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Stender v. Archstone-Smith Operating Trust

United States Court of Appeals, Tenth Circuit

December 7, 2018

STEVEN A. STENDER; INFINITY CLARK STREET OPERATING, LLC, on behalf of themselves and all others similarly situated, Plaintiffs - Appellants,
v.
ARCHSTONE-SMITH OPERATING TRUST; ARCHSTONE-SMITH TRUST; ERNEST A. GERARDI, JR.; RUTH ANN M. GILLIS; NED S. HOLMES; ROBERT P. KOGOD; JAMES H. POLK, III; JOHN C. SCHWEITZER; R. SCOT SELLERS; ROBERT H. SMITH; STEPHEN R. DEMERITT; CHARLES MUELLER, JR.; CAROLINE BROWER; MARK SCHUMACHER; ALFRED G. NEELY; LEHMAN BROTHERS HOLDINGS, INC.; TISHMAN SPEYER DEVELOPMENT CORPORATION; RIVER HOLDING, LP; RIVER TRUST ACQUISITION (MD), LLC; RIVER ACQUISITION (MD), LP; ARCHSTONE-SMITH MULTIFAMILY SERIES I TRUST; ARCHSTONE, INC.; AVALONBAY COMMUNITIES, INC.; ARCHSTONE ENTERPRISE, LP; ERP OPERATING LIMITED PARTNERSHIP; EQUITY RESIDENTIAL, Defendants - Appellees. and HAROLD SILVER, Plaintiff,

          Appeal from the United States District Court(D.C. No. 1:07-CV-02503-WJM-MJW) for the District of Colorado

          Matthew W.H. Wessler, Gupta Wessler PLLC, Washington, D.C. (Daniel Townsend, Gupta Wessler PLLC, Washington, D.C., Kenneth A. Wexler and Kara A. Elgersma, Wexler Wallace LLP, Chicago, Illinois, and Lee Squitieri, Squitieri & Fearon, LLP, New York, New York, with him on the briefs), for the Plaintiffs-Appellants.

          Jonathan D. Polkes, Weil, Gotshal & Manges LLP, New York, New York (Caroline Hickey Zalka, Adam B. Banks, and Justin D. D'Aloia, Weil, Gotshal & Manges LLP, New York, New York, Frederick J, Baumann and Alex C. Myers, Lewis Roca Rothgerber Christie LLP, Denver, Colorado, and Leslie A. Eaton, Gregory P. Szewczyk, and J. Matthew Thornton, Ballard Spahr, LLP, Denver, Colorado, with him on the brief), for the Defendants-Appellees.

          Before BRISCOE, BACHARACH, and CARSON, Circuit Judges.

          BACHARACH, CIRCUIT JUDGE.

         This appeal grew out of a battle between the majority and minority owners of units in an investment vehicle. The majority unitholder wanted to merge, but this would require the minority to sell their units or convert them to shares in a newly created entity. The minority unitholders balked because they wanted to retain their original units, but the majority unitholder approved the merger, terminating the minority's units in the process. The termination of these units led the minority to sue.

         Resolution of this suit largely turns on a classic issue of contract interpretation: Did the contract, consisting of a declaration of trust, empower the majority unitholder to approve a merger that eliminated and replaced the minority unitholders' units without providing an opportunity for a class vote? The district court answered "yes" and granted the defendants' motions for summary judgment. We agree with the district court.

         1. The parties create an investment vehicle for interests in real estate.

         The parties created an investment vehicle that comprised an operating trust to buy and sell interests in real estate. This type of investment vehicle is called a "real estate investment trust." To form the trust, investors contributed property in exchange for units (called "A-1 units") in an operating trust. These units carried certain rights like steady distributions and a right of redemption for cash or common stock in the operating trust.

         The operating trust was organized as an entity known as an "umbrella partnership real estate investment trust." The umbrella partnership, in turn, was owned by a "parent trust" called the "Archstone-Smith Trust." The parent trust contributed cash to the operating trust (the Archstone-Smith Operating Trust) in exchange for general partnership units.

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         2. The majority unitholder (Archstone-Smith Trust) pursues a merger.

         Before the 2008 market crash, the Archstone-Smith Trust negotiated a sale to a partnership between Lehman Brothers and Tishman Speyer Development Corporation. Under the terms of the sale, the Lehman-Tishman partnership would create a new entity to merge into the operating trust. The merger would eliminate the A-1 units, and owners of these units could either sell the units or exchange them for shares in the new entity.

         Unhappy with this choice, the A-1 unitholders sued the Archstone-Smith Trust and others for breaches of contract and fiduciary duties. These claims turn primarily on whether the declaration of trust unambiguously allowed the operating trust to merge, which would terminate the A-1 units without a class vote of A-1 unitholders. The district court concluded that the operating trust could merge and terminate the A-1 units in the process, so the court granted summary judgment to the defendants. We agree with the district court's conclusion and the grant of summary judgment.

         3. We engage in de novo review, applying Maryland's substantive law.

         To decide the appeal, we must construe the declaration of trust. Because the district court's construction of the declaration of trust resulted in a grant of summary judgment, we engage in de novo review, viewing the evidence in the light most favorable to the A-1 unitholders. Reid v. Geico Gen. Ins. Co., 499 F.3d 1163, 1167 (10th Cir. 2007).

         The parties agree that Maryland law governs construction of the declaration of trust. Applying Maryland law to matters of construction, the district court could grant summary judgment to the defendants only if the declaration of trust had unambiguously allowed termination of the A-1 units through a merger without a class vote of A-1 unitholders. See Higby Crane Serv., LLC v. Nat. Helium, LLC, 751 F.3d 1157, 1160 (10th Cir. 2014) ("Summary judgment on a contract dispute should be granted if the contractual language is unambiguous.").

         4. The A-1 unitholders' contract claim fails as a matter of law because the declaration of trust unambiguously allowed the operating trust to merge with another entity and terminate the A-1 units in the process.

         Maryland law provides that

. a real estate investment trust can merge with another entity unless the declaration of trust prohibits mergers and
. a merger can result in the termination of the trust's units in the existing entity.

Md. Code Ann., Corps. & Ass'ns §§ 8-501.1(b), 8-501.1(o)(3). The resulting issue is whether the declaration of trust prohibited the Archstone- Smith Trust from terminating the A-1 units in the merger without a class vote of A-1 unitholders.

         The defendants point to §§ 5.3(B) and 9.2(B) of the declaration of trust; the A-1 unitholders rely on §§ 5.3(A), 12.3, and 12.4. The threshold procedural question is whether the A-1 unitholders preserved their reliance on § 5.3(A). We answer "no."

         To avoid forfeiture, the A-1 unitholders had to fairly present the district court with the substance of their current argument involving § 5.3(A). See FDIC v. Kan. Bankers Surety Co., 840 F.3d 1167, 1169-70 (10th Cir. 2016) (holding that an argument about contractual language was forfeited because it had not been fairly presented in response to the motion for summary judgment). This section provides: "The Trustee [the Archstone-Smith Trust] may not take any action in contravention of any express prohibition or limitation of this [declaration of trust] without an amendment of such provision adopted in accordance with Article 12 hereof and [Title 8 of the Annotated Code of Maryland, Corporations and Associations Article]." Appellants' Rec. Excerpts at 558.

         On appeal, the A-1 unitholders present two contentions:

1. Section 5.3(A) prohibited the operating trust from undermining the attributes of A-1 units without amending ...

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