CNL Income Funds Limited Partnerships Litigation

CNL Income Funds Limited Partnerships (n/k/a FF-TSY Holding Company II, LLC)

On August 9, 2004, a $1.63 Billion three-way merger was proposed among CNL Restaurant Properties, Inc. (“CNL Restaurants”), U.S. Restaurant Properties, Inc. (“USRP”) and CNL Income Fund, Ltd. I-XVIII (collectively, the “CNL Income Funds”) and was the subject of a final proxy statement that was filed with the SEC on January 3, 2005. USRP and CNLRP were publicly owned real estate investment trusts and the 18 CNL Income Funds were publicly owned limited partnerships, all of which were involved in the ownership and operation of restaurant properties in the United States. The Merger was consummated on February 25, 2005 and the surviving entity became known as Trustreet Properties, Inc. (“Trustreet”). The surviving entity is now known as FF-TSY Holding Company II, LLC (“FF-TSY”), a Delaware limited liability company and a subsidiary of General Electric Capital Corporation (a subsidiary of General Electric Corporation), which acquired Trustreet on February 26, 2007.

On August 2, 2007, Chimicles & Tikellis LLP filed a class action complaint in the United States District Court for the Middle District of Florida on behalf of a class of all the former Limited Partners of the CNL Income Funds, charging the General Partners of the CNL Income Funds James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation (collectively, “the General Partners”) with breaches of the fiduciary duties owed to the former Limited Partners of the 18 CNL Income Funds (“Limited Partners”) in connection with the Merger. On October 26, 2007, Plaintiffs filed an amended complaint which alleges that the General Partners:

1. failed to explore and pursue alternative transactions to the proposed self-dealing Merger that would maximize the Limited Partners’ return on their investments;
2. negotiated and participated in a Merger Agreement in which they had an inherent conflict of interest, which constituted wrongful self-dealing and was not only adverse to the interests of the Limited Partners, but beneficial to the other parties to the Merger;
3. skewed the relative values ascribed to each party to the Merger in favor of CNL Restaurants and USRP at the expense of the Limited Partners and permitted the ultimate transactions consti¬tuting the Merger to be negotiated in a manner calculated to shift Merger Consideration from the Limited Partners to CNL Restaurants;
4. permitted an inherently unfair Break-Up Fee Provision to be included in the Merger Agreement:
5. utilized a so-called fairness opinion by Wachovia that: (i) distorted and undervalued the Limited Partners’ Units; (ii) did not address the inequitable allocation of the Merger Consideration among the Limited Partners, USRP and CNL Restaurants; and (iii) did not derive a value of the CNL Income Funds as part of the Surviving Corporation.;
6. jointly prepared and disseminated a false and misleading Proxy which, among other things, misrepresented the fairness of the terms of the Merger, mischaracterized the nature of the Merger negotiations, failed to disclose material valuation data of the terms of the Merger , concealed the Merger’s transfer of value from the Limited Partners to CNL Restaurants and USRP and failed to inform the Limited Partners about the existence of the present lawsuit in any meaningful way prior to the end of the Proxy solicitation period
7. solicited each Limited Partner’s vote pursuant to the false and misleading Proxy; and
8. caused and allowed the Limited Partners to receive grossly inadequate Merger Consideration;

In addition, the Complaint alleges that Defendant FF-TSY, formerly known as Trustreet (formerly known as CNL Restaurants and USRP) aided and abetted the General Partners’ breaches of fiduciary duties owed to the Limited Partners and was unjustly enriched pursuant to the Merger. Alternatively, Plaintiffs assert that they have equitable standing to recover damages from the General Partners and FF-TSY, formerly known as Trustreet, formerly known as CNL Restaurants and USRP, on a quasi-direct or flow-through basis, whereby any recovery for claims concerning the Merger that otherwise could have been asserted by the CNL Income Funds in a derivative claim should be held in constructive trust for the benefit of the former Limited Partners of the CNL Income Funds, who are entitled to receive the proceeds of the Merger Consideration.

Defendants filed motions to dismiss Plaintiffs’ amended complaint in January 2008. The motions to dismiss are currently fully briefed and awaiting ruling from the judge.

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