United States: Court Of Chancery Finds Personal Jurisdiction Over Out-Of-State Trust Due To Trustor's Involvement In The Formation Of Delaware LLC

Last Updated: September 28 2017
Article by Scott E. Waxman and J. Tyler Moser

In Terramar Retail Centers, LLC v. Marion #2-Seaport Trust U/A/D/ June 21, 2002, Civil Action No. 12875-VCL (Del. Ch. August 18, 2017), the Delaware Court of Chancery denied an out-of-state defendant's motion to dismiss for lack of personal jurisdiction, finding that defendant's trustor was actively involved in negotiating both the underlying business deal and the terms of the operating agreement of the Delaware limited liability company at issue.

Terramar involves Seaport Village, a specialty shopping center in San Diego, California, developed in 1978 by the Taubman family. The Taubman family initially funded Seaport Village through an entity named San Diego Sea Port Village, Ltd. ("Limited"), which secured $40 million in financing from a Japanese bank. After defaulting on the loan in 1998, Limited decided to engage an individual named Cohen, a real estate professional well-versed in capital sourcing, to refinance Limited's loan. With Cohen's assistance, Limited formed San Diego Lending Co., LLC ("Lending"), to facilitate a $24 million borrowing to purchase the original loan from the Japanese bank. As part of the restructuring, Cohen, Limited, and Lending entered into a complex agreement, which, among other things, gave Cohen the right to receive cash flows from Limited and Lending, mimicking a 50% interest in the entities.

By 2002, Limited needed additional capital. Terramar Retail Centers, LLC ("Terramar"), a real estate development company, agreed to provide Limited with $7 million. Cohen, Limited, and Terramar joined forces to form Seaport Village Operating Company, LLC (the "Company"), a Delaware limited liability company. Terramar received a 50% interest in the Company, whereas Cohen and Limited split equally the remaining 50%. To hold his 25% interest, Cohen created the Marion #2-Seaport Trust (the "Trust").

To govern the internal business affairs of the Company, the Trust, Limited, and Terramar entered into an operating agreement dated September 1, 2002. Cohen was especially active in negotiating the business deal and operating agreement. Among other things, the operating agreement provided Terramar with the right to request that all other members buy out its interest at a fair market value at any time after January 1, 2006 (the "put right"). The put right was bolstered by providing Terramar with the additional right to dissolve the Company and sell its assets to third parties if the other members did not purchase Terramar's interest within 6 months of exercising the put right. In 2015, Terramar exercised its put right pursuant to the terms of the operating agreement; however, both the Trust and Limited disputed Terramar's assessment of the Company's fair market value.

After not receiving the requisite purchase price within the 6-month window, Terramar filed a complaint in the Court of Chancery, seeking a declaration that it had the right to dissolve the Company and sell its assets. In response, the Trust filed a motion to dismiss, arguing that the Court lacked personal jurisdiction over the Trust for purposes of claims asserted under the Company's operating agreement.

In determining that it had personal jurisdiction over the Trust, the Court applied a familiar two-step analysis. The Court began by assessing whether the plaintiff satisfied Delaware's long-arm statute before proceeding to analyze whether the exercise of personal jurisdiction would comport with the Due Process Clause of the United States Constitution.

The vast majority of the Court's analysis in Terramar was spent grappling with the Delaware long-arm statute, which provides that a Delaware court may exercise specific personal jurisdiction over a non-resident who "in person or through an agent . . . [t]ransacts any business or performs any character of work or service in the State . . . ." The Court found that the mere formation of a Delaware entity, as was the case here, constitutes a transaction of business within Delaware sufficient to establish specific personal jurisdiction. However, to find specific (not general) personal jurisdiction, there must also be a nexus between the formation of the Delaware entity and the cause of action asserted in the lawsuit. The Court found this nexus to exist, because Terramar's claims are based in the Company's operating agreement, and the business arrangement Terramar seeks to enforce is embodied in the operating agreement and implemented through the Company's creation.

The Court also looked to the Trust's degree of involvement in the formation of the Company. The Court concluded that sufficient evidence existed in the record to support an inference that the Trust, through Cohen, played a meaningful role in the Company's formation. Specifically, the Court found that Cohen brokered the formation of the Company, had an existing and ongoing relationship with Limited, possessed contractual rights in entities which resembled equity, and maintained an exclusive right to broker future financings. Further, the Court noted that most conversations negotiating the underlying business deal and operating agreement flowed through Cohen.

Finally, the Court evaluated whether the exercise of personal jurisdiction comported with constitutional due process. In doing so, the Court analyzed whether the Trust purposefully established minimum contacts with Delaware and evaluated those minimum contacts in light of notions of fair play and substantial justice. In Delaware, courts have consistently held that meaningful participation in the formation of a Delaware entity constitutes sufficient minimum contacts to satisfy constitutional due process. The Court found this standard to be satisfied, emphasizing that the Trust was not merely a passive investor, but rather actively participated (through Cohen) in negotiating the deal that resulted in the formation of the Company. This level of participation and involvement, the Court reasoned, should have put the Trust on notice that it may be hailed into Delaware to adjudicate disputes. The Court did give "pause" to the passage of time between the Company's initial formation and the commencement of the current litigation; however, the Court explained that this did not violate due process, because the parties contemplated a long-term relationship upon formation, which was evidenced by the inclusion of the put right that could be properly exercised by Terramar years after the date of formation.

Terramar Retail Centers, LLC v. Marion #2 – Seaport Trust UAD June 21 2002, C.A. No. 12875-VCL (Del. Ch. August 18, 2017)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions