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Evans v. Greenlaw

United States District Court, N.D. Texas, Dallas Division

May 14, 2018

RICHARD EVANS, derivatively on behalf of UNITED DEVELOPMENT FUNDING IV, Plaintiff,
v.
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 OF SETTLEMENT

          BARBARA M. G. LYNN CHIEF JUDGE

         Before the Court is the parties' proposed derivative settlement. For the reasons stated below, final approval of the settlement is GRANTED.

         I. BACKGROUND

         A. Defendants and the allegations against them

         United 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.

         On 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.

         On 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.

         B. Procedural history

         On May 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).

         On July 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.

         Several 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).

         Several 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 Court.

         C. The settlement

         In 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 ...

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