United States District Court, N.D. Texas, Dallas Division
RICHARD EVANS, derivatively on behalf of UNITED DEVELOPMENT FUNDING IV, Plaintiff,
HOLLIS M. GREENLAW, PHILIP K. MARSHALL, J. HEATH MALONE, STEVEN J. FINKLE, JOHN R. RAY, TODD ETTER, UMTH GENERAL SERVICES, L.P., and UMTH LAND DEVELOPMENT, L.P., Defendants, and UNITED DEVELOPMENT FUNDING IV, Nominal Defendant.
MEMORANDUM OPINION AND ORDER GRANTING FINAL APPROVAL
BARBARA M. G. LYNN CHIEF JUDGE
the Court is the parties' proposed derivative settlement.
For the reasons stated below, final approval of the
settlement is GRANTED.
Defendants and the allegations against them
Development Funding IV (“UDF IV”) is a
publicly-traded real estate investment trust (a
“REIT”) that issues loans for the acquisition and
development of residential real estate. (ECF No. 53 at 2).
UDF IV is organized under Maryland law, and has a principal
place of business in Grapevine, Texas. Defendant UMTH General
Services, L.P. serves as UDF IV's advisor and manages UDF
IV on a day-to-day basis. Defendant UMTH Land Development,
L.P. (“Land Development”) is UDF IV's asset
manager. UDF IV's affairs are overseen by a Board of
Trustees (the “Board”). Defendant Hollis M.
Greenlaw is Chairman of the Board and Chief Executive Officer
of UDF IV. Philip K. Marshall, J. Heath Malone, and Steven J.
Finkle are independent trustees on the Board. John R. Ray
previously served on the Board. Todd Etter is the Executive
Vice President of Land Development, and Chairman, of UMT
Services, Inc., as well as the general partner of UMTH
General Services, L.P. and UMTH Land Development, L.P.
February 22, 2016, Richard Evans-a shareholder of UDF IV-sent
a letter to the Board, accusing the Board of operating UDF IV
like a Ponzi scheme and engaging in self-interested
transactions. (ECF No. 57 at 3 ¶ 9; ECF No. 57-1). The
letter demanded that the Board establish an independent
committee of investigators to assess allegations that UDF IV
operated as a Ponzi scheme; take corrective actions against
any individuals responsible for such wrongdoing; and
implement adequate internal controls and systems to prevent a
recurrence of similar events in the future. (See ECF
No. 77-1; see also ECF No. 34-2). The Board did not
immediately respond to the letter.
March 4, 2016, Evans filed this derivative lawsuit against
UMTH General Services, L.P., UMTH Land Development, L.P.,
Greenlaw, Marshall, Malone, Finkle, Ray, Etter, and nominal
defendant UDF IV (collectively “Defendants”).
(ECF No. 1). Evans alleged that the Board members repeatedly
used their corporate powers to authorize interested party
transactions with other entities that UDF IV's executives
controlled. (See, e.g., Id. at 2-3 ¶¶ 2-4;
id. at 12-17 ¶¶ 38-51). Evans further
alleged that UDF IV's officers and directors used UDF
IV's real estate investment business to perpetuate a
“massive Ponzi scheme” to pay the debts of
related entities, thereby generating losses to UDF IV of tens
of millions of dollars. (Id. at 2 ¶ 2). Evans
asserted claims against Defendants for breach of fiduciary
duty, unjust enrichment, and aiding and abetting liability.
17, 2016, the parties jointly moved to stay this proceeding
pending the resolution of related securities fraud
litigation, In re UDF IV Securities Litigation, No.
3:15-cv-4030-M, and Hay v. United Development Funding IV,
et al., No. 4:16-cv-00188-M. (ECF No. 46). The Court
granted the motion and stayed the case. (ECF No. 47).
12, 2016, Evans served a settlement demand on Defendants.
(ECF No. 53 at 6). On November 9, 2016, Evans and Defendants
attended an in-person mediation in Fort Worth.
(Id.). Evans was joined at the mediation by
plaintiffs from other UDF IV derivative state court actions:
(i) Floreale v. Greenlaw, et al., No. 058-286599-1;
(ii) Knoll v. Greenlaw, et al., No. 342-284220-16;
and (iii) Frey v. Greenlaw, et al., No.
096-287723-16. Evans was also joined at the mediation by the
parties from In re UDF IV Securities Litigation, No.
3:15-cv-4030-M, and Hay v. United Development Funding IV,
et al., No. 4:16-cv-00188-M. The mediation was
unsuccessful, but Evans continued to negotiate.
months after the mediation, Defendants produced 170, 000
pages of documents related to UDF IV's operations. (ECF
No. 53 at 7). On August 22, 2017, Evans's counsel
interviewed Timothy McCormick, independent counsel for UDF
IV's Audit Committee. (Id.). During the
interview, McCormick stated that the Audit Committee had
investigated claims that UDF IV operated as a Ponzi scheme.
(Id.; see also ECF No. 57-1). McCormick
discussed the chronology of the Audit Committee's
investigation and gave a summary of conclusions reached by
the Audit Committee, provided a detailed explanation of how
UDF IV operated with respect to its affiliates, advisors, and
managers, and stated UDF IV's responses to the
public's accusations of fraud. (ECF No. 53 at 7).
months later, Evans and Defendants agreed in principle to
settle this case. (ECF No. 53 at 8). On December 21, 2017,
the parties filed their Stipulation of Settlement with this
exchange for a release of derivative claims against
Defendants and related persons, the proposed settlement would
provide the following to UDF IV:
• $1.5 million, received from UDF IV's D&O
insurance carrier, will be paid into an escrow account to be
used by UDF IV. Up to $175, 000 will be used by UDF IV to
implement new corporate governance measures. Up to $650, 000
will be used to compensate Evans's counsel for
attorney's fees and expenses. The balance will be used to
partially fund UDF IV's settlement of claims in Hay
v. United Development Funding IV, et al., No.
4:16-cv-188-M, and In re United Development Funding IV
Securities Litigation, No. 3:15-cv-4030-M. (ECF No. 53
at 10 ¶ 1.1).
• UDF IV will add an additional independent trustee to
UDF IV's Board, who is an “audit committee
financial expert, ” with at least three years of
relevant real estate experience at a public company, and who
will serve as Chairman of UDF IV's Audit Committee.
(Id. at 11 ¶ 1.2(A)).
• UDF IV will appoint a qualified person, with at least
three years of relevant experience at a public company, to
serve in the capacity of Chief Compliance Officer
(“CCO”) and be responsible for developing a
comprehensive legal compliance and ethics program for UDF IV.
(Id. at 11-12 ¶ 1.2(B)).
• UDF IV will implement revisions to its related party
transaction policy. (Id. at 12 ¶ 1.2(C);
see also Ex. A, attached to ECF No. 53).
• UDF IV's Audit Committee will be obligated to
review and consider certain designated materials when
deciding whether to approve transactions with Significant
Borrowers (defined as “borrowers that have aggregate
borrowings across their affiliated companies in excess of 15%
of UDF IV's aggregate loan portfolio as reported in the
prior financial quarter”), and these materials must
describe the proposed transaction, the proposed loan or
investment request, proposed ...