Hospitality Investors Trust, Inc. Announces Proposed Settlement of Derivative Litigation
February 21, 2020
On February 20 Hospitality Investors Trust, Inc. (“HIT”) filed an 8-K with the SEC announcing a proposed settlement between and among Plaintiff Tom Milliken, Hospitality Investors Trust, Inc., and “the AR Defendants” as follows: American Realty Capital Hospitality Advisors, LLC; American Realty Capital Hospitality Properties, LLC and American Realty Capital Hospitality Grace Portfolio, LLC; AR Capital, LLC and AR Global Investments, LLC, Nicholas S. Schorsch; William M. Kahane; Peter M. Budko; Edward M. Weil; Brian S. Block, (Stanley R. Perla; Abby M. Wenzel; Robert H. Burns; Edward T. Hoganson were subsequently excluded from claims), and Jonathan P. Mehlman.
On March 21, 2018 and May 1, 2018, the Board of HIT adopted resolutions forming a Special Litigation Committee (“SLC”) vested with the authority to investigate the allegations made in connection with the July 2017 Demand and December 2017 Demand, the Derivative Action, and the Wollman Demand Letter, and to evaluate whether the Company should allow the claims asserted in the Derivative Action to proceed, to prepare any reports, and take such other actions that the SLC deemed appropriate in its sole authority.
Between May 2018 and October 2019, the SLC with the assistance of independent counsel, conducted investigations into such allegations, including collecting and reviewing documents from the Company and conducting 19 separate interviews with 10 individuals. On October 11, 2019, the SLC issued its 147-page report (“SLC Report”) and submitted the SLC Report to the Court. In sum, the SLC determined that: (i) it was appropriate to pursue certain claims asserted in the Derivative Action against Schorsch, Kahane, Budko, Weil, Block, the Advisor, the Property Managers, and AR Capital; and (ii) that it was not appropriate to pursue claims against Hoganson, Perla, Wenzel, or Burns. The SLC also determined it was appropriate to pursue certain claims against Mehlman. Prior to issuance of the SLC Report, the SLC negotiated a settlement-in-principle with Mehlman.
The Settlement
The Settlement requires the Stipulating Defendants to cause their insurers to make a cash settlement payment to HIT of $14,931,108.47. The Settlement also requires the AR Entity Defendants to tender 66,555 shares of Company common stock to HIT.
The Settlement further requires Mehlman to make a cash settlement payment to HIT of $250,000 and to tender 16,949 shares of Company common stock to HIT. A settlement-in-principle with Mehlman was reached about six months before the settlement with the AR Defendants.
Background and Procedural History
A. On July 14, 2017, Plaintiff sent a demand letter to the HIT Board of Directors (“Board”) demanding that the Board investigate and take action to remedy alleged breaches of fiduciary duty related to certain events including: (1) the November 11, 2015 amendment to the advisory agreement between the Company and Advisor (“Advisory Agreement”) pursuant to which the Company would make payments of asset management fees to the Advisor in the form of cash rather than in the form of subordinated participation interests in the Company’s operating partnership; and (2) the Company’s entry into the “Framework Agreement” on January 13, 2017 pursuant to which the Company would make payments to the Advisor and to the Property Managers in connection with the termination of the Advisory Agreement and the Company’s internalization of the Company’s management function (“July 2017 Demand”).
B. Between August 2017 and December 2017, Plaintiff’s Counsel and the Company’s counsel had meetings and other communications relating to the July 2017 Demand, and the Company provided Plaintiff’s Counsel with non-public documents, subject to a non-disclosure agreement, relating to the July 2017 Demand.
C. On December 12, 2017, Plaintiff sent a second demand letter, addressed to the Company’s outside counsel, demanding that the Board investigate and take action to remedy alleged breaches of fiduciary duty related to the Company’s property management arrangements with the Property Managers which Plaintiff contended were improper (“December 2017 Demand”).
D. On February 26, 2018, Plaintiff initiated this derivative action, Milliken v. American Realty Capital Hospitality Advisors, LLC et al. in the United States District Court for the Southern District of New York, Case No. 18-CV-1757-VEC (“Derivative Action”), asserting derivative claims on behalf of the Company for breach of fiduciary duty, waste of corporate assets, aiding and abetting breach of fiduciary duty, breach of contract, and unjust enrichment, and seeking declaratory judgment. The Derivative Action complaint contained, inter alia, the facts and claims contained in the July 2017 Demand and December 2017 Demand.
E. On March 15, 2018, a second Company stockholder, Dr. Stuart Wollman (“Wollman”), sent a demand letter to the Board which generally restated many of the claims asserted in the Derivative Action (“Wollman Demand Letter”).
F. On March 21, 2018 and May 1, 2018, the Board of Directors adopted resolutions forming a Special Litigation Committee (“SLC”) vested with the authority to investigate the allegations made in connection with Plaintiff’s July 2017 Demand and December 2017 Demand, the Derivative Action, and the Wollman Demand Letter, and to evaluate whether the Company should allow the claims asserted in the Derivative Action to proceed, to prepare any reports, and take such other actions that the SLC deems appropriate in its sole authority. The SLC was comprised of two of the Company’s independent directors, Stephen P. Joyce and Edward A. Glickman.
G. On July 23, 2018, Plaintiff filed with the Court his Amended Complaint in the Derivative Action, which added a derivative claim for violations of Section 14(a) of the Securities Exchange Act of 1934, as amended, against Kahane, Mehlman, Hoganson, Wenzel, Perla, and Burns.
H. On August 7, 2018, the Court entered an order staying the Derivative Action pending the SLC’s investigation.
I. Between May 2018 and October 2019, the SLC with the assistance of independent counsel and experts, conducted an investigation into the allegations raised in the Derivative Action, the July 2017 Demand, the December 2017, and the Wollman Demand Letter, including collecting and reviewing documents from the Company (700 gigabytes of electronic data) and conducting 19 separate interviews with 10 individuals.
J. On April 16, 2019 the Company filed with the Securities and Exchange Commission (“SEC”) its annual report for 2018 on Form 10-K in which the Company announced that:
(1) the SLC had determined it appropriate for the Company to pursue certain claims asserted in the Derivative Action against Schorsch, Kahane, Budko, Weil, Block, the Advisor, the Property Managers, and AR Capital, and not pursue other claims;
(2) the SLC and Mehlman, the current CEO of the Company, had reached a settlement-in-principle, subject to signing a definitive settlement agreement and Court approval; and
(3) the SLC had determined that it was not appropriate to pursue claims against Hoganson, Perla, Wenzel, or Burns.
K. Between June and December 2019, counsel for the Plaintiff, HIT, the SLC and Stipulating Defendants engaged in extensive discussions concerning a potential global resolution of the Derivative Action.
L. On September 11, 2019, an in-person mediation session in New York City was held with the Honorable James R. Epstein (retired), a JAMS mediator.
M. On October 11, 2019, the SLC issued its 147-page report (“SLC Report”) and submitted the SLC Report to the Court.
N. On November 8, 2019, another in-person mediation session was held with Lawrence W. Pollack, Esquire, a JAMS mediator.
O. On November 15, 2019, counsel for the Parties appeared before the Court for a status hearing, and the Court lifted the stay in the Derivative Action.
P. Following the November 8, 2019 mediation session with Mr. Pollack, Plaintiff, HIT, the SLC and Stipulating Defendants engaged in frequent settlement discussions through Mr. Pollack.
Q. On December 27, 2019, after months of extensive discussions, arm’s-length negotiations, participation in in-person and telephonic mediation sessions with Mr. Pollack and Judge Epstein, and exchange of settlement proposals and counter-proposals, Plaintiff, HIT, the SLC and Stipulating Defendants reached an agreement-in-principle concerning the proposed settlement of the Derivative Action.
R. The Defendants deny the allegations asserted in the Derivative Action, the July 2017 Demand and December 2017 Demand, and deny all liability for the claims alleged therein.
S. On the basis of its investigation, the SLC has determined that the Settlement described herein is fair, reasonable, adequate, and in the best interests of the Company and its stockholders.
T. On the basis of information available to them, including publicly available information and the information secured prior to and after the filing of the Derivative Action, Plaintiff’s Counsel have determined that the Settlement described herein is fair, reasonable, adequate.
U. The Parties wish to settle and resolve the claims asserted in, relating to, or arising out of the Derivative Action, including but not limited to those claims authorized by the SLC.
V. The Parties, following arm’s-length negotiations, have reached an agreement set forth in this Stipulation, providing for the settlement of the Derivative Action on the terms and subject to the conditions set forth below, subject to the approval of the Court, and the Parties all believe the Settlement is in their best interests.
W. On January 29, 2020, just two days before the Court-established deadline for the filing of this Stipulation and Motion for Preliminary Approval, Wollman and his counsel filed a complaint in the Court, designating it as a related case to this Action, against the Company and most of the Defendants, claiming common law fraud on behalf of himself and a putative class of Company investors. Stuart Wollman v. Hospitality Investors Trust, Inc., Civil Action No. 1:20-cv-00798 (S.D.N.Y.)(“Wollman Complaint”). The Wollman Complaint fails to allege any distinct injury separate from any harm suffered by HIT and constitutes an improper attempt to convert derivative claims into direct claims. Dismissal with prejudice of the Wollman Complaint as to HIT and all Defendants who are named in that action shall be a condition precedent to the effectiveness of this Settlement. In all other respects, the Parties will proceed with all other steps contemplated by this Stipulation to secure final approval of this Settlement. The defendants named in the Wollman Complaint intend to seek an expedited judicial determination dismissing the Wollman Complaint with prejudice and other appropriate relief.
X. Plaintiff (with the concurrence of the Company and the SLC) has agreed to settle and release all Settled Claims pursuant to the terms and conditions of this Stipulation and subject to Court approval, after considering: (a) the substantial benefits provided under the proposed Settlement; (b) the uncertain outcome and the risk of any litigation, especially in complex actions such as the Derivative Action, including the difficulties and delays inherent in such litigation, and the defenses to the claims alleged in the Derivative Action; and (c) the desirability of permitting the Settlement to be consummated as provided by the terms of this Stipulation.
Defendants’ Denial of Liability and Wrongdoing
The Defendants have denied, and continue to deny, each and every claim and contention alleged or asserted in the Derivative Action, July 2017 Demand, December 2017 Demand, Wollman Demand Letter, and SLC Report, and affirm that they have acted properly, lawfully, and in full accord with their fiduciary duties, to the extent they owed any such duties to HIT, and other legal obligations, at all times. Further, the Defendants have denied expressly, and continue to deny, all allegations of wrongdoing, fault, liability, or damage against them arising out of any of the conduct, statements, acts or omissions alleged, or that could have been alleged, in the Derivative Action, July 2017 Demand, December 2017 Demand, Wollman Demand Letter, and SLC Report, and deny that they ever committed or attempted to commit any violations of law, any breach of fiduciary duty owed to the Company or its stockholders, or any wrongdoing whatsoever.
The AR Defendants further expressly maintain that all of the Settled Claims were barred by broad mutual releases entered between the AR Defendants and the Company in 2017, and that there is no basis to vitiate those binding releases. The Defendants state that they are entering into this Stipulation solely because the Settlement would eliminate the burden, disruption, and distraction inherent in further litigation. Had the terms of this Stipulation not been reached, the Defendants would have continued to contest vigorously the allegations in the Derivative Actions, and the Defendants maintain that they had and have meritorious defenses to all claims alleged or claims that could have been alleged in the Derivative Action, July 2017 Demand, December 2017 Demand, Wollman Demand Letter, and SLC Report.
Source: SEC 8-K Filing by Hospitality Investors Trust, Inc. 2/20/2020
