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Great-West Investors LP v. Thomas H. Lee Partners, L.P., et al., C.A. No. 5508 – VCN (Jan. 14, 2011) (Noble, V.C.)

January 14, 2011

The Court granted in part and denied in part the defendants’ motion to dismiss the plaintiff’s claims for breaches of contract, fiduciary duties and the implied covenant of good faith and fair dealing, as well as the plaintiff’s claims for declaratory relief, specific performance and reformation for mutual mistake, unilateral mistake and fraud. At issue was a provision of a limited partnership agreement requiring periodic negotiation among the plaintiff and the defendants as to management fees and certain calculations relating thereto. Absent the parties’ periodic agreement as to the manager’s fees, the general partner was entitled to trigger a default escalation of the manager’s fees.

With respect to the declaratory relief sought by the plaintiff, the Court agreed that the plaintiff’s interpretation of the provision requiring good faith negotiation in calculating the management fee was a reasonable reading of such provision and therefore declined to dismiss the claim; however, the Court dismissed the plaintiff’s claim that the partnership agreement provided for a default 5% escalator (as opposed to a 105% default escalator as expressly set forth in the partnership agreement). Although the partnership agreement stated that the management fee, if the default escalator was triggered, “will increase … by an amount equal to the product of 1.05 multiplied by the Expense Assumption …”, the plaintiff argued that the dictionary definition of the term “by” is “to the extent or amount of”, or, alternatively, that reading the default escalator provision to impose a 105% escalator would produce an unconscionable and absurd result. The Court declined to read ambiguity into the plain meaning of the provision, and noted that parties are free to make bad deals and that the Court’s role is not to re-write a contact in such circumstance. The Court further noted that a contact is unconscionable “only if it is characterized by both ‘an absence of meaningful choice and contact terms unreasonably favorable to one of the parties.’” The plaintiff was a sophisticated party and free to walk away from this agreement had it been concerned with the terms of this deal.

The Court declined to dismiss the plaintiff’s breach of contact claims, finding that the plaintiff advanced reasonable interpretations of the provisions of the partnership agreement (requiring good faith negotiations and the provision of relevant information among the parties) which, if breached by the defendants, could entitle the plaintiff to damages and/or specific performance. Although the Court noted that it is difficult for a court of equity to order a party to negotiate a contact in good faith, the Court declined to dismiss the plaintiff’s claim for specific performance because it is not impossible for a party to prove entitlement to specific performance in the form of, for example, an order requiring another party to provide certain information which, in the absence thereof, would make good faith negotiations impossible.

The Court granted the defendants’ motion to dismiss the plaintiff’s breach of fiduciary duty claims because the plaintiff’s claims (that the defendants failed to negotiate calculations under the partnership agreement in good faith as required by the partnership agreement) arose “entirely out of the parties’ contractual obligations.” Similarly, the Court dismissed the plaintiff’s claim for breach of the implied covenant of good faith and fair dealing because the obligations and rights in dispute were expressly governed by the partnership agreement and the plaintiff failed to establish any contractual term for the Court to imply.

The Court denied the defendants’ motion to dismiss the plaintiff’s claims for reformation of the partnership agreement for mistake or fraud. If the partnership agreement provided for a 105% increase in management fees in the event that the parties could not agree on allocation amounts, then the plaintiff argued that the Court should reform the contract to provide for a 5% increase due to mistake or fraud.

A contract may be reformed in the event of fraud, mutual mistake or, in rare circumstances, “’unilateral mistake coupled with the other parties’ knowing silence'.” To survive a motion to dismiss a claim for reformation based on mutual mistake, a claim must allege “(i) that the parties reached a definite agreement before executing the final contract; (ii) that the contract failed to incorporate the terms of the agreement; (iii) that the parties’ mutually mistaken belief reflected the true parties’ true agreement; and (iv) the precise mistake the parties made.” Viewed in the light most favorable to the plaintiff, the Court decided that the plaintiff adequately alleged a mutual mistake claim based on the plaintiff’s claims that (i) counsel to the assignor informed the defendants’ outside counsel of the assignee and the plaintiff’s understanding that the partnership agreement provided for a 5% increase (and not an 105% increase), (ii) the defendants’ outside counsel agreed that the partnership agreement provided for a 5% increase and that the partnership agreement should be modified to reflect such understanding, and (iii) the defendants’ counsel later failed to retract the foregoing agreement even after informing the plaintiff that the defendants did not want to amend the partnership agreement upon the plaintiff’s admission as a substituted limited partner.

Based on the same allegations, the Court also declined to dismiss the plaintiff’s claim for reformation based on a unilateral mistake. The defendants argued that the plaintiff waived any claim for mistake by later entering into an amended and restated partnership agreement which contained the same management calculation. The Court disagreed, finding that the plaintiff had no reason to know of its mistake prior to executing the restated partnership agreement.

The Court also found that the plaintiff sufficiently set forth a claim for reformation based on fraud which required that a claimant allege “(i) a misrepresentation, which can take the form of a statement, omission, or active concealment of the trust; (ii) the defendant’s knowledge that the representation was false; (iii) intent to induce the plaintiff to act or refrain from acting; (iv) justified reliance on the misinformation; and (v) damage as a result of such reliance.” Although noting that the plaintiff’s claim for reformation based on fraud survived the motion to dismiss “only if barely,” the Court found that the plaintiff’s allegations, if true, adequately supported a claim for reformation due to fraud on the part of the defendants.

The full opinion is available here