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L.L. CAPITAL PTNRS., L.P. v. ROCKEFELLER CTR. PROP

April 16, 1996

L.L. CAPITAL PARTNERS, L.P., Plaintiff, against ROCKEFELLER CENTER PROPERTIES, INC., Defendant.


The opinion of the court was delivered by: KAPLAN

MEMORANDUM OPINION

 LEWIS A. KAPLAN, District Judge.

 This case presents the question whether an issuer engaged in a public offering of securities has an obligation to disclose what fairly might be termed a straw in the wind bearing on the possible future action of a third party which, should that action occur, would have a material impact on the issuer.

 In 1993, plaintiff purchased common stock of defendant Rockefeller Center Properties, Inc. ("RCP"), the principal asset of which was a $ 1.3 billion participating mortgage loan to the owners of Rockefeller Center. RCP disclosed that the property was operating at a substantial deficit which had been funded to that point by affiliates of the borrowers. It disclosed that those affiliates might cease funding the deficit at any point. In 1995, eighteen months later, the affiliates pulled the plug, and the borrowers filed for bankruptcy protection. Plaintiff now claims in essence that RCP should have disclosed a fact which, it says, would have alerted plaintiff to what it characterizes as a likelihood that events would play out in this way, as well as RCP's allegedly "growing belief" that default ultimately was likely. RCP moves to dismiss the complaint on the ground that it fails to state a claim upon which relief may be granted.

 Facts

 The well pleaded factual allegations of the complaint are accepted as true for purposes of this motion to dismiss the complaint.

 The Rockefeller Center Mortgage

 Rockefeller Center is a commercial development consisting of approximately twelve buildings located in midtown Manhattan and the land on which they are situated. It contains approximately 6.2 million square feet of rentable commercial space and was owned at all relevant times by two partnerships, Rockefeller Center Properties ("RCP Partnership") and RCP Associates ("RCPA"), which are owned and controlled by Rockefeller Group, Inc. ("RGI"). RGI was wholly owned until 1990 by the Rockefeller family, which then sold an 80 percent ownership interest to the Mitsubishi Estate Company, Ltd. ("Mitsubishi") for $ 1.4 billion. (Cpt P 9)

 In July 1985, the Rockefeller family formed and incorporated defendant RCP, a real estate investment trust, to obtain public investment in Rockefeller Center. Shortly thereafter, RCP issued and sold in a public offering $ 750 million of common stock and $ 550 million of convertible debentures. (Id. P 10) The proceeds of the offering were used by RCP to make a $ 1.3 billion convertible participating mortgage loan (the "Loan") to RCP Partnership and RCPA (collectively, the "Borrowers"). The Loan is secured by mortgages on Rockefeller Center, matures on December 31, 2007, and is RCP's principal asset. (Id. PP 11-12)

 The Borrowers have experienced cash flow shortfalls continuously since 1985 in consequence both of operating cash flow deficits and substantial capital improvements to the property. These deficits were anticipated by RCP from the outset and were expected to continue until September 1994. In order to protect RCP and, presumably, to induce it to make the Loan, the Borrowers arranged in 1985 for the posting of letters of credit (the "LC") in favor of RCP to give assurance that the anticipated deficits would be funded. The LC was issued in the original amount of $ 126 million and was scheduled to decline in 1993 and 1994. In 1993, however, as part of the settlement of a class action, the Borrowers increased the amount of the LC to $ 200 million and delayed the scheduled decline until May 1995. (Id. P 13)

 The deficits historically were funded by Mitsubishi and the Rockefellers through capital contributions, loans and non-interest bearing advances to the Borrowers. But the deficits were not expected to continue indefinitely. Approximately 47 percent of the total rental space in Rockefeller Center was scheduled to be up for renewal in October 1994, when existing leases expired. The hope and expectation in 1985 was that the new or renewed leases would be at much higher rentals and thus generate positive cash flow for Rockefeller Center. (Cpt P 14) Thus, both Mitsubishi's and RCP's investments in Rockefeller Center depended heavily on office rental rates in midtown Manhattan being at a profitable level in 1994.

 As almost any real estate investor can attest, things do not always work out as planned. So too here. By 1992, the condition of the New York City commercial real estate market had deteriorated to the point that the lease expirations scheduled for late 1994 posed a looming crisis for the Borrowers rather than a prospective windfall. The rental rates predicted in 1985 could not be obtained. According to the complaint, it was clear to the Rockefeller family, Mitsubishi, the Borrowers, and RCP in 1992 and 1993 that the 1994 lease expirations would place Rockefeller Center into negative cash flow, i.e., payments on the Loan and capital expenditures would exceed rental income. As the standard commercial lease is ten years in duration, the Center would be locked in to negative cash flow for five to ten years after the 1994 expirations, so the deficits would continue past September 1994. The $ 200 million LC, however, protected against any default on the Loan until the first half of 1995. (Id. P 15)

 A Concerned RCP Seeks A Solution

 By June 1993, the deficits had grown to $ 389.4 million. In consequence, advisers to the Rockefeller family and executives of RCP sought to urge Mitsubishi either to restructure the Loan or to acquire RCP and extinguish it. (Id. P 16) During the fourth quarter of 1993, they sought to schedule several meetings with Mitsubishi in Tokyo to discuss Mitsubishi's post-1994 intentions and the anticipated insufficiency of the Borrowers' cash flow to service the loan beyond September 1994. Mitsubishi, according to the complaint, "rebuffed RCP's efforts to obtain such a meeting." (Id. P 17) RCP, the complaint alleges, had a "growing belief, based on its communications with the Borrowers, that Mitsubishi and the Rockefeller family were likely, for the very first time since 1985, to cease to fund" the deficits or the Loan. (Id. P 16)

 The Offering

 On September 29, 1993, RCP filed a Registration Statement for 3,000,098 shares of common stock subject to issuance on the exercise of warrants issued in settlement of a class action. (Id. P 18; Registration Statement (McLauglin Aff. Ex. B) at 6) The exercise price was the greater of $ 7 per share or the average price during a pricing period less 12 percent. (Cpt P 18)

 The Registration Statement plainly disclosed the circumstances of the Borrowers and the uncertainty of continued coverage of the deficits by Mitsubishi and the Rockefellers. *fn1" In a section captioned "Financial Condition Of The Borrower," it said:

 
"The Borrower has incurred a substantial cash flow shortfall since the inception of the Loan in 1985 . . . . At June 30, 1993, this cumulative cash flow shortfall amounted to $ 389.4 million and has been funded by capital contributions to the Borrower ..., loans from its partners ... and non-interest bearing advances from an affiliate, However, it is the Company's understanding that the partners of the Borrower are not required to continue to fund the Borrower's cash flow shortfalls and they might cease to do so at any time." (Registration Statement at 8) (emphasis added)

 It stated also that RCP would have recourse only to the property in the event of default. (Id. at 7)

 In December 1993, plaintiff, after attempting to assess whether Mitsubishi and the Rockefeller family would continue to subsidize the Borrowers' unprofitable position in Rockefeller Center, purchased 700,000 shares pursuant to the ...


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