Note 14 - Commitments and Contingencies

9 Months Ended

Sep. 30, 2023

Commitments and Contingencies Disclosure [Text Block]

14.

Commitments and Contingencies

We are party to lawsuits and bankruptcy filings discussed in detail below. This litigation has been and is expected to continue to be expensive, lengthy, and disruptive to normal business operations following the period covered by this report. Moreover, the results of these proceedings are difficult to predict.

As of September 30, 2023, the Company believes that the allegations in these lawsuits are without merit and intends to continue to vigorously defend against them. However, the outcomes of these lawsuits, including the timing of the final disposition of the lawsuits, are unpredictable. It is reasonably possible that these lawsuits could result in large monetary awards, especially if compensatory and/or punitive damages are awarded. Such damages may include a partial or complete loss of the value of the Company’s interest in Pillarstone OP. Management, with the consultation of the Company’s legal counsel, is not able to conclude whether these lawsuits will be resolved without a material adverse effect on our financial position, earnings, or cash flows.

Delaware Lawsuit by Whitestone OP Against Us.

On July 12, 2022, we were named as a defendant in a lawsuit by Whitestone OP in a lawsuit styled Whitestone REIT Operating Partnership, L.P. v. Pillarstone Capital REIT, C.A. No. 2022-0607-LWW, in the Court of Chancery of the State of Delaware. The suit challenged our rights agreement, dated as of December 27, 2021 (as the same may be amended from time to time, the “Rights Agreement”), between us and American Stock Transfer & Trust Company, LLC, as rights agent, and claimed that our adoption of the Rights Agreement breached the Pillarstone OP Amended and Restated Agreement of Limited Partnership, and that we breached our fiduciary duties as general partner of Pillarstone OP to Whitestone OP and breached the implied covenant of good faith and fair dealing under the Amended and Restated Agreement of Limited Partnership.

Based upon various issues, including those discussed in this report, we filed a lawsuit on September 16, 2022, in district court in Harris County, Texas, against Whitestone and related parties alleging, among other things, breach of the Pillarstone OP Amended and Restated Agreement of Limited Partnership and fiduciary duty and breach of the Management Agreements.

On July 21, 2022, Whitestone OP filed a Motion to Preserve the Status Quo in the Delaware lawsuit requesting broad restrictions on our ability to conduct our business, including buying properties, enforcing the Rights Agreement, incurring expenses, or engaging in transactions. The Status Quo Order also prevented Whitestone OP from exercising its right under the Pillarstone OP Amended and Restated Agreement of Limited Partnership to require Pillarstone OP to redeem its OP Units. Our amended petition in the Texas lawsuit argued that Whitestone’s material breaches of contract and fiduciary duty operated to discharge and/or excuse any obligation to perform under the redemption provisions of the Pillarstone OP Amended and Restated Agreement of Limited Partnership.

Representatives of our board of trustees attempted to initiate discussions to settle these matters in August 2022 with representatives of Whitestone’s board of trustees to avoid a prolonged, expensive legal fight. However, Whitestone was not open to settling these matters at that time or the other various times since August 2022 we attempted to initiate discussions to resolve these matters.

On July 17, 2023 and July 18, 2023, trial was held in the Delaware lawsuit. Post-trial argument in the lawsuit was held on October 18, 2023. Whitestone has asked the Delaware court to award damages of approximately $51,200,600 and post-judgement interest of $6,820,000 in the filing of its post-trial opening brief on August 28, 2023. On January 25, 2024, the Delaware court issued its opinion and determined that we breached the implied covenant of good faith and fair dealing without resolving the breach of contract or breach of fiduciary duty claims. Although Whitestone asked for monetary damages of $51,200,600 plus interest, the Delaware court declined to award damages.

The Delaware court declared the Rights Agreement unenforceable against Whitestone, permitted Whitestone OP to tender a notice of redemption for its OP Units and determined that the Pillarstone OP limited partnership agreement should be followed whereby we would decide whether to assume Pillarstone OP’s redemption obligation and determine what value to attribute to Pillarstone OP’s assets. The Delaware court declared that any further relief must await future proceedings. On January 25, 2024, Whitestone OP delivered its notice of redemption for all but one of its OP Units. The claims in this case were settled pursuant to the settlement agreement described in “—Bankruptcy Filings” below.

Our Texas Lawsuit against Whitestone.

Our executive management team worked to restore normal operations and leasing activities quickly after Whitestone’s unanticipated termination of their managerial services. Many of our actions were affected by a lack of usable information being made available to us on a timely basis. We discovered significant deferred maintenance and neglect of our assets had occurred under Whitestone’s management. Our efforts to address these matters were in some cases stymied by Whitestone’s litigation against us in Delaware where the court limited our ability to incur expenses above low threshold amounts for the types of expenses a company in our industry could expect to incur in the ordinary course of business. Our legal and professional fees have increased substantially as we address the internalization of management and the litigation matters discussed above.

On September 16, 2022, we filed a lawsuit styled Pillarstone Capital REIT and Pillarstone Capital REIT Operating Partnership LP v. Whitestone TRS, Inc., Whitestone REIT, Whitestone REIT Operating Partnership, L.P., Cause No. 2022-59478, in the District Court, Harris County, Texas, 189th Judicial District alleging, among other things, breach of the Pillarstone OP limited partnership agreement and the Management Agreements for the Real Estate Assets by the Whitestone defendants and breach of fiduciary duties relating to Pillarstone OP by Whitestone OP going outside the role of limited partner and harming us and Pillarstone OP. A portion of the claims in this case were moved into an adversary proceeding by Whitestone Uptown Tower, LLC in the Uptown Tower bankruptcy case described in “—Bankruptcy Filings” below, and the other claims were settled pursuant to the settlement agreement described in “—Bankruptcy Filings” below.

Bankruptcy Filings.

On December 1, 2023, Whitestone Uptown Tower, LLC filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas in the case styled In re: Whitestone Uptown Tower, LLC a/a/ Pillarstone Capital REIT Operating Partnership, Case No. 23-32832-mvl-11, in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division.

On March 4, 2024, bankruptcy cases were filed for us and Pillarstone OP, as well as Whitestone CP Woodland Ph. 2, LLC, Whitestone Industrial-Office, LLC and Whitestone Offices, LLC, the subsidiaries owning our Real Estate Assets other than Uptown Tower. The bankruptcy cases were consolidated into the jointly administered bankruptcy cases styled In re: Whitestone Industrial-Office, LLC, et. al., Case No. 24-30653-mvl-11, in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, the same court as, but separate cases from, the Whitestone Uptown Tower, LLC bankruptcy case.

The bankruptcy cases proceeded under an approved plan of liquidation in the jointly administered bankruptcy cases and an approved plan of reorganization in the Uptown Tower bankruptcy case. The plan of liquidation in the jointly administered bankruptcy cases provided for a plan agent, and Frances A. Smith was appointed plan agent. The plan agent was appointed for the purposes of administering all claims in the plan of liquidation in the jointly administered bankruptcy cases and making distributions to holders of allowed claims and equity interests under the plan of liquidation in the jointly administered bankruptcy cases. The plan agent’s administration of the claims may include, without limitation, and pursuant to her reasonable business judgment, investigating, prosecuting, objecting to, resolving, reconciling, compromising, litigating, administering, and making distributions on account of, the claims.

The plan agent is not a trustee and does not participate in the management or operations of the debtors’ businesses, assets or financial affairs or the review and approval of the day-to-day operational expenses of the debtors’ business post-confirmation, unless the bankruptcy court determines cause exists for the plan agent to do so after notice and hearing.

The plan agent has the sole and exclusive authority to administer the claims in the jointly administered bankruptcy cases, including the determination to compromise a claim involving Whitestone OP, any debtor or their affiliates or professionals, subject to notice and hearing and a party’s good-faith objection and the bankruptcy court’s final adjudication of the matter. The plan agent also has the authority to make demand on the debtors for funds necessary to satisfy allowed claims asserted against a debtor from that debtor’s funds (even if held by Pillarstone OP), which may include sales proceeds.

The plan agent is entitled to receive compensation as a flat fee of $10,000 per month, plus reimbursement of actual, necessary expenses. If during any month the plan agent spends more than fifteen (15) hours in the performance of her duties, she will be entitled to compensation at a rate of $650 per hour for each additional hour of services.

The plan of liquidation in the jointly administered bankruptcy cases and the plan of reorganization in the Uptown Tower bankruptcy case authorized the sale of all of our properties. Those properties were sold between October 2024 and July 2025. Our debts have been repaid from the proceeds from these sales of our Real Estate Assets in accordance with our plan of liquidation and the Whitestone Uptown Tower, LLC plan of reorganization following the period covered by this report.

In December 2025 over our objections, the bankruptcy court in the jointly administered bankruptcy cases issued an order approving an agreement between the plan agent and Whitestone REIT, Whitestone OP and Whitestone TRS settling the Whitestone claims in the jointly administered bankruptcy cases. The plan agent and Whitestone negotiated the settlement agreement without our participation. The bankruptcy court’s order and the settlement agreement provided for, among other things:

●

Allowed Claims (as defined in the plan of liquidation) of Whitestone Industrial-Office, LLC, Whitestone Offices, LLC and Whitestone CP Woodland Ph. 2, LLC (the “Subsidiary Debtors”) shall be satisfied by payment in full from the Subsidiary Debtors. At the direction of the plan agent, the debtors shall make such payments to holders of Allowed Claims of the Subsidiary Debtors. After payment of the Allowed Claims of the Subsidiary Debtors, all remaining funds (the “Partnership Estate Funds”) shall flow to the Pillarstone OP estate.

●

the debtors shall use Partnership Estate Funds to establish the following three reserves to support the plan agent’s claim administration process:

the debtors shall use $1,000,000.00 of the Partnership Estate Funds to establish the “Partnership Tax Reserve”. The plan agent shall direct the debtors to use the Partnership Tax Reserve to satisfy state and federal tax claims owed by Pillarstone OP and us. The debtors shall make such payments as directed by the plan agent;

the debtors shall use $1,000,000.00 of the Partnership Estate Funds to establish the “Case Administration Reserve”. The plan agent shall direct the debtors to use the Cash Administration Reserve to fund estate administrative expenses including payment of estate employees, attorneys’ fees, accounting fees, costs of administering claims, and winding up the estates of us, Pillarstone OP and the Subsidiary Debtors (together, the “Debtors Estates”). The debtors shall make such payments as directed by the plan agent; and

the debtors shall use $500,000.00 of the Partnership Estate Funds to establish the “Partnership GUC Reserve”. The plan agent shall direct the debtors to use the Partnership GUC Reserve to satisfy all allowed general unsecured claims, including insider general unsecured claims, against Pillarstone OP. The debtors shall make such payments as directed by the plan agent. Should the debtors fail to make payment as directed, the plan agent shall seek relief from the Bankruptcy Court;

●

the debtors shall distribute $4,050,000.00 to the Pillarstone Capital REIT estate (the “Pillarstone Distribution”) from the Partnership Estate Funds in satisfaction of all outstanding claims by us against the Pillarstone OP estate. The plan agent shall administer claims against our estate and shall direct the debtors to satisfy any allowed claims against our estate with the Pillarstone Distribution and any other cash in our estate. The plan agent shall direct the debtors to distribute any surplus proceeds remaining from the Pillarstone Distribution to our equity interest holders in accordance with the plan of liquidation in the jointly administered bankruptcy cases. This distribution was made in December 2025;

●

following the satisfaction of all the claims of the Subsidiary Debtors, and of the reserves set forth above, the debtors shall distribute all funds remaining in the Pillarstone OP estate to Whitestone OP no later than December 12, 2025. This payment (the “WROP Distribution”) was made in December 2025;

●

the plan agent shall direct the debtors to distribute any surplus funds from the Partnership Tax Reserve, Case Administrative Reserve, and Partnership Tax Reserve remaining after the complete administration of the Debtors’ Estates to Whitestone OP. The debtors shall make such Surplus Reserve Funds payments as directed by the plan agent;

●

upon entry of the final order approving the motion to approve the settlement, the plan agent and Whitestone OP shall promptly move to dismiss with prejudice:

the adversary proceeding commenced by Pillarstone OP in the jointly administered bankruptcy cases;

the Houston litigation discussed in Part II, Item 1 “Legal Proceedings—Houston Case”; and

the Delaware litigation discussed in Part II, Item 1 “Legal Proceedings —Delaware Case”;

●

upon entry of the final order, and payment of the WROP Distribution, Whitestone OP shall (a) move to dismiss with prejudice all pending litigation initiated by it against any of the debtors, and (b) withdraw its proof of claim against Pillarstone OP in the amount of $52,963,904.83 and its proof of claim against Pillarstone Capital REIT in the amount of $9,966,778.64;

●

the plan agent, on behalf of the debtors and the Debtors Estates, granted a release to Whitestone REIT, Whitestone OP, Whitestone TRS and certain of their related parties and agreed to ensure the dismissal with prejudice of all pending claims, causes of action and lawsuits brought by any of the debtors against such parties. The Whitestone parties granted releases to the plan agent and the Debtors Estates and agreed to ensure the dismissal with prejudice of all pending claims, causes of actions and lawsuits against any of the debtors, including the Delaware litigation. Whitestone OP agreed to dismiss its claims and causes of action against James C. Mastandrea pending in his adversary claims in the jointly administered bankruptcy cases to the extent he is seeking indemnification against the Debtors Estates on account of those claims; and

●

the bankruptcy court shall retain exclusive personal and subject matter jurisdiction to enforce the terms of the settlement agreement and to decide any claims or disputes that may arise or result from, or be connected with, the settlement agreement, or any breach or default thereunder.

Whitestone Uptown Tower, LLC was not party or subject to the settlement, and the litigation in its bankruptcy case was not resolved under the settlement.

We cannot predict or quantify the ultimate impact that events occurring during the bankruptcy process may have on our business, financial condition and results of operations, and there is no certainty as to our ability to continue as a going concern.

PILLARSTONE CAPITAL REIT 10-Q