as a manager is claimed
by more than 1 person, may determine the person or persons entitled to
serve as managers; and to that end make such order or decree in any
such case as may be just and proper.
A&J seeks a declaration that its removal by an improper and unsubstantiated vote
and its replacement as Class B Manager by Krug are invalid. In response, Krug asks
the Court to declare that Krug was properly and effectively appointed Class B
Manager and that A&J has no authority to continue to act in that capacity. Krug
123
D.I. 110.
29
further requests that A&J immediately tender possession and control of all the
Company’s assets, property, documents, books, records and accounts to Krug.124
A. The Authenticity of the Ballots
The parties devoted significant briefing and oral argument to A&J’s challenge
regarding the authenticity of the Removal Ballots (and, by extension, the legitimacy
of the underlying votes). To be sure, the process by which removal purportedly
occurred leaves much to the imagination. The Removal Ballot does not provide any
basis for removal, or even state that removal is for cause as defined in the operative
agreements. Nor does it provide for Members to indicate their physical address or
any other means of identification beyond a signature line. Since Krug relied on
Liming Wang to transmit the Removal Ballot to the Members, and Liming Wang
did not testify at trial, the Court has no basis to discern how the Removal Ballots
were distributed, what, if anything, the Members were told about the bases for
removal or even whether the Members were asked to remove A&J for cause. The
testimony of Zhu Wang and Ms. Sun fell far short of filling these information
gaps.125
124
In its Answer and Counterclaim, Krug cited Sections 18-100 and 18-111, but I assume
this was a scrivener’s error. Def.’s Answer and Countercl. ¶ 1.
125
Ms. Sun testified that Liming Wang did not tell her anything about the reasons for
removing A&J and that she did not receive any documents explaining the reasons. Trial
Tr. 356 (Sun). Neither Zhu Wang nor Ms. Sun recalled whether they forwarded the
30
The parties debate whether the signatures on several of the Removal Ballots
are real and to whom they belong.126 A&J alleges that at least 25 email addresses
used to send Ballots to Krug and 22 signatures on the Removal Ballots do not match
addresses and signatures in Company records. Other Removal Ballots contain exact
copies of signatures from other known documents, suggesting that someone copied
and pasted the signatures onto the Removal Ballots.127 Casting a shadow over all of
this is A&J’s allegation that Greenland, supported by a block of Members who are
Greenland employees or related to Greenland employees, improperly influenced the
removal vote.
Although much ink has been spilled and much breath has been expelled to
proffer and debunk A&J’s forgery and conspiracy evidence, I need not go down that
craggy path to resolve this dispute. If Krug cannot establish that cause for removal
existed, including whether Members knew the cause for removal at the time they
cast their votes, then the process by which removal occurred, and the question of
Removal Ballot to other Members or discussed the reasons for removal with other
Members. Trial Tr. 322–23 (Wang), 356 (Sun).
126
As explained below, the validity of A&J’s removal turns on facts other than the
authenticity of the Removal Ballots. Accordingly, I do not rely on the testimony of
Plaintiff’s handwriting expert, Ruth Brayer, and I deny Plaintiff’s Motion in Limine to
Exclude Challenged Ballots and Defendant’s Motion in Limine to Preclude Testimony of
Brayer as moot. See D.I. 112 and D.I. 115.
127
See JX 321, JX 322.
31
whether the Ballots are authentic and valid, are irrelevant.128 For reasons explained
below, I find by a preponderance of evidence that Krug’s supposed bases to remove
A&J do not rise to the standards for removal set by the Operating and Management
Agreements. Accordingly, I decline to address the claims of forgery or collusion
between certain Members and Greenland, and also decline to decide whether the
128
At the conclusion of oral argument on A&J’s motion for summary judgment, I explained
that while Krug could supplement his for-cause basis for removal with additional evidence
or causes for termination discovered after removal, he still was obliged to demonstrate that
A&J had engaged in conduct, or failed to engage in conduct, at the time of removal that
would satisfy the standards for removal as laid out in the operative agreements. See A&J
Capital, Inc. v. Law Office of Krug, C.A. No. 2018-0240-JRS, at 44 (Del. Ch. July 18,
2018) (TRANSCRIPT). Stated differently, Krug cannot justify removal by searching for
grounds after-the-fact. In Davenport Group MG, L.P. v. Strategic Investment Partners,
Inc., then-Vice Chancellor Steele held that post-termination evidence of cause for removal
is not per se irrelevant in an action challenging the removal of a general partner.
Davenport, 685 A.2d 715, 723 (Del. Ch. Jan. 23, 1996). Drawing from principles that have
emerged in our employment law in the context of wrongful termination, the court noted
that an employer is not barred from introducing evidence it discovers post-termination
when defending a claim of wrongful termination. Id. These cases do not hold, however,
that the employer may escape liability for wrongful termination (in a for cause termination
case) even though it did not possess cause at the time of termination and instead relies only
upon after-acquired evidence to justify its actions. See, e.g., McKennon v. Nashville
Banner Pub. Co., 513 U.S. 352, 358 (1995) (“It would not accord with this scheme [of the
ADEA] if after-acquired evidence of wrongdoing that would have resulted in termination
operates, in every instance, to bar all relief for an earlier violation of the Act.”). When
taken out of context, the wording in Davenport that “‘After-acquired’ but factually
undisputed information alone may support the removal of the General Partner” could be
construed to support Defendant’s effort to defend A&J’s removal only with grounds that
were discovered after removal. Davenport, 685 A.2d at 723. But a holding that would
allow removal for any reason unearthed after the fact of removal would circumvent the for-
cause contractual predicate for which A&J bargained. And it would deny the Members of
the opportunity meaningfully to participate in the removal process because, by definition,
their removal votes would not have been informed by the after-acquired evidence.
32
haphazard means by which Krug solicited the removal votes nullifies the results of
the vote.129
B. The Standards for Removal
Under the unambiguous terms of the Operating and Management Agreements,
A&J can be removed only for cause, which the agreements define as “gross
negligence, intentional misconduct, fraud or deceit.”130 Proving any one of these
predicates for removal is no easy task.
“In the civil context, the Delaware Supreme Court has defined gross
negligence as ‘a higher level of negligence representing an extreme departure from
the ordinary standard of care.’”131 “It refers to a decision ‘so grossly off-the-mark
as to amount to reckless indifference or a gross abuse of discretion.’” 132 Stated
129
Although I have elected not to tackle these issues, I note that much of the dust that has
been kicked up in this dispute would have remained settled had only Krug designed a
system to solicit votes that allowed for more transparency and accountability. Going
forward, the parties would be wise to learn from this unfortunate experience and to
incorporate more formality and precision in their dealings with one another and with
Members.
130
JX 10-0014, JX 8-0010. See Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins.
Co., 616 A.2d 1192, 1195–96 (Del. 1992) (“When the language of a . . . contract is clear
and unequivocal, a party will be bound by its plain meaning . . . .”).
131
In re Synutra Int’l, Inc., 2018 WL 705702, at *5 (Del. Ch. Feb. 2, 2018) (ORDER)
(quoting Browne v. Robb, 583 A.2d 949, 953 (Del. 1999)).
132
Id. (quoting Solash v. Telex Corp., 1988 WL 3587 at *9 (Del. Ch. Jan. 19, 1988)).
33
differently, “[t]o establish gross negligence, a plaintiff must plead and prove that the
defendant was ‘recklessly uninformed’ or acted ‘outside the bounds of reason.’”133
Our law sets the mark to prove intentional misconduct so that it is similarly
difficult to strike. “The duty to refrain from intentional misconduct is . . . essentially
a subset of or another name for, the duty to act in good faith, where the focus is on
whether the defendant (1) acted intentionally to harm those to whom he owes the
duty or (2) intentionally or consciously ignored his duties, thereby causing harm to
those to whom he owes the duty to refrain from intentional misconduct.”134
Lastly, “‘fraud’ is defined as ‘an intentional perversion of truth for the purpose
of inducing another in reliance upon it to part with some valuable thing belonging to
him or to surrender a legal right.’”135 To prove fraud, a plaintiff must demonstrate
five elements: (1) a false representation, usually one of fact, made by the defendant;
(2) the defendant’s knowledge or belief that the representation was false, or was
made with reckless indifference to the truth; (3) an intent to induce the plaintiff to
act or refrain from acting; (4) the plaintiff’s action or inaction taken in justifiable
133
Id. (quoting Albert v. Alex. Brown Mgmt. Servs., Inc., 2005 WL 2130607, at *4 (Del.
Ch. Aug. 26, 2005)).
Dawson v. Pittco Capital P’rs, L.P., 2012 WL 1564805, at *28 n.303 (Del. Ch. Apr. 30,
134
2012).
135
Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199,
1208 n.16 (Del. 1993) (quoting Black’s Law Dictionary 337 (5th ed. 1983)).
34
reliance upon the representation; and (5) damage as a result of such reliance.136
At common law, “fraud” and “deceit” are interchangeable.137
Krug argues that the for cause standards set forth in the operative agreements
define standards of conduct only and, therefore, if A&J engaged in conduct that
violated any of the standards, then it may be removed as Class B Manager even if
that conduct was not undertaken for a purpose of causing, or did not cause, harm to
the Company or its Members. I disagree. First, the operative agreements do not
state that the Class B Manager may be removed for grossly negligent or fraudulent
conduct; they state, instead, that removal will be justified, among other reasons, for
“gross negligence” or “fraud.” Second, and more to the point, the contractually
imposed standards of conduct necessarily incorporate an appreciation that the
proscribed conduct must either be harmful or cause harm to justify removal. If there
is no risk of harm to the Company as a result of the Manager’s actions, then there
can be no deviation from the standards of care or conduct contemplated by the
definitions of gross negligence, intentional misconduct, fraud or deceit.138 Third,
136
Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del. 1983).
137
Id.; see also Nye Odorless Incinerator Corp. v. Felton, 162 A. 504, 510 (Del. Super.
1931).
138
Accord, Ramsey v. Georgia S. Univ. Advanced Dev. Ctr., 189 A.3d 1255 (Del. 2018)
(holding that Delaware negligence law incorporates the notion of a foreseeable risk of harm
directly into the determination of whether a defendant owed a duty (as a matter of law) to
35
Krug has not cited any case in support of his construction of the contractual removal
standards that would justify divorcing the proscribed conduct from anticipated or
actual harm caused by the conduct and he does not appear to disagree that the parties
likely incorporated the elements of the standards as commonly known in our law.139
And finally, even if harm (foreseeable or actual) were divorced from the contractual
standards as Krug would have it, as explained below, the preponderance of evidence
does not support the contention that A&J violated any of the standards of conduct in
connection with any of the alleged grounds for removal.
C. The Preponderance of Evidence Does Not Support Removal for Cause
Krug points to two series of actions undertaken by A&J that justified its
removal for cause: (i) A&J’s request for the prepayment fee as part of the
prepayment of the loan coupled with the manner by which A&J structured the vote
for approval of the prepayment plan (by stating that abstention would be deemed as
approval); and (ii) the payments authorized by A&J and made to Henry Global.
Krug does not clearly tie these events to any one or more of the particular standards
the plaintiff as opposed to reserving the foreseeability inquiry for the proximate causation
determination).
139
See, e.g., Def.’s Opening Post-Trial Br. (“DOB”) 10 (D.I. 168) (“None of these
standards [for gross negligence, intentional misconduct, fraud or deceit] are explicitly
defined in the applicable agreements, but they are well-known under Delaware law.”);
A&J Capital, Inc. v. Law Office of Krug, C.A. No. 2018-0240-JRS, at 94 (Del. Ch. Oct. 30,
2018) (TRANSCRIPT) (“[G]ross negligence is what case law defines as gross negligence.
It’s the common understanding of it.”).
36
for removal as stated in the operative agreements but rather contends in general terms
that the identified conduct violates all of the standards.140 He does suggest, however,
that if each act standing alone is not enough to establish cause, then together they
represent misconduct that more than justifies removal.141 For reasons explained
below, here again, I disagree.
1. A&J’s Request for the Prepayment Fee and Structure of the
Prepayment Approval Vote Did Not Provide Cause for Removal
Krug characterizes A&J’s request for a prepayment fee as an “attempt to steal
a substantial amount of money from the Members, under false pretenses . . . .”142
I reject that claim summarily as nothing more than litigation hyperbole.143 In
140
See, e.g., DOB 11 (asserting generally that A&J’s attempt to steal from the Members
under false pretenses and paying funds to Henry Global while concealing them from
Members exceeds the gross negligence standard); DOB 24 (offering A&J’s failure to
include additional reasons for prepayment in the Prepayment Notice as “another example
of A&J’s deceit”); DOB 29 (“Purposefully misleading the Members to obtain additional,
unearned compensation constitutes gross negligence, intentional misconduct, fraud, and
deceit.”); DOB 30 (“A&J’s wrongful manipulation of the voting process constitutes
independent ‘gross negligence’ and ‘intentional misconduct’ . . . and demonstrates A&J’s
ill intent . . . .”); DOB 43 (offering the conclusion, without analysis, that payments to Henry
Global constituted gross negligence and intentional misconduct).
A&J Capital, C.A. No. 2018-0240-JRS, at 88–89, 103; DOB 53, 65 (“The totality of
141
A&J’s wrongdoing mandates removal.”).
142
Def.’s Opening Pre-Trial Br. 11 (D.I. 133).
143
At the risk of engaging in a superfluous exercise in semantics, the evidence came
nowhere close to proving (by any evidentiary standard) the crime of theft. See Parker v.
State, 2019 WL 180172, at *2 (Del. Jan. 14, 2019) (quoting 11 Del. C. § 841 and explaining
that theft is the taking of the property of another without consent and with the intent to
deprive that person of it or to appropriate it). Not only was the prepayment fee to come
directly from Greenland (who had consented to the fee), the solicitation of approval for the
37
addition to his allegation of attempted theft, Krug claims that three aspects of the
prepayment fee reveal A&J’s fraudulent intent and, together, establish cause for
removal. These arguments merit further consideration.
First, Krug argues that A&J knowingly lied when it advised Members that the
prepayment fee was for “services rendered in connection with the Prepayment.”144
Krug asserts that each service listed as justification for the fee is unrelated to the
prepayment proposal or already required of A&J under the operative agreements in
exchange for its management fee. For example, Krug alleges that the first service
(“Negotiating with the Borrower the terms of the Fourth Loan Amendment”) is
already required under Section 5.3(d)(ii)(7) of the Operating Agreement, which
mandates that A&J “Negotiate, amend and/or supplement the terms of any loans
made or to be made by the Company to the Developer.” Similarly, Section 5.14 of
the Operating Agreement requires the Class B Manager to “operate the Company in
a manner that is designed to comply with legal and policy requirements of the EB-5
Program, as advised by the Regional Center.” Krug argues that this section
prepayment proposal and accompanying ballot explicitly gave Members “the right to
consent or not consent to the Prepayment [including the fee], as more fully set forth in the
Notice of Election . . . .” JX 56-0004. See also JX 56 (noting that the purpose of the Notice
is to, in part, “request that the Class B Members consent to and authorize the Company to
agree to the Prepayment and enter into the Fourth Loan Amendment . . . .”).
144
JX 56-0002.
38
encompasses the eighth service (“Identifying opportunities for redeployment of
capital”) identified in the Prepayment Notice as a basis for the prepayment fee.145
Second, Krug asserts that A&J’s structuring of the vote so that a Member’s
silence counted as a vote in favor of prepayment reveals an intent to deceive
Members into approving the prepayment fee.146 This is so, according to Krug, even
though the Prepayment Notice clearly disclosed how A&J intended to count the
votes.
Lastly, in his post-trial answering brief, Krug argued for the first time that
fraudulent intent could be inferred from A&J’s decision to tie approval of the
prepayment fee to approval of the prepayment plan. Specifically, Krug argues that
if prepayment of the loan was necessary or at least beneficial to the Company given
the potential harm from the overflowing Pledge Account, then A&J breached its
145
Krug further argues that A&J completed the second service (“Negotiating prior
amendments to the Loan Agreement”) and the third service (“Negotiating inter-creditor
terms with the secured lender”) prior to discussion of the prepayment plan. Additionally,
the fourth service (“Preparing documentation and conducting research with respect to
preserving the collateral securing the Loan”) was not necessary to the prepayment since
collateral does not need to be preserved if the loan is being repaid. Lastly, the fifth service
(“Assisting developer to organize the construction supporting documents . . .”) and seventh
service (“Continued oversight of the Company and investment management during the
interim period between repayment of the Loan”) must be performed regardless of the
prepayment.
146
A&J Capital, C.A. No. 2018-0240-JRS, at 87–88, 91–92.
39
obligation to act in the Members’ best interests when it conditioned the avoidance
of the harm on the approval of its prepayment fee.
After considering the evidence, I find that none of these actions, whether
considered independently or in total, provided cause for removal. In each instance,
Krug’s arguments center on A&J’s alleged deceit or intentional misconduct—A&J
misled Members about the “true justifications” for the prepayment fee, attempted to
sneak in approval of the fee with a counterintuitive voting structure and tied the
prepayment and fee proposals together to force the Members’ to approve its fee. Of
course, an intent to deceive or harm cannot be drawn directly from the trial record
because there is no evidence of either (despite extensive discovery). And the
inference of deceit or intent to harm cannot be drawn circumstantially when it is
clear that A&J unabashedly disclosed the reasons for the prepayment, the fact that it
was seeking a prepayment fee and the reasons why it believed the fee was justified,
and then made clear that it was up to the Members to decide whether to approve the
prepayment proposal. The fact that the prepayment was Greenland’s idea, not
A&J’s, and the fact that the Members ultimately voted to reject the prepayment
proposal, further undermines the contention that A&J acted to deceive or harm the
Members.
40
A&J’s listed justifications provided Members with the opportunity and
information necessary to determine whether A&J deserved a prepayment fee.147
Even if A&J peppered its stated justifications for the fee with services that the
Operating and Management agreements already required it to perform, a premise not
well-supported in the evidence, there is no evidence that it did so to dupe or
otherwise harm the Members.148 In fact, the Members may have been more likely
to approve the prepayment had A&J included the “true justifications” that Krug
argues A&J intentionally concealed. For example, it is likely that Members would
have found A&J’s request for an $800,000 prepayment fee to be justified had they
known that A&J would forego $1.6 million in expected management fees, with no
source of recouping that compensation during the years required to redeploy the
capital, if the prepayment proposal were approved. Additionally, A&J did not hide
147
Although Verba did not “realize [A&J] needed authority . . . to ask members to approve
a prepayment fee that’s not coming from the members themselves,” (Trial Tr. 105 (Verba)),
he testified that “[A&J] certainly felt that . . . approval for such a fundamental change as
this [prepayment plan] required a member vote.” (Trial Tr. 102 (Verba)). See also Trial
Tr. 249–50 (Xu) (“Q: A&J decided to keep $800,000 of that prepayment fee for itself?
A: Well . . . it’s our proposal, but have to be approved (sic) by the investors.”).
148
The record suggests that A&J believed the justifications clearly referred to previous,
current and expected work related to the prepayment. Trial Tr. 103 (Verba) (“Q: What was
the intent of this section? A: The intent was to . . . have Class B members approve
additional compensation for the Class B manager in connection with the work that was
done before the prepayment, the work that was done in connection with prepayment, and
the work to be done in connection with prepayment and redeployment.” Q: . . . Are all of
the bullet points actually services rendered in connection with the prepayment? A: They’re
obviously not . . . .”).
41
the ball when it included justifications like “Continued oversight of the Company
and investment management during the interim period between repayment of the
Loan; and Identifying opportunities for redeployment of capital.” These services
would be provided only if the Members approved the prepayment plan.
Ultimately, there is no evidence that A&J’s justifications misled any of the
Members. Even Krug acknowledged that it was “obvious” that most of the services
A&J listed to support the prepayment fee were not associated with prepayment.149
Ms. Wang testified that she determined not to support the prepayment plan in part
because of the disclosures A&J provided in the prepayment proposal.150 It seems
that a majority of the Members did not disagree with Krug and Ms. Wang’s
assessments as they voted to reject all aspects of the prepayment plan including, of
course, the prepayment fee. Given this evidence, I cannot find that A&J engaged in
conduct that implicated any of the contractual bases for removal when it provided
its justifications for the requested prepayment fee. It merely provided its reasons
and then put the matter to the Members to either accept or reject.
The prepayment proposal also discloses the allegedly deceitful voting
structure and that the prepayment plan is tied to the fee. The proposal explicitly
149
Trial Tr. 443, 444, 448 (Krug).
150
Trial Tr. 326–27 (Wang).
42
states, “If a Class B Member does not return his or her completed Notice of Election
on or prior to the Deadline, the Class B Member will be deemed to have consented
to the Prepayment.”151 It also clearly links the prepayment plan and the fee request:
“Separate and apart from the Prepayment Amount, Borrower shall be required to pay
a prepayment fee equal to $1,000,000, payable as follows . . . .” 152 In hindsight,
perhaps A&J should have structured the vote differently or separated the prepayment
proposal from the fee, but neither of these choices rises to gross negligence, bad
faith, fraud or deceit when A&J informed the Members of the exact terms of the plan
and the structure of the vote. If the Members disagreed with the structure of the
plan, they had the right under the Prepayment Notice and the operative agreements
to reject the plan and to solicit approval for their own initiates. Indeed, Members
could have resolved to separate the prepayment plan and the prepayment fee if that
was the course they wished to take.153 That did not occur. In any event, given the
origin and purpose of the prepayment plan, and A&J’s full disclosure of the structure
151
JX 56-0004.
152
JX 56.
153
While no Members sought to separate the prepayment fee from the prepayment plan, a
group of Members, apparently urged on by Greenland, unsuccessfully sought Member
approval of a plan that would have authorized Greenland to take a portion ($15.08 million)
of the Pledge Account directly. Trial Tr. 118 (Verba) (estimating that A&J received about
90 votes requesting the release of $15.08 million to Greenland), 353 (Sun) (“Q: . . . And
you sent an email to the company, or to A&J, requesting the release of $15.08 million to
Greenland; correct? A: Yes.”).
43
of the vote and the linkage between the prepayment plan and the prepayment fee, I
do not find that either of these aspects of the prepayment plan implicated any of the
contractual bases for removal.
2. The Payments to Henry Global Did Not Provide Cause for Removal
Krug’s second proffered basis to remove A&J is that A&J caused the
Company to make improper payments to Henry Global. Specifically, Krug claims
that A&J wrongfully made payments in excess of Henry Global’s allotted share of
the Administration Fee under the PPM and concealed those payments from
Members.
The PPM prohibits fees “paid out of the Subscription Price or investment in
the Membership Interests of the Company.” 154 The parties agree that the
Subscription Price is the initial $500,000 investment made by each Member and that
these investments cannot be used to pay third parties like Henry Global. It is the
second prohibited source of fees—the “investment in the Membership Interests of
the Company”—that forms the basis of Krug’s allegation here. According to Krug,
this phrase means that fees paid to Henry Global cannot come from the “investment
income” generated by the Members’ Subscription Price. For its part, A&J interprets
“investments in the Membership Interests” to mean “a bundle of rights constituting
154
JX 12-0040.
44
a Member’s interest in the Company” made up of the Subscription Price plus any
additional “Capital Contribution” made by the Members.155 A&J reads the PPM as
prohibiting the Class B Manager from paying fees out of the Subscription Price or
any additional Capital Contributions, but allowing it to pay fees out of the interest
income generated by the Members’ investments in the loan.
Krug also argues that the payments to Henry Global are excessive. He points
out that both the DSA and the PPM already require Henry Global to recruit EB-5
investors for the Company and to assist Members with immigration documentation
and information requests.156 Additionally, Krug maintains that Henry Global had
previously entered into individual agreements with the Members that required Henry
Global to provide the same immigration services as required by the PPM and DSA.
Finally, Krug argues that A&J intentionally prevented the Members from
learning of the payments to Henry Global by concealing the DSA from the Members
and distributing, through Henry Global, financial statements in English and without
155
Section 3.2 of the Operating Agreement states that “[t]he Members may be
permitted . . . to make additional Capital Contributions if the Mangers determine that such
additional contributions are necessary or appropriate . . . [and] if such additional Capital
Contributions are not to be made by all of the Members pro rata, the additional Capital
Contributions and corresponding changes in the Membership Interests shall require the
approval of the Members . . . .” JX 10-007.
156
DOB 45 (citing JX 22 and JX 13).
45
the accounting firm’s notes. According to Krug, this misconduct alone justified
removal.
There can be no question that A&J was authorized to pay Henry Global for its
services. Section 5.3(d)(ii)(10) of the Operating Agreement authorizes the Class B
Manager to “[e]nter into any agreement which the Managers may reasonably deem
appropriate for any purpose beneficial to the Company . . . .”157 Krug has not pointed
to any evidence suggesting that A&J considered the payments to Henry Global to be
unreasonable and yet continued to make them. To the contrary, the credible evidence
reveals that the payments to Henry Global are reasonable and that A&J believed
them to be so.
Henry Global provides significant services in its role as Program Locator and
Distributor. At the outset of its engagement, Henry Global was required to learn
about the Project, organize conferences with potential investors to inform them of
the Project, translate loan documents and raise capital.158 As part of raising capital,
Henry Global assisted investors with their application packages, traveled with the
investors outside of China to open escrow accounts and assisted with currency
transfers.159 Once the investments were secured, Henry Global acted as a liaison to
157
JX 10-0015.
158
Trial Tr. 39 (Verba), 291 (Wang).
159
Trial Tr. 39–40 (Verba).
46
the Company by communicating questions from the investors to the Company,
coordinating votes and distributing documents.160 Even now, Henry Global
continues to assist Members with their citizenship application packages, including
their Visa applications, and prepares them for their interviews with immigration
officials.161 In the event of redeployment, Henry Global will perform many if not
most of these services again as it orients investors to the new project.162
The PPM recognizes that the Program Locator and Distributor are entitled to
fees for their services, but it does not restrict the payments to a specific amount.
Rather, the PPM restricts the sources of Henry Global’s fees to the Administration
Fees and interest income. Krug does not challenge that the fees paid to Henry Global
come from those two sources. Nor does he challenge A&J’s argument that the fees
fit squarely within the interest income allocation scheme established in the PPM.
As noted, two provisions of the PPM disclosed that payments to Henry Global
would be made from the interest income:
All of the Administration Fees are paid to Program Locators and
Processors for capital raising and document processing and to the
Class A Manager and Regional Center as payment for their fees . . . .163
160
Trial Tr. 40 (Verba), 290 (Wang).
161
Trial Tr. 41 (Verba), 290 (Wang).
162
Id.
163
JX 12-0035.
47
....
The Company will pay out of the Administration Fee and interest
income all ordinary administrative and operating expenses . . . as well
as payments to Managers and other third party service providers for
servicing the Loan, assisting with the Offering, and providing
immigration services to the Company, Subscribers, and Class B
Members.164
These provisions explain that “interest income” and the Members’ $45,000
Administration Fee will be used to pay “ordinary administrative and operating
expenses” as well as fees to third-party Program Locators, Processors, the Class A
Manager and the Regional Center. The PPM also makes clear that none of the fees
to these entities may be paid from the $500,000 Subscription Price or “investment
in the Membership Interests of the Company.”165 “Membership Interest” is defined
in the Operating Agreement to encompass the Class B Members’ right to receive
distributions from the Company, the right to vote or participate in management, the
right to receive information and all other rights and obligations under the LLC Act.166
“Investment in the Membership Interests,” though not defined, appears to reference
the Members’ financial contributions to the Company in exchange for the bundle of
rights captured within their Membership Interests. The only Member contributions
164
JX 12-0042.
165
JX 12-0035.
166
JX 10-0005.
48
specified in the operative agreements are the Administration Fee, Subscription Price
and any Capital Contributions. Indeed, the PPM states that “the Subscriber will have
all the rights of a Class B Member” once the Subscriber has delivered the
Subscription Price (also called a “Capital Contribution”) and Administration Fee.167
What these provisions make clear is that Henry Global’s fee cannot be paid
from the Members’ financial contributions to the Company, but the fees can be paid
from “interest income,” i.e., the interest on the loan comprised of the Members’
investment in the Company. In arguing that the PPM prohibits fees to Henry Global
paid from the Members’ “investment income,” Krug conflates “interest income”
with the Members’ investment. But, in accordance with the PPM, the Company
pays Henry Global from the Administration Fee and interest income on the loan.168
Nothing in the suite of agreements at issue here precludes A&J from paying Henry
Global’s fees from these sources.
Henry Global’s share of the interest income fits with the PPM’s allocation of
the interest income to other parties. Under the PPM, the Class B Members can
expect 0.2% of the interest,169 the Class A Manager is entitled to 0.1% and the
167
JX 12-0004.
168
Trial Tr. 36, 38–39 (Verba).
169
JX 12-0027. The PPM states that 1.8% of the 2.2% interest income will be payable in
cash on a quarterly basis to the Company. Id. The remaining 0.4% will accrue annually
and be payable at the maturity date. Id. “[F]rom the two percent (2.0%) so accrued and
49
Class B Manager is entitled to 0.4%.170 This allocation leaves 1.5% of the interest
remaining and the DSA provides for Henry Global to receive 1.5%.171 And, of
course, nothing in the operative agreements indicates that the Members are entitled
to the remaining 1.5% interest income. This makes sense given that the PPM
emphasizes that the prevailing purpose of the EB-5 investment is to secure
permanent residency in the United States.172 With the significant restrictions of the
EB-5 regulations and the long horizon required to obtain citizenship under the
program, it is clear that profit is not what motivated Members to invest.173
The evidence that Henry Global was compensated by each Member
individually in addition to receiving payments from the Members’ Administration
Fees and interest income suggests that Henry Global was perhaps double dipping.174
payable at the Maturity Date [0.4% x five years], 1.0% [0.2% x five years] is expected to
be payable by the Company to the Class B Members.” Id.
170
JX 12-0032, 12-0034.
171
The DSA entitles Henry Global to 1.3% of the outstanding loan amount on a quarterly
basis and 1% of the outstanding loan amount during the term of the loan (that is, the
remaining 0.2% of the deferred 0.4% accrued annually over five years). JX 16-0002; Trial
Tr. 23 (Verba).
172
JX 12-0005, 12-0026.
173
See Sun Dep. 18 (testifying that she invested in the Company for immigration purposes
and understood that her expected rate of return was “very little.”); Wang Dep. 13–14
(testifying that she invested in the Company because it was part of the EB-5 requirements
and would allow her to apply for citizenship status).
174
Trial Tr. 292–94 (Wang) (“Q: And in addition to those documents [to make the
$500,000 investment], you also entered into a personal agreement with Henry Global for
50
Even if true, Henry Global’s excessive gain does not reveal wrongdoing on the part
of A&J. Krug presented no evidence that A&J knew of the alleged agreements
between individual Members and Henry Global.175 Even assuming A&J’s
knowledge, and crediting Ms. Wang and Ms. Sun’s testimony regarding the terms
of their separate agreements with Henry Global, there is no contractual prohibition
against Henry Global receiving revenue from multiple sources.
I am also not persuaded that A&J intentionally concealed the payments to
Henry Global from the Members. The record suggests that A&J ordered an
independent accounting firm to review the Company’s financial statements
including the Company’s payments to Henry Global. A&J then provided those
Henry Global to provide services to you; correct? A: Yes, yes. That’s the agreement, for
them to provide any related immigration services. Q: Separate and apart from the $545,000
you paid for the investment, how much money did you pay to Henry Global for its
immigration services? A: . . . it’s somewhere between 50 and 60,000 [RMB] . . .
Q: In exchange for the money that you paid Henry Global, did Henry Global agree to help
you prepare immigration documents in relationship to the company? A: Correct. Q: Did
Henry Global agree to assist you in processing those immigration documents with the
government agencies in the United States? . . . A: Correct.”).
175
Krug submitted a copy of an individual agreement between Henry Global and a non-
testifying Member but did not address it at trial or in briefing and did not suggest that the
Company or A&J possessed or knew of the agreement. Trial Tr. 283–85. See also Trial
Tr. 35 (Verba) (“Q: Do you know whether Henry Global has separate fee arrangements of
their own with any of the investors for services? A: . . . All I know is the documents that
we’ve signed with Henry Global as the agent . . . and I’m not really familiar with [the
agreement between the investor and Henry Global], which is also in Chinese. And my
Chinese is not too good. Q: So were you aware of any separate fee agreements prior to
seeing that document? A: No.”).
51
financial statements with the accounting firm’s notes to Henry Global for
distribution to the Members. Whether by accident or intentionally, Henry Global
excluded the last page of the notes from the documents supplied to the Members.
But I have found no credible evidence in the trial record that would suggest A&J had
any part in concealing the payments to Henry Global, if they were, in fact,
concealed.176 A&J requested an independent review and provided the complete
versions of the statements for distribution to Members. And when A&J determined
that it was best for it to distribute the statements directly, it distributed them in their
entirety.
After carefully reviewing the evidence, I am satisfied that Krug did not prove
that the payments to Henry Global were unauthorized, prohibitively excessive or
improperly hidden from the Members. Nor did he prove that the payments
diminished the Members’ expected investment returns. Accordingly, I cannot find
that A&J engaged in gross negligence, intentional misconduct, fraud or deceit when
it made payments to Henry Global under the DSA.
176
Ms. Wang testified at trial that her vote to remove A&J was motivated in part by A&J’s
payments to Henry Global. Trial Tr. 316 (Wang). Thus, at least one Member saw enough
in what was provided to her to prompt questions about the payments to Henry Global, even
without the missing notes. At bottom, it does not matter whether the Members could
determine whether and why Henry Global was overpaid. A&J provided them with the
exact amounts owed to the third party each year and this evidence runs contrary to the
notion that A&J acted with an intent to deceive.
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III. CONCLUSION
For the reasons stated above, I find for Plaintiff and will enter final declaratory
judgment in its favor as requested in the Complaint. Plaintiff shall submit a
conforming final judgment, upon notice as to form, within twenty days.
53