Kurlander v. Kaplan

UNITED STATES DISTRICT COURT

MIDDLE DISTRICT OF FLORIDA

TAMPA DIVISION

PHILIP KURLANDER, M.D. and

BAKER HILL HOLDING, a New York

limited liability company,

Plaintiffs,

v. Case No. 8:19-cv-00644-T-02CPT

ROBERT R KAPLAN, ROBERT R.

KAPLAN, JR., LEO KIELY, SCOTT MUSIL,

BILL FIELDS, and HC GOVERNMENT

REALTY TRUST, INC., a Maryland

Corporation,

Defendants.

_____________________________________/

ORDER

This matter comes to the Court on Defendants’ Motions to Dismiss Plaintiff’s

Complaint from Robert R. Kaplan and Robert R. Kaplan, Jr. (collectively “the

Kaplans”), Leo Kiely, Scott Musil, and Bill Fields (collectively, the “Independent

Directors”), and HC Government Realty Trust, Inc. (“HC REIT”). Dkts. 31, 32, 33.

Plaintiff has filed oppositions in response, Dkts. 42, 43, 44, to which Defendants

have replied, Dkts. 48, 49, 50. The Court took extensive argument from counsel at a

hearing on these matters on August 7, 2019. The Court abstains on Count I under the

Burford doctrine, and grants the motions to dismiss on Counts II and III without

prejudice.

BACKGROUND

For purposes of this order, the Court accepts as true the facts alleged in the

Complaint. Dkt. 1. In 2010, Edwin Stanton formed a company, later called

Holmwood Capital, LLC, (“Holmwood Capital”) to invest in real estate. Id. ¶¶ 19.

Thereafter, Stanton reached out to his attorney and friend, Mr. Kaplan Jr., to

discuss the company. Id. ¶ 20. It was agreed that Mr. Kaplan Jr. and his father, Mr.

Kaplan, both members of the law firm Kaplan Voekler Cunningham & Frank, PLC

(“Law Firm”) would invest nominal funds and legal services for the venture. Id. ¶¶

20-22.

To seek additional funding for the company, Kaplan introduced Holmwood

Capital to Dr. Kurlander, a surgeon and citizen of New York. Dkt. 1 ¶ 1, 22. Dr.

Kurlander also owns and controls Plaintiff Baker-Hill, a New York limited liability

company. Id. ¶ 2. On May 25, 2012, Plaintiffs provided mezzanine financing as a

lender and, at the end of 2012, became equity investors in Holmwood Capital with

63% ownership. Id. ¶¶ 22-23.

Over the next several years, Holmwood Capital acquired seven commercial

properties. Id. ¶ 28. Meanwhile, the Kaplans, Mr. Stanton (through his company,

Stanton Holdings), and Plaintiffs formed an independent management company

called Holmwood Capital Advisors, LLC (“HC Advisors”), with each owning

25%. Id. ¶ 29. The Kaplans continued to perform related legal work, including the

preparation of organizational documents for Holmwood Capital and HC Advisors.

Id. ¶¶ 27, 30.

The Kaplans “insisted” that to obtain additional financing a new entity

should be formed to take advantage of “Regulation A,” which allows for small

business entities to raise capital without the restrictions of publicly listed

companies. Id. ¶ 31. Dr. Kurlander, Mr. Stanton, and the Kaplans and Law Firm

thus formed HC Holdings and HC REIT, which was initially held about equally by

each of the Kaplans, Mr. Stanton, and Dr. Kurlander. Id. ¶ 32. HC REIT was the

general partner of the operating partnership, HC Holdings, with Holmwood

Portfolio Holdings, LLC and Holmwood Capital, LLC as limited partners. Id. ¶ 33.

HC REIT is a Maryland corporation.

Though Mr. Stanton and Plaintiffs had expressed concerns about losing

control, they ultimately agreed with the Kaplans for HC REIT to have a board of

directors with four independent directors and Mr. Kaplan, Dr. Kurlander, and Mr.

Stanton. Id. ¶¶ 34-35. The Kaplans represented the independent directors would

respect the preexisting management agreement between HC REIT and HC

Advisors. Id. ¶ 35. Mr. Stanton also served HC REIT as the chief executive officer,

Mr. Kaplan, Jr. as the president, Mr. Kaplan as the secretary, and Dr. Kurlander as

the treasurer. Id.

HC Advisors continued to search for funding and, through BB&T Capital

Markets, the Kaplans were introduced to the Hale Partnership. Id. ¶ 39. The

Kaplans negotiated with the Hale Partnership, which culminated in the Hale

Package. Id. ¶ 39. Instead of bringing the proposal to HC Advisors, the Kaplans

presented the Hale Package to the HC REIT Board in August 2018. Id. ¶ 40.

Plaintiffs submitted an alternative capital proposal, the “Baker Hill Package.” Id. ¶

41. With one director having resigned, a deadlock between the packages was

reached. Id. ¶ 12.

To proceed with his investment, the Hale Partnership agreed to redeem the

equity interests of the Plaintiffs and Mr. Stanton, which in January 2019 was

agreed upon subject to an independent investment bank’s fairness opinion of the

proposed redemption price. Id. ¶ 44. The fairness opinion resulted in a lower

repurchase price, and Plaintiffs and Mr. Stanton declined to proceed with the deal.

Id. ¶¶ 46-47.

On March 5, 2019, Elizabeth Watson, the former CFO of HC REIT, sent to

Mr. Kaplan, Jr. a memorandum that she had prepared. Id. ¶ 50. That memorandum

explained the unfavorable terms of the Hale Package. Id. Though Mr. Kaplan, Jr.

did not forward the memorandum to the Board, on March 11, 2019 Defendant

Musil did. Id. ¶ 50. The next day at 10:43 a.m., Mr. Kaplan provided notice of a

board meeting set for 11:15 a.m. the following day. Id. ¶ 51. This was about thirty-

two minutes more than the minimum required by the organizational documents. Id.

Also on March 12, 2019, Mr. Kaplan disseminated a 121-page agenda of the

meeting which included terms and conditions that constituted the Hale Package. Id.

¶ 52-53.

All directors, except Dr. Kurlander who is a medical doctor and was

performing surgery, attended the March 13 meeting. Id. ¶ 55. Mr. Stanton

requested a continuance, which was denied. Id. ¶ 56. The HC REIT Board then

approved, by a four to one margin, the items for consideration, which “paved the

way for the Hale Package and all that goes with it,” with Mr. Stanton being the

only dissenter. Id. ¶ 57. This meant mezzanine financing at an interest rate of 14%,

additional money invested in 10% Series B Cumulative Convertible Preferred

Stock, money invested as common stock, and the potential for additional

investments. Dkt. 1-3. The Series B Preferred Stock was made on parity with the

Series A preferred stock with respect to dividends and other distribution rights.

Dkt. 1-4 at 2. Mr. Stanton and Dr. Kurlander were removed as officers of HC

REIT. Dkt. 1-5 at 28; Dkt. 1-7 at 2-3; Dkt. 1 ¶ 53(e) & (f). On March 14, 2019, Mr.

Kaplan, Jr. notified Mr. Stanton that the management contract between HC REIT

and HC Advisors would not be renewed, “which such nonrenewal shall take effect

on March 31, 2020.” Dkt. 1-7 at 2.

Plaintiffs bring three counts against Defendants. In Count I, Plaintiffs

petition for dissolution of the HC REIT under § 3-414 of the Maryland Code.

Count II is for breach of fiduciary duty against the Independent Directors and the

Kaplans (collectively the “Board Defendants”). Count III seeks declaratory

judgment.

LEGAL STANDARD

To survive a Rule 12(b)(6) motion to dismiss, a plaintiff must plead

sufficient facts to state a claim that is “plausible on its face.” Ashcroft v. Iqbal, 556

U.S. 662, 678 (2009) (citation omitted). When considering a Rule 12(b)(6) motion,

the court accepts all factual allegations of the complaint as true and construes them

in the light most favorable to the plaintiff. Pielage v. McConnell, 516 F.3d 1282,

1284 (11th Cir. 2008) (citation omitted). Courts should limit their “consideration to

the well-pleaded factual allegations, documents central to or referenced in the

complaint, and matters judicially noticed.” La Grasta v. First Union Sec., Inc., 358

F.3d 840, 845 (11th Cir. 2004) (citations omitted).

DISCUSSION

I. Choice-of-Law

A federal court sitting in diversity must apply the choice-of-law rules of the

state in which it sits. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487 (1941).

Under Florida’s choice-of-law principles, the law of the state of incorporation

governs the liabilities of the officers or directors of a corporation. International

Ins. Co. v. Johns, 874 F.2d 1447 (11th Cir. 1989). It is thus undisputed that HC

REIT is incorporated in Maryland, and thus Maryland law governs.

II. Statutory Dissolution Under § 3-413 of the Maryland Code

In Count I, Plaintiffs ask the Court to dissolve HC REIT pursuant to § 3-413

of the Maryland Code. Defendants argue that the Court should abstain from

resolving the issue, invoking Burford v. Sun Oil Co., 319 U.S. 315 (1943), and

that, alternatively, the conditions for dissolution are not satisfied.

This Court begins by noting that abstention occupies a precarious position in

federal court jurisprudence. On one hand, federal courts have “a virtually

unflagging obligation . . . to exercise the jurisdiction given to them.” Colo. River

Water Conservation Dist. v. United States, 424 U.S. 800, 817 (1976). Yet, Burford

requires a court to abstain “when exercise of federal review of the question in a

case and in similar cases would be disruptive of state efforts to establish a coherent

policy with respect to a matter of substantial public concern.” Sabato v. Florida

Dept. of Ins., 768 F. Supp. 1562, 1565 (S.D. Fla. 1991) (citations omitted). As

such, situations warranting Burford abstention are extraordinary.

However, courts have routinely found that dissolving a corporation formed

under state law presents such a case. See, e.g., Patel v. Oakwin Lodging Inc., 2008

WL 3365233, at *1 (M.D. Fla. Aug. 8, 2008) (abstaining from dissolution claim

“to avoid infringing on the state’s important interests in overseeing the continued

existence of corporations created under its laws”); Ives v. Advanced Broadband

Solutions, Inc., 2004 WL 180043, at *3 (D. Md. Jan. 23, 2004) (“Abstention

on Burford grounds in cases seeking equitable relief affecting corporations is a

well recognized application of the doctrine.”); see also Friedman v. Revenue

Mgmt., Inc., 38 F.3d 668, 671 (2d Cir. 1994) (“New York has a strong interest in

the creation and dissolution of its corporations and in the uniform development and

interpretation of the statutory scheme regarding its corporations.”). And, beyond

Burford, the United States Supreme Court in Pennsylvania v. Williams held that

“[i]t has long been accepted practice for the federal courts to relinquish their

jurisdiction in favor of the state courts, where its exercise would involve control of

or interference with the internal affairs of a domestic corporation of the state.” 294

U.S. 176, 185 (1935).

Indeed, Maryland has enacted a robust framework to govern its corporations,

including detailed procedures for their dissolution. See Md. Code Ann., Corp. &

Ass’n Code § 3-401, et seq. This includes extensive rules for the appointment of

receivers in involuntary dissolutions; imposing liability on shareholders, officers,

and directors in dissolutions; and providing notice to creditors following

dissolution. See §§ 3-404, -414, -415, -419. Accordingly, it seems that Maryland

has a substantial interest in a coherent judicial management of the dissolution of

Maryland corporations.

While Plaintiffs are correct in pointing out that the Burford doctrine is

narrow, they cite no examples of courts that have found the doctrine inappropriate

in the dissolution context. Instead, the Court finds the reasoning of the above

courts applicable here.

And, while the case law precedent supports Burford abstention, practical

realities make abstention even more compelling. If this Court granted dissolution

of the Maryland corporation, presumably the Court would be required to enjoin a

state officer in Maryland and compel that officer to strike HC REIT from the

Maryland rolls. Then, presumably, this Court would have to ordain and follow a

detailed Maryland receivership procedure to sell the REIT’s dozen or so

commercial buildings, and apportion the assets of this apparently-solvent public

company among its hundreds of shareholders, creditors, and lessees. This does not

seem a wise jurisprudential task for a federal judge sitting 950 miles from the

Maryland capital to undertake. This Court abstains under Burford.

III. Breach of Fiduciary Duty Against Board Defendants

Count II of the Complaint alleges that the Board Defendants breached their

fiduciary duty to Plaintiffs. Defendants argue that this claim should be dismissed

because it is inappropriately filed as a direct suit, HC REIT’s Articles of

Incorporation limit director liability, and, even if liability is not limited in the

Articles, the business judgment rule shields the directors from suit. Dkt 31 at 2–3;

Dkt. 33 at 2. The Court will handle Defendants’ arguments in turn.

1. Direct or Derivative Suit

A shareholder can either file a direct claim against a corporation or a

derivative claim on its behalf. See Sutton v. FedFirst Fin. Corp., 126 A.3d 765,

782–84 (Md. 2015). “[T]he derivative form of action permits an individual

shareholder or group of shareholders to bring suit to enforce a corporate cause of

action against officers, directors, and third parties where those in control of the

company refuse to assert a claim belonging to it.” Shenker v. Laureate Educ., Inc.,

983 A.2d 408, 423 (Md. 2009). One prerequisite to a derivative action is “a

demand on the corporation's board of directors to pursue the claim against the

offending parties or demonstrate to the court that such demand would be futile due

to the conflicting interests of the members of the board.” Id. at 423.

In contrast, shareholders can only bring a direct action against the

corporation if, based on their allegations, they have “suffered an injury that is

separate and distinct from any injury suffered either directly by the corporation or

derivatively by the stockholder because of the injury to the corporation.” Mona v.

Mona Elec. Grp., Inc., 934 A.2d 450, 464 (Md. 2007) (internal citations omitted).

That injury must be “personal to” the shareholder. Id.; see also Strougo v. Bassini,

282 F.3d 162, 171 (2d Cir. 2002) (applying Maryland law in noting that “[t]o sue

directly under Maryland law, a shareholder must allege an injury distinct from an

injury to the corporation, not from that of other shareholders.”).

To be sure, federal courts interpreting Maryland law split on whether claims

for breach of fiduciary duty are appropriate as direct or derivative suits. Compare

City of St. Clair Shores Gen. Emps. Ret. Sys. v. Inland W. Retail Real Estate Tr.,

Inc., 635 F. Supp. 2d 783, 798 (N.D. Ill. 2009) (“[Shareholders] lack standing to

bring a direct action for breach of fiduciary duty against the [corporation’s

directors or officers.]”), with Strougo, 282 F.3d at 173 (“[T]he defendants have

asserted that under Maryland law, directors and officers cannot be sued directly by

shareholders for alleged breaches of fiduciary duty. We disagree.”). Maryland

courts have yet to stake out a clear position on this either. See Strougo, 282 F.3d at

173 (“Maryland case law appears to be silent on the narrow question whether

shareholders may bring fiduciary duty claims directly against officers and

directors.”). However, it is clear that under Maryland law direct suits properly arise

from allegations for breach of duties owed directly from the director or officer to

the shareholder or rights that are individual to the shareholder. Waller v. Waller, 49

A.2d 449, 453 (Md. 1946) (“Unquestionably a stockholder may bring suit in his

own name to recover damages from an officer of a corporation for acts which are

violations of a duty arising from contract or otherwise and owing directly from the

officer to the injured stockholder, though such acts are also violations of duty

owing to the corporation.”); see also, e.g., Jolly Roger Fund LP v. Sizeler Prop.

Inv'rs, Inc., No. Civ. RDB 05–841, 2005 WL 2989343, at *5 n.12 (D. Md. Nov. 3,

2005). (“[A] suit alleging corporate malfeasance that directly results in the

impairment of a common stockholder's right to vote is likely a direct suit.”).

Here, Plaintiffs’ claim seeks to enforce numerous rights that are personal to

them. More than simple share devaluation, Plaintiffs claim that as a result of the

Hale Package they have suffered a decrease in control of the various ventures. This

includes Kurlander’s removal from the board of directors, his removal as treasurer

of HC REIT, and the nonrenewal of the management agreement between HC

Advisors and HC REIT. Dkt. 1 ¶53. In short, Kurlander alleges he is blocked from

future investment decisions—an injury that certainly not all shareholders suffered.

While the uniqueness of the Plaintiffs’ relationships with the REIT intertwines

their interests closely with those of the REIT itself, the fact that other shareholders

could bring share dilution claims is not dipositive. See Shenker, 983 A.2d at 424

(“That the plaintiff suffered his or her injury in common with all other shareholders

is not determinative of whether the injury suffered is direct or indirect.”).

Plaintiffs have alleged sufficient facts to establish a direct claim. They allege

unique harms related to their distinct relationships with HC REIT. Accordingly, the

Court will not dismiss Count II on this basis.

2. Business Judgment Rule

Defendants then invoke the business judgment rule. This rule shields

corporate directors from liability when they act prudently and in good faith.

Oliveira v. Sugarman, 152 A.3d 728, 736 (Md. 2017) (citation omitted). The rule,

codified in § 2-405.1(1)(a) of the Corporations and Associations Code, requires a

director to act: (1) in good faith; (2) in a manner he reasonably believes to be in the

best interests of the corporation; and (3) with the care that an ordinarily prudent

person in a like position would use under similar circumstances. This rule acts as a

presumption that “in making a business decision the directors of a corporation

acted on an informed basis, in good faith and in the honest belief that the action

taken was in the best interests of the company.” Oliveira, 152 A.3d at 736 (internal

citations omitted). To overcome the business judgment rule’s presumption, a

plaintiff must adequately allege the “presence of fraud or lack of good faith in the

conduct of a corporation’s internal affairs[.]” Black v. Fox Hills North Comty.

Ass’n, Inc., 599 A.2d 1228, 1231 (Md. 1992). Furthermore, “[i]f the corporate

directors’ conduct is authorized, a showing must be made of fraud, self-dealing or

unconscionable conduct to justify judicial review.” Id.

But “[i]f the plaintiff demonstrates that he or she has suffered the alleged

injury directly, . . . the business judgment rule does not apply.” Shenker, 983 A.2d

at 424. If a Plaintiff is alleging injuries personal to them the presumption of the

rule does not apply because the “obligation of directors to perform their duties in

accordance with good business judgment runs to the corporation, not directly to the

shareholders.” Oliveira, 152 A.3d at 737. As mentioned above, Plaintiffs bring a

direct claim against Defendants in Count II. The Court will not dismiss Count II on

this basis.

3. Exculpatory Clause

Defendants next direct the Court to an exculpatory clause in HC REIT’s

Articles of Incorporation. That clause provides:

Limitation of Director and Officer Liability. To the maximum

extent that Maryland law in effect from time to time permits

limitation of the liability of directors and officers of a

corporation, no present or former Director, officer or External

Manager of the Corporation, subject to the terms of any contract

between the Corporation and any External Manager, shall be

liable to the Corporation or its stockholders for money damages.

. . . .

Dkt. 33-2 at 16. Such a provision is valid except where (1) the directors and

officers received an improper benefit, or (2) the actions, or inactions, of the

directors and officers were the result of active and deliberate dishonesty and was

material to the cause of action adjudicated in the proceeding. Md. Code Ann.

Corps. & Ass’ns § 2-405.2; Md. Code Ann., Cts. & Jud. Proc. § 5-418. Where a

plaintiff fails to allege that the directors and officers received improper benefits or

were deliberately dishonest, the limitation of liability provision in the corporate

charter will result in a dismissal of all monetary claims filed against the directors

and officers. Hayes v. Crown Central Petroleum Corp., 78 F. App’x 857, 865 (4th

Cir. 2003).

Here, Plaintiffs allege there was such an improper benefit and that

Defendants engaged in active deliberate dishonesty. Specifically, Plaintiffs point to

the independent directors’ seemingly gratuitous service on the board, the short

notice of the board meeting that approved the Hale Package, exploitation of

Kurlander’s uniquely personal relationship with HC REIT, and refusal to continue

the board meeting until Kurlander was available to attend. Dkt. 1 at 20–21. But, the

Court is skeptical that notice that is abrupt yet consistent with HC REIT’s

organizational documents, the refusal to adjust around Dr. Kurlander’s surgical

schedule, or the delay in disseminating the Watson memorandum or agenda rises to

any sort of dishonesty or improper benefit. Further, the allegation that the

Independent Directors received no payment for their services as board members

does not rise to improper benefit or active and deliberate dishonesty nor would any

alleged exploitation of Kurlander’s personal interests in HC REIT.

In any event, the Court agrees with Plaintiffs that it is premature to decide

the issue at this stage. See Malpiede v. Townson, 780 A.2d 1075, 1092 (Del. 2001)

(“In the case of a Rule 12(b)(6) motion, [if a charter provision limiting director

liability] is raised for the first time in the motion or brief in support of the motion,

it is a matter outside the pleading.”). As such, the Court will not dismiss the claims

for money damages on this basis.

4. The Merits

To state a claim for breach of fiduciary duty, a plaintiff must allege that: (i) a

fiduciary duty exists; (ii) a fiduciary breached that duty; and (iii) harm resulted

from the breach. Alleco Inc. v. Harry & Jeanette Weinberg Found, Inc., 665 A.2d

1038, 1046 (Md. 1995). Officers and directors owe fiduciary duties to the

corporation and its shareholders. Merchants Mortg. Co. v. Lubow, 339 A.2d 664,

669 (Md. 1975). This fiduciary relationship imposes duties of care, loyalty, and

good faith. Shenker, 983 A.2d at 419. A director must act in a manner he

“reasonably believes to be in the best interests of the corporation,” and “[w]ith the

care that an ordinarily prudent person in a like position would use under similar

circumstances.” Md. Code Ann., Corps. & Ass. § 2-405.1(a).

The duty of loyalty requires directors to exercise independent judgment and

generally avoid having a material personal interest in a transaction. Hudson v.

Prime Retail, Inc., 2004 WL 1982383, at *11 (Md. Cir. Ct. Apr. 1, 2004) (citation

omitted); Shapiro v. Greenfield, 764 A.2d 270, 282 (Md. 2000). “[D]istinct loyalty

issues arise in cases where directors stand to receive benefits from a transaction

that are not generally enjoyed by the stockholders, or where a director stands on

both sides of a corporate transaction.” Hudson, 2004 WL 1982383, at *12.

However, once the decision has been made to have a change-of-control

transaction, the duties of the directors change. At that point the directors transition

from “defenders of the corporate bastion to auctioneers charged with getting the

best price for the stockholders.” Revlon, Inc. v. MacAndrews & Forbes Holdings,

Inc., 506 A.2d 173, 182 (Del.1986) This means that “in any change-of-control

situation, the common law imposes on those directors duties to maximize

shareholder value and make full disclosure of all material facts concerning the

merger to the shareholders.” Shenker, 983 A.2d at 421.

Yet, while directors owe duties to the corporation and the shareholders,

“they are not trustees for the individual stockholders.” Waller, 49 A.2d at 454. Any

fiduciary duty owed by directors “runs . . . to the corporation and not, at least

directly, to the shareholders. Werbowsky v. Collomb, 766 A.2d 123, 133 (Md.

2001). In short, any action for breach of fiduciary duty by directors or officers to

shareholders must allege a distinct duty was owed to the shareholder—otherwise

the allegations are inappropriate for a direct claim.

Regarding the independent directors, it is undisputed that they owed duties

of loyalty, care, and good faith to the corporation. Yet, the vast majority of

Plaintiffs’ Complaint decries the conduct of the Kaplans, not the independent

directors. Plaintiffs allege that the independent directors were careless in the

performance of their duties by failing to adequately vet the Watson memorandum

and were content to look the other way. Dkt. 1 ¶50. These both seem founded on

the mere fact that they voted for the Hale Package. Further, Plaintiffs are unable to

point to benefits the directors stood to gain from the package that were not

generally enjoyed by the stockholders. Indeed, presumably both would benefit

from an influx of funds. Also, any allegations related to prudence of the Hale

Package for “business growth and investment strategy” cannot be considered in a

direct action. Dkt. 1 ¶54(c); see Danielewicz v. Arnold, 769 A.2d 274, 283 (Md. Ct.

Spec. App. 2001) (“[A] stockholder cannot maintain an action at law against an

officer or director of the corporation to recover damages for fraud, embezzlement,

or other breach of trust which depreciated the capital stock or rendered it

valueless.”).

In terms of the outside consequences of the board’s decision regarding the

Hale Package—including Plaintiffs’ allegations regarding loss of indirect control

over HC REIT and other strategic interest in HC REIT—these do not rise to the

level of a breach of any duty owed to Plaintiffs. Dkt. 1 ¶54(a), (d). The

independent directors “are not trustees for the individual stockholders.” Waller, 49

A.2d at 454. The personal financial consequences of the board’s decision on the

plaintiffs do not provide a basis for a breach of fiduciary duty against the

independent directors. Allegations that the directors are passive are insufficient.

Plaintiffs do not plausibly allege the independent directors violated fiduciary

duties. This would require allegations about duties owned personally to the

Plaintiffs, which Plaintiffs have not presently argued.

The same can be said of Plaintiffs’ claims against the Kaplans. Again, the

Kaplans as director and officer owe duties of loyalty, care, and good faith to the

corporation and shareholders. Lubow, 339 A.2d at 669. However, as with the

independent directors, these duties are only owed to shareholders through the

corporation and not individually to shareholders. See City of St. Clair Shores Gen.

Emps. Ret. Sys., 635 F. Supp. 2d at 798 (holding that, under Maryland law,

shareholders cannot bring direct claims for breach of fiduciary duties against the

directors of a corporation for duties owed by the directors to the corporation and

shareholders). As such, allegations of “personal embarrassment, family frustration,

business strain, and potential liability” and “[failure] to properly respond to the Hale

Package and the Baker-Hill Package” are not sufficient to state a claim for breach of

duty owed to the Plaintiffs as individual shareholders. Dkt. 1 ¶¶ 70, 72.

Even in terms of the duty of loyalty, Plaintiffs have failed to allege that the

Kaplans stand to receive benefits from the Hale Package “that are not generally

enjoyed by the stockholders.” Hudson, 2004 WL 1982383, at *12. In fact, Kaplan

and Kaplan Jr. both suffered the similar negative consequences as the Plaintiffs

because they all owned the exact same percentage of HC Advisors—and therefore

lost financial and strategic interests in HC REIT as a result of the Hale Package—

as the Plaintiffs. Accordingly, Plaintiffs have not alleged sufficient facts to state a

claim for breach of fiduciary duty.

This is especially true if one examines the, as-filed by Plaintiffs, Watson

Memorandum—rather than merely looking to the Complaint’s interpretation of it.

Dkt. 1-1. A fair reading of the Memorandum shows the incumbent, pre-Hale entity

to be in poor shape financially and potentially could indicate a need for change and

an injection of “new blood.”

Even if this is a “change-of-control” situation where “corporate directors

owe their shareholders fiduciary duties of candor and maximization of shareholder

value,” Plaintiffs have not pled sufficient facts to state a claim that these duties

have been breached. Shenker, 983 A.2d at 421. Beyond allegations of their own

personal strategic and financial benefits associated with the competing Baker-Hill

plan, Plaintiffs have not alleged that Hale Package failed to maximize overall

shareholder value or that the directors failed to disclose any material facts. As

such, even if this were a situation where Revlon applies—a fact that is not clear

from the face of the Complaint itself—Plaintiffs have still pled insufficient facts

for a breach of fiduciary duty.

In sum, Plaintiffs fail to allege sufficient facts rising to breaches of fiduciary

duty by Kaplan, Kaplan Jr., or the independent directors, Bill Fields, Leo Kiely,

and Scott Musil. As such, Plaintiffs’ claims for breach of fiduciary duty must be

dismissed without prejudice.

IV. Declaratory Judgment

Count III seeks judgment declaring that, among other things, the Hale

Package is not in the best interest of HC REIT and would cause a unique and

deliberate hardship on Plaintiffs, that the circumstances of the March 13 board

meeting were “deliberately calculated to exclude” Kurlander from participation,

and that “the status quo ante must be maintained until such time as an appropriate

fiduciary . . . can assume responsibility for the orderly dissolution of HC REIT.”

Dkt. 1 ¶ 23-24.

In evaluating the appropriateness of declaratory judgment, a court should

consider whether “declaratory relief would (1) serve a useful purpose in clarifying

and settling the legal relations in issue, and (2) terminate and afford relief from the

uncertainty, insecurity, and controversy giving rise to the proceeding.” Traturyk v.

Western-Southern Life Assur. Co., 6:15-cv-1347-Orl-40TBS, 2016 WL 727546, at

*3 (M.D. Fla. Feb. 24, 2016). However, since the Complaint in this case was filled

there have been a number of developments that have potentially affected the

“status quo.” Namely, this Court denied Plaintiffs’ motion for a temporary

restraining order to prevent consummation of the Hale Package (Dkt. 5), the Hale

Package was adopted, and new directors have assumed control of HC REIT under

the terms of the Hale Package. Dkt. 31 at 23. In light of these developments,

Plaintiffs’ request to maintain the status quo is seemingly moot. Any request for a

declaratory judgment would need to be updated to reflect these new facts in order

to be decided upon. As such, the Court takes no position currently on the

appropriateness of a declaratory judgment in this case and dismisses the now-

outdated Count III without prejudice.

V. Attorney’s Fees

Defendants also move the Court to strike Plaintiffs’ request for attorney’s

fees. Dkt. 31 at 24. Any claim for fees in an amended pleading should expressly

state the statutory or contractual entitlement to same. See Euro RSCG Direct

Response, LLC v. Green Bullion Fin. Servs., 872 F. Supp.2d 1353, 1364 (S.D. Fla.

2012) (granting motion to strike attorneys’ fees request where plaintiff failed to

articulate a statutory or contractual basis for attorneys’ fees); see also JTH Tax,

Inc. v. Whitaker, No. 2:07-cv-170, 2007 WL 2821830, at *3 (E.D. Va. 2007).

CONCLUSION

The Court grants Defendants’ Motions to Dismiss (Dkts. 31, 32, 33) as to

Counts II and III of the Plaintiffs’ Complaint without prejudice and abstains on

Count I under the Burford doctrine. Plaintiffs shall have twenty (20) days to file an

amended complaint consistent with this Order.

DONE AND ORDERED at Tampa, Florida, on August 21, 2019.

/s/ William F. Jung

WILLIAM F. JUNG

UNITED STATES DISTRICT JUDGE

COPIES FURNISHED TO:

Counsel of Record