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Dauphin v. Jennings

United States District Court, E.D. Virginia, Alexandria Division

April 7, 2017

Katherine R. Dauphin, Plaintiff,
Louis A. Jennings and Beverly L. Hennager, Defendants.


          Liam O'Grady, United Stales District Judge

         This matter comes before the Court on Defendants Louis Jennings and Beverly Hennager's Motion for Stay of Action on the Proposed Assignment of the DAMN Lease Pending Hearing. Dkt. No. 287. The Court conducted a hearing on the Motion on March 10, 2017 during which John Ryan, representative of CBRE, engaged by the Special Master to sell the leasehold, provided testimony on the process of achieving the maximum value of the DAMN Leasehold to the Kay Jennings Family Limited Partnership. For the reasons discussed below, Defendants' Motion is hereby DENIED. The Court authorizes the Special Master to enter into the assignment agreement with DAMN, LLC as of today's date.

         I. Background[1]

         The judicially-administered distribution of property in this matter arises out of Plaintiff Kathleen Dauphin's Complaint filed on December 31, 2014 in the Circuit Court of Fairfax, Virginia seeking dissolution of the partnership, of which Plaintiff and Defendants are general and limited partners. Dkt. No. 1, Exh. A; Dkt. No. 181. Michael Jennings, an interested party in the litigation is also a limited partner in the partnership. Defendants removed the case to this Court. Dkt. No. 1. On August 10, 2015, the parties entered into a settlement agreement whereby a Special Master, the Honorable Paul Sheridan, was appointed to, among other things, obtain a valuation of the partnership property, account for money due to the partnership, and investigate the best course of action to maximize the value of the partnership assets. Dkt. No. 133, Exh. 1; Dkt. No. 67. Pursuant to that authority, on April 7, 2016, die Special Master retained John Ryan of CBRE, a commercial real estate firm, to market the partnership real estate holdings for sale or lease. The Special Master also retained JMSP, Inc. to conduct an appraisal of the properties. The appraisal was issued on December 7, 2015.

         On August 29. 2016, after considering multiple reports from the Special Master and taking testimony from John Ryan, the Court approved the sale of three parcels of partnership property (the "D, E, & F" parcels). Dkt. No. 217. In the same order, the Court instructed the Special Master and CBRE to continue accepting and considering offers for the remaining partnership property asset, a long-term lease on the DAMN Property. Id.

         The complicated ownership structure of the Leasehold and the underlying DAMN Property complicated marketing efforts. Michael Jennings owns 40% of the DAMN Leasehold and each of die general partners (the plaintiff and the two defendants) own 20%. The DAMN Property, which is subject to the Leasehold, is held entirely by DAMN, LLC, a corporation owned by Michael Jennings. Put simply, Michael Jennings has an ownership stake in the Leasehold and the Property. He was not obligated to sell the DAMN Property pursuant to the settlement agreement. Nevertheless, Michael Jennings expressed a willingness to sell the DAMN Property in conjunction with a sale of the DAMN Leasehold and he retained CBRE to market the DAMN Property for sale during the same time that the DAMN Leasehold was advertised by CBRE acting on behalf of the partnership.

         The Defendants expressed a strong desire to purchase the DAMN Leasehold. The Court held that the Defendants were permitted to submit an offer but their doing so did not exclude the Special Master from soliciting and considering additional bids. Dkt. No. 281. Defendants submitted an offer which was initially recommended by CBRE and the Special Master. See Special Master's Status Report dated December 22, 2016. Ultimately, the agreement was deemed not acceptable by CBRE and the Special Master for reasons discussed infra. After considering numerous additional offers, CBRE advised the Special Master that the maximum value of the DAMN Leasehold would be achieved by assigning the leasehold to DAMN, LLC. Upon review, the Special Master accepted CBRE's findings, negotiated the terms of a proposed assignment of the lease and advised the Court via email on February 10, 2017 that it should authorize a transfer of the DAMN Leasehold to DAMN, LLC for an agreed upon value of $2.4 million.

         Defendants moved to stay action on the Special Master's proposed assignment. Dkt. No. 288. Defendants object that the proposed transaction violates the partnership agreement and the value of the transaction is less than the amount set forth in the real estate appraisal. Id. at ¶ 3. DAMN, LLC, as an interested party, filed an objection to the stay. Dkt. No. 294. By letter to CBRE, Defendants requested the production of certain communications by CBRE and documents the firm relied upon in recommending the transaction with DAMN, LLC. The Court permitted the release of this documentation, Dkt. No. 297, after which Defendants submitted "Objections to Proposed Assignment" which identified additional grounds upon which Defendants believed that the stay should be granted. Dkt. No. 334. The Court conducted a hearing in this matter on March 10, 2017. Dkt No. 336. During the hearing, the Court elicited testimony from John Ryan as to the process by which he recommended the transaction with DAMN, LLC. Id. In response to issues left unresolved during the hearing, the Special Master issued a report dated March 22, 2017 and distributed the report to the parties via email.[2] The Special Master also distributed to the parties a report by CBRE describing the process of marketing the DAMN Leasehold in further detail.[3]

         II. Legal Standard

         The settlement agreement authorizes the Special Master to obtain "a valuation of all property of the partnership by independent appraisal(s), .. [and] recommend[] to the court as expeditiously as possible, as to how to maximize the value of the partnership assets[.]" Dkt. No. 133, Exh. 1, ¶¶ 1-2. "Sale or other disposition of the property must be approved by the Court." Mat ¶ 5.

         III. Discussion

         In rendering its findings on the Motion and the transfer of the Partnership Leasehold to DAMN, LLC, the Court considers the Motion, objections thereto, the testimony of Mr. Ryan, his email correspondence relating to the transaction, [4] and the reports of the Special Master and CBRE. Based on this evidence, the Court finds that the proposed transaction does not violate the partnership agreement, maximizes the value of the asset for the partnership, and that Defendants' remaining objections are without merit. These findings are detailed below.

         A. Application of the Partnership Agreement to the Assignment

         Defendants contend that the assignment of the lease to DAMN, LLC violates the partnership agreement because the transaction entails an assignment of a limited partner's interest in the partnership without satisfying the requirements of Section 9 of the agreement. Section 9 requires that any limited partner's offer to sell their interest in an asset must first "ha[ve] been offered to the Partnership and Partners" and if the transaction results in a substitute limited partner the General Partner must consent to such substitution. Dkt. No. 1, Exh. A at 23-25. If the offer for the interest is made in cash, "the Partnership shall have an option ... to purchase all but not less than all of the partnership interest" within thirty days of the proposed sale. See Dkt. No. 1, Exh. A at 28. Defendants aver that proposed transaction will transfer ...

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