Cygnus Opportunity Fund, LLC v. Washington Prime Group, LLC

After a Chapter 11 bankruptcy, a publicly traded corporation emerged as Washington Prime Group, LLC (Washington) (defendant), a Delaware limited-liability company (LLC). Strategic Value Partners, LLC (SVP) (defendant), which held the corporation’s senior notes, received 87 percent of Washington’s equity. The corporation’s other stockholders (minority unitholders) (plaintiffs) received 9 percent of Washington’s equity, and other creditors received the rest. The LLC agreement structured Washington like a corporation, with a board of managers, LLC officers, and membership interests referred to as shares. It stated that neither the managers nor SVP owed any fiduciary duties. It also prohibited SVP from engaging in any transaction to acquire additional shares without specified approval, meaning approval from a majority of independent managers or non-SVP members. The agreement also gave minority unitholders a challenge right for 18 months, meaning they were entitled to notice and an opportunity to challenge if SVP attempted a squeeze-out merger. The right did not apply if the squeeze-out was approved by a designated minority-approved independent manager, who was Martin Reid (defendant), someone with incentive to stay in SVP’s good graces. Nineteen days after the bankruptcy concluded, SVP made a tender offer to purchase additional shares from minority unitholders. SVP neither obtained specified approval nor provided notice, and neither Washington’s managers nor its officers made any disclosures. The tender offer was not successful, with SVP acquiring only a small number of shares. Two months later, SVP proposed a squeeze-out merger. Washington created a one-person committee of Reid alone to approve the squeeze-out, which he did. Without any prior notice of the merger, the minority unitholders were told that their units had been converted into $27.25 cash per unit. Believing that price to be a substantial undervaluation, the minority unitholders sued Washington, its managers and officers (defendants), and SVP, asserting claims for breach of fiduciary duty, breach of the LLC agreement, and breach of the implied covenant of good faith and fair dealing. The Washington and SVP parties moved to dismiss the suit for failure to assert viable claims.