Paul Capital Advisors L.L.C. v. Holland

COURT OF CHANCERY
OF THE
SAM GLASSCOCK III STATE OF DELAWARE COURT OF CHANCERY COURTHOUSE
VICE CHANCELLOR 34 THE CIRCLE
GEORGETOWN, DELAWARE 19947

Date Submitted: May 8, 2023
Date Decided: August 29, 2023

David E. Ross, Esquire Norman M. Powell, Esquire
Eric D. Selden, Esquire Emily V. Burton, Esquire
A. Gage Whirley, Esquire Lauren Dunkle Fortunato, Esquire
ROSS ARONSTAM & MORITZ LLP Nehama L. Hanoch, Esquire
Hercules Building YOUNG CONAWAY SARGATT &
1313 N. Market Street, Suite 1001 TAYLOR, LLP
Wilmington, Delaware 19801 Rodney Square
1000 N. King Street
Wilmington, Delaware 19801

Stephen Norma, Esquire
Ellis H. Huff, Esquire
POTTER ANDERSON & CORROON LLP
1313 N. Market Street
Hercules Plaza, 6th Floor
Wilmington, Delaware 19801

Re: Paul Capital Advisors, L.L.C., et al. v. Holland, et al., C.A. No.
2022-0167-SG

Dear Counsel:

Alexander’s cutting of the Gordian Knot with a single stroke is a metaphor for

resolving complex litigation that has been worn smooth by overuse, yet it comes

temptingly to mind as I labor to pick oakum from the tangle of contracts and

undertakings by which, here, the Plaintiffs attempted to monetize certain illiquid

assets; my job is made more difficult by the fact that it is unexplained, and not
intuitive, why the parties felt the complexity of the methods employed had merit.

This Letter Opinion is my second opinion concerning that task. The Defendants offer

me a blade to slice this monkey’s fist of contract issues, via their Motions to Dismiss,

addressed below; upon review, however, I must decline.

I will not repeat the statement of the facts set out, in painstaking if still

abbreviated form, in Paul Capital I;1 I adopt that statement of facts here, and address

only briefly the facts necessary to my denial, via this Letter Opinion, of the bulk of

the Defendants’ Motions to Dismiss the remaining allegations of the Second

Amended Complaint (the “SAC”). The liquidation scheme which the parties here

employed involved the use of trusts (the “Exchange Trusts”), to hold the assets to be

monetized, and the resulting sales’ proceeds. In Paul Capital I, I found that the

Plaintiffs were not fiduciary beneficiaries of those Exchange Trusts. They therefore

lacked standing to remove the Trust Advisors to the Exchange Trusts or maintain

breach of fiduciary duty claims.2 That left the contract claims alleged in the SAC

(together with tort claims alleging fraud and promissory estoppel). This Letter

Opinion addresses the various Defendants’ Motions to Dismiss those claims as well

under Rule 12(b)(6).

1
Paul Cap. Advisors, L.L.C., et al. v. Stahl, et al., 2022 WL 3418769, at *4–7 (Del. Ch. Aug. 17,
2022) as corrected (Aug. 25, 2022) (“Paul Capital I”).
2
Id. at *12.
2
The following adumbration of the facts is sufficient, I think, to convey the

complexity of the allegations in the SAC: The Plaintiffs are a Delaware LLC

involved in private equity, and associated partnerships that function as private equity

funds (jointly, “Paul Capital”). Paul Capital holds—or held—investments in other

private equity funds. These investments are termed “Secondaries.” They are

generally illiquid. By 2017, Paul Capital intended to sell these Secondaries for cash.

Paul Capital found a buyer in Defendant Beneficent Company Group

(“BEN”), a Delaware limited partnership. BEN, however, was cash-poor; it

proposed to buy the Paul Capital Secondaries with another illiquid asset, BEN

common units. To advance Paul Capital’s goal of receiving cash, and presumably

for other reasons the parties have not adequately revealed, BEN and Paul Capital

concocted a scheme that is laid out below in simplified form.

The parties agreed that the transactions would be undertaken through a

Delaware LLC, MHT, which is run by Defendant Murray Holland (together with

MHT, the “MHT Defendants”). Paul Capital transferred the secondary assets to

MHT. MHT formed nine trusts, the Exchange Trusts referred to above, and

transferred the Secondaries to these trusts. The Exchange Trusts were controlled by

two Trust Advisors, one of whom was Mr. Holland. The Exchange Trusts in turn

transferred the Secondaries, or rights therein, to the buyer, BEN. In return, BEN

transferred the BEN units to the Exchange Trusts. The parties contemplated an

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auction of the BEN units for cash. MHT was to receive the proceeds, then pay up

to $550 million to Paul Capital, and retaining for itself any amount exceeding this

sum. If, on the other hand, the auction came in under $500 million, BEN was

obligated to pay the difference to Paul Capital, in cash or additional BEN common

units (the Contingent Value Rights (the “CVRs”)). Thus, the parties contemplated

that, post auction, Paul Capital would have at least $500 million and at most $550

million in cash or a combination of cash and CVRs, BEN would have the

Secondaries, and MHT would have an amount contingent on the auction achieving

in excess of $550 million in cash. But that is not what happened.

Instead, the auction resulted in a winning bid, from GWG Holdings, Inc.

(“GWGH”), another company associated with Defendant Holland. But this was not

an all-cash bid. It was composed of $150 million in cash, and GWGH common stock

together with GWGH “L-Bonds.” The stock and bonds were supposedly worth $400

million, making the GWGH bid worth $550 million. Neither the common stock nor

the bonds were liquid assets, however, and thus could not satisfy Paul Capital’s

purpose, to receive cash for the Secondaries.

To address this purpose, MHT and the Exchange Trusts undertook to facilitate

the refinancing of the L-Bonds and sale of the GWGH common stock promptly. On

those terms, and despite the fact that it was exchanging illiquid Paul Capital assets

for illiquid BEN assets, and in turn exchanging those for illiquid GWGH assets, Paul

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Capital accepted GWGH’s offer as the winner of the auction. The Exchange Trusts

transferred the BEN units to GWGH and received $150 million in cash and the

illiquid GWGH assets in 2018. MHT and the Trusts paid the $150 million cash to

Paul Capital, and retained the GWGH assets, which again, they had undertaken to

convert to cash promptly. This did not happen. GWGH has since gone bankrupt.

This complex scheme, presented in simplified form above, was memorialized

by numerous agreements among the parties. Paul Capital, which asserts that it is a

party or third-party beneficiary to the pertinent contracts, points out that it has

transferred its secondary assets, which it valued at $500 million, to BEN for a return

of only $150 million in cash. It seeks damages for breach of the contracts against

the various entities involved and the advisors of the Exchange Trusts. It also asserts

claims of promissory estoppel and fraud. I address these causes of action, below.

Counts III, IV, VI and VII—The Contract Claims

These counts address the breach of contract actions that the Plaintiffs have

brought under the complex contractual scheme described above. In the SAC, the

Plaintiffs describe the contracts at issue, that they were breached, and that they were

parties or third-party beneficiaries of each. They allege resulting damages. This

states a prima facie case under the notice pleading standard.3 The Defendants

counter with defenses individual to each contract, arguing that the contracts did not

3
Ct. Ch. R. 8(a).
5
include Plaintiffs as intended beneficiaries or otherwise excluded them from seeking

damages. It is true that contractual issues often present fertile ground for motions

on the pleadings because unambiguous contract issues may be resolved as a matter

of law from the face of the agreements.4 Here, by contrast, I am unable to determine

to what extent all the contracts are to be read together, and without an understanding

of the motivation of the particular contractual scheme as it was known to the parties

at the time of contracting, I am unwilling to determine rights under the various

agreements at the pleadings stage.5 While discovery may make these issues ripe for

summary judgment, I decline to dismiss the contract counts.

Finally, the Defendants point out that, with respect to the Trust Agreements,

I have already found that they excluded the Plaintiffs as trust beneficiaries.6 They

argue that it follows that the Plaintiffs cannot be third-party beneficiaries of the Trust

Agreements.7 But this is a non-sequitur. Whether a party is a third-party contractual

beneficiary is dependent on the intent of the parties thereto,8 and that intent is not

necessarily foreclosed by a renunciation of fiduciary duties to the third parties.

4
Allied Cap. Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1030 (Del. Ch. 2006).
5
See Chi. Bridge & Iron Co. N.V. v. Westinghouse Elec. Co. LLC, 166 A.3d 912, 926–27 (Del.
2017) (explaining that an understanding of the business relationship among the parties informs
analysis of the contractual scheme).
6
Paul Capital I, 2022 WL 3418769, at *11.
7
Opening Br. Defs. Supp. Mot. Dismiss 34–35, Dkt. No. 173 (“BEN OB”); Reply Br. Defs.
Supp. Mot. Dismiss 2–7, Dkt. No. 187 (“BEN RB”).
8
Madison Realty P’rs 7, LLC v. Ag ISA, LLC, 2001 WL 406268, at *5 (Del. Ch. Apr. 17, 2001).
6
Count VI and VIII—The Tort Claims

Promissory Estoppel

To state a claim for promissory estoppel, a plaintiff must allege that (i) the

defendant made a promise to the plaintiff; (ii) the defendant reasonably expected the

plaintiff to take, or refrain from taking, action; (iii) the plaintiff acted to his detriment

due to his reasonable reliance on the promise; and (iv) the plaintiff would suffer an

injustice unless the promise is enforced.9 The promise “must be a real promise, not

just mere expressions of expectation, opinion, or assumption.”10 It must also be a

“manifestation of an intention to act or refrain from acting in a specified manner,

conveyed in such a way that another is justified in understanding that a commitment

has been made; a person’s assurance that the person will or will not do something.”11

With respect to the MHT Defendants, Plaintiffs allege that, by emailing the

GWGH Winning Bid Notice to Plaintiffs, the MHT Defendants “promised”

Plaintiffs that (1) “GWGH would make an up-front cash payment of $150 million;”

(2) “GWGH ‘is obligated to seek to refinance its debt with a more favorable credit

facility and/or institutional note within 12 months following issuance[;]’” (3) “‘[a]

nationally recognized bank, such as Credit Suisse, will be engaged to sell the stock

in an orderly manner through one or a series of transactions in 2018, delivering cash

9
Lord v. Souder, 748 A.2d 393, 399 (Del. 2000).
10
Territory of U.S. Virgin Islands v. Goldman, Sachs & Co., 937 A.2d 760, 805 (Del. Ch. 2007).
11
Promise, BLACK’S LAW DICTIONARY (11th ed. 2019).
7
proceeds for the sellers[;]’” and (4) “‘[c]losing is expected to be on or prior to April

30, 2018[.]’”12

Similarly, BEN is alleged to have made the following “promises” by sending

Plaintiffs a “Due Diligence Package”: (1) “that GWGH had ‘obligations’ to

refinance the GWGH L-Bonds within 12 months of the closing of the Auction of the

BEN [ ] Units, and that ‘GWG[H]’s financial models reflect the refinancing

occurring no later than October 2018’;” (2) “that the Trust Advisors of the . . .

Exchange Trusts were similarly ‘obligated to reduce the L-Bonds to cash and

distribute cash proceeds as quickly as practicable[;]’” (3) “that GWGH and the Trust

Advisors, for the benefit of the . . . Exchange Trusts, would agree to negotiate in

good faith the terms of an Orderly Marketing Agreement with a major investment

bank for the orderly marketing and resale of the GWGH common stock; and” (4)

“the GWGH ‘shares will be sold following the expiration of that [six-month] lock-

up per the terms of an orderly marketing agreement[.]’”13

Plaintiffs further allege that the MHT Defendants and BEN both forwarded a

comfort letter from GWGH (the “GWGH Comfort Letter”)14 and later forwarded an

undertakings letter from GWGH (the “GWGH Undertakings Letter” and, together

12
Verified Second Am. Compl. ¶ 336, Dkt. No. 66 (emphases in original) (“SAC”).
13
Id. ¶¶ 341, 343 (emphases in original).
14
Id. ¶ 347.
8
with the GWGH Comfort Letter, the “GWGH Letters”),15 both of which contained

“promises” that Plaintiffs admit were made by GWGH.16 By delivering the GWGH

Winning Bid Notice, the Due Diligence Package, GWGH’s Comfort Letter, and

GWGH’s Undertakings Letter, the Defendants allegedly intended to induce

Plaintiffs to accept the bid made by GWGH.17 Relying on these alleged promises

from the Defendants, Plaintiffs accepted GWGH’s bid even though it did not consist

entirely of cash,18 as Plaintiffs had intended when entering into this complex

contractual scheme. As a result of accepting GWGH’s bid, Plaintiffs allegedly

“suffered and will continue to suffer substantial damages[,]” an “injustice [that] can

only be avoided by enforcing [Defendants’] promises to Plaintiffs.”19

The Defendants counter Plaintiffs’ allegations by arguing the alleged

promises that Plaintiffs attribute to Defendants were made instead by non-party

GWGH.20 Even if the mere act of delivering the documents, which contain GWGH’s

promises, to Plaintiffs was sufficient to allege that the promises contained within are

also attributable to the Defendants, the Defendants argue that Plaintiffs did not

adequately plead reasonable reliance because Plaintiffs were able to, and allegedly

15
Id. ¶ 351.
16
Id. ¶¶ 348, 352.
17
Id. ¶¶ 334, 341, 347, 351.
18
Id. ¶¶ 335, 342, 345, 350, 353.
19
Id. ¶ 354.
20
BEN OB 42–44; BEN RB 23–24; Opening Br. Defs. MHT and Holland Supp. Mot. Dismiss
22–29, Dkt. No. 174 (“MHT Defs.’ OB”); Reply Br. Defs. MHT and Holland Supp. Mot.
Dismiss 20–23, Dkt. No. 185 (“MHT Defs.’ RB”).
9
did, conduct their own due diligence of GWGH and the promises it made.21 Lastly,

the Defendants assert Plaintiffs have suffered no injustice because Plaintiffs have

received, and continue to be entitled to receive, the consideration Plaintiffs agreed

to receive by accepting GWGH’s bid.22

Drawing all reasonable inferences in favor of Plaintiffs, as I must do at the

pleadings stage,23 I conclude that Plaintiffs have sufficiently alleged that the Due

Diligence Package contained promises—that the assets would be sold in a definite

time, for instance—attributable to BEN and meant to encourage Plaintiffs to accept

the GWGH bid, which Plaintiffs did to their detriment.

Plaintiffs, however, have failed to sufficiently allege that the MHT Defendants

made any promises to Plaintiffs. The alleged promises contained in the GWGH

Winning Bid Notice are either attributable directly to GWGH, rather than the MHT

Defendants, or are mere recitations of the material terms of GWGH’s bid.

Communicating the material terms of GWGH’s bid to Plaintiffs is insufficient to

support a claim that the MHT Defendants promised anything to Plaintiffs.

Therefore, Plaintiffs have failed to state a claim for promissory estoppel against the

MHT Defendants with respect to the GWGH Winning Bid Notice.

21
BEN OB 44–45; BEN RB 24–25; MHT Defs.’ OB 29–30; MHT Defs.’ RB 23–25.
22
BEN RB 44; MHT Defs.’ OB 30; MHT Defs.’ RB 25.
23
Orman v. Cullman, 794 A.2d 5, 15 (Del. Ch. 2002).
10
With respect to the GWGH Letters, both of which were allegedly forwarded to

Plaintiffs by BEN and the MHT Defendants, Plaintiffs failed to allege that the

promises contained therein were made by either BEN or the MHT Defendants. In

the SAC, Plaintiffs repeatedly acknowledge that the promises in the GWGH Letters

were made by GWGH.24 In an attempt to enforce GWGH’s promises against BEN

and the MHT Defendants, Plaintiffs consistently state that the GWGH Letters were

forwarded to Plaintiffs by MHT and BEN to induce Plaintiffs into accepting

GWGH’s bid.25 Plaintiffs have failed to allege how merely forwarding the GWGH

Letters, without more, could constitute a “manifestation of an intention to act or

refrain from acting in a specified manner, conveyed in such a way that another is

justified in understanding that a commitment has been made[,]”26 on behalf of BEN

and the MHT Defendants. Therefore, Plaintiffs’ promissory estoppel claim with

respect to the GWGH Letters fails to state a cause of action and must be dismissed.

The Fraud Claims

Common Law Fraud

“To establish a claim for [common law] fraud, a plaintiff must prove (i) a false

representation, (ii) a defendant’s knowledge or belief of its falsity or his reckless

24
See, e.g., SAC ¶¶ 350, 353 (“Plaintiffs would not have accepted GWGH’s bid in the absence
of the promises and representations that GWGH made in the [GWGH Letters] that w[ere]
forwarded by MHT and BEN.”) (emphasis added).
25
See SAC ¶¶ 347, 350–51, 353.
26
Promise, BLACK’S LAW DICTIONARY (11th ed. 2019).
11
indifferent to its truth, (iii) a defendant’s intention to induce action, (iv) reasonable

reliance, and (v) causally related damages.”27

Plaintiffs allege that the Defendants “attempted to extinguish [Plaintiffs’ CVR

Contract] rights by knowingly and falsely inducing [Plaintiffs’] representative on

BEN’s board to sign the Second Amendment to the CVR Contract.”28 To

accomplish this feat, a BEN lawyer, on behalf of BEN, convinced Plaintiffs’

designated BEN board member, David de Weese, to sign the Second Amendment to

the CVR Contract (the “Second Amendment”) by claiming the signature “was

simply a ministerial act” because Plaintiffs had already “approved the terms of the

amendment.”29 Plaintiffs allege, however, that the Second Amendment was

designed “to substantially alter and effectively extinguish [Plaintiffs’] rights under

the . . . CVR Contract[]”30 by changing the contractual “definition of ‘Net Auction

Consideration’” to eliminate BEN’s obligation to ensure Plaintiffs “receive[d] $500

million in cash[.]”31

The BEN defendants assert that Plaintiffs’ fraud claim necessarily fails to state a

claim because the BEN lawyer did not make a misrepresentation to Plaintiffs

27
In re Wayport, Inc. Litig., 76 A.3d 296, 323 (Del. Ch. 2013).
28
SAC ¶ 376.
29
Id. ¶ 380.
30
Id. ¶ 385.
31
Id. ¶¶ 386–87 (emphasis in original).
12
because (1) the statements were not misrepresentations and (2) the statements were

not made to Plaintiffs.32 I consider each assertion in turn.

While BEN claims the statements the BEN lawyer made to de Weese were all

accurate,33 Plaintiffs contend that the BEN lawyer misrepresented (1) the legal effect

of the Second Amendment; (2) that Plaintiffs had already approved the Second

Amendment; and (3) that de Weese’s signature was merely a “ministerial act.”34 At

this stage, I must accept the Plaintiffs’ allegations as true. The BEN defendants

further assert that these statements, even if false, were not made to Plaintiffs because

de Weese was acting solely in his capacity as director on BEN’s board when he

signed the Second Amendment.35 Viewing the facts in the light most favorable to

Plaintiffs, I find that Plaintiffs have sufficiently alleged that, while BEN’s LLC

Agreement eliminated de Weese’s fiduciary duties owed to BEN, de Weese still

owed such duties to Plaintiffs.36 I can reasonably infer that in signing the Second

Amendment, de Weese acted on behalf of his principal, the Plaintiffs, and that the

allegedly false statements induced him to do so.

The MHT Defendants aptly point out that the allegedly false statements upon

which Plaintiffs rest their fraud claim were made only by a BEN lawyer.37 Plaintiffs

32
BEN OB 50–51, 55–57.
33
BEN RB 27–29.
34
SAC ¶¶ 380–84.
35
BEN OB 50–51; BEN RB 25–27.
36
See Pls.’ Answering Br. 73–75; SAC ¶ 211.
37
MHT Defs.’ RB 25; see SAC ¶¶ 375–92.
13
have failed to allege that the MHT Defendants made any false misrepresentations to

Plaintiffs. Therefore, Plaintiffs’ fraud claim with respect to the MHT Defendants

fails on its face to state a claim and must be dismissed.

Equitable Fraud

“A claim for equitable fraud can lie only where the claimant sufficiently pleads

the existence of: (1) a special relationship between the parties or other special

equities, such as some form of fiduciary relationship; or (2) a justification for a

remedy that only equity can afford.”38

Plaintiffs fail to allege that a special relationship exists between them and BEN

or the MHT Defendants. As contractual counterparties, absent unusual

circumstances, Plaintiffs do not share a special relationship with either BEN or the

MHT Defendants for the purposes of equitable fraud.39

Conclusion

With respect to the Contract Claims, Counts III, IV, V, and VII, Defendants’

Motions to Dismiss are DENIED. BEN’s Motion to Dismiss Count VI concerning

the GWGH Letters and BEN’s Motion to Dismiss Count VIII with respect to the

equitable fraud claim are GRANTED. BEN’s Motion to Dismiss Count VI with

38
Zebroski v. Progressive Direct Ins. Co., 2014 WL 2156984, at *7 (Del. Ch. Apr. 30, 2014)
(citation omitted).
39
See Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 144 (Del. Ch. 2009) (explaining
that there exists no special circumstances meriting application of the doctrine of equitable fraud
where the parties “[a]re counterparties who negotiated at arms’ length.”).
14
respect to the Due Diligence Package and Count VIII with respect to the common

law fraud claim are DENIED. The MHT Defendants’ Motion to Dismiss Counts VI

and VIII are GRANTED. The parties should submit an appropriate form of order.

Sincerely,

/s/ Sam Glasscock III
Vice Chancellor

15