Simon-Mills II, LLC, et al. v. Kan Am USA XVI Ltd. P’ship, et al., C.A. No. CV 8520-VCG (Del. Ch. Mar. 30, 2017) (Glasscock, V.C.)
In this post-trial opinion involving a contract dispute between the parties, the Court of Chancery denied the plaintiffs’ request to enforce its call right under certain contracts. Additionally, the Court dismissed defendants’ breach of contract counterclaim but granted defendants’ request for declaratory judgment.
Plaintiffs and counterclaim defendants (“Simon” or “Simon Entities”) are a series of Delaware limited liability companies doing business as retail shopping center developers. Defendants and counterclaim plaintiffs (“KanAm”) are closed-end funds, structured as Delaware limited partnerships. The litigation involves a complicated set of facts interlaced with several different contracts negotiated between several different contractual parties, including Simon and KanAm, over a period spanning decades. In a nutshell, the dispute stemmed from a series of Joint Venture Agreements (the “JV Agreements”) between Simon and KanAm pursuant to which the parties held interests in several joint ventures. The JV Agreements contained a call provision that permitted Simon to purchase KanAm’s interests in the joint ventures subject to KanAm’s discretion to elect to receive cash or, in the alternative, units of a specific partnership—non-party the Mills Partnership (the “Mills Units”)—as consideration. The Mills Units, however, became defunct after Simon and an unrelated third-party acquired and eventually dissolved the Mills Partnership. Subsequently, Simon sent contractual notices of the exercising of its call right to purchase KanAm’s interest using units of Simon Entities (“Simon Units”). However, KanAm elected to receive Mills Units as consideration (as opposed to receiving cash) and declined to close. Simon then filed suit to enforce its call right under the contracts.
Simon’s amended complaint asserted, among other claims, a breach of contract claim alleging that by failing to close the transaction after Simon gave its notices of exercise, KanAm breached the JV Agreements. In addition, Simon claimed that by refusing to receive Simon Units in place of Mills Units, KanAm breached the implied covenant of good faith and fair dealing (“implied covenant”). Among other relief, Simon sought damages and specific performance of the JV Agreements. KanAm responded with two counterclaims. First, KanAm asserted that Simon breached the JV Agreements because Simon triggered the call knowing that the default consideration—Mills Units—was nonexistent, and also because Simon failed to provide valid call notices. Second, KanAm sought declaratory judgment that the Mills Units (as opposed to Simon Units) was the required consideration under the JV Agreements. KanAm sought damages purportedly related to Simon’s breach. Both parties sought fees in connection with the litigation.
The Court denied Simon’s request to enforce its call right, finding that the call rights in the JV Agreements require the tendering units to be Mills Units. In arriving at this conclusion, the dispositive inquiry, as the Court put it, was “whether there was ever a meeting of the minds between the parties about whether Simon Units were a contractual substitute for Mills Units in the present circumstances.” Finding that it could not determine the parties’ intent regarding this issue solely from the unambiguous language of the JV Agreements, the Court resorted to relevant extrinsic evidence—mostly the parties’ past agreements and their course of conduct and dealings during their long contractual relationships—to ascertain the parties’ intent. In that regard, the Court held that the extrinsic evidence showed that Simon “failed to establish by a preponderance of the evidence that the parties mutually agreed to the substitution of Simon Units for Mills Units.” Of particular importance to the Court was one JV Agreement—the Orange City Mills Agreement—in which the parties defined “Mills” to include units of Mills Partnership’s successor (i.e., Simon). The Court noted that given that the Orange City Mills Agreement “provided for Mills’ successor units to function as tender, the lack of such a provision in all other joint ventures demonstrates the opposite.”
Next, the Court addressed Simon’s contention that its willingness to tender Simon Units was not a material breach of the JV Agreements and thus did not excuse KanAm’s performance. The Court found this “non-material breach” argument to be “inapposite.” Treating the call as an option—“acceptance of which must be strictly construed”—the Court found that by offering non-compliant Simon Units, Simon failed to comply with the conditions of the call and therefore could not enforce the contract. Furthermore, the Court noted that KanAm had the contractual right to void the non-compliant notices irrespective of whether Simon’s breach was non-material.
The Court went on to address Simon’s request for specific performance. In that respect, the Court held that Simon did not satisfy its burden to have the Court force KanAm to sell its interests because by tendering non-compliant currency, Simon was not capable of performing under the terms of the JV Agreements. Furthermore, the Court noted, “in light of its knowledge of, but failure to address, the issue of consideration … Simon would find difficult its burden to show by clear and convincing evidence that equity would favor specific performance.”
The Court then turned to Simon’s claim that KanAm breached the implied covenant. It found that the implied covenant was inapplicable because it only applies to fill in the blanks for terms that the parties did not anticipate or consider in order to prevent frustration of the parties’ intent. Here, the Court noted, the parties were well aware of the consideration issue but decided to “engage in a strategic game of musical chairs, dancing around the contractual silence” instead of addressing it.
Separately, the Court found that Simon failed to show that KanAm knowingly and unequivocally waived its right to insist on receiving Mills Units. In addition, the Court noted, the record did not support Simon’s assertion that KanAm should be quasi-estopped from demanding Mills Units because KanAm’s conduct did not rise to the level of unconscionability.
Finally, the Court addressed KanAm’s counterclaims. With respect to KanAm’s breach of contract claim, the Court found that Simon had the right to call and Simon’s exercise of that right with non-compliant Simon units only triggered KanAm’s right to void the call and did not constitute a breach. Therefore, the Court denied KanAm’s request for damages. The Court, however, granted KanAm’s request for declaratory relief finding that the JV Agreements required Simon to tender Mills Units and that Simon could not enforce its call right by tendering Simon Units. Lastly, on the issue of fees, the Court noted that it would address that issue if the parties could not agree on a fee award after resolving the pending claims between them.