FindLaw | Hillwood Center Partners Sues Mark Cuban-Controlled Companies

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FindLaw | Hillwood Center Partners Sues Mark Cuban-Controlled Companies

  1. 1. CAUSE NO. HILL WOOD CENTER PARTNERS, L.P., IN THE DISTRICT COURT individually and on behalf of RADICAL ARENA, LTD, Plaintiffs, VS. JUDICIAL DISTRICT RADICAL CUBAN, LLC, RADICAL ARENA, LTD, and DALLAS BASKETBALL LIMITED D/B/A DALLAS MAVERICKS, Defendants. DALLAS COUNTY, TEXAS PLAINTIFF'S ORIGINAL PETITION Plaintiff Hillwood Center Pa' titers, L.P. ("Hillwood"), individually and on behalf of Radical Arena, LTD ("Radical Arena"), files this Original Petition against Defendants Radical Cuban, LLC ("Radical Cuban"), Radical Arena (together, the "Radical Defendants"), and Dallas Basketball Limited d/b/a Dallas Mavericks (the "Mavericks"), and states: INTRODUCTION In 2000, entities directly or indirectly owned and controlled by Mark Cuban ("Cuban") purchased the controlling interests in the Mavericks and in the entities that collectively own a 50% interest in the long-term lessee and operator of the American Airlines Center (the "AAC") in Dallas, Texas. While the Mavericks' NBA franchise basketball team has enjoyed success on the basketball court, the financial aspects of the business of the Mavericks have suffered substantially, causing the Mavericks to have to PLAINTIFF'S ORIGINAL PETITION — Page 1
  2. 2. rely heavily on borrowings to meet ongoing financial obligations. The AAC, on the other hand, has enjoyed economic success and has made substantial profit distributions to its owners, one of which is Radical Arena. Those profits have not been distributed to the owners of Radical Arena, but instead, the majority thereof have been wrongfully diverted to the Mavericks to fund the substantial cash shortfalls resulting from the business operations of the Mavericks, personally benefiting Cuban at the expense of Radical Arena and its owners. Hillwood brings this suit to redress those wrongs. DISCOVERY CONTROL PLAN 2. Hillwood requests a Level 3 discovery control plan. PARTIES, JURISDICTION, AND VENUE Hillwood is a Texas limited partnership with its principal place of business in Dallas, Texas. Hillwood is a limited partner of Radical Arena and was a limited partner of Radical Arena at the time of the transactions that are the subject of this suit. 4. Radical Arena is a Texas limited partnership with its principal place of business in Dallas, Texas and may be served with process by serving its registered agent, Capitol Corporate Services, Inc., at 800 Brazos, Suite 400, Austin, Texas 78701. 5. Radical Cuban is a Texas limited liability company with its principal place of business in Dallas, Texas and may be served with process by serving its registered agent, Capitol Corporate Services, Inc., at 800 Brazos, Suite 400, Austin, Texas 78701. Radical Cuban is the general pai tiler of Radical Arena. 6. The Mavericks are a Texas limited partnership with its principal place of business in Dallas County, Texas and may be served with process by serving its PLAINTIFF'S ORIGINAL PETITION — Page 2
  3. 3. registered agent, Capitol Corporate Services, Inc., at 800 Brazos, Suite 400, Austin, Texas 78701. 7. The Court has jurisdiction over this dispute, the amount in question being far in excess of the jurisdictional minimum of this Court. Venue is appropriate in Dallas County, Texas, pursuant to TEX. CIV. PRAC. & REM. CODE § 15.002. BACKGROUND FACTS A. The Mavericks. 9. Hillwood DBL, Ltd. ("Hillwood DBL") is the former majority interest owner of the Mavericks. In April 2000, Hillwood DBL sold its controlling interest in the Mavericks to entities owned and controlled by Cuban, which remain the majority and controlling interest owners. Currently, Cuban-controlled entities collectively own an approximate 76% interest in the Mavericks. A Cuban-controlled owner entity, Radical Mavericks Management, LLC ("Radical Mavericks Management"), serves as the general partner of the Mavericks and thereby controls and makes business and operational decisions for the Mavericks. B. AAC. 10. The AAC, which opened in 2001, is home to both the Mavericks and the National Hockey League's Dallas Stars (the "Stars") franchises. The AAC is operated by Center Operating Company, L.P., a Texas limited paitilership ("COC"), under a long- term lease with the City of Dallas. The general partner of COC is Center GP, LLC ("Center GP"). COC and Center GP are owned equally by entities associated with the PLAINTIFF'S ORIGINAL PETITION — Page 3
  4. 4. Stars and the Mavericks, one of which is Radical Arena, which owns approximately 33.5% of COC. Each of the teams pays rent to COC for use of the AAC. 11. Entities owned and controlled by Cuban (Radical Cuban and Radical Hoops, LTD) own an approximate 92.5% interest in Radical Arena. Hillwood owns an approximate 7.5% interest in Radical Arena. Cuban controls Radical Arena through its general partner, Radical Cuban. C. Radical Arena LP Agreement. 12. Effective as of April 2000, Radical Cuban, Radical Hoops, LTD and Hillwood entered into the Amended and Restated Agreement of Limited Pai inership of Radical Arena, LTD (the "LP Agreement"). The express and only business purpose of Radical Arena is established by Section 5 of the LP Agreement: The Partnership may engage in any activity permitted by law (whether conducted directly or indirectly through any type of Investment in any type of entity) directly related to its ownership of an interest in Center Operating Company, L.P., a Texas limited partnership, and Center GP, LLC, a Texas limited liability company. (emphasis added) 13. Importantly, Section 9.1 of the LP Agreement requires that all cash not needed for working capital or debt reserves or for reasonably anticipated contingencies "shall be distributed. . . no less frequently than annually" to the partners. 14. While the LP Agreement gives Cuban (through the general partner, Radical Cuban) broad discretion to run the day to day operations of Radical Arena, his powers are not unlimited. Specifically, Section 5 of the LP Agreement limits Radical Arena to conducting business only within the scope of that stated business purpose. PLAINTIFF'S ORIGINAL PETITION — Page 4
  5. 5. D. The Loan by Radical Arena to the Mavericks. 15. To provide the liquidity necessary to operate and fund shortfalls between revenues and the cost of operations, the Mavericks maintain a bank line of credit (the "LOC"), which is personally guaranteed by Cuban. Through the years the borrowing capacity under the LOC has been periodically increased, with the 2006 borrowing capacity being more than double the 2003 borrowing capacity. From 2003 to 2006, the Mavericks incurred, in each year, substantial operating losses, necessitating borrowings of substantial sums under the LOC. The outstanding balance owed by the Mavericks under the LOC at June 30, 2006 was more than double the outstanding balance owed at June 30, 2003. 16. Despite the availability of further borrowing by the Mavericks under the LOC, Cuban, acting through the general partner of Radical Cuban, has caused Radical Arena to make multiple loans to the Mavericks, rather than distributing the funds Radical Arena had received from COC to its partners, notwithstanding that such actions were contrary to and outside of the limited purpose activities of Radical Arena and the express distribution provisions set forth in the LP Agreement. The making of those loans was not authorized or within the scope of permitted business activities of Radical Arena. Further, the making of those loans was not approved by all of the partners of Radical Arena as was required, under Section 10.3 of the LP Agreement, for Radical Arena to take any action in contravention of the LP Agreement (i.e., the making of such loans that were not a permitted activity under Section 5 of the LP Agreement). In addition, the making of PLAINTIFF'S ORIGINAL PETITION — Page 5
  6. 6. those loans conferred an improper personal benefit on Cuban to the detriment of Radical Arena and its owners. 17. Specifically, in September 2006, notwithstanding the express limitations under the LP Agreement on the permitted business activities of Radical Arena, Radical Cuban caused Radical Arena to loan $20 million to the Mavericks evidenced by a Subordinated Promissory Note in this amount dated September 5, 2006 (the "Note"). The Note provided for an interest rate of 5.4% per annum, was due and payable in a lump sum on September 4, 2007, was made expressly subordinate to all other indebtedness of the Mavericks for borrowed monies (including the amounts owed under the LOC), was unsecured, and was not guaranteed. 18. In addition to the fact that the making of this loan was not a permitted business activity of Radical Arena, Cuban, acting through the general partner Radical Cuban, caused Radical Arena to allow the Mavericks (an entity also controlled by Cuban through its general partner Radical Mavericks Management) the benefit of the above- referenced terms of the Note (and to the detriment of Radical Arena) that are not arms- length and competitive with similar transactions with unrelated parties, so that the Mavericks enjoyed Note terms substantially more favorable than could have been obtained in the market from an independent and unrelated lender, a clear violation of Section 10.8 of the LP Agreement. 19. At the time of the loan from Radical Arena, Cuban also caused the other Mavericks-related COC ownership entities (also controlled through general partners controlled by Cuban) to loan an additional $15 million to the Mavericks. PLAINTIFF'S ORIGINAL PETITION — Page 6
  7. 7. 20. The Mavericks had the right and loan capacity to borrow $20 million under the LOC rather than borrow such amount from Radical Arena. Had the Mavericks borrowed such amount under the LOC, Cuban would have been personally liable for the repayment of such LOC loan, due to the LOC being personally guaranteed by Cuban. Under the terms of the Note set by Cuban, acting through the general partner Radical Cuban, Cuban did not guarantee the repayment of the Note. Accordingly, Cuban obtained a substantial personal benefit (avoiding personal repayment liability) by causing Radical Arena to make the $20 million loan rather than have the Mavericks borrow such sum under the LOC. 21. In September 2007, Cuban, acting through the general partner Radical Cuban, caused Radical Arena to allow the Mavericks to not repay the amounts due to Radical Arena under the Note when due, to increase the loan amount to $21,077,041.10 (to include unpaid interest), and to extend the loan maturity date to September 3, 2008, as evidenced by an Amended and Restated Subordinated Promissory Note (the "Amended Note") signed by the Mavericks, which contained the same terms regarding subordination to all of the Mavericks' indebtedness, below market interest rate, no collateral, and no guaranty. 22 In April 2008, Cuban, acting through the general partner Radical Cuban, caused Radical Arena to (a) again extend the maturity date for the loan for another year, and (b) loan the Mavericks an additional $8,140,000, thereby increasing Radical Arena's total loan to the Mavericks to more than $29 million, by using funds that were once again diverted from required distributions to the Radical Arena partners in contravention of the PLAINTIFF'S ORIGINAL PETITION — Page 7
  8. 8. terms of the LP Agreement. Moreover, at the same time, the interest rate on the loan was reduced from 5.4% per annum to 3.5% per annum, as evidenced by another amended and related promissory note (the "Second Amended Note"). Hillwood has not been furnished a copy of the Second Amended Note. Hillwood believes that the aggregate amount of the loans to the Mavericks from Radical Arena and the other Mavericks-related COC owner entities is approximately $50 million, all subordinate to the Mavericks' other indebtedness for borrowed monies, including the LOC. 23. The Mavericks' borrowing capacity under the LOC has been increased substantially since 2006, thereby substantially increasing the potential debt to which the repayment of the loans by Radical Arena to the Mavericks is subordinate due to the terms of those loans (favorable to the Mavericks and unfavorable to Radical Arena) that Cuban, acting through the general partner Radical Cuban, caused Radical Arena to give to the Mavericks. E. Derivative Action. 24. Hillwood has demanded that Cuban, acting through Radical Cuban as general partner of Radical Arena and through Radical Mavericks Management as general partner of the Mavericks, cause the funds of Radical Arena that were diverted from partner distributions to the loans to the Mavericks to be returned to Radical Arena and distributed to its partners. That demand has been expressly rejected. Hillwood has not requested Radical Cuban to initiate suit on behalf of Radical Arena because any such effort would have been futile. As noted, Radical Arena is controlled and majority owned by Radical Cuban and Radical Hoops, both Cuban directly or indirectly owned entities. PLAINTIFF'S ORIGINAL PETITION — Page 8
  9. 9. The Mavericks, and Cuban personally, also received a substantial benefit under the loan transactions at issue. Therefore, it is highly unlikely that Radical Cuban would have agreed to initiate suit against itself, or any another Cuban directly or indirectly owned entity, for entering into the above-described loan transactions that directly benefited both the Mavericks and Cuban. Accordingly, Hillwood now brings this derivative action in the right of Radical Arena, and as limited partner, to address these wrongs. FIRST CAUSE OF ACTION: BREACH OF CONTRACT 25. Hillwood adopts and incorporates by reference paragraphs 1 through 24 above at this point as if same were set forth in full. 26. The LP Agreement is a binding and enforceable contract to which Hill wood is a party and under which it has fulfilled all of its obligations. As set forth more fully above, the Radical Defendants breached the LP Agreement by failing to pay contractually required distributions to Hillwood, by entering into the above-described loan transactions with the Mavericks in violation of the express purpose clause of the LP Agreement and on teii Is that are not aims-length, and by taking action in contravention of the LP Agreement without first obtaining the consent of all Radical Arena partners to do so. As a result of these breaches, Hillwood has suffered damages in an amount far in excess of the minimum jurisdictional limits of this Court, for which it now sues. SECOND CAUSE OF ACTION: BREACH OF FIDUCIARY DUTY 27. Hillwood adopts and incorporates by reference paragraphs 1 through 26 above at this point as if same were set forth in full. PLAINTIFF'S ORIGINAL PETITION — Page 9
  10. 10. 28. A fiduciary relationship exists between Radical Cuban, on the one hand, and Hillwood and Radical Arena, on the other hand. The course of conduct of Radical Cuban described above violates the fiduciary duties owed to Hill ood and Radical Arena and constitutes willful misconduct on the part of Cuban acting through the general partner Radical Cuban and Radical Mavericks Management. In particular and by way of example, Radical Cuban breached its general partner duty of care and good faith to Radical Arena by (a) causing Radical Arena to make loans to the Mavericks that were not permitted by the LP Agreement, were not arms-length, and were not approved by all partners of Radical Arena, (b) delivering monies to the Mavericks for which there was no Radical Arena authorization and for which there was no reasonable likelihood for return by the Mavericks given the extremely poor financial condition of the Mavericks and the continuing substantial operating losses resulting from the business of the Mavericks, and (c) causing harm to Radical Arena and its partners as the result of the above acts. In addition, Radical Cuban breached its general partner duty of loyalty to Radical Arena by (i) placing the personal interests of its direct or indirect owner, Cuban, above and to the detriment of the interests of Radical Arena by causing Radical Arena to provide funding for the costs of operations of the Mavericks in order to enable the Mavericks to avoid having to obtain those needed funds from a borrowing under the LOC and to enable Cuban to avoid personal liability for the repayment (under his personal guaranty of the LOC loans) of any such additional borrowing by the Mavericks under the LOC, and (ii) placing the interests of the Mavericks above and to the detriment of the interests of Radical Arena by causing Radical Arena to accept from the Mavericks below-market PLAINTIFF'S ORIGINAL PETITION — Page 10
  11. 11. terms and security on the fundings by Radical Arena to the Mavericks. As a result of these acts, Hillwood and Radical Arena have suffered damages in an amount far in excess of the minimum jurisdictional limits of this Court, for which they now sue. THIRD CAUSE OF ACTION: PARTICIPATION/CONSPIRACY 29. 1 lillwood adopts and incorporates by reference paragraphs 1 through 28 above at this point as if same were set forth in full. 30. The course of conduct of Radical Cuban described above violated the fiduciary duties owed to Hillwood and Radical Arena. The Mavericks, under control by Cuban through its general partner Radical Mavericks Management, assisted, encouraged, participated, and/or conspired with Radical Cuban in connection with this course of conduct, which was a substantial factor in causing Radical Cuban to violate the fiduciary duties owed to Hillwood and Radical Arena. As a result, Hillwood and Radical Arena suffered damages in an amount far in excess of the minimum jurisdictional limits of this Court, for which they now sue. FOURTH CAUSE OF ACTION: UNJUST ENRICHMENT 31. Hillwood adopts and incorporates by reference paragraphs 1 through 30 above at this point as if same were set forth in full. 32. Cuban, in his position of controlling both the Radical Defendants and the Mavericks, caused Radical Arena to divert its funds that were required by the LP Agreement to be distributed to its partners to be delivered instead to the Mavericks in the form of loans that were not permitted under the LP Agreement, that personally benefitted Cuban by reducing personal liability exposure and that conferred substantial, unjustified PLAINTIFF'S ORIGINAL PETITION — Page 11
  12. 12. benefits on the Mavericks. Moreover, rather than requiring the Mavericks to timely repay the loan, Cuban has caused the Radical Defendants to repeatedly extend the maturity of the loans. Such conduct of the Radical Defendants, with support and participation by the Mavericks, resulted in the Mavericks being unjustly enriched to the detriment of Radical Arena and Hillwood. As a result, Hillwood and Radical Arena suffered damages in an amount in excess of the minimum jurisdictional limits of this Court, for which they now sue. FIFTH CAUSE OF ACTION: ACCOUNTING 33. Hillwood adopts and incorporates by reference paragraphs 1 through 32 above at this point as if same were set forth in full. 34. Hillwood requests that the Court appoint an independent auditor, at Defendants' sole cost and expense, to investigate and make a report regarding the matters described herein, and that the Court order Defendants to cooperate with this investigation and allow full access to all of the records in their possession, custody, or control and facilitate the accomplishment of such an accounting. SIXTH CAUSE OF ACTION: ATTORNEY'S FEES 35. Hillwood adopts and incorporates by reference paragraphs 1 through 34 above at this point as if same were set forth in full. 36. As a result of the Radical Defendants' and the Mavericks' wrongful acts and omissions, Hillwood retained the undersigned attorneys to represent it and agreed to pay their reasonable and necessary fees. Hillwood seeks recovery of its reasonable and necessary attorney's fees, court costs, and expenses through trial and all appeals under PLAINTIFF'S ORIGINAL PETITION — Page 12
  13. 13. applicable law, including, but not limited to, TEX. CIV. PRAC. & REM. CODE § 38.001, et seq., the express agreements among the parties, and as otherwise authorized by law. SEVENTH CAUSE OF ACTION: EXEMPLARY DAMAGES 37. Hillwood adopts and incorporates by reference paragraphs 1 through 36 above at this point as if same were set forth in full. 38. Hillwood seeks exemplary damages from Defendants based on their willful, wrongful, and malicious conduct described above. MISCELLANEOUS 39. All conditions precedent to the filing of Hillwood's claims in this action have been performed or have already occurred. 40. By filing these claims, Hillwood does not waive or release any rights, claims, causes of action, or defenses, or make any election of remedies, but rather expressly reserves all such rights, claims, causes of action, and defenses, whether or not the same have been asserted or may hereafter be asserted in this or any other proceeding. JURY DEMAND 41. Hillwood requests that all issues of fact be tried before a jury. RELIEF REQUESTED 42. Hillwood respectfully requests the following relief: (a) That the Defendants be served with process and be required to answer in the time and manner prescribed by law; (b) That the Court award judgment against Defendants, jointly and severally, for Hillwood's and Radical Arena's actual and exemplary damages; PLAINTIFF'S ORIGINAL PETITION — Page 13
  14. 14. (c) That Hillwood recover its reasonable and necessary attorney's fees, court costs, and expenses (including, but not limited to, expert witness fees and expenses) incurred through the trial of this cause and any appeal; (d) That Hil'wood recover pre-judgment and post-judgment interest at the highest rate and to the maximum extent permitted by law; and (e) That 1111 ood have all such other and further relief, both general and special, at law and in equity, including, but not limited to the accounting requested above, to which it may show itself justly entitled. Respectfully submitted, FIGARI & DAVENPORT, L.L.P. BY: k . Davenport , State Bar No. 05418000 Don Colleluori State Bar No. 04581950 Ryan K. McComber State Bar No. 24041428 3400 Bank of America Plaza 901 Main Street, LB 125 Dallas, Texas 75202-3796 Tel: 214/939-2000 Fax: 214/ 939-2090 ATTORNEYS FOR PLAINTIFF HILL WOOD CENTER PARTNERS, L.P., individually and on behalf of RADICAL ARENA, LTD PLAINTIFF'S ORIGINAL PETITION — Page 14

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