Simon-Mills II, LLC v. Kan Am USA XVI Limited Partnership

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
SIMON-MILLS II, LLC, ARUNDEL )
MILLS MEZZANINE GP, L.L.C., )
GRAPEVINE MILLS OPERATING )
COMPANY, L.L.C., CONCORD )
MILLS MALL GP, L.L.C., KATY )
MILLS MALL GP, L.L.C., )
COLORADO RETAIL )
DEVELOPMENT COMPANY, L.L.C., )
and DENVER WEST DEVELOPMENT )
COMPANY, LLC, )
)
Plaintiffs / Counterclaim )
Defendants, )
)
v. ) C.A. No. 8520-VCG
)
KAN AM USA XVI LIMITED )
PARTNERSHIP, KAN AM USA XII )
LIMITED PARTNERSHIP, KAN AM )
USA XIV LIMITED PARTNERSHIP, )
KAN AM USA XIX LIMITED )
PARTNERSHIP, KAN AM USA XVIII )
LIMITED PARTNERSHIP, KAN AM )
USA TIER II LIMITED )
PARTNERSHIP, KAN AM USA XV )
LIMITED PARTNERSHIP, KAN AM )
USA XX LIMITED PARTNERSHIP, )
and KAN AM USA XVII LIMITED )
PARTNERSHIP, )
)
Defendants / Counterclaim )
Plaintiffs. )
MEMORANDUM OPINION
Date Submitted: December 16, 2016
Date Decided: March 30, 2017
Donald J. Wolfe, Jr., Matthew E. Fischer, Timothy R. Dudderar, Berton W. Ashman,
Jr., Matthew F. Davis, J. Matthew Belger, Jacqueline A. Rogers, Elizabeth H. Mellon,
of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware, Attorneys for
Plaintiffs.
Jon E. Abramczyk, Matthew R. Clark, of MORRIS, NICHOLS, ARSHT &
TUNNELL LLP, Wilmington, Delaware; OF COUNSEL: L. Joseph Loveland,
Letitia A. McDonald, Emily Shoemaker Newton, J. Andrew Pratt, of KING &
SPALDING LLP, Atlanta, Georgia, Attorneys for Defendants.
GLASSCOCK, Vice Chancellor
This post-trial Memorandum Opinion involves interpretation of a series of
contracts. The case presents a cautionary tale of strategic silence, or more charitably
incomplete contractual terms, in structuring and negotiating complex economic
relationships among sophisticated investors. This litigation arises from a series of
Joint Venture Agreements (the “JV Agreements”), the parties to which include the
Plaintiffs (collectively “Simon” or the “Simon Entities”) and the Defendants
(collectively “KanAm” or the “KanAm Entities”). The JV Agreements permit
Simon to purchase KanAm’s interests, at a time and for a price set out in the
Agreements. The parties dispute the consideration that must be tendered in order
for the Plaintiffs to exercise this call provision. The contract requires that
consideration be paid in units of a specific partnership, Mills Partnership, but Mills
Partnership, and its units (“Mills Units”), are defunct. The issue is whether the
Plaintiffs’ inability to tender Mills Units gives the Defendants an effective veto
power over the contractual call provision. That is, can the Defendants insist on
receiving non-existent units under the contractual language, and thus frustrate
exercise of the call? Or, in the alternative, can the Plaintiffs pursuant to the contracts
and Delaware law effectively tender units similar to Mills Units, and thereby compel
the Defendants to sell under terms to which it did not agree?
The parties could have, but failed to, address this situation in the contractual
language. My task, now, is to apply the contracts the parties did agree to, consistent
1
with their intent as expressed in those contracts. The difficulty with this task is
exacerbated in that the obligations seeking to be enforced under the JV Agreements
arise out of several different contracts, negotiated at various times going back to the
1990’s, with several different contractual parties involved.
At first blush, this situation seems to call for an application of the implied
covenant of good faith and fair dealing, which is inherent in every contact. The
implied covenant is inapplicable here, however. Instead, it is my view, developed
through the trial record, that the parties engaged in a strategic game of musical
chairs, dancing around the contractual silence in the hope that the music would stop
at a period of time advantageous to their own purposes. The music has stopped.
I examined this matter on cross motions for summary judgment, and reached
the conclusion in Simon I1 that a full record was necessary to answer the questions
presented here. The contractual language is clear; under the conditions here, the
Plaintiffs had the right to call the Defendants’ interest in the joint ventures, but unless
the Defendants chose to accept cash, the Plaintiffs could only complete the
transactions by tendering contractually-compliant consideration, which here (with a
single exception) meant Mills Units. Those units were unavailable to the Plaintiffs
from the time it acquired the joint ventures. Thus, although the contract was not
1
Simon-Mills II, LLC v. Kan Am USA XVI Ltd. P'ship, 2014 WL 4840443 (Del. Ch. Sept. 30,
2014).
2
ambiguous, I required a record to examine whether the parties had a meeting of the
minds that some other consideration could be tendered, or, conversely, as to whether
the call right would be rendered nugatory. The parties have created such a plenary
record.
The Plaintiffs seek relief on several grounds. First, they argue that a
contractual agreement was reached, as demonstrated by the record, that units of the
Plaintiffs’ entity (“Simon Units”) replaced Mills Units as tender. I read the record
otherwise. The record makes it abundantly clear that both the Plaintiffs and the
Defendants were aware that, once the Plaintiffs absorbed and dissolved the Mills
Partnership, contractually-compliant Mills Units would become permanently
unavailable. Rather than solve this issue by negotiation, however, both sides, for
what must have been strategic reasons, elected to take their chances with the
contracts as written rather than solve the obvious problem through negotiation.
Having made that choice, the Plaintiffs are stuck with the contractual language, as it
exists.
Next, the Plaintiffs argue that Simon Units are similar to Mills Units, and thus,
in tendering Simon Units, they have not “materially breached” the contracts. But
such an analysis itself is inapt. Under the contracts, the notice of exercise of the call
3
right is conditioned on an ability to tender the appropriate consideration.2 Since the
Plaintiffs are unable to do so, their notices are voidable under the contracts at issue,
and KanAm has no obligation to perform. In other words, failure to tender Mills
Units is not a “breach,” it simply renders the call ineffective. In any event, while the
Simon Units have many characteristics identical to compliant Mills Units, they have
differences as well. The extent of these differences, and the consequences thereof
to the Defendants, should have been the subject of the negotiation that the parties
eschewed.
Finally, as already briefly discussed, the Plaintiffs ask me to supply a term to
the contract—substituting Simon Units for Mills Units—under the implied covenant
of good faith and fair dealing. But the implied covenant exists to supply terms that
were not anticipated and not considered by the parties, to avoid frustration of the
intent of those parties. As I have stated, the parties were well aware of the issue, but
declined to address it; the implied covenant is therefore inapplicable.
For all these reasons, the Plaintiffs’ request to enforce its call right is denied.
The Defendants, via counterclaim, seek damages. They note that the
Plaintiffs, through attempting these calls, triggered contractual duties on the part of
2
See, e.g., JX0152 § 11.6(e)(iv) (providing that “if at the time of Closing, either party fails to
perform as required, then and in such event the non-breaching party shall have the right to void
the Buy/Sell Notice attributable thereto or to pursue any rights at law or in equity (including
without limitation, instituting a suit for specific performance)”) (emphasis added).
4
the Defendants, which were expensive to comply with. They seek to recover these
expenses, and allege that the unsuccessful call notices breached the parties’
agreements. In giving contractual notice of the exercise of the call, the Plaintiffs did
not breach the Agreements. The Plaintiffs had the right to call, the Defendants had
the right to elect cash or Mills Units. The Defendants elected units; the Plaintiffs are
unable to tender, but this does not itself amount to a breach.
I have found that the call rights in the JV Agreements require tender of Mills
Units. One JV Agreement in particular tends to prove the rule. In the Orange City
Mills Agreement (but no other JV Agreement), the parties defined “Mills” in such a
way as to include its successor, Simon, and Simon Units are eligible to be
contractually-compliant consideration. With respect to Orange City Mills, the
Plaintiffs may have effectively called the Defendants’ interest. The Plaintiffs argue
that this fact shows the parties must have intended their units to be acceptable tender
in the other agreements as well; to me, in light of the fact that the parties to the
Orange City Mills venture provided for Mills’ successor units to function as tender,
the lack of such a provision in all other joint ventures demonstrates the opposite.
I note that construing the contracts as written does not work a forfeiture of a
primary interest or destroy value here. The Plaintiffs cannot force the Defendants to
sell their interests for appraised value, but they may negotiate for a sale, or proceed
as they have as joint venturers.
5
My reasoning follows.
I. FACTUAL BACKGROUND
The following are the facts as I find them following a seven-day trial spanning
over nine hundred exhibits. Below I first describe the necessary background
information underlying this dispute, including importantly the evolution of the
parties’ relationship, before turning to my findings regarding what the extrinsic
evidence at trial showed.
A. The Parties and Relevant Non-parties3
The Plaintiffs (and Counterclaim Defendants), the Simon Entities, are a series
of Delaware limited liability companies focused on retail shopping developments.
They are Simon-Mills II, LLC, Arundel Mills Mezzanine GP, L.L.C., Grapevine
Mills Operating Company, L.L.C., Concord Mills Mall GP, L.L.C., Katy Mills Mall
GP, L.L.C., Colorado Retail Development Company, L.L.C., and Denver West
Development Company, LLC. Each Plaintiff is wholly owned, either directly or
indirectly, by Simon Property Group, L.P. (the “Simon Partnership”).4 The Simon
Partnership “owns, develops, and manages retail real estate properties.”5
The sole general partner of the Simon Partnership is a real estate investment
trust (“REIT”), structured as an umbrella partnership real estate investment trust
3
Unless the context requires a more specific designation, the Plaintiffs will be referred to as Simon,
and the Defendants as KanAm.
4
Pretrial Stip. 2, 6 (May 4, 2016).
5
Id. at 6.
6
(“UPREIT”), the Simon Property Group, Inc. (“Simon Corp”).6 In addition to being
the sole general partner of the Simon Partnership, all of Simon Corp’s “assets are
owned, directly or indirectly, by its operating partnership, Simon Partnership.” 7
Simon Corp, however, owns a majority interest in Simon Partnership.8 Common
stock of Simon Corp trades on the New York Stock Exchange (“NYSE”).9
The Defendants (and Counterclaim Plaintiffs), the KanAm Entities, are a
series of nine “closed-end funds, structured as Delaware limited partnerships, with
German investors as limited partners.”10 They are, Kan Am USA XVI Limited
Partnership, Kan Am USA XII Limited Partnership, Kan Am USA XIV Limited
Partnership, Kan Am USA XIX Limited Partnership, Kan Am USA XVIII Limited
Partnership, Kan Am USA Tier II Limited Partnership, Kan Am USA XV Limited
Partnership, Kan Am USA XX Limited Partnership, and Kan Am USA XVII
Limited Partnership.11 The Defendants are an investment vehicle for German
investors to deploy capital in American-based retail-store development projects.12
The KanAm Entities’ investments in America have been managed by James
Braithwaite and Kent Hammond since the 1980’s.13
6
Id. at 7.
7
Id.
8
Id.
9
Id.
10
Id.
11
Id. at 2.
12
See Trial Tr. 845:6–846:8 (Braithwaite).
13
See id. at 649:16–650:12 (Braithwaite); id. at 938:10–939:21 (Hammond).
7
The parties have stipulated that Simon and KanAm hold interests in the
following projects at issue here: Orange City Mills Mezzanine II Limited Partnership
(“Orange City Mills”), Arundel Mills Mezzanine Limited Partnership (“Arundel
Mills”), Grapevine Mills Limited Partnership (“Grapevine Mills”), Concord Mills
Mall Limited Partnership (“Concord Mills”), Katy Mills Mall Limited Partnership
(“Katy Mills”), Mills-Kan Am Colorado Limited Partnership (“Colorado Mills”),
and Mills-Kan Am Denver West, L.P. (“Denver West”) (collectively the “JV
Limited Partnerships”).14 All of the JV Limited Partnerships are “a limited
partnership organized under the laws of the state of Delaware. Each of the JV
Limited Partnerships is governed by a limited partnership agreement” (the “JV
Agreements”).15
Non-party The Mills Limited Partnership (the “Mills Partnership”)16 and the
Mills Corporation (“Mills Corp” and together with “Mills Partnership,” “Mills”)
were also real estate investment vehicles.17 Mills Corp was a REIT “based in Chevy
Chase, Maryland, which developed, owned, and managed retail real estate
properties.”18 Mills Corp, like Simon Corp, was structured as an UPREIT. 19 Mills
14
Pretrial Stip. 9.
15
Id.
16
Sometimes referred to in the original text of documents as “TMLP.”
17
Unless context requires a more specific designation Mills Partnership and Mills Corp will simply
be referred to as “Mills.”
18
Pretrial Stip. 8.
19
Id.
8
Partnership served as the operating partnership and “directly or indirectly owned all
of Mills” Corp’s assets.20 Mills Corp served as the general partner to, and the
majority owner of Mills Partnership.21 Mills Corp’s “stock formerly traded on the
NYSE.”22 As discussed below, Mills was acquired and ultimately dissolved by a
joint venture of Simon and an unrelated third-party in 2007.
B. The Evolution of the Parties’ Relationship
1. Mills Corp’s IPO
In the mid-1980’s KanAm together with the Western Development
Corporation (“Western”) started developing four “Mills” complexes (not at issue
here) which were envisioned and marketed as a new shopping experience.23 This
shopping “experience” has been referred to as the “Mills Concept” which consisted
of “race track” style retail spaces where pedestrians would come and shop “like
walking down a street.”24 The Mills Concept shopping experience was styled to
include a variety of price points for shoppers and a “larger entertainment component
than you would typically find in a mall.”25 “Between 1983 and 1991, certain Kan
20
Id.
21
Id.
22
Id.
23
See Trial Tr. 839:7–839:22 (Braithwaite); JX0004 at 5, 8, 13 (advertising certain “Mills” as “The
Next Generation of Retailing”).
24
See Trial Tr. 842:20–843:20 (Braithwaite); id. at 844:1–844:10 (Braithwaite).
25
See id. at 467:18–468:17 (Sokolov).
9
Am limited partnerships provided [Western] with more than $210 million in equity
to finance projects, including the first four ‘Mills’ shopping centers. . . .”26
The four “Mills Concept” properties that KanAm and Western developed
were contributed to the Mills Partnership at the time of Mills Corp’s 1994 IPO. 27
KanAm held approximately 41% of the outstanding partnership units of the Mills
Partnership at the time of the Mills Corp IPO.28 Mills Corp held a 51.3% interest in
the Mills Partnership at the time of the IPO.29 Additionally, three principals of
KanAm served as directors of Mills Corp from its inception through its financial
problems in the mid-2000’s, and ultimate dissolution: James Braithwaite, Franz von
Perfall, and Dietrich von Boetticher.30 Following the 1994 IPO, the Mills Corp
Board and its shareholders approved a proposal in early 1995 that set out a
framework whereby KanAm could contribute equity to certain projects going
forward as joint ventures with Mills Corp (the “Shareholder Resolution”).31 Mills
Corp Chairman and CEO, Herbert Miller, indicated that KanAm “was a likely party
26
Pretrial Stip. 7. The four original “Mills” shopping centers, none of which are at issue in this
litigation are Potomac Mills, Franklin Mills, Sawgrass Mills, and Gurnee Mills. See id.
27
Trial Tr. 839:19–840:14 (Braithwaite); JX0004 at 8–9. See Pretrial Stip. 7–8 (“In 1994, Western
Development and certain Kan Am limited partnerships jointly contributed the four Mills centers
and other projects to The Mills Limited Partnership . . . in conjunction with the creation and
formation of the Mills Corporation . . . , which went public in an IPO.”).
28
JX0004 at 21.
29
Id.
30
Trial Tr. 854:6–16 (Braithwaite).
31
See JX0011 at 10–11; Pretrial Stip. 9.
10
to supply some of the required capital” due to the then “17-year relationship”
between Mills Corp and its predecessors, and KanAm.32
2. The Early JV Agreements
The February 16, 1995 Shareholder Resolution of Mills Corp, discussed
above, provided the “general terms” governing the future Joint Ventures (“JVs”)
between Mills affiliates and KanAm.33 Among various other provisions,34 the
“general terms” provided certain exit mechanisms including that each partner would
have “a right of first refusal to purchase the other’s interest.”35 Importantly, the
solicitation for the Shareholder Resolution provided the consideration for the put and
call rights would include units of the Mills Partnership and stated that:
either partner will have the right to require the purchase by [Mills
Partnership] of [KanAm’s] interest in the Partnership after the end of
the fifth anniversary of the substantial completion of the Project . . . at
a price to be determined by the amount [KanAm] would receive if the
Project were sold at its appraised value. . . . The purchase price for
[KanAm’s] interest may be paid for in any combination of cash or
[Mills Units] as agreed to by the parties.36
The solicitation indicated that KanAm would “have significant consent rights . . .
which could, in certain cases, prevent [the Mills Partnership] from selling a project
when it wished or operating a project exactly as it desired . . . .”37 Mills Corp
32
See JX0011 at 1–2.
33
Pretrial Stip. 9.
34
Not discussed in detail here as they are less relevant to this litigation.
35
JX0011 at 12.
36
Id. (emphasis added).
37
Id. at 13.
11
explained that the consents were acceptable because they were not greater than what
similar investors would require, that the parties’ interests were “generally” aligned,
and that if the consent rights became a problem, KanAm could be bought out for
“appraised value once the project is mature.”38
The consideration required for the put/call of KanAm’s interest was to “be
paid for in any combination of cash or [Mills Units] as agreed to by the parties.”39
Mills Corp was structured as an UPREIT, and the limited partnership units of the
operating partnership, Mills Partnership, were redeemable and could be converted
into publicly traded stock of Mills Corp.40 This consideration structure had benefits
in addition to liquidity; it would permit KanAm to secure non-recognition tax
treatment pursuant to Internal Revenue Code Section 721.41
In September 1995, KanAm and Mills signed a JV Agreement for Ontario
Mills (not at issue here).42 Prior to execution of that JV Agreement, Simon and Mills
executed an agreement on August 16, 1995, providing the “principal terms and
conditions” for “proposed joint venture” arrangements regarding certain future
projects.43 This marked the beginning of Simon’s involvement in Mills projects.
KanAm and Mills added Simon as a partner to the Ontario Mills JV in December
38
Id.
39
Id. at 12 (emphasis added).
40
See Trial Tr. 15:8–17:12 (Simon).
41
See, e.g., id. at 941:3–9 (Hammond).
42
See JX0017.
43
See JX0014 at 1; Pretrial Stip. 9.
12
1995 following the execution of the original agreement between Mills and KanAm.44
This was the first JV including Simon, Mills, and KanAm.45
The September 1995 Ontario Mills agreement between Mills and KanAm
provided a buy/sell provision consistent with the February 1995 Mills’ Shareholder
Resolution. Section 11.3 of the Ontario Mills JV Agreement, titled “Buy/Sell
Arrangements of KanAm Partnership Interests” provided that after the project has
been open for five years,46 Mills or KanAm could trigger the buy/sell provisions.47
If Mills exercised the call, KanAm “shall be paid in full in units of limited
partnership in [the Mills Partnership] unless KanAm elects to receive cash.”48 If
KanAm exercised its put the consideration was to be paid in cash, unless Mills
elected to pay in Mills Units.49 Further, the original agreement provided that if
KanAm were to receive Mills Units, those units “shall have the same rights
(including redemption, conversion, registration and anti-dilution protection) as
attached to Units issued in connection with the formation transactions of [the Mills
Partnership].”50 Among other things, this provides that the units would be liquid and
convey tax benefits.
44
See JX0025.
45
See Trial Tr. 163:23–164:3 (Barkley).
46
JX0017 § 11.3(a).
47
Id. at §§ 11.3(b), 11.3(c).
48
Id. at § 11.3(d) (emphasis added).
49
Id.
50
Id. at § 11.3(f).
13
The Ontario Mills agreement was amended on December 29, 1995, to add
Simon as a partner.51 Upon Simon joining Ontario Mills, the ownership break down
was as follows: 50% by Mills, 25% by Simon, and 25% by KanAm. 52 The
amendment changed the buy/sell provision’s consideration clause to provide that if
Mills exercised the call, “unless KanAm[] elects to receive cash, the Buy/Sell Price
shall be paid in full as follow: two-thirds (2/3) in units of limited partnership in [the
Mills Partnership] and one-third (1/3) in units of limited partnership in Simon.”53
The amendment added a provision to protect KanAm regarding Simon Units, similar
to that regarding Mills Units in the original agreement. Any Simon Units tendered
to KanAm were required to have “the same rights” as units issued in connection with
the formation of Simon.54 Additionally, the provision governing the buy/sell
requirements was amended to add that any such exchange of units was “intended to
be a tax-free transaction” under Section 721.55
From the late 1990’s to early 2000’s Simon reviewed each investment
opportunity and elected not to participate in the development of three of the other
projects at issue in this litigation: Katy Mills, Colorado Mills, and Orange City
Mills.56 That is, Mills and certain KanAm parties formed Orange City Mills in 1996,
51
See JX0025.
52
See Trial Tr. 374:3–19 (Foxworthy).
53
JX0025 § 11.3(d).
54
Id. at § 11.3(f).
55
Id. at § 11.3(d).
56
See JX0041; JX0050; JX0089.
14
Katy Mills in 1998, and Colorado Mills in 2001.57 Simon eschewed initial
investment; as discussed below, Simon’s interests in these three projects arose later,
in 2007, as a result of its acquisition of Mills. The buy/sell provisions of these
projects—Orange City Mills, Katy Mills, and Colorado Mills—never referenced
Simon Units.
Simon did, however, together with Mills and KanAm, participate in three
other JVs at issue here from their inception: Grapevine Mills, Concord Mills, and
Arundel Mills.58 Each of these projects consisted of two separate agreements; first,
an LLC agreement between the Mills Partnership and the Simon Partnership
governing their relationship (a “Simon-Mills LLC”),59 and second, a JV Agreement
where a Simon-Mills LLC was the managing general partner, and the applicable
KanAm party was a general and limited partner, while the Mills Partnership and the
Simon Partnership were also limited partners.60
Generally, the JV Agreements in Concord Mills, Grapevine Mills, and
Arundel Mills tracked the amended JV Agreement for Ontario Mills providing
KanAm call-right consideration in both Simon and Mills Units.61 There were,
however, certain differences regarding the buy/sell provisions. Specifically, the
57
Pretrial Stip. 10.
58
See JX0027; JX0058; JX0071.
59
See, e.g., JX0082; JX0063.
60
See JX0027; JX0058; JX0071.
61
See, e.g., Trial Tr. 680:5–11 (Braithwaite); id. at 942:24–943:7 (Hammond).
15
three later agreements provided a ten-year lock-out period instead of the five-year
period provided for in Ontario Mills.62 Additionally, the buy/sell consideration
provisions were somewhat different from that in Ontario Mills. First, rather than the
specified two-thirds, one-third unit consideration set out in the Ontario Mills JV, the
new agreements provided that unit consideration would be paid “ratably in
proportion to the ownership interests” based on Simon and the Mills Partnership’s
respective ownership interest.63 Consideration paid in Units remained the default in
the event of a call, but KanAm continued to have the option to elect to be paid in
cash.64 Additionally, KanAm contracted for the right to receive consideration
partially in cash, and partially in units.65 Thus, implicitly, at the time these deals
were struck, in case Mills was bought out by Simon, and then Simon called the
KanAm interest, KanAm had bargained to accept, in that case, only Simon Units as
non-cash consideration.
If the buy/sell consideration for KanAm’s interest in Concord, Arundel or
Grapevine Mills was to be paid in units, those Simon Units and Mills Units were
required to meet specific requirements.66 As with the agreement governing Ontario
62
JX0027 § 11.3(a); JX0058 § 11.3(a); JX0074 § 11.3(a).
63
JX0027 § 11.3(d); JX0058 § 11.3(d); JX0074 § 11.3(d). I note there is evidence in the record
that the parties had at one time planned to amend the Ontario Mills JV to change the fixed
percentage provision to a proportional buy/sell consideration like those in Concord, Grapevine and
Arundel Mills. See JX0024 at 3.
64
See JX0027 § 11.3(d); JX0058 § 11.3(d); JX0074 § 11.3(d).
65
See id.
66
JX0027 § 11.3(f); JX0058 § 11.3(f); JX0074 § 11.3(f).
16
Mills, Mills Units were required to have “substantially the same rights (including
redemption, conversion, registration and anti-dilution protection) as” units issued by
the Mills Partnership at its initial formation.67 Simon Units had to meet a similar
requirement but had the additional condition that “[i]f there exists more than one
class of Simon Units, then any Simon Units received by [KanAm] pursuant to this
Section 11.3 shall have the most favorable rights (including redemption, conversion,
registration and anti-dilution protection) as are attached, as of the date of this
Agreement, to the various classes of Simon Units issued to other limited partners of
Simon . . . .”68 I note that the JV Agreements were later amended to allow KanAm
to accelerate its put rights, that is, exercise them prior to the ten-year lockout, in the
event of a change-in-control transaction involving Mills.69 A similar change for the
call right was made in the Grapevine Mills agreement, but not in the agreements
covering the other JVs.70
Simon points to prospectuses KanAm disseminated during this time period to
German investors from whom KanAm sought to raise capital for each of these JVs.71
Those prospectuses do not disclose any particular distinction between Mills Units
67
See, e.g., JX0027 § 11.3(f).
68
See, e.g., id. (emphasis added).
69
Compare JX0071 §§ 1.13, 11.3(a) with JX0058 § 11.3(a). See Trial Tr. 873:6–874:8
(Braithwaite).
70
See JX0109.
71
See Simon’s Post-Trial Opening Br. 17 (citing JX0031; JX0037; JX0060; JX0070).
17
and Simon Units, such as tax risks.72 Additionally, two prospectuses in the record
make no mention of the currency to be used in the buy/sell transactions,73 and the
two that do mention the buy/sell currency do not mention Simon Units.74
3. The 2002 “Shotgun” Exit
By 2002, disputes arose between Simon and Mills regarding the management
of their JVs.75 The applicable LLC Agreements that governed Mills’ and Simon’s
relationship in Ontario, Grapevine, Concord, and Arundel Mills contained a
“shotgun” buy/sell mechanism which could be invoked to cure deadlocks.76
Pursuant to the shotgun buy/sell provision, the party that triggered the shotgun was
required to make an offer to the counterparty—the counterparty then either had a
choice to buy at that price or sell at that price.77 Simon triggered the shotgun buy/sell
provision, and Mills ultimately elected to purchase Simon’s interests.78
However, before Mills bought Simon’s interest, Braithwaite of KanAm wrote
a letter to Simon’s CEO, David Simon, on March 4, 2002 inquiring about the Ontario
Mills buy/sell provision in Section 11.3 of the JV Agreement.79 Specifically,
Braithwaite indicated KanAm “would be interested in discussing with [Simon] how
72
See JX0031; JX0037; JX0060; JX0070. See also Trial Tr. 726:22–727:13 (Braithwaite).
73
See JX0031; JX0037.
74
See JX0060 at 32; JX0070 at 44.
75
Trial Tr. 386:1–387:11 (Foxworthy).
76
See id.
77
See id. at 387:12–388:11 (Foxworthy).
78
See id. at 17:20–18:22 (Simon).
79
See JX0099 at 2.
18
Section 11.3 of the Ontario Mills Agreement might be implemented if there has been
a buy/sell between Mills and Simon of your interests in Ontario Mills, L.L.C.”80
David Simon responded via letter on March 5, 2002, stating that following the
removal of either Simon or Mills, KanAm’s rights under the Ontario Mills
agreement would be to receive the appropriate units “of whichever of Mills or Simon
[remained] your partner.”81 There was no direct objection by Braithwaite or KanAm
to Simon’s explanation of what Section 11.3 would mean following the shotgun
buy/sell.82 Braithwaite testified that even though he disagreed with Mr. Simon’s
position in the letter at the time, he did not respond.83 According to Braithwaite,
there was “no point” in taking issue with Simon’s statement because he ‘knew’ that
Simon would be bought out.84 The record tends to support Braithwaite’s position
that the response was unnecessary, as the general consensus at the time was that
Mills would buy out Simon.85
80
Id.
81
JX0100 at 1.
82
See Trial Tr. 23:20–24:13 (Simon).
83
See id. at 732:22–737:13 (Braithwaite).
84
See id.
85
See, e.g., id. at 389:4–23 (Foxworthy) (testifying that while Simon was willing to buy, and that
it was possible they might have to be the buyer, “[w]e expected—I would have to say we expected
to be the seller because for them to have lost the four assets that we were dealing with would have
been a terrible infringement of their franchise”); JX0101 (indicating in a March 7, 2002, internal
Mills Memorandum, which Braithwaite received, that Mills would continue negotiating in
pursuing the acquisition and that the “benefits of such a transaction are numerous”).
19
On April 29, 2002, affiliates of Simon executed an agreement to sell their
interests in Ontario, Grapevine, Concord, and Arundel Mills to affiliates of Mills.86
Shortly thereafter in 2002, certain KanAm entities acquired part of Simon’s former
interests in Ontario, Grapevine, Concord, and Arundel Mills from Mills following
its successful purchase of Simon’s interests.87
Following Simon’s exit from the four JVs, Mills and KanAm amended the
governing documents, to remove references to Simon.88 On May 31, 2002, the
operative Ontario Mills JV agreement, a project not at issue here, was amended to
delete references to Simon.89 Also on May 31, 2002, the Grapevine Mills JV
Agreement was amended to delete references to Simon.90 On November 22, 2002,
KanAm and Mills entered a new partnership agreement for Concord Mills.91 In the
resulting agreement for Concord Mills, Section 11.3’s buy/sell provision only
references Mills Units, and provides that they are the default consideration if Mills
exercised its call right, unless KanAm elected to receive cash or a mix of cash and
units.92 Additionally, the Arundel Mills JV underwent similar changes. On May 31,
2002, the JV Agreement was amended to remove references to Simon.93 A new
86
JX0104; Pretrial Stip. 10.
87
Pretrial Stip. 10. See JX0111.
88
See, e.g., JX0111 § 9(f).
89
See JX0108 §§ 2(e), 10.
90
See JX0109 §§ 2(e), 13.
91
See JX0120.
92
Compare JX0120 §§ 11.3(d), 11.3(f) with JX0058 §§ 11.3(d), 11.3(f).
93
See JX0106 §§ 2(e), 15.
20
partnership document was executed for Arundel Mills on August 4, 2004, and like
the new partnership agreement in Concord Mills, provided that Mills Units were the
default buy/sell consideration, and contained no reference to Simon Units.94 Thus,
either through deletion of references to Simon, or via new partnership agreements
which do not provide for Simon Units, the default consideration for the buy/sell
provisions under each JV was modified to provide that consideration be paid in Mills
Units meeting certain specifications. While Simon admits Mills and KanAm acted
to delete references to it from the JV Agreements from which it exited, Simon argues
the amendments were “ministerial.”95 As described below, Simon eschewed such
amendments, ministerial or otherwise, when it acquired Mills’ interests a few years
later.
From 2003 to 2004 certain KanAm entities “distributed approximately 11
million Mills Units to German investors in the respective KanAm limited
partnerships.”96 These distributions presented certain logistical challenges, such as
the language barrier between German-speaking investors and Mills as well as
redemption and tax compliance challenges.97 In an attempt to streamline the
administrative issues,98 KanAm and the Mills Partnership executed a services
94
See JX0152 §§ 11.6(d), 11.6(f).
95
Simon’s Post-Trial Opening Br. 20.
96
Pretrial Stip. 10.
97
See, e.g., Trial Tr. 1004:22–1007:15 (Hammond).
98
See id.
21
agreement on December 1, 2004.99 Under the services agreement KanAm provided
certain administrative functions such as managing cash distributions, redemptions,
and tax withholdings on behalf of investors, in exchange for a nominal fee.100
Additionally, KanAm orchestrated a multi-step process that effectively allowed
German investors to redeem Mills Units for Mills stock, a taxable event, and
streamlined a rather winding process in order to meet all the regulatory and tax
burdens.101 The redemption process alone required that over nineteen steps be taken
on behalf of the investor.102 KanAm did not have a similar services agreement with
Simon during Simon’s participation in the JVs.
4. Mills Faces Trouble
While KanAm originally held 41.1% ownership in the Mills Partnership at the
time of the 1994 IPO of Mills Corp, by March 2004 KanAm’s ownership had
dropped to 2.17%.103 In February 2005, Mills Corp disclosed it would “would restate
financial results for 2002 through 2004 to correct accounting errors primarily
relating to its treatment of equity in earnings from joint ventures, the capitalization
of interest and certain other costs, and the timing of gains on sales of partnership
interests.”104 Following the February 2005 disclosure, Mills Corp announced in
99
JX0171.
100
See id. at §§ 2, 5.
101
See Trial Tr. 1009:13–1013:3 (Hammond).
102
See id.; JX0162.
103
Pretrial Stip. 10.
104
Id.
22
January 2006 that additional accounting problems were uncovered, and that it would
restate its financial results from 2000 through 2004.105 By March 2006, the SEC
informed Mills Corp “that it had commenced a formal investigation.”106
Due to these accounting issues, Mills Corp “never filed its 2005 annual report
on Form 10-K or any subsequent annual report, and it never filed a quarterly report
after its Form 10-Q for the third quarter of 2005.”107 The failure to file required SEC
reports had the additional consequences of preventing Mills Corp from registering
its common stock, and preventing holders of Mills Partnership Units from seeking
conversion of their units into Mills Corp stock.108 This development was disclosed
to certain KanAm investors by April 2006.109 Thus, because the units could not
convert during this period if the buy/sell provisions were triggered, Mills would not
have been able to provide Mills Units that were convertible into publicly-traded
stock, a necessary quality of units to exercise the call. In other words, contractually-
compliant Mills Units were unavailable for exercise of any call right.
By August 2006, Mills Corp “announced that the accounting errors were
expected to reduce stockholders’ equity . . . by $296 million and reduce . . . net
income for 2003, 2004, and the first three quarters of 2005 by $210 million.”110 The
105
Id. at 11.
106
Id.
107
Id.
108
See Trial Tr. 765:16–766:8 (Braithwaite).
109
See JX0220 at 4.
110
Pretrial Stip. 11.
23
price of Mills Corp stock declined significantly,111 almost 75% from February 2005
to January 2007.112 During this time period it was unclear whether Mills Corp could
continue operating as a going concern.113 Also in August 2006, Mills Corp
“announced that its auditor believed that there was ‘substantial doubt’ that Mills
Corp could stay in business because of looming deadlines for repayment of
approximately $2 billion in debt.”114
5. Mills Markets Itself
Due to the accounting scandal and the financial difficulty it was facing, Mills
announced in February 2006, “that its board had decided to explore strategic
alternatives and had retained financial and legal advisors to assist in that process.”115
Mills would sell either the entire company or carve out portions of its assets. 116 In
the interim, before any sale occurred, Mills secured a “rescue loan of about $2
billion” from Goldman Sachs, which Mills would likely not have the ability to
repay.117 In addition to obtaining the rescue loan, Mills continued to consider its
strategic options.118 Mills ultimately divested several “problem” assets including the
111
See Trial Tr. 764:14–765:3 (Braithwaite).
112
JX0615 ¶ 49. See id. at Ex. 7.
113
Pretrial Stip. 11. See JX0237.
114
Pretrial Stip. 11.
115
Id.
116
See, e.g., Trial Tr. 602:5–603:1 (Ordan) (testifying that from Mills’ perspective, the “goal of
the [strategic] process was to sell the company, either to one buyer or to multiple buyers”).
117
Id. at 593:19–594:18 (Ordan).
118
See, e.g., JX0256.
24
Meadowlands Project in New Jersey, its international properties, and certain other
investments.119
KanAm was involved in the sales process of Mills via its directors on the Mills
Board along with the advisors KanAm retained. KanAm retained its own financial
advisor, and also considered selling its interests in the JVs.120 KanAm’s advisors
spoke directly with certain potential purchasers, including Simon.121 Ultimately, the
three KanAm representatives on the Mills Corp board, Messrs. Braithwaite, von
Boetticher, and von Perfall, were asked to recuse themselves from the Mills sales
process due to alleged conflicts of interest.122 The KanAm representatives resisted
the request.123 KanAm’s representatives on Mills’ board did step out of the room
when they believed it appropriate, and abstained from voting on the ultimate
transaction, however they remained involved in the strategic process.124
Early in the sales process, in April 2006, Mills Corp, together with Goldman
Sachs and J.P. Morgan, assembled a “Descriptive Memorandum” which was
transmitted to “a limited number of parties who have expressed an interest in
submitting proposals” to enter a deal with Mills Corp.125 Simon received the
119
See Trial Tr. 436:14–437:1 (Sokolov).
120
See id. at 767:12–768:3 (Braithwaite).
121
See id. at 894:11–896:2 (Braithwaite).
122
JX0222 at 3.
123
See JX0226. See also Trial Tr. 590:7–592:15 (Ordan).
124
See Trial Tr. 615:4–17 (Ordan).
125
See JX0293 at 1, 3.
25
Descriptive Memorandum, and it was circulated by certain Simon employees,
including senior legal officers.126 Under the heading “KanAm joint venture key
terms and rights summary,” the Memorandum described that the “Put-call rights
enable . . . Mills to require KanAm to sell its interests to Mills for cash or partnership
units of Mills LP, the choice of consideration to be made in KanAm’s sole discretion
. . . .”127
Along with other potential buyers, Mills entered discussions with Brookfield
Asset Management Inc. (“Brookfield”) regarding a potential purchase.128 This
discussion led to an (ultimately-unconsummated) merger agreement. “Brookfield
was not a publicly traded REIT.”129 Because of its entity structure, Brookfield
clearly did not have partnership units which would be convertible into publicly
tradable stock. Brookfield recognized the specified currency in the buy/sell
provisions would not work.130 Braithwaite, on behalf of KanAm, agreed with
Brookfield to negotiate in good faith the means to effectuate the put-call currency
were Brookfield to acquire Mills.131 Even though Braithwaite was on Mills Corp’s
Board, the agreement to further negotiate that he reached with Brookfield on behalf
126
See id.
127
Id. at 88.
128
Pretrial Stip. 12.
129
Id.
130
See Trial Tr. at 776:7–18 (Braithwaite). I note that Mr. Braithwaite also testified that they “had
been questioned by a number of other potential buyers about the subject.” Id. at 782:9–23
(Braithwaite).
131
Id. at 773:18–776:18 (Braithwaite).
26
of KanAm was never disclosed to Mills Corp.132 This is in spite of the fact that Mills
and Brookfield had executed a merger agreement.133 Simon also negotiated to
acquire, and ultimately, as described below, did (with a partner) acquire, Mills.
Despite this issue of consideration of call right currency having been the subject of
a discussion between Braithwaite and Brookfield, it was not raised by Braithwaite
in his discussions with Simon, allegedly because “Simon chose to have very limited
discussions with [KanAm] before the merger.”134 There are no contemporaneous
documents from this 2007 sales period by KanAm evincing a specific concern about
receiving Simon Units.
Mills Corp’s outside counsel, Willkie Farr & Gallagher, recognized that the
unavailability of Mills Units could present a challenge for future acquirers trying to
exercise a call of KanAm’s interest.135 Mills Corp’s outside counsel indicated, in a
memorandum to Mills, that “[o]f note, the joint venture agreements strictly call for
the OP Units to be those of [the Mills Partnership], and do not contain language
authorizing the use of similar OP-type securities in the event [the Mills Partnership]
no longer issues Units or ceases to exist as the result of a Mills corporate
restructuring or corporate-level transaction.”136 Mills Corp’s outside counsel
132
Id. at 777:13–778:23 (Braithwaite).
133
See id.
134
Id. at 778:6–780:20 (Braithwaite).
135
JX0193 at 2; JX0241 at 3–4.
136
JX0241 at 4 (emphasis added).
27
recognized the risk that KanAm may insist that it must receive the Mills Units it
bargained for, and thus the call right would be frustrated.137 Mills’ counsel presented
alternatives to deal with this situation. One was to make Mills’ successors agree that
they may not exercise the call due to the unavailability of Mills Units, “however,
deletion of this ability to buy-out KanAm presumably will be unattractive to
potential buyers and will negatively impact pricing for Mills’ interests.”138
Similarly, Simon’s general counsel testified that its due diligence process
recognized that Mills and KanAm had deleted references to Simon from the JV
Agreements, and had included that the only non-cash consideration for the call was
Mills Units.139 Both the internal legal team at Simon, and its outside counsel were
aware that the specified (default) consideration was Mills Units, but the general
counsel testified that they were not concerned because KanAm had accepted call
provisions which included Simon Units in the past.140 Simon’s general counsel
directly discussed the issue with Mr. Simon during due diligence, but Simon decided
not to raise and discuss the issue with KanAm at the time.141
137
Id. See JX0192 at 2.
138
JX0241 at 4.
139
Trial Tr. 291:7–292:18 (Barkley).
140
Id. at 292:16–293:7 (Barkley); id. at 302:22–306:17 (Barkley) (testifying that “we weren't
concerned so much about the legal point because we knew KanAm had accepted a call provision
with our units in the past. Our units had not changed.”).
141
Id. at 311:16–312:14 (Barkley).
28
6. Simon-Farallon Joint Venture Buys Mills
Mills received several offers from potential acquirers. On January 15, 2007,
Farallon Capital Management (“Farallon”), who like Brookfield was not a publicly
traded REIT, submitted a proposal for a recapitalization transaction whereby
Farallon would buy $499 million in additional Mills Corp shares at $20.00 per
share.142 At the time, Farallon owned 10.9% of Mills Corp’s outstanding shares.143
Shortly thereafter, on January 17, 2007, Mills Corp announced that a merger
agreement with Brookfield had been reached “pursuant to which Brookfield would
acquire Mills Corp. and the Mills Partnership for cash at a price of $21.00 per
share.”144 A joint venture of Simon Corp and Farallon then submitted an unsolicited
topping proposal to acquire Mills Corp for $24.00 cash per share.145 Brookfield
countered, but Simon/Farallon ultimately submitted a successful bid of $25.25 per
share.146
SPG-FCM Ventures LLC (the “Simon-Farallon JV”), a 50/50 joint venture
between a Simon Corp subsidiary and certain Farallon funds, executed a merger
agreement with Mills Corp on February 16, 2007.147 A subsidiary of the Simon-
Farallon JV merged into the Mills Partnership, with the Mills Partnership being the
142
Pretrial Stip. 12.
143
Id.
144
Id. at 13.
145
Id.
146
Id.
147
Id. at 13–14.
29
surviving entity and the Simon-Farallon JV indirectly owning the Mills
Partnership.148 Mills did not merge into Simon, but, due to the structure of the
transaction, following the merger Mills Units convertible into common publicly
tradable stock—that is, Mills Units suitable as consideration for a call on KanAm—
remained unavailable, as they had been since trading was suspended on Mills Corp’s
stock.149 The transaction closed on April 3, 2007.150 I note that pursuant to the
merger agreement, “180 German KanAm investors holding approximately 3.4
million Mills Units were eligible to exchange their Mills Units for either cash or
Simon Units” in this transaction.151 Of these, however, only “[f]ive investors
holding approximately 53,000 Mills Units, which represented approximately 1.6
percent of the 3.4 million eligible units, chose to convert to Simon Units.” 152 Mills
Corp was later dissolved in August 2007.153 The Mills Corp liquidation had been
provided for in the merger deal structure,154 and Mills Partnership Units convertible
into Mill Corp common stock were permanently unavailable, thereafter.
At the time of the transaction with the Simon-Farallon JV, KanAm executives,
including Braithwaite, did not voice a concern about the transaction with Simon.155
148
Id. at 14.
149
See, e.g., Trial Tr. 832:11–18 (Braithwaite).
150
Pretrial Stip. 14–15.
151
Id. at 14.
152
Id.
153
Id. at 14–15.
154
See JX0275.
155
Trial Tr. 781:7–23 (Braithwaite); id. at 973:15–19 (Hammond).
30
Similarly, prior to the Simon-Farallon JV transaction, KanAm insiders, such as Mr.
Hammond, were not able to identify any instance of KanAm suggesting to Simon or
Farallon the need to amend the buy/sell consideration provisions in the JV
Agreements.156 KanAm did not notify Mills’ CEO, Mark Ordan, either; Ordan does
not specifically recall the buy/sell consideration being raised by KanAm, but
testified that if it were raised he “would have alerted [Mills’] attorneys” and taken it
“very seriously” and would have “absolutely” disclosed such information to the
SEC.157 However, as described above, Simon along with its outside counsel, was
already aware of the consideration issue. They independently identified the issue
and raised it to Mr. Simon. Simon decided not to raise or discuss it with KanAm,
however.158 This is despite the fact that the Simon-Farallon JV Agreement went as
far as to address the situation in which either Simon or Farallon sought to exercise
call rights in a project against the wishes of the other.159
KanAm represented to investors during this time that as a result of the Mills
sale “[n]othing has changed either for the economic or the legal situation” of the
KanAm funds.160 KanAm representatives, including Braithwaite, met with Simon
to confirm that each side would honor the obligations under the contracts and “live
156
Id. at 974:6–14 (Hammond).
157
See id. at 611:20–614:22 (Ordan).
158
Id. at 311:23–312:14 (Barkley).
159
See JX0297 §§ 5.12, 1.6.
160
JX0311 at 2.
31
by the contracts.”161 According to Mr. Simon, the Simon-Farallon JV at the time
believed that despite the language of the contracts, the call right continued to be
viable.162 Braithwaite, for his part, testified that KanAm chose not to inform Simon
of its understanding that the call right was subject to KanAm’s discretion to elect
Mills Units, because the lockout periods had not run, and thus the discussion was
not yet “ripe.”163
Between Simon’s exit in 2002 until the Simon-Farallon JV’s acquisition of
Mills in 2007 the Simon Entities were not involved in the joint ventures subject to
the present dispute. The 2007 acquisition, however, caused the Simon-Farallon JV
to become counter-parties to KanAm in three of the original JVs which the Simon
Entities had invested in with KanAm, and then exited: Grapevine, Concord and
Arundel Mills. Additionally, with the acquisition of Mills, the Simon-Farallon JV
became parties to JVs in which Simon had never before had an interest, that is, those
developed by Mills and KanAm without Simon’s involvement, but acquired by the
Simon-Farallon JV as a result of the sale of Mills. Those projects, at issue here, are
Orange City, Katy, and Colorado Mills. The buy/sell consideration provisions were
not renegotiated even though Mills Units meeting the specifications set out in the JV
Agreements were no longer available, as all parties were aware. Similarly, the JV
161
See Trial Tr. 795:10–23 (Braithwaite).
162
See id. at 36:22–38:20 (Simon).
163
Id. at 792:9–793:4 (Braithwaite).
32
Agreements were not updated to reflect, in any way, the unavailability of Mills
Units.
7. Denver West
In October 2007 the Simon-Farallon JV, following its acquisition of Mills,
and a KanAm entity entered into a new JV known as Denver West.164 Denver West,
like the other projects at issue in this litigation, was a retail development project. It
was located adjacent to a property covered by a separate JV Agreement at issue here,
Colorado Mills. Denver West was the only JV entered between KanAm and Simon
following the Simon-Farallon JV’s acquisition of Mills.165 Additionally, it was the
first new JV entered since Mills Units became unavailable.166
The starting point for the negotiations of the Denver West JV Agreement was
the Colorado Mills JV Agreement; the Denver West JV Agreement initial drafts
were red-lines of the Colorado Mills document.167 An early draft of the agreement
circulated by Simon Senior Staff Attorney, Melissa Breeden, changed various terms
of the contract, but kept in place Mills Units as the default buy/sell consideration in
the event the call was exercised, despite the fact that compliant Mills Units were
unavailable.168 Breeden later circulated a revised draft of the Denver West
164
Pretrial Stip. 15. The KanAm participant was KanAm USA XX Limited Partnership. Id.
165
See Trial Tr. 190:2–11 (Barkley).
166
Id.
167
See JX0324.
168
See id. at 53.
33
agreement and included a comment from Brian Warnock, Simon’s Senior Vice
President for Acquisitions regarding Section 11.3’s buy/sell provision, stating that
“Simon and Farallon would like the Buy/Sell Price to be paid in cash only, since
upon the dissolution of Mills Corp. payment in [Mills Partnership] units no longer
works.”169 Thus, Simon initially took the position that the buy/sell consideration
should only be paid in cash, and, implicitly, that the consideration prescribed, Mills
Units, could not be tendered.170
The negotiations continued, involving a number of issues. Eventually, Rick
Zeckel, Simon’s Vice President of Property Management, intervened due to delays
in the negotiation process and reached out to Braithwaite at KanAm on October 2,
2007.171 Zeckel expressed his opinion that the attorney reviewing the agreement for
KanAm was holding up the deal through the “attorney’s desire to put his fingerprints
on all the documents . . . .”172 Zeckel also shared his “understanding that [KanAm
has] agreed that there is no need to retain the concept of Mills Units in the buy-sell
provisions, yet [the KanAm attorney] has insisted this remains.”173 The same day,
Braithwaite responded that while “Denver West is a relatively simple transaction[,
169
JX0328 at 1 (emphasis added).
170
See id.
171
See JX0330 at 1–2.
172
Id. at 1.
173
Id.
34
it] has raised some broader issues between Kan[A]m and Simon/Farallon that have
not previously been addressed.”174 Braithwaite continued that he had:
two or three conversations with Brian Warnock about these issues and
we are trying to keep these much broader and significant issues from
complicating this simpler trans[ac]tion. The Simon attorneys did not
seem to understand these issues and drafted the documents in an
unacceptable manner. We are . . . trying to draft documents around
these issues in a manner that will be acceptable to both sides that will
leave the issues open without compromising either side[’s] position.
Therefore it is not as simple as it would initial[ly] seem. 175
Braithwaite added that “[i]t might be helpful if someone on your side could explain
to your attorneys that these are not insignificant issues and that it would be helpful
if they could understand what we are trying to achieve for all parties.”176 The next
day, October 3, 2007, Melissa Breeden of Simon circulated a revised draft agreement
that again included the reference to Mills Units as the consideration for the buy/sell
provision.177 KanAm’s position was that it wanted the language to track that of other
partnership agreements, specifically Colorado Mills.178
Due to time pressures and an impending deadline, the parties executed a JV
Agreement for Denver West effective as of October 10, 2007, which provided that
cash would be the sole currency for payment of the buy/sell consideration in the
174
Id.
175
Id.
176
Id.
177
JX0333 at 1, 52.
178
Trial Tr. 800:17–801:11 (Braithwaite).
35
event the call was triggered.179 On October 9, 2007, a draft of a “side letter” was
circulated by Hammond of KanAm to Warnock of Simon.180 The side letter was
directly targeted at Section 11.3’s required buy/sell consideration.181 This initial
draft proposed that KanAm’s rights would be the same as they were in the Colorado
Mills JV Agreement, which provided for Mills Units as the default consideration.182
The initial draft side letter indicated that the acquisition of Mills by Simon created
“a disagreement as to the form of the non-cash consideration under Section 11.3”
including “whether the units are to be units of [the Simon Partnership] instead of
units of [the Mills Partnership] . . . .”183 Additionally, it sought to affirm that
KanAm, by entering the Denver West Agreement, would be deemed “not [to have]
waived any of its rights or claims as to the form of non-cash consideration under
Section 11.3 of any of the Limited Partnership Agreements or the Denver West
Agreement.”184 The draft concluded that “[t]he parties hereby agree to engage in
good faith negotiations to resolve the disagreement as to the form of non-cash
consideration.”185
179
See JX0342 § 11.3(d).
180
JX0340.
181
Id. at 2–3.
182
Id.
183
Id. at 2.
184
Id. at 2–3.
185
Id. at 3.
36
The parties continued to revise the side letter, and a revised draft was
circulated by Breeden of Simon on October 11, 2007,186 followed by subsequent
negotiations and revisions by KanAm individuals.187 The final version of the side
letter was executed on October 17, 2007, and removed the reference that the parties
would “agree to engage in good faith negotiations to resolve the disagreement as to
the form of non-cash consideration” which was in the earlier circulated draft.188 The
executed version provided that “if the parties agree, or it is later determined, that
non-cash consideration may be paid under the payment provision” of the Colorado
Mills agreement, then that same consideration would be applied to the Denver West
agreement.189 In other words, the parties identified the non-cash consideration issue,
negotiated over it, but ultimately avoided reaching a resolution of it in entering the
Denver West JV. They punted.
As discussed further in the extrinsic evidence analysis section below, the
parties heavily disputed at trial the meaning and relevance of the Denver West
negotiations and the side letter, along with certain non-contractual statements made
by KanAm representatives to investors.
186
See JX0344.
187
See JX0345.
188
Compare JX0348 with JX0340.
189
JX0348 at 5 (emphasis added).
37
8. Grapevine Mills
A refinancing was required in the Grapevine Mills project, a JV at issue here,
in 2008. In connection with that refinancing Breeden of Simon prepared and had
circulated a draft of an amendment to the Grapevine Mills JV.190 Simon’s September
9, 2008 draft amendment deleted references to Mills Units in the buy/sell
provisions.191 Breeden indicated that Simon’s position was “[w]e want to have all
cash here as well” like in Denver West.192 The parties successfully amended the
Grapevine Mills agreement in light of the refinancing, but the buy/sell consideration
of Mills Units was not changed.193 There appears to be no documentary evidence at
the time of the Grapevine refinancing and amendment that Simon offered to, or
sought to, change the non-cash consideration in Grapevine to Simon Units.194
9. Simon-Farallon Break-up
In March of 2012, Simon acquired Farallon’s interests in the Mills
Partnership.195 Following the transactions, the JV “interests that were previously
directly or indirectly owned by the Mills Partnership were indirectly owned by
190
See JX0366.
191
See id. at 66–70.
192
JX0367.
193
See JX0369.
194
See, e.g., Trial Tr. 258:1–20 (Barkley). I note one potential difficulty Simon faced at the time
with agreeing to provide Simon Units is that they were involved in these properties with KanAm
in conjunction with their JV Partner, Farallon, who could not clearly offer units with the
characteristics of Mills Units. See id. 258:21–263:1 (Barkley); id. at 38:17–39:9 (Simon).
195
See JX0440.
38
Simon Partnership.”196 In connection with the acquisition, Simon and KanAm
executed the “Agreement and Indemnity.”197 The Agreement and Indemnity (the
“2012 Agreement”) was initially presented to KanAm by Mr. Barkley, Simon’s
General Counsel, with the representation that “[t]here would be no changes required
to existing venture agreements at property level companies . . . .”198
Shortly thereafter the parties executed the 2012 Agreement.199 The 2012
Agreement affirmed that Simon had stepped into the shoes of the Mills Partnership
together with all rights the Mills Partnership had.200 The Agreement also confirmed
that it “shall not be construed as a modification of such organizational documents,
nor be construed to diminish, enlarge or in any way affect such rights, if any, which
. . . shall remain in full force and effect in accordance with their terms.”201 Once
again, the parties failed to raise the issue of call consideration during the 2012
Agreement negotiations—that is, KanAm did not affirmatively disclose its position
that despite Simon stepping into the shoes of Mills Partnership, Simon would not be
able to exercise the call provision due to the unavailability of contractually-
compliant Mills Units.202 Simon, for its part, recognized that the 2012 Agreement
196
Pretrial Stip. 16.
197
Id.
198
JX0430 at 1; Trial Tr. 216:4–23 (Barkley); id. at 225:1–5 (Barkley).
199
JX0450.
200
See id. at §§ 1(b), 1(d). See also Trial Tr. 210:13–211:7 (Barkley).
201
JX0450 § 1(d).
202
Trial Tr. 211:8–20 (Barkley).
39
did not change any of the rights or obligations that the Mills Partnership owed
KanAm.203 Similarly, prior to the commencement of this litigation, Simon admits
that it did not discuss with KanAm its position, advanced in this litigation, that an
intended purpose or effect of the 2012 Agreement was to modify the buy/sell
currency in the JV Agreements or permit the substitution of Simon Units.204
C. Simon Triggers the Call
In April 2012 Braithwaite and Hammond of KanAm visited Simon’s
headquarters to meet with several high-level Simon officials.205 At the April
meeting, the possibility of Simon exercising its call right in certain JVs at issue in
this litigation was raised.206 KanAm purportedly was “surprised” by this discussion,
but did not inform Simon at that time of its view that KanAm could thwart Simon’s
ability to consummate the call by the election of Mills Units.207
Pursuant to the buy/sell provisions of the JV Agreements there was a ten-day
buy/sell notice period which would open on May 1, 2012.208 The parties negotiated
and executed two letter agreements extending the window for 2012.209 The first
agreement executed on May 3, 2012, extended the start of the ten day period until
203
See, e.g., id. at 220:16–221:21 (Barkley).
204
See, e.g., JX0684 at Resp. Nos. 2, 3.
205
See Trial Tr. 40:21–41:15 (Simon); Pretrial Stip. 16.
206
See Trial Tr. 813:6–814:16 (Braithwaite).
207
See id. at 990:11–991:4 (Hammond).
208
See JX0456 at 1.
209
Id.; JX0462.
40
June 1, 2012 and the second agreement dated June 4, 2012 extended the ten-day
window until June 19, 2012.210 During these initial extension negotiations, KanAm
did not raise its ability to defeat the call provisions by electing Mills Units.211 Simon
ultimately agreed to not trigger the buy/sell provisions in 2012.212
The record reflects that on June 21, 2012, Braithwaite of KanAm sent von
Perfall and other KanAm principals a legal memorandum, prepared by KanAm’s
litigation counsel, regarding the put/call consideration issue.213 A later memo
distributed internally at KanAm on June 27, 2012, from KanAm’s litigation counsel
indicates that Simon “must offer us Mills Units and that they cannot substitute”
Simon Units.214 The remaining substance of these memoranda was redacted to
protect attorney-client privilege.215
On June 27, 2012, Braithwaite circulated an email to Simon, which advised
Simon that, in exercising the call, it “is required to deliver” Mills Units in accordance
with the JV Agreements.216 Braithwaite opined in the email that KanAm “does not
believe that Simon can perform such obligation and deliver the specified and
required” Mills Units.217 Braithwaite communicated KanAm’s willingness to
210
JX0456 at 1; JX0462 at 1–2.
211
See Trial Tr. 45:2–7 (Simon).
212
Id. at 45:8–14 (Simon).
213
See JX0469 at 1.
214
JX0470.
215
See JX0469; JX0470.
216
JX0471 at 1.
217
Id.
41
negotiate with Simon acceptable non-cash consideration; Simon indicated that it
would get back to KanAm regarding renegotiation.218 It appears this was the first
documented notice from KanAm to Simon that it was taking this position regarding
the contractual language.219 During the time this disclosure was made by
Braithwaite, the parties were attempting to negotiate a letter agreement to resolve
several administrative disputes arising under the JVs.220 Part of the consideration
for the executed letter agreement in late June was that Simon would not trigger the
buy/sell provisions that year.221 In delivering the executed copy of the June 28, 2012
letter agreement, KanAm indicated in its cover letter that the buy/sell consideration
issues had not been resolved.222
Later that year, in October 2012, KanAm and Simon amended the Concord
Mills JV Agreement.223 This amendment did not change the buy/sell consideration
under Section 11.3 of the JV Agreement.224 Additionally, the amendment ratified
and affirmed all the pre-existing agreements except as modified—thus it ratified and
affirmed the unchanged consideration portion of Section 11.3.225
218
See Trial Tr. 834:15–23 (Braithwaite).
219
See id. at 822:3–824:3 (Braithwaite).
220
See JX0474.
221
See id. at 5.
222
See id. at 2.
223
JX0488.
224
See id.; Trial Tr. 346:21–347:11 (Barkley).
225
See JX0488 at ¶ 40; Trial Tr. 346:21–347:11 (Barkley).
42
In 2013, Braithwaite of KanAm again communicated with Simon, this time
directly to Mr. Simon at an in-person meeting on April 15, 2013, regarding KanAm’s
willingness to negotiate non-cash consideration.226 Similarly, Braithwaite sent a
follow-up letter to Mr. Simon reflecting the same position.227 This April 16, 2013
letter states that KanAm had a “long history, familiarity and special relationship”
with Mills and that Mills Units were “a material reason” that KanAm entered the JV
Agreements and agreed to the put/call consideration.228 The letter concluded that
KanAm remained open to negotiate amendments to the put/call consideration.229
Mr. Simon indicated that he would follow up, but after two extensions rather than
negotiating, Simon initiated this action.230 The same day this action was filed, Simon
sent notices that it was triggering the call for four of the JVs on May 2, 2013.231
KanAm in response insisted on the specified default consideration, Mills Units, and
refused to close.232 In 2014, Simon sent KanAm notices with respect to the three
remaining JVs at issue here.233 KanAm again insisted on Mills Units and declined
226
Trial Tr. 835:7–836:10 (Braithwaite).
227
JX0500.
228
Id. at 1.
229
Id. at 2.
230
Trial Tr. 835:7–836:10 (Braithwaite).
231
JX0504; JX0508.
232
JX0811.
233
See JX0557; JX0558; JX0559.
43
to close.234 The pleadings were amended to add these three additional JVs to the
present action.
II. PROCEDURAL HISTORY
Simon initiated this action on May 3, 2013. Shortly thereafter, KanAm moved
for judgment on the pleadings. Significant motion practice ensued, which is
discussed elsewhere. The parties subsequently cross-moved for summary judgment
on March 28, 2014. Those motions were then briefed and, following oral argument,
I denied both motions by Memorandum Opinion of September 30, 2014 for reasons
I briefly revisit in the analysis section below. This first period of litigation involved
only four JVs for which notice was given in 2013—Orange City Mills, Arundel
Mills, Grapevine Mills, and Concord Mills.
Following the summary judgment decision, the Plaintiffs filed a Second
Amended Complaint (the “Amended Complaint”).235 The Amended Complaint
added three additional JVs—Katy Mills, Colorado Mills, and Denver West—for
which Simon attempted to exercise its call rights on in May 2014. The Amended
Complaint pleads four counts. First, through Count I, the Plaintiffs seek declaratory
judgments on a number of issues regarding the JV Agreements and the Defendants
purported breaches. Second, through Count II, the Plaintiffs assert a breach of
234
JX0813.
235
See Dkt. No. 119.
44
contract claim alleging that by failing to close on the transactions after Simon
provided notice and offered Simon Units, KanAm breached the JV Agreements.
Next, through Count III, the Plaintiffs assert a claim that KanAm breached the
implied covenant of good faith and fair dealing through its conduct in refusing to
accept Simon Units and insisting on delivery of the call consideration in Mills Units.
Finally, Count IV seeks specific performance of the applicable JV Agreements.
Along with the remedy of specific performance, the Plaintiffs seek damages for the
Defendants alleged breaches including the purported improper distributions paid to
the Defendants after the call was triggered. Additionally, the Plaintiffs seek costs,
expenses and attorneys’ fees pursuant to the JV Agreements, along with an award of
interest.
The Defendants, through their Supplemental Verified Counterclaim (the
“Counterclaim”) assert two counts.236 Count I asserts a breach of contract by Simon
for triggering the call with knowledge that the default consideration was not
available, and that by failing to provide valid buy/sell notices Simon breached the
JV Agreements. Count II seeks a declaratory judgment that the required
consideration in the applicable JV Agreements is Mills Units, and that Simon cannot
force KanAm to accept Simon Units. KanAm seeks damages arising from Simon’s
236
See Dkt. No. 110.
45
alleged breaches, litigation costs including attorneys’ fees pursuant to the JV
Agreements, and interest.
I tried this matter over seven days, with the first five days occurring on May
16 through May 20, 2016, and the remaining two days on August 16, and August
17, 2016. The parties engaged in post-trial briefing, and a post-trial oral argument
was held on December 16, 2016. What follows is my analysis of the merits of the
parties’ claims in light of the proof shown at trial.
III. ANALYSIS
Several issues remain to be decided in this post-trial decision. This is a
contract action. Therefore, the threshold inquiry is what are the terms of the
applicable contracts—the parties’ JV Agreements? Specifically, what are the terms
of the buy/sell provisions?
These terms have previously been reviewed in this case. When ruling on the
parties’ cross-motions for summary judgment I found that:
[t]he JV Agreements unambiguously provide that the default
consideration when exercising the call is Mills Units meeting certain
criteria. However, these Agreements do not address the unavailability
of Mills Units due to a change in control or restructuring transaction.
Accordingly, I cannot conclude from this unambiguous language
whether the parties intended the call right to lapse if and when Mills
Units satisfying the contractual criteria became unavailable. Instead, I
must resort to extrinsic evidence to determine how the parties intended
to proceed in the circumstances in which they now find themselves.237
237
Simon I, 2014 WL 4840443, at *14 (citations omitted).
46
I denied summary judgment because there was some evidence in the record that
KanAm considered Simon Units as contractually-compliant. Thus, I was not able to
“conclude that the Defendants intended only to accept Mills Units, and, accordingly,
that the call right was meant to lapse when those Units became unavailable.”238 I
found that this, and other issues raised by the parties’ cross-motions for summary
judgment “require[d] further factual development to ascertain the parties' intent.”239
I explained that “where the contract does not address the matter in dispute, the Court
may resort to extrinsic evidence to ascertain the parties’ intent, such as the overt
statements and acts of the parties, the business context, prior dealings between the
parties, and other business customs and usage in the industry.”240 Similarly, the
summary judgment decision in this matter left open Simon’s claim for breach of the
implied covenant of good faith and fair dealing for further factual development.241
The parties have created a full record at trial. The determinative question here
is 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.
238
Id.
239
Id. Those other issues included, at the time, whether KanAm demonstrated a contractual
indifference to the type of units it would receive, whether there was a special relationship between
KanAm and Mills such that Mills Units are unique and whether Mills and Simon Units are
materially different in terms of tax treatment and other risks. See id.
240
Id. at *15 (internal quotations omitted).
241
Id. at *14.
47
This Memorandum Opinion first reviews the relevant extrinsic evidence in an
attempt to derive the parties’ intent and determine whether there was a meeting of
the minds regarding the unavailability of Mills Units. Next, I examine the arguments
raised under the substantial performance doctrine before turning to the equitable
issues raised by the parties. Finally, I address KanAm’s Counterclaims and the
appropriate relief under the circumstances present here.
A. The Contractually Required Buy/Sell Consideration
1. General Principles
I first examine the general legal principles applicable here. Plaintiffs (and,
with respect to the Counterclaim, Defendants/Counterclaim Plaintiffs) bear the
burden of proof, to demonstrate entitlement to relief by a preponderance of the
evidence.242 Thus, “Plaintiffs, as well as Counterclaim-Plaintiffs, have the burden
of proving each element, including damages, of each of their causes of action against
each Defendant or Counterclaim-Defendant, as the case may be, by a preponderance
of the evidence.”243 “Proof by a preponderance of the evidence means proof that
something is more likely than not.”244 The burden with respect to the remedy of
242
See, e.g., In re Mobilactive Media, LLC, 2013 WL 297950, at *9 (Del. Ch. Jan. 25, 2013).
243
inTEAM Assocs., LLC v. Heartland Payment Sys., Inc., 2016 WL 5660282, at *13 (Del. Ch.
Sept. 30, 2016) (citation omitted).
244
Id. (citation omitted).
48
specific performance of a contract is that a plaintiff must make a showing by clear
and convincing evidence.245
Delaware follows the objective theory of contracts. “Because Delaware
adheres to the objective theory of contract interpretation, the court looks to the most
objective indicia of that intent: the words found in the written instrument.”246
Therefore, “[a] contract’s express terms provide the starting point in approaching a
contract dispute.”247 Further, Delaware law requires that contracts are to be read as
a whole.248
I have already determined that the JVs unambiguously provide that Mills
Units—defined as Units of Mills Partnership with certain characteristics—are the
contractually required default consideration.249 However, where a contract is silent
on an issue, such as what was to happen upon the unavailability of Mills Units, the
Court “may resort to extrinsic evidence to ascertain the parties' intent.”250 Even
when reviewing extrinsic evidence, the text remains important. This Court will
245
See In re IBP, Inc. Shareholders Litig., 789 A.2d 14, 52 (Del. Ch. 2001) (observing Delaware
law “requires that a plaintiff demonstrate its entitlement to specific performance by clear and
convincing evidence”).
246
Sassano v. CIBC World Markets Corp., 948 A.2d 453, 462 (Del. Ch. 2008) (citations omitted).
247
Ostroff v. Quality Servs. Labs., Inc., 2007 WL 121404, at *11 (Del. Ch. Jan. 5, 2007).
248
Salamone v. Gorman, 106 A.3d 354, 368 (Del. 2014) (“When interpreting a contract, this Court
‘will give priority to the parties' intentions as reflected in the four corners of the agreement,’
construing the agreement as a whole and giving effect to all its provisions.”) (quoting GMG Capital
Inv., LLC. v. Athenian Venture Partners I, L.P., 36 A.3d 776, 779 (Del. 2012)).
249
Simon I, 2014 WL 4840443, at *14.
250
Id. at *15 (citing Senior Hous. Capital, LLC v. SHP Senior Hous. Fund, LLC, 2013 WL
1955012, at *41 (Del. Ch. May 13, 2013)).
49
enforce contracts to effectuate the intent of the parties as demonstrated through the
text, that is, “the introduction of extrinsic, parol evidence does not alter or deviate
from Delaware's adherence to the objective theory of contracts.”251 When reviewing
the extrinsic evidence submitted, it should be reconciled, to the extent possible, with
the text of the contract. Generally, the parties’ undisclosed and private views of a
contract’s meaning “are irrelevant and unhelpful to the Court's consideration of a
contract's meaning, because the meaning of a properly formed contract must be
shared or common.”252 Similarly, when “considering extrinsic evidence, the Court
should uphold, to the extent possible, the reasonable shared expectations of the
parties at the time of contracting.”253 Further, “[i]n giving effect to the parties'
intentions, it is generally accepted that the parties' conduct before any controversy
has arisen is given great weight.”254
Where there is an ambiguity or contractual silence on an issue the Court will
examine the extrinsic evidence presented by the parties “which may include
statements and conduct of the parties, business circumstances surrounding the
execution of the contract, any course of dealing between the parties, and any usage
251
United Rentals, Inc. v. RAM Holdings, Inc., 937 A.2d 810, 835 (Del. Ch. 2007) (citation
omitted).
252
Id. (citations omitted).
253
Shareholder Representative Services LLC v. Gilead Sciences, Inc., et al., 2017 WL 1015621,
at *16 (Del. Ch. Mar. 15, 2017) (internal quotations omitted).
254
Ostroff, 2007 WL 121404, at *11 (internal quotations omitted).
50
of trade or industry custom.”255 Finally, the Court should, “where possible, avoid an
interpretation that would render any provision illusory or meaningless.”256
2. The Parties’ Contentions
Simon’s position, based on the evidence developed at trial, is that evidence
extrinsic to the JV Agreements demonstrates that by “Mills Units” the contracts
really mean “Mills Units or similar, including Simon Units.” Further, Simon argues
that its ability to call KanAm’s interest is a “fundamental right” that the parties did
not intend to lapse.257 Simon observes that qualifying Mills Units became
unavailable due to Mills’ own financial difficulties,258 and questions why KanAm
waited five years to “first communicate its current position.”259 Simon argues that
“KanAm’s interpretation effectively nullifies Simon’s call right, a result no party to
the JV Agreements intended.”260 Further, Simon argues that there is no evidence
that the call right, and buy/sell provisions which are a “fundamental aspect of the JV
Agreements,” were intended to “simply lapse if Mills Units became unavailable.”261
KanAm relies heavily on the plain and unambiguous provisions in the JVs
specifying that Mill Units meeting certain requirements are the default currency.
255
Delaware Exp. Shuttle, Inc. v. Older, 2002 WL 31458243, at *6 (Del. Ch. Oct. 23, 2002)
(citations omitted).
256
Id. (citations omitted).
257
Simon’s Post-Trial Opening Br. 55.
258
Id. at 57 n.20.
259
Id. at 61.
260
Id. at 62.
261
Id. at 63.
51
KanAm attempts to focus the scope of extrinsic evidence by pointing to the
“operative JV Agreements” and pointing out that only one of such “operative”
agreements ever included a reference to Simon Units.262 KanAm officials have
testified that their position is that Simon could exercise the call right but could not
“consummate the transaction” if KanAm chooses to receive Mills Units.263 That is,
it is KanAm’s position that the call right has not entirely lapsed; their position,
however, leads to the conclusion that the “call right” is no right, but only an
opportunity to seek KanAm’s agreement to sell its interest for cash. KanAm
contends that the parties are free to renegotiate the applicable buy/sell consideration,
and that the sole reason there has been no agreement as to “substitute non-cash
consideration [is] because Simon refused to address the issue.”264
Ultimately, KanAm asserts that the factual record developed at trial
demonstrates that “these sophisticated parties never mutually agreed to substitute
Simon Units for Mills Units.”265 For the reasons below, I agree.
3. The Extrinsic Evidence
I now turn to an examination of the most relevant extrinsic evidence presented
by the parties. I find it helpful to group the extrinsic evidence presented in this
262
See KanAm’s Post-Trial Sur Reply Br. 8–11.
263
See Trial Tr. 822:3–19 (Braithwaite).
264
KanAm’s Post-Trial Sur Reply Br. 2 (emphasis removed).
265
Id. at 6.
52
litigation into four general time periods: first, the 1990’s and the initial agreements;
second, the events surrounding Simon’s exit in 2002; third, the events surrounding
Mills’ financial trouble and Simon’s return via its JV with Farallon in 2007; and
finally Farallon’s exit from the JV in 2012. Each will be reviewed in turn. When
reviewed as a whole the extrinsic evidence shows that the Plaintiffs have failed to
establish by a preponderance of the evidence that the parties mutually agreed to the
substitution of Simon Units for Mills Units—that is, they have failed to show there
was ever a meeting of the minds.266
a. The 1990’s through 2002
As discussed in the factual background section, Ontario Mills, while not at
issue in this litigation, was the original template for certain of the JV Agreements at
issue here, including the original three JV Agreements where Simon and KanAm
were counter-parties: Arundel Mills, Concord Mills, and Grapevine Mills.
Additionally, three other JVs at issue in this litigation were formed during this period
between Mills and KanAm, in which Simon did not participate: Orange City Mills
in 1996, Katy Mills in 1998 and Colorado Mills in 2001.267
266
While certain portions of the record are analyzed in more detail below, I also rely in this
determination on the factual background that I have laid out previously in this Memorandum
Opinion.
267
I note Simon admits the buy/sell provision in the agreements governing these three JV
Agreements generally mirror those in Grapevine, Arundel and Concord Mills and only reference
Mills Units. See, e.g., Simon’s Post-Trial Presentation Slide 36. See also JX0041 § 11.3(d);
JX0050 § 11.3(d); JX0089 § 11.3(d).
53
KanAm initially entered the Ontario Mills agreement with Mills as a counter-
party; when Simon was later added to the Ontario Mills JV, the JV Agreement was
amended to reflect that circumstance.268 The amendment revised the buy/sell
consideration section to provide that the default consideration was to be two-thirds
Mills Units, and one-third Simon Units in the event the call was exercised.269
Additionally, the amendment added the description that such an exchange of units
was intended to be tax free under Section 721. The reason for the amendment to the
buy/sell consideration to include Simon Units was made clear by trial testimony:
Simon Units were required consideration in order for the Section 721 tax deferral
feature to function.270 Braithwaite and Hammond, KanAm’s principal negotiators,
testified that at the time of these negotiations the only real tax concern about
receiving Simon Units was to ensure that the transaction “would get the same sort
of tax deferral.”271 Nonetheless, the fact of the amendment demonstrates that, at this
stage at least, the parties did not intend the term “Mills Units” to mean “partnership
units similar to Mills, including Simon Units.”
While the Ontario Mills JV Agreement contained a fixed percentage of Simon
to Mills Units as the call consideration, the subsequent agreements in Concord Mills,
268
See JX0025.
269
See id. at § 11.3(d).
270
Trial Tr. 945:19–946:14 (Hammond). See id. at 693:7–694:8 (Braithwaite).
271
Id. at 949:9–18 (Hammond). See id. at 679:13–23 (Braithwaite).
54
Grapevine Mills, and Arundel Mills provided that unit consideration would be paid
“ratably in proportion to the ownership interests.”272 The three agreements at issue
during this time period, however, did draw certain distinctions between Simon and
Mills Units, including the extra requirement that contractually-compliant Simon
Units must “have the most favorable rights (including redemption, conversion,
registration and anti-dilution protection) . . .” of any units of Simon.273 However,
KanAm negotiators do not recall expressing any particular concern about receiving
Simon Units at that time.274 Similarly, no convincing evidence exists about why the
“most favorable rights” provision was inserted only for Simon Units and not for
Mills Units. In other words, the inclusion of the most favorable rights provision for
Simon Units only indicates that the parties considered that Simon and Mills Units
were not necessarily equivalent, but does not explain why. The evidence also shows
that KanAm was willing to take solely the “best” Simon Units if Simon bought out
Mills.
Simon makes much of the fact that KanAm, at the time, impliedly agreed to
potentially accept only Simon Units; if Simon had bought out Mills, Simon Units
would have been the operative consideration. Additionally, Simon points to
prospectuses distributed by KanAm to investors during this time that either do not
272
See JX0027 § 11.3(d); JX0058 § 11.3(d); JX0074 § 11.3(d).
273
See, e.g., JX0027 §§ 11.3(d), (f).
274
See Trial Tr. 694:11–14 (Braithwaite).
55
mention the buy/sell currency at all,275 or, when they do so, do not draw a particular
distinction between Simon and Mills Units.276 KanAm asserts that any early
evidence of relative contractual indifference towards Simon Units is less relevant as
it was at the “infancy” of the REIT industry.277 Similarly, KanAm observes that the
contracts themselves show KanAm took care to specify only certain units of Simon
or Mills with specific qualities “would pass muster.”278
I find that the parties’ course of conduct and other extrinsic evidence from this
period is largely unpersuasive. Simon has shown that there was, early on and at a
general level, contractual indifference by KanAm to receiving either Simon or Mills
Units. However, KanAm has also shown that when it agreed to accept Simon Units
during this time period, the parties modified the contracts to expressly so state, and
to provide what qualities the Simon Units had to have, including the most favorable
rights provisions. That is, the record from this period does not support the idea that
KanAm agreed to automatic substitution of any successor operating partner units, or
that the parties meant “Mills Units or similar” when they specified Mills Units.
275
See JX0031; JX0037.
276
See JX0060 at 31; JX0070 at 44.
277
KanAm’s Post-Trial Answering Br. 30.
278
KanAm’s Post-Trial Sur Reply Br. 14.
56
b. Simon’s 2002 Exit and the Subsequent Amendments
As discussed in the factual background section, in 2002 Simon exited three
JVs at issue here, Grapevine Mills, Concord Mills and Arundel Mills, after it reached
an impasse with Mills. These were the only KanAm/Mills JVs in which Simon had
an interest at the time. The exit was achieved via a “shotgun” exit mechanism.
When Simon triggered the exit, it was not contractually clear who would remain in
the JVs—that is, Simon named the price at which it would either buys Mills out or
sell its interest to Mills, at Mills’ option.279
In the interim, before it became clear who would remain in the JVs,
Braithwaite of KanAm sent Simon’s CEO, David Simon, a letter on March 4, 2002,
to inquire about the buy/sell consideration in the Ontario Mills JV Agreement.280
Braithwaite indicated KanAm “would be interested in discussing with [Simon] how
Section 11.3 of the Ontario Mills Agreement might be implemented if there has been
a buy/sell between Mills and Simon of your interests in Ontario Mills, L.L.C.” 281
The Ontario Mills agreement, unlike the other JVs actually at issue here, provided
for a fixed consideration ratio of one-third Simon Units and two-thirds Mills Units
upon exercise of the call. David Simon responded on March 5, 2002, stating that
following the exit of Simon or Mills, KanAm’s right under the Ontario Mills
279
See Trial Tr. 387:18–388:11 (Foxworthy).
280
See JX0099.
281
Id. at 2 (emphasis added).
57
agreement was to receive the appropriate units “of whichever of Mills or Simon
[remained] partner.”282 Neither Braithwaite nor anyone else at KanAm responded
to Simon’s explanation of what Section 11.3 would mean for Ontario Mills
following the shotgun buy/sell, nor was there further discussion.283
KanAm argues it did not respond because the issue, to Braithwaite’s mind,
was mooted shortly after the letter exchange when he learned that Mills’
management had recommended Mills acquire Simon’s interests.284 KanAm also
points out that, had the parties had a pre-existing understanding that Simon Units
would be automatically substituted for Mills Units, Braithwaite’s letter to Simon
would have been unnecessary, and the question would never have been asked.285
Simon points to the exchange regarding Ontario Mills, and KanAm’s silence in
response to Mr. Simon’s assertion that Simon Units would serve as currency, as
strong evidence that KanAm was indifferent to the units it received so long as they
provided for non-recognition tax treatment.286 I find this exchange less helpful than
Simon does with respect to showing a meeting of the minds regarding the present
issues before me. First, Ontario Mills features a unique JV Agreement, with a fixed
exchange ratio not at issue in the JV Agreements here. I note that, with respect to
282
JX0100 at 1.
283
See Trial Tr. 23:20–24:13 (Simon).
284
See JX0101; Trial Tr. 735:16–737:18 (Braithwaite).
285
See KanAm’s Post-Trial Sur Reply Br. 16.
286
See Simon’s Post-Trial Opening Br. 59.
58
the JV Agreements in issue, all references to Simon Units were subsequently
removed, as discussed below. Second, with respect to Simon’s argument that
KanAm’s silence—in response to Simon’s written assertion that Simon Units would
substitute for Mills Units—connotes KanAm’s agreement with or indifference to the
assertion, I am unpersuaded. The record tends to support KanAm’s mootness
point—that no response was necessary in light of Braithwaite’s awareness that Mills
would acquire Simon’s interest.
Instructive to the issue before me—whether there was a meeting of the minds
regarding the effect of the unavailability of Mills Units—is what happened once
Simon exited the JVs. Mills and KanAm amended the governing documents to
remove references to Simon.287 On May 31, 2002, the Ontario Mills JV Agreement,
a project not at issue here, and the Grapevine Mills JV Agreement were amended to
delete references to Simon.288 Similarly, later in 2002, KanAm and Mills formed a
new partnership for Concord Mills.289 The Concord Mills JV Agreement, thereafter,
only makes reference to Mills Units, and provides that they are the default
consideration except if KanAm elected to receive cash or a mix of cash and units.290
The Arundel Mills JV Agreement underwent similar changes: first, the JV
287
See, e.g., JX0111 § 9(f).
288
See JX0108 §§ 2(e), 10; JX0109 §§ 2(e), 13.
289
See JX0120.
290
Compare JX0120 §§ 11.3(d), 11.3(f) with JX0058 §§ 11.3(d), 11.3(f).
59
Agreement was amended to remove references to Simon,291 second a new
partnership document was executed for Arundel Mills in August 2004, and as with
Concord Mills, explicitly provided that Mills Units were the default buy/sell
consideration, and contained no reference to Simon Units.292
In sum, Simon was written out of all JV Agreements to which they were
previously counter-parties to KanAm, either through deletion of references to
Simon, or by new partnership agreements which do not provide for Simon Units.
The default consideration for each JV became Mills Units meeting certain
specifications. Unsurprisingly, Simon and KanAm disagree as to the significance of
these amendments. Simon admits Mills and KanAm acted to delete references to it
from the JV Agreements during this time period but asserts that the amendments
were simply “ministerial.”293 Simon further argues that “there is no evidence in the
record regarding the amendments to the JV Agreements in 2002 other than that they
occurred” and that “KanAm is not entitled to a post-trial inference that these
amendments were intended to do anything more than remove references to Simon to
reflect its recent exit from the JVs.”294 KanAm’s view, as stated through the
testimony of Braithwaite, is that the amendments took the issue of Simon Units as
291
See JX0106 §§ 2(e), 15.
292
See JX0152 §§ 11.6(d), 11.6(f).
293
Simon’s Post-Trial Opening Br. 19–20.
294
Simon’s Post-Trial Reply Br. 13.
60
consideration off “the table.”295 Further, Braithwaite testified that the amendments
reflect a decision post-2002 to not accept Simon Units.296 Similarly, KanAm asserts
the amendments and restated JV Agreements were not ministerial changes as they
evince a conscious choice to limit the appropriate consideration to Mills Units
meeting certain qualifications—that is, they address (in KanAm’s view) an
“essential element” of the contract and “they reflect in the clearest way possible that
Mills and KanAm intended to limit the non-cash consideration to Mills Units.”297
I find that the record tends to support KanAm’s position regarding the post-
2002 amendments, though not to the extent KanAm contends. To the extent those
contractual revisions shed light on the meaning of “Mills Units” as the default
contractual consideration, and whether there was a meeting of the minds to accept
alternative consideration, the amendments tend to show the unambiguous language
means exactly what it says—Mills Units meeting specified requirements are the
proper consideration. To the extent these rather stale events are persuasive regarding
the JV Agreements in question, they indicate that KanAm thought it important to
denote what units could evoke its obligations in the event of a call. I note, in support
295
Trial Tr. 758:20–759:13 (Braithwaite).
296
See id. at 758:11–19 (Braithwaite) (“QUESTION: Okay. But there was no feeling internally at
KanAm that we would no longer accept Simon units post-2002? ANSWER: There certainly was
that decision as it applied to these partnerships [Ontario, Arundel, Concord, and Grapevine Mills].
And since it didn't exist in any other circumstance, we didn't think about it. It wasn't something
we spent a lot of time thinking about because it wasn't a real-world circumstance.”).
297
KanAm’s Post-Trial Answering Br. 34.
61
of this interpretation of the evidence, that in 2006, in negotiating an unrelated
project, Mills requested that KanAm amend the buy/sell provision to allow for units
of any future UPREIT operating partner to substitute for Mills Units, a request which
KanAm declined.298
c. Simon’s 2007 Return
Following Mills’ financial struggles, the Simon-Farallon JV acquired Mills.
Simon, through its JV with Farallon, returned to the three projects at issue discussed
above. The parties failed to renegotiate or alter the buy/sell consideration provisions
to account for Simon-Farallon’s entry, and Mills’ exit. Thus, there are three JVs at
issue here—Grapevine, Concord, and Arundel Mills—for which Simon Units were
(1) identified as tender for the call right and (2) then removed by amendment as
tender in favor solely of Mills Units when Simon exited. Those JVs, however,
retained Mills Units as tender when Mills dissolved and Simon, with Farallon,
became the counterparty. The Simon-Farallon JV’s acquisition of Mills also
included three JVs at issue here to which Simon was not an original party,299 that is,
the projects which Simon declined to invest in originally—Colorado, Katy, and
Orange City Mills. The buy/sell consideration provisions in these agreements also
298
See Trial Tr. 770:16–772:1 (Braithwaite); JX0206 at 18 (proposing revisions to Section 11.3 of
the Meadowlands agreement to state that Mills’ successor so long as it was structured as an
UPREIT, with publicly traded stock “may deliver its operating partnership units or other available
securities instead of TMLP Units as consideration . . .”).
299
See JX0170; JX0122; JX0155.
62
called for Mills Units and were not revised despite the entry of the Simon-Farallon
JV—there was silence regarding this issue. While there is no smoking gun
demonstrating why such changes were not made, common sense, commercial
realities, and experience tends to support that such a negotiation of these provisions
could have been costly, time consuming, and uncertain—therefore, the parties
consciously decided to avoid it. If the alterations were merely “ministerial” as
Simon argues the 2002 deletions were, they could have been performed by a stroke
of a pen with no negotiation necessary; if this is true it is hard to understand why the
alterations failed to occur. I find the former proposition—that both parties made
strategic decisions to avoid the issue—more plausible.
The parties point to additional facts from this period as persuasive. Simon
points to Braithwaite’s negotiations with an alternative potential acquirer,
Brookfield, as evidence that KanAm was content accepting Simon Units.300 In
support of this argument Simon observes that Braithwaite affirmatively reached out
to Brookfield, an entity with which Mills reached a merger agreement before the
Simon-Farallon JV submitted a topping bid, and agreed to negotiate the issue of
successor consideration for the call right. Braithwaite admits to reaching an
“agreement in principle” on behalf of KanAm to negotiate in good faith with
300
See Simon’s Post-Trial Reply Br. 15–16.
63
Brookfield on this issue.301 Simon argues the reason for this negotiation was clear:
Brookfield, due to its entity structure (not an UPREIT), could not offer partnership
units in a tax-deferred way.302 According to Simon, KanAm’s failure to reach out to
Simon in a similar way is telling. To me, nothing about KanAm’s willingness to
negotiate with Brookfield indicates an indifference to the consideration it would
receive, however. Next, in an appeal to equity, Simon points to KanAm’s then-
silence about what it now maintains was its position—that only Mills Units, and not
successor units, would evoke the call right—and Simon asserts that the “multi-
billion dollar transaction was priced” on the basis that the purchaser had an operative
call right.303
Braithwaite and KanAm were not the only parties with knowledge who were
silent, however. Mills’ outside counsel, Willkie Farr & Gallagher, produced a
memorandum during this time period which indicated:
[o]f note, the joint venture agreements strictly call for the OP Units to
be those of [the Mills Partnership], and do not contain language
authorizing the use of similar OP-type securities in the event [the Mills
Partnership] no longer issues Units or ceases to exist as the result of a
Mills corporate restructuring or corporate-level transaction.304
301
See Trial Tr. 775:10–776:18 (Braithwaite).
302
See Simon’s Post-Trial Reply Br. 15–16.
303
Id. at 15.
304
JX0241 at 4 (emphasis added).
64
Despite the plain language of the contract which resulted in this analysis, Mills did
not raise the issue directly with Simon. However, a Descriptive Memorandum
created by Mills, together with Goldman Sachs and J.P. Morgan and distributed to
potential acquirers (including Simon), provided that the “Put-call rights enable . . .
Mills to require KanAm to sell its interests to Mills for cash or partnership units of
Mills LP, the choice of consideration to be made in KanAm’s sole discretion . . . .”305
Importantly, Simon’s general counsel also recognized that the JV Agreements
did not refer to Simon Units, and provided that the only non-cash consideration was
Mills Units.306 The internal legal team at Simon, and its outside counsel, knew that
the specified default consideration was Mills Units. Simon’s current explanation for
why it chose to proceed without resolution of this issue is, to me, unsatisfying;
Simon’s general counsel, Mr. Barkley, testified that Simon was not concerned,
because KanAm had agreed to accept Simon Units in the past.307 If true, this was
unwise. I also note that Barkley directly discussed the issue with Mr. Simon during
the due diligence process surrounding the Simon-Farallon JV, but Simon still
decided not to raise and discuss the issue with KanAm at the time. 308 In short, it
appears each legal eye which read these contracts identified the issue. The decision
305
JX0293 at 1, 88 (emphasis added).
306
Trial Tr. 291:7–292:18 (Barkley).
307
Id. at 292:16–293:7 (Barkley); id. at 302:22–306:17 (Barkley).
308
Id. at 311:16–312:14 (Barkley).
65
to leave the issue open by all involved appears strategic and does not support a
finding of a meeting of the minds regarding an automatic substitution of Simon
Units.
The negotiation surrounding the Denver West JV Agreement, the only
agreement executed following Simon’s re-entry, is instructive. Simon initially
insisted that the buy/sell consideration be paid only in cash.309 A senior staff attorney
at Simon, Breeden, circulated an email with comments that cash needed to be paid
since “payment in [Mills] units no longer works.”310 This comment appears to have
originated from Brian Warnock, Simon’s Senior Vice President for Acquisitions.311
Thus, at this time it is clear that there was no widespread or absolute understanding
within Simon itself that a reference to Mills Units in a JV Agreement’s buy/sell
provision actually meant Simon Units. During the discussion of the JV, KanAm
continued to negotiate the terms and seek some form of non-cash consideration, until
Rick Zeckel, Simon’s Vice President of Property Management, expressed his
frustration with delays over the negotiations regarding the buy/sell provisions.312
Braithwaite responded that these negotiations raised “much broader and significant
issues” that the parties were trying to avoid for the “simpler” deal that Denver West
309
Simon also initially took this position in 2008 during the Grapevine Mills refinancing.
310
JX0328 at 1.
311
See id.
312
JX0330 at 1–2.
66
represented.313 Due to time pressures the Denver West agreement was signed with
cash as the only currency.
However, the parties ultimately executed a unifying side letter qualifying the
cash currency. The executed side letter provides that “if the parties agree, or it is
later determined” that non-cash consideration would be payable with respect to an
existing JV, Colorado Mills, then that same non-cash consideration would apply to
Denver West.314 Prior to execution of the side letter, several drafts were circulated.
Early KanAm drafts included the following language: “a disagreement as to the form
of the non-cash consideration under Section 11.3” exists including “whether the
Units are to be units of [the Simon Partnership] instead of units of [the Mills
Partnership] . . . .”315 Further, the draft provided that by entering the Denver West
Agreement KanAm “has not waived any of its rights or claims as to the form of non-
cash consideration under Section 11.3 of any of the Limited Partnership Agreements
. . . .”316 Finally, the draft stated that “[t]he parties hereby agree to engage in good
faith negotiations to resolve the disagreement as to the form of non-cash
consideration.”317 The executed side letter, however, removed the reference that the
313
Id. at 1.
314
JX0348 at 5. The parties do not dispute that this language simply means that if non-cash
consideration is payable in Colorado Mills, then that same non-cash consideration applies to
Denver West. See, e.g., Simon’s Post-Trial Opening Br. 33–34.
315
JX0340 at 2.
316
Id. at 2–3.
317
Id. at 3.
67
parties would “agree to engage in good faith negotiations to resolve the disagreement
as to the form of non-cash consideration” which was in the earlier circulated draft
and, as set forth above, pegged the issue to resolution of the same issue in the
Colorado Mills JV.318
The reference in the final side letter to the consideration in the Colorado Mills
JV is telling, and the Denver West negotiations indicate strongly that there was not
a definitive agreement or common understanding reached between Simon and
KanAm regarding a substitute for Mills Units as non-cash consideration.319 As I
noted in the summary judgment opinion in this matter, the side letter suggests that
further negotiations were contemplated.320 There would be nothing to later “agree”
upon or “later determine” if the parties understood at that time that the units called
for under the Colorado Mills agreement, to which the side letter was pegged, and
which, like all of the other JVs here provided for Mills Units, simply meant
“successor units” or “units similar to Mills Units.” Further supporting the absence
of a meeting of the minds during this period, as Simon’s General Counsel testified,
318
Compare JX0348 at 5 with JX0340. See JX0170.
319
See Trial Tr. 909:18–910:19 (Braithwaite). It is difficult to see what non-cash consideration
KanAm would be seeking at this time other than Simon Units. It is an irony of this case that in
this negotiation KanAm appears to have sought a modification to let it elect Simon Units, while
Simon sought to modify the call right to specify cash. If in fact KanAm was seeking Simon Units,
I find it nonetheless unhelpful to Simon. Simon declined to agree to provide Simon Units, rather
leaving the issue open by entering a side letter pegged to non-existent Mills Units.
320
Simon I, 2014 WL 4840443, at *16–17.
68
there are no internal Simon communications indicating that Simon would provide
its units to KanAm if it exercised a call right under the JV Agreements.321
I next briefly address the non-contractual statements by KanAm during this
time period to investors and in audited financial statements, upon which Simon relies
in an attempt to show the parties intended and understood that Simon Units were
automatically substituted as consideration. Simon points to an October 9, 2007,
meeting in Dusseldorf, Germany (the “Dusseldorf Meeting”) where according to
Simon, KanAm communicated to certain investors and sales people that Simon Units
were the required non-cash currency following Mills’ exit.322 The deposition
testimony of three investors and sales partners at the Dusseldorf Meeting supports
Simon’s assertion.323 Each alleges that Mr. von Boetticher, a KanAm principal and
former Mills board member, informed those at the Dusseldorf Meeting, essentially,
that there would be no changes to the exit mechanisms and that Simon Units would
be substituted.324 At trial, Mr. von Boetticher did not recall making such statements
to investors or any specifics of the meeting itself.325
321
Trial Tr. 258:12–258:20 (Barkley) (“QUESTION: And isn't it the case, sir, as we've talked
about in your deposition, that you cannot identify a single internal memorandum or e-mail at Simon
where Simon people said to each other during this period of time, from 2007 through and including
2012, ‘Simon units will be provided to KanAm under the joint venture agreements’? ANSWER:
I don't recall there being anything like that, yes.”); id. at 285:2–9 (Barkley).
322
See Simon’s Post-Trial Opening Br. 36–39.
323
See id. (quoting depositions of Norbert Geisen, Reiner Michael Cramer, Jeorg Dudel).
324
See id.
325
See Trial Tr. 532:8–536:8 (von Boetticher).
69
Next, Simon points to communications between Juergen Goebel, a KanAm
employee, and a KanAm investor, Albert Hoeller.326 Hoeller contacted Goebel and
inquired about the procedure for liquidation in the future in light of Simon’s entry.327
Goebel replied via email explaining, essentially, that nothing had changed, and that
if the buy/sell provisions were triggered “the countervalue [would] be paid out in
cash or in the form of Simon units.”328 Simon argues this email is strong
contemporaneous evidence of KanAm’s understanding of the buy/sell provisions.329
Additionally, Simon points to KanAm’s audited financial statements
following Simon’s return,330 which indicated that there was no impact on the KanAm
partnership and that the JV Agreements “under certain conditions may require the
sale of [KanAm’s] interests.”331 KanAm made similar disclosures for several years,
from 2008 through 2012, before later updating the financial statements.332 KanAm
asserts that the above language simply reflects that Simon could still exercise the
call but KanAm retained the discretion to select units, and that it was simply a
“conservative position about what might be ‘required.’”333
326
See Simon’s Post-Trial Opening Br. 40–41 (citing JX0352).
327
See JX0352 at 3.
328
Id. at 1.
329
See Simon’s Post-Trial Opening Br. 60 (citing JX0352); Simon’s Post-Trial Reply Br. 21
(arguing “[t]he information conveyed in Mr. Goebel’s email reflected KanAm’s contemporaneous
understanding”).
330
See Simon’s Post-Trial Reply Br. 21–22.
331
See, e.g., JX0392 at 8–9.
332
See, e.g., JX0370; JX0392; JX0399; JX0419; JX0467; JX0521 at 13.
333
See KanAm’s Post-Trial Sur Reply Br. 30.
70
The evidence Simon has put forward regarding the Dusseldorf Meeting, the
Goebel email, and KanAm’s financial filings is some evidence that KanAm expected
that Simon could successfully call based on a tender of Simon Units. It does create
conflict in the record about whether it was mutually understood that Simon Units
were a viable tender in place of Mills Units. KanAm has asserted that these are
“random comments gleaned from non-contractual documents” and that “[t]he
contracts, at all times, spoke for themselves and should be enforced as written.”334
While “random comments” is an overstatement, the references are not so widespread
within KanAm as to convince me that KanAm had a corporate understanding that
Simon Units were acceptable tender, in light of the other evidence cited above.
Importantly, as KanAm observes, this information does not present a course of
dealing between two contractual parties,335 and there is no evidence in the record
that this information was relied on by Simon. Rather, during this time period, there
were no internal communications at Simon reflecting their understanding that Simon
Units were appropriate,336 let alone a reliance on the above statements. I find that
when viewed as a whole the extrinsic evidence during this time period, in light of
the unambiguous contractual terms, is insufficient to demonstrate that there was a
334
KanAm’s Post-Trial Answering Br. 6.
335
See KanAm’s Post-Trial Sur Reply Br. 27–28 (quoting Restatement (Second) of Contracts, §
223(1) “[a] course of dealing is a sequence of previous conduct between the parties to an agreement
which is fairly to be regarded as establishing a common basis of understanding for interpreting
their expressions and other conduct”).
336
See, e.g., Trial Tr. 258:12–258:20 (Barkley); id. at 285:2–9 (Barkley).
71
mutual intent, or meeting of the minds, between KanAm and Simon regarding the
automatic substitution of Simon Units.
d. Farallon’s Exit and Simon’s Attempt to Call
Following Simon’s break up with Farallon, the 2012 Agreement and
Indemnity was reached between KanAm and Simon. Simon points to the 2012
Agreement as supportive of its position that Simon Units were substituted as the
appropriate buy/sell consideration despite the language of the contracts.337 KanAm
points out this agreement arose when Simon asked for KanAm’s consent regarding
its acquisition of Farallon, and in exchange agreed to indemnify KanAm against
losses. KanAm observes that there is no mention of the buy/sell provisions in the
indemnity agreement nor is there any evidence that the parties intended this
agreement to work such a change.338
I find the record supports KanAm regarding the 2012 Agreement. First, the
Agreement was presented initially to KanAm by Simon’s General Counsel, who
advised that “[t]here would be no changes required to existing venture agreements
at property level companies . . . .”339 Similarly there is no testimony in the record
that the parties understood or intended for such a substantial change to be worked to
the buy/sell consideration by the 2012 Agreement. In other words, the 2012
337
See Simon’s Post-Trial Opening Br. 60–61.
338
See KanAm’s Post-Trial Answering Br. 36–37.
339
JX0430 at 1; Trial Tr. 216:4–23 (Barkley); id. 225:1–5 (Barkley).
72
Agreement preserved existing contract rights, including KanAm’s right to insist on
a tender of Mills Units. The 2012 Agreement did not create new rights regarding
the call.
I next briefly address the circumstances surrounding the agreements under
which KanAm agreed to an extension of the buy/sell exercise period, and Simon’s
eventual attempted call. When Simon first indicated its interest in exercising the
call, KanAm did not immediately raise its current position that it could insist on
Mills Units, and could thus thwart the call’s operation. KanAm did not raise this
issue to Simon until after it signed two extensions to the buy/sell window in 2012.
The call was not triggered that year, and in the fall of 2012 the Concord Mills JV
Agreement was amended; however, no change was made to the buy/sell provision.
During this period KanAm offered to renegotiate the buy/sell consideration—
including at an in-person meeting with Mr. Simon in 2013. Simon declined, and
ultimately initiated this suit while triggering the call provisions. I take from these
facts that KanAm, like Simon, was unsure of its ability to insist on Mills Units; it
does not demonstrate to me that the parties understood that Simon Units were an
agreed to substitute, therefore.
e. The Contractual Terms
In sum, the JV Agreements unambiguously provide for Mills Units meeting
certain specifications. There is insufficient extrinsic evidence to demonstrate, by a
73
preponderance of the evidence, that Simon and KanAm shared a mutual intent or
reached a meeting of the minds that, despite this unambiguous language, Simon
Units could satisfy the call right. No doubt, there has been gamesmanship and
strategic silence by both sides spanning their long relationship. While Simon Units
were initially contractually-compliant in the three original JVs to which KanAm was
an original partner with Simon and Mills, those agreements were amended or
restated to remove references to Simon Units. The three other JVs to which Simon
was not an original investor never mentioned Simon Units. When the Simon-
Farallon JV acquired Mills there was contractual silence regarding these provisions.
All sides knew consideration for the call was an unresolved issue, but failed to
bargain for a substitute tender. Compounding the problem, in the best chance to
address and fully settle the issue, Denver West—the only post-Simon-return JV—
Simon as well as KanAm punted on the issue. Unfortunately for Simon, I must
therefore enforce the Agreements as written. Absent a showing of mutual intent
regarding the substitution of Simon Units, I cannot add an additional term to the
unambiguous contractual provisions.
Before leaving a discussion on the meaning of the Agreements, I note that one
of the JV Agreements at issue here, Orange City, includes what the parties have
identified as unique language relating to successor interests and the substitution of
74
successor units as the proper buy/sell consideration.340 Simon was not an initial party
to the Orange City JV,341 but became a party following its acquisition of Mills. Like
the other JVs at issue, Orange City provides that the default consideration in the
event of a call is Mills Units meeting certain specifications.342 However, the
definition of “Mills” or “TMLP”343 in this JV Agreement was not like the others.
Specifically, Section 11.2 of the Orange City JV Agreement contains a clause that
defines Mills as follows: “[Mills] (which term, for purposes of this Section 11.2 and
Section 11.3 shall be deemed to include Mezz II GP LLC and any other Mills
Partners).”344 The JV further defines Mills Partners as follows: “Mills Partner(s):
Collectively, [Mills] and Mezz II GP LLC and their respective Affiliates, successors
and/or assigns who or which become Partners in accordance with this
Agreement.”345 Finally, the buy/sell consideration provision in Section 11.3
provides that: “[i]f [Mills] is the Offeror . . . unless [KanAm] elects to receive cash,
340
See Post-Trial Oral Argument Tr. 96–97 (arguing on behalf of KanAm that “the fact that it's in
one and not in the others doesn't mean I take it from this one and read it into all the others. It tells
me that they agreed in this one to this provision and affirmatively did not agree in any other
agreement to that term. . . . the language that exists in Orange that does not exist in any of the other
joint ventures, and Simon never asked to have it included”); Simon’s Post-Trial Opening Br. 17
n.9 (identifying the unique language in the Orange City JV Agreement).
341
See JX0155.
342
Id. at §§ 11.3(d), 11.3(f).
343
The Orange City JV Agreement’s short term for The Mills Partnership is “TMLP”—for clarity
I have substituted “[Mills]” for “TMLP” when quoting the JV Agreement.
344
JX0155 § 11.2(a) (emphasis added).
345
Id. at § 1.39 (emphasis added); id. at § 1.2 (defining Affiliate, “[w]ith respect to any Person, a
Person who, directly or indirectly, controls, is under common control with, or is controlled by, that
Person,” with control meaning “the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of such Person”).
75
the Buy/Sell Price shall be paid in full in [Mills] [U]nits of limited partnership . . .
.”346 Mills Units is not a separately-defined term. In other words, uniquely with
respect to the JV Agreements at issue, under this Orange City Agreement, successors
of Mills—like Simon—are specifically included in the definition of Mills, and thus
“TMLP [Mills] Units” includes units of any successor of Mills (so long as they
otherwise possess the requisite characteristics, including liquidity and tax avoidance,
required of compliant Mills Units).
Under this contractual language, Simon points out that, as the successor to
Mills, and via Section 11.2’s modifier of the definition of “[Mills]” for Sections 11.2
and 11.3, its units are eligible to be explicitly contractually-compliant. As a result,
Simon attempts to make a universal point; it asserts that, since KanAm appears to
have been indifferent to accepting successor operating partnership units in the
Orange City Mills JV, it must be indifferent generally, and I should construe all of
the JV Agreements consistent with Orange City Mills. I find the opposite. The fact
that KanAm and Mills bargained for successor units to be tender in one JV
Agreement makes more significant the fact that they omitted the same provision in
the other Agreements. Moreover, in another JV negotiation not at issue here, Mills
sought a similar provision, which KanAm rejected.347
346
Id. at § 11.3(d).
347
See Trial Tr. 770:16–772:1 (Braithwaite); JX0206 at 18.
76
KanAm, for its part, argues that the definition of Mills to include successors
“means only that Simon as a successor to [the Mills Partnership] can exercise the
rights that [the Mills Partnership] had; it does not change the specified consideration
from Mills Units to Simon Units.”348 I disagree. The parties to the Orange City JV
could have, but did not, separately define Mills Units. They could have, but did not,
provide that, notwithstanding that Mills is defined as Mills and any successors for
the purposes of the buy/sell provision, “Mills Units” excluded successor units.349
I construe the Orange City JV Agreement as follows: Simon as a successor is
to be construed as “TMLP” [“Mills”]; and its units, if otherwise contractually-
compliant, are effective Mills Units, which are contractual tender for the call for
KanAm’s interest in this JV. In support of this finding I note the broad modifier to
the Mills definition is located directly within the Article of the JV Agreement
covering transfers. The only question remaining is whether Simon, once read into
the agreement per the definition, can offer compliant units pursuant to Section
11.3(f). Section 11.3(f) provides that: “[a]ny Units received by [KanAm] pursuant
348
KanAm’s Post-Trial Answering Br. 56 n.204. See Post-Trial Oral Argument Tr. 96 (arguing
on behalf of KanAm that “the language doesn’t track” to a substitution of Simon Units for Mills
Units).
349
I note that certain other JV Agreements without the broader definition present in Orange City
provide in their corresponding payment provisions that “[a]ny TMLP Units received . . . .” rather
than the “[a]ny Units received . . . .” language present in the Orange City JV. Compare JX0155 §
11.3(f) with JX0152 § 11.6(f); JX0170 § 11.3(f). That is, unlike with other JVs, the payment
provision in Section 11.3(f) of Orange City omits the direct reference to TMLP Units, indicating
that successor units were contemplated.
77
to this Section 11.3 shall have substantially the same rights (including redemption,
conversion, registration and anti-dilution protection) as attached to units issued in
connection with the formation transactions of [Mills Partnership] and Mills Corp . .
. .”350 The majority of the briefing in this matter did not focus on this narrow issue.
The evidence at trial made clear that there are differences, from KanAm’s
perspective, between Simon and Mills Units. The parties differ as to the materiality
of those differences. To be compliant, however, successor units in the Orange City
JV need not be identical to any particular Mills Units; they only need to provide
substantially the same rights in the four delineated areas.
Simon asserts that both parties agree these narrower requirements are met with
respect to Simon Units.351 While the record as it has been presented tends to support
this assertion,352 in light of the absence of an explicit focus on this issue I will permit
the parties to submit supplemental memoranda referencing the record on this issue
if a stipulation cannot be reached as to whether compliant successor units have been
tendered with respect to the Orange City JV.353
350
JX0155 § 11.3(f).
351
See Simon’s Post-Trial Reply Br. 33 (asserting that “[t]he parties agree that Simon Units satisfy
[the tax deferral] central purpose and are indistinguishable with respect to redemption, conversion,
registration, and anti-dilution – the only other characteristics of units identified in the buy/sell
provisions”).
352
See, e.g., Trial Tr. 1168:4–1169:15 (Fick); id. at 1275:10–1276:1 (Croker).
353
I note my commentary here is limited only to these particular factors.
78
B. The Material Breach Doctrine
I next turn to a discussion of the doctrine of material breach. Simon argues
that “[e]ven if the Court were to find that the extrinsic evidence does not show that
the parties intended for the call right to be operative under the present circumstances,
KanAm’s effort to escape its obligations independently fails because Simon’s
willingness to deliver the buy/sell price in cash or Simon Units is not a material
breach of the JV Agreements that would excuse KanAm’s performance.”354 Simon’s
argument is perhaps better stated as that it stands ready to substantially perform, and
thus I should specifically enforce KanAm’s reciprocal obligation to sell.
Nonetheless, I will in this discussion refer to Simon’s position as one of “non-
material breach.” KanAm, for its part, asserts that the buy/sell provisions are
contractual options to purchase and pursuant to Delaware law are to be strictly
construed.355 Further they assert that specific contractual “default provisions” in the
JV Agreements bar the doctrine of substantial performance.356
I first note that the call provision operates as an option; Simon has the right to
purchase KanAm’s interest in each JV at certain contractually-provided times. The
price to be paid is pegged to appraised value, and must be paid (absent an election
by KanAm to take cash) in the equivalent value of units of the Mills Partnership. In
354
Simon Post-Trial Opening Br. 64.
355
KanAm’s Post-Trial Answering Br. 51–52.
356
Id. at 52–53.
79
order to trigger its right to purchase, Simon must comply with the conditions set
forth in the contract. Specific performance of an option contract requires strict
adherence to these conditions. I find Simon’s argument that it is not in material
breach to be inapposite. Having failed to satisfy the conditions for the call, it cannot
enforce the contract, as contractual provisions in option contracts are construed
strictly. Moreover, specific contract language reinforces the point—the notice of the
call, per the JV Agreements, is voidable absent compliance with the conditions
necessary to compel the sale. My reasoning is explained in more detail below.
Simon’s argument that it is not in material breach turns on a doctrine designed
to prevent a non-material deviation from the requirements of a contract from
depriving a party of its expectations thereunder. Stated simply, it is a doctrine to
prevent oppression through fortuity. Generally, under Delaware law, a breach will
be deemed material if “touches the fundamental purpose of the contract and defeats
the object of the parties in entering into the contract.”357 If a breach is not material,
performance by the injured party is generally not excused and refusal to perform by
the injured party may itself constitute a breach.358 That is, “a slight breach by one
party, while giving rise to an action for damages, will not necessarily terminate the
357
Preferred Inv. Servs., Inc. v. T & H Bail Bonds, Inc., 2013 WL 3934992, at *11 (Del. Ch. July
24, 2013) (citations omitted).
358
See BioLife Sols., Inc. v. Endocare, Inc., 838 A.2d 268, 278 (Del. Ch. 2003).
80
obligations of the injured party to perform under the contract.”359 The question of
whether a breach is material sufficient to justify non-performance entails a fact-
specific weighing analysis.360 To determine whether a breach is material, Delaware
courts have looked to the factors provided by Section 241 of the Restatement
(Second) of Contracts.361 The Restatement factors are as follows:
(a) the extent to which the injured party will be deprived of the benefit
which he reasonably expected;
(b) the extent to which the injured party can be adequately compensated
for the part of that benefit of which he will be deprived;
(c) the extent to which the party failing to perform or to offer to perform
will suffer forfeiture;
(d) the likelihood that the party failing to perform or to offer to perform
will cure his failure, taking account of all the circumstances including
any reasonable assurances; and
(e) the extent to which the behavior of the party failing to perform or to
offer to perform comports with standards of good faith and fair
dealing.362
The parties spent much time at trial on this issue, establishing by evidence the
similarities and differences between Mills and Simon Units, which I summarize
briefly below. As stated above, among the prime concerns of KanAm is that the
consideration provide tax benefits as well as liquidity for its members. Simon Units,
359
Id. (citations omitted).
360
See id.
361
See, e.g., id.
362
Restatement (Second) of Contracts § 241 (1981).
81
I note, do provide liquidity and are congruent, but not identical, with respect to tax
consequences and risks.
Both Simon and Mills were structured as umbrella partnership real estate
investment trusts (“UPREITS”). This entity structure, for both Simon and Mills,
facilitated liquidity and tax benefits. As an UPREIT, Simon could provide limited
partnership units of the Simon Partnership (Simon Units) that were redeemable for
cash or stock. The assets themselves, the interests in the properties, were held at the
partnership level. Upon redemption, the distributed Simon Units could convert into
either cash or publicly traded stock of the parent REIT—Simon Corp. This process
would generally permit a counterparty in a JV to secure non-recognition tax
treatment—that is, generally speaking, an exchange of an interest in a JV for such
units is not a taxable event under the United States tax code.363 Mills’ entity structure
generally mirrored that of Simon, it offered units of Mills Partnership (Mills Units)
that were redeemable and upon redemption could convert into publicly traded shares
of Mills Corp.364 Thus, at a general level the operation and purpose of Mills Units
and Simon Units was similar.
363
See Trial Tr. 154:5–155:3 (Simon).
364
See id.
82
Simon and Mills as entities, however, were distinct in terms of size, portfolio
composition,365 and their historical relationship to KanAm. The record supports that
KanAm investors had a level of familiarity with Mills which they did not possess
with Simon. KanAm contributed assets to Mills at Mills’ inception. Historically,
KanAm had a large ownership stake in Mills—up to 41% at the time of the original
Mills IPO; thus, the record supports a finding that when KanAm bargained to receive
Mills Units, it had some reasonable expectation that it could influence the actions of
Mills. Additionally, for almost two decades KanAm had three representatives on
Mills’ Board, which evinces a special ability to monitor and participate in Mills that
did not exist with Simon. Mills, as a smaller entity, had a higher proportion of
projects that were core to its business and unlikely to be sold, which sales themselves
could trigger negative tax consequences.366 Simon, on the other hand, had a strategy
of “aggressively recycling capital” which means they were more likely to exit JV
projects, an event which could trigger tax consequences.367 Further, empirically,
when given the chance upon Simon’s re-entry, only a small minority of KanAm
investors elected to exchange their Mills Units for Simon Units. 368 KanAm asserts
365
I note that the investments were generally in specific projects, however, upon conversion the
broader portfolio would be relevant because a particular unit or stock’s value would be tied to the
broader portfolio.
366
See Trial Tr. 389:14–17 (Foxworthy) (testifying that were Mills to lose certain of the JVs at
issue here, it would have been “a terrible infringement of their franchise”); JX0613 at 47.
367
See Trial Tr. 107:8–108:14 (Simon).
368
See Pretrial Stip. 14; Trial Tr. at 1016:23–1018:24 (Hammond).
83
that its contracts did not reflect an agreement to put its tax and economic destiny in
the hands of the larger, and less familiar, Simon Entities. Simon points out, however,
that none of this alleged unique relationship was disclosed contemporaneously to
KanAm investors when it entered certain JVs that provided for both Mills and Simon
Units.369
The evidence indicates that payment in Simon Units could result in
administrative and tax consequences for KanAm and its investors, beyond those
inherent in Mills Units.370 If so, the injury to KanAm, for the most part, is not
calculable ex ante, as the tax consequences are in the form of heightened tax risks
that would depend on later determinations by regulatory authorities or actions by
Simon.371 For example, German regulators would look to Simon’s approximately
600 US based LLCs and apply a multi-factor test to each LLC for “opacity,” a
finding of which would trigger additional tax consequences.372 KanAm observes
that German tax authorities have already reviewed certain joint tax filings of KanAm
and Mills, on the other hand, and accepted the classifications of taxation provided.373
369
See Simon’s Post-Trial Reply Br. 34–35. KanAm chalks this up to being a “simple omission”
and asserts these “1990s statements do not relate to the operative JV Agreements.” KanAm’s Post-
Trial Sur Reply Br. 38.
370
I note that there was not a similar services agreement reached between Simon and KanAm, in
contrast to the services agreement between KanAm and Mills discussed in the factual background
section. See Trial Tr. 1018:15–22 (Hammond).
371
See generally JX0614.
372
See, e.g., Trial Tr. 1358:10–1359:16 (Riha); id. at 1366:7–1368:8 (Riha).
373
See JX0614 at 19.
84
Similarly, KanAm argues that if Simon were to add 6,000 German investors as
limited partners further tax risks—arising from potential classification as a publicly-
traded-partnership—would be triggered.374
In rebuttal, Simon points out that the only relevant tax protection actually
contained in the JV Agreements is non-recognition tax treatment pursuant to Section
721, and argues that KanAm’s professed current concern about these additional tax
risks is litigation-driven.375 Simon observes that none of the tax risks now raised in
litigation were communicated to KanAm investors via the prospectuses issued when
Simon was a counter-party, and that KanAm did not bargain for the protections they
now seek.376 Simon also observes that its units provide the requisite liquidity,
conversion, and redemption qualities specified in the JV Agreements.
Finally, for the reasons laid out in painful detail in the factual background and
extrinsic evidence analysis above, the record is unhelpful to Simon with respect to
the equitable considerations under the Restatement analysis. Simon will not be
deprived of a reasonable expectation of a benefit; the problem of the appropriate
call-right tender was known by Simon from the time of the Simon-Farallon JV, and
374
See KanAm’s Post-Trial Answering Br. 70 (citing JX0613 at 71–80).
375
See Simon’s Post-Trial Reply Br. 33 (arguing Simon Units satisfy the tax deferred central
purpose and are “indistinguishable” with respect to the other listed characteristics).
376
Id. at 34. Simon also denies that such tax risks are legitimate.
85
it chose to roll the dice rather than negotiate the issue. For similar reasons, KanAm’s
position is equitably weak.
The foregoing recitation should demonstrate that a determination of the
materiality of the difference between Simon and Mills Units, from the point of view
of the parties under the factors discussed above, is an issue both fact-intensive and
difficult. Here, however, I need not reach a conclusion under the material breach
doctrine, as under the terms of the contracts, I find the analysis inapt.377
The call right functions as an option. KanAm has contractually agreed to sell
its interest in each JV to Simon, at Simon’s option, in exchange for a number of
Mills Units to be determined by the appraised value of KanAm’s interest at the time
sold. Regarding option contracts, the treatises indicate that precise compliance with
the terms of the option is required before the sale is enforced. The doctrine of non-
material breach (or substantial compliance) is generally inapplicable to option
contracts because a true forfeiture is not involved—each party retains its original
interest—and the one–sided nature of such contracts, if not strictly construed, could
allow, in effect, unilateral modification. As Williston on Contracts states:
[w]hen the optionee decides to exercise its option, it must act
unconditionally and according to the terms of the option . . . . Nothing
377
I note, in any event, were I to invoke the doctrine, it is exceedingly difficult for me to see how
providing consideration not in the form bargained for under the terms of the applicable contracts,
between sophisticated parties, would not be a material breach. With respect to the buy/sell
provisions, the nature of the consideration is naturally material; it is the gravamen of the
agreement.
86
less than an unconditional and precise acceptance will suffice unless
the optionor waives one or more of the terms of the option. . . . Because
the option itself affords the offeree protection against the offeror's
inconsistent action, the general attitude of the courts is to construe the
attempt to accept the terms offered under the option strictly. The
problem of a potential forfeiture does not enter into the matter.378
The Restatement (Second) of Contracts is similar:
[d]espite equity's dislike of forfeitures, . . . requirements governing the
time and manner of exercise of a power of acceptance under an option
contract are applied strictly. It is reasoned that any relaxation of terms
would substantively extend the option contract to subject one party to
greater obligations than he bargained for.379
Here, KanAm bargained for Mills Units. To the extent I treat the call right as
an option, deviation from the terms of the offer cannot be excused as a non-material
breach. Simon argues strenuously that it would be unfair to treat the call right as a
simple option. It rightly points out that I must read contracts as a whole, and that
the call right is but a bargained-for portion of a larger contract; it argues that it has
already performed under the contract and that it will be denied the full benefit of its
bargain if the call can only be consummated with non-existent Mills Units. Treating
a call right imbedded in a larger contract with other reciprocal obligations as an
option is problematic, as Simon points out. The record indicates that the right to buy
out counterparties as the projects mature was an important part of the JVs. Simon’s
378
1 WILLISTON ON CONTRACTS § 5:18 (4th ed. 2006) (footnotes omitted).
379
Restatement (Second) of Contracts § 25, Rpt. Note cmt. d (2008). See Liberty Prop. Ltd. P'ship
v. 25 Massachusetts Ave. Prop. LLC, 2008 WL 1746974, at *17 n.75 (Del. Ch. Apr. 7, 2008)
(quoting id.).
87
contentions would be more persuasive here, however, if a reasonable expectation of
Simon was that Simon Units would be accepted by KanAm. The record, however,
shows that Simon was aware that at least an issue existed with respect to proper
consideration, yet elected to proceed with the JVs regardless.
Treatment of the call under these particular JV Agreements as an option—
acceptance of which must be strictly construed—finds support in the provisions of
the JV Agreements themselves. The contracts at issue require strict compliance with
the buy/sell provisions in order to consummate the call. The “default provision,”
which is contained in each agreement at issue,380 provides that “if at the time of
Closing, either party fails to perform as required, then and in such event the non-
breaching party shall have the right to void the Buy/Sell Notice attributable thereto
or to pursue any rights at law or in equity (including without limitation, instituting a
suit for specific performance).”381 As I have already found, the Plaintiffs have failed
to show by a preponderance of the evidence that there was a meeting of the minds
with respect to Simon Units being contractually-compliant substitute units. Rather,
the contracts unambiguously require tender of Mills Units meeting certain
380
See JX0027 § 11.3(e)(iv); JX0122 § 11.3(e)(iv); JX0120 § 11.3(e)(iv); JX0152 § 11.6(e)(iv);
JX0155 § 11.3(e)(iv); JX0170 § 11.3(e)(iv); JX0342 § 11.3(e)(iv).
381
JX0152 § 11.6(e)(iv) (emphasis added). I note that while Simon asserts that this section alone
is insufficient to void the buy/sell notices absent a showing of material breach, it relies on the
second clause of this section in support of its argument that this contractual provision “alone is
sufficient” to grant specific performance. See Simon’s Post-Trial Opening Br. 75; Simon’s Post-
Trial Reply Br. 47.
88
specifications. The Plaintiffs are trying to perform the contract by offering non-
compliant Simon Units. Simon has therefore failed to perform as required under the
JV Agreements, and the bargained-for provision that if “at the time of Closing, either
party fails to perform as required, then and in such event the non-breaching party
shall have the right to void the Buy/Sell Notice attributable thereto . . .” has been
triggered.382
KanAm has a contractual right to void non-compliant notices pursuant to the
JV Agreements. Enforcement of the call right under the doctrine of non-material
breach would render this bargained-for contractual right surplusage. Stated another
way, the non-breaching party always has a right to avoid performance in the event
of a material breach. If the contractual right to void the buy/sell notice simply meant
KanAm may avoid closing only in the event of a material breach, it would do no
actual work in the contract. A fair reading of this provision is that in the event a
party fails to comply with the requirements to exercise the buy/sell provision, the
non-breaching party can void the notice. I find KanAm’s assertion that such a
provision was put into these contracts, at least in part, to avoid a “close enough”
argument persuasive.
Finally, I pause to briefly address Simon’s requested relief. The agreements
in question were to conduct joint ventures. The call right gives Simon the right to
382
See JX0152 § 11.6(e)(iv) (emphasis added).
89
buy out its counterparty for a specific consideration at a specific time. Simon seeks
specific performance of that contractual right to purchase the KanAm interests, with
Simon Units or cash, thereby forcing KanAm out of the JVs.383
In order for equity to force KanAm to sell, Simon must demonstrate that it has
complied with the contract and is able to perform. Delaware courts will specifically
enforce a contract only if the party seeking relief establishes that “(1) a valid,
enforceable, agreement exists between the parties; (2) the party seeking specific
performance was ready, willing, and able to perform under the terms of the
agreement; and (3) a balancing of the equities favors an order of specific
performance.”384 Further, “[t]he decision as to the availability of specific
performance rests within the sound discretion of this Court.” 385 Additionally,
“specific performance [is] an extraordinary remedy, not to be awarded lightly,” and
a “party seeking specific performance must prove by clear and convincing evidence
that she is entitled to specific performance and that she has no adequate remedy at
law.”386
383
While enforcement of the contract specifically is the primary relief requested, I note that Simon
has also pursued damages on the theory that Simon Units are contractually-compliant and that by
refusing to accept them and exit the JVs, KanAm breached—it seeks restitution for distributions
after the attempted exercise of the call.
384
BAE Sys. Info. & Elec. Sys. Integration, Inc. v. Lockheed Martin Corp., 2009 WL 264088, at
*7 (Del. Ch. Feb. 3, 2009) (citations omitted).
385
Id. (citation omitted).
386
Halpin v. Riverstone Nat'l, Inc., 2015 WL 854724, at *5 (Del. Ch. Feb. 26, 2015) (citations
omitted) (emphasis added).
90
As detailed above, Simon was not capable of performing under the terms of
the agreements—it failed to provide the contractually required currency. Further, in
light of its knowledge of, but failure to address, the issue of consideration in the JV
Agreements, Simon would find difficult its burden to show by clear and convincing
evidence that equity would favor specific performance even if I had found that
Simon Units were contractually-compliant.
C. The Implied Covenant of Good Faith and Fair Dealing
I next turn to Simon’s claim arising under Count III of its Complaint, which
asserts that KanAm violated the implied covenant of good faith and fair dealing by
demanding non-existent Mills Units. This Court’s summary judgment opinion
briefly addressed this issue stating that “as the JV Agreements do not address the
unavailability of Mills Units, the Plaintiffs' allegation that the Defendants have
breached their implied duty of good faith and fair dealing is not precluded by our
case law.”387 I now revisit this issue in light of the fully developed factual record
from trial.
As our Supreme Court has explained the implied covenant “is a limited and
extraordinary legal remedy.”388 Generally, “the implied covenant requires a party in
a contractual relationship to refrain from arbitrary or unreasonable conduct which
387
Simon I, 2014 WL 4840443, at *14.
388
Nemec v. Shrader, 991 A.2d 1120, 1128 (Del. 2010).
91
has the effect of preventing the other party to the contract from receiving the fruits
of the bargain.”389 The implied covenant, however, is limited to a gap filling role.
The “implied covenant of good faith and fair dealing involves . . . inferring
contractual terms to handle developments or contractual gaps that . . . neither party
anticipated.”390 However, “[i]t does not apply when the contract addresses the
conduct at issue.”391 In the same vein, “[t]he implied covenant only applies to
developments that could not be anticipated, not developments that the parties simply
failed to consider . . . .”392 Additionally, the covenant is “not an equitable remedy
for rebalancing economic interests after events that could have been anticipated, but
were not, that later adversely affected one party to a contract.”393 Finally, “[a] party
does not act in bad faith by relying on contract provisions for which that party
bargained where doing so simply limits advantages to another party.”394
Simon asserts “that KanAm has violated the implied covenant of good faith
and fair dealing by attempting to defeat Simon’s exercise of the call right by
purporting to ‘choose’ payment in non-existent Mills Units.”395 Simon argues that
389
Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 442 (Del. 2005) (internal quotations
omitted).
390
Nationwide Emerging Managers, LLC v. Northpointe Holdings, LLC, 112 A.3d 878, 896 (Del.
2015) (quoting Nemec, 991 A.2d at 1125) (alterations provided by the Supreme Court in
Northpointe Holdings).
391
Id. (citation omitted).
392
Nemec, 991 A.2d at 1126.
393
Id. at 1128.
394
Id.
395
Simon’s Post-Trial Opening Br. 69.
92
“KanAm has intentionally frustrated Simon’s fundamental rights” to exercise the
call by voiding the buy/sell notices arbitrarily and unreasonably. 396 Simon alleges
that KanAm’s interpretation is “especially unreasonable given KanAm’s position
that its put right remains fully intact” and that “the parties did not and never would
have agreed to such an unfair arrangement had they thought to negotiate with respect
to the matter.”397 KanAm counters that there is no gap to be filled here—that the
parties expressly were aware that the JV Agreements required tender of Mills Units,
and yet there was a decision on both sides to not address a replacement currency.
Simon’s position, in my view, is not supported by our law or the facts of this
matter. This is not a case where the parties never considered that exercise of an
option would be frustrated by an unexpected happenstance. Dispositive, I think, of
Simon’s claim is the fact that while there was contractual silence on this issue from
both sides, the issue was not unknown to the parties—each side independently
identified the potential issue, attempts were made to negotiate it, but no agreement
was ever reached. That is, the circumstances the parties found themselves in—a call
provision that explicitly provides the seller the option to require unavailable units as
consideration—was recognized by all, but no agreement was reached. A party, after
396
Id.
397
Id. at 70. I note, in light of my findings, which effectively render the call right unenforceable,
it remains to be determined whether KanAm’s put right remains operative, and whether, in equity,
it could enforce such a right. The put and call were obviously negotiated to be reciprocal, and the
continued vitality of the put is problematic.
93
consciously avoiding an issue, cannot seek rescue through the implied covenant, and
I may not provide through equity what the parties failed knowingly to provide for
themselves. Further, nothing in the record supports the implication that the parties
would have agreed to the automatic substitution that Simon seeks through the
implied covenant. Since I cannot know what resolution the parties would have
reached through negotiation, relief via the implied covenant is unavailable.
D. Waiver/Estoppel
1. Waiver
Simon asserts that KanAm waived any right it had to insist on Mills Units via
its words or conduct over the course of several years, during which, according to
Simon, KanAm demonstrated an understanding that Simon Units were acceptable
non-cash consideration. KanAm observes that Simon was aware of the JV
Agreements’ terms and that KanAm “had no duty to tell Simon that the contractual
Buy/Sell Provisions meant what they say.”398
It is well-settled that a party may waive her contractual rights; as our Supreme
Court has explained, “[w]aiver is the voluntary and intentional relinquishment of a
known right.”399 Delaware Courts will find a waiver upon a showing “(1) that there
is a requirement or condition capable of being waived, (2) that the waiving party
398
KanAm’s Post-Trial Answering Br. 79.
399
Realty Growth Inv'rs v. Council of Unit Owners, 453 A.2d 450, 456 (Del. 1982) (citations
omitted).
94
knows of that requirement or condition, and (3) that the waiving party intends to
waive that requirement or condition.”400 Waiver involves “knowledge of all material
facts and an intent to waive, together with a willingness to refrain from enforcing
those contractual rights.”401 The standard for demonstrating waiver is “quite
exacting;” because waiver is redolent of forfeiture, “the facts relied upon to
demonstrate waiver must be unequivocal.”402
In support of its waiver claim, Simon points to statements allegedly made at
the Dusseldorf Meeting and the Goebel email exchange, as both representing
“unequivocal expression of KanAm’s intent to waive any right to insist on receiving
non-existent Mills Units.”403 Additionally, Simon points to KanAm’s dealings with
Brookfield, including Braithwaite’s undisclosed agreement in principle, to negotiate
in good faith the buy/sell consideration, despite his service on the Mills board.404
Simon asserts that “KanAm had an obligation in good faith to raise” the issue in
connection with the Simon-Farallon JV’s acquisition of Mills.405
400
Amirsaleh v. Bd. of Trade of City of N.Y., 27 A.3d 522, 530 (Del. 2011) (citation omitted).
401
AeroGlobal Capital Mgmt., LLC v. Cirrus Indus., Inc., 871 A.2d 428, 444 (Del. 2005) (citation
omitted).
402
Amirsaleh, 27 A.3d at 529 (internal quotations omitted). See Kallop v. McAllister, 678 A.2d
526, 532 (Del. 1996) (“Waiver, however, requires more than mere inaction. To substantiate his
waiver defense, [the defendant] needed to show that [the plaintiff] intentionally relinquished his
right to rely on the Letter Agreement.”) (citations omitted).
403
Simon’s Post-Trial Reply Br. 44–45.
404
Simon’s Post-Trial Opening Br. 71.
405
Id. at 72.
95
Simon has failed to demonstrate KanAm’s knowing and unequivocal waiver
of the right to insist on receiving Mills Units; that is, the facts relied upon in an
attempt to prove waiver are not unequivocal in nature. While the allegations
surrounding the Dusseldorf Meeting and the Goebel email do indicate that certain
individuals at KanAm thought it might be compelled to accept Simon Units, they do
not demonstrate an intentional and knowing relinquishment of a right. These
statements were not made directly to Simon—there were no such communications
by KanAm to Simon. However, during the general time period of the Goebel email
and Dusseldorf Meeting, in late 2007,406 the Denver West negotiations occurred
where Simon itself refused to provide Simon Units and insisted on cash
consideration for the buy/sell agreement. KanAm informed Simon there were
broader issues at play arising under the buy/sell provisions awaiting resolution.
Similarly, the executed Denver West side-letter was pegged to resolution of an
existing dispute, that is, what the parties might later “agree” or “determine” would
apply to the Colorado Mills JV Agreement, which itself provided for Mills Units.
The Denver West negotiation clearly reveals that the parties were aware that the
consideration issue was unsettled and required “agreement,” or judicial
“determination,” and cuts strongly against a clear and unequivocal waiver.
406
The Goebel email exchange occurred in December 2007. JX0352. The Dusseldorf meeting
was held on October 9, 2007. See Simon’s Post-Trial Opening Br. 36. The Denver West side
letter was executed on October 17, 2007. JX0348.
96
Following Denver West, Simon simply points to several years of silence on the issue.
This is insufficient to demonstrate waiver. I note that the condition to be waived—
payment in Mills Units—would not arise until the buy/sell was triggered, making
KanAm’s silence on this issue less persuasive. I find Simon has failed to make a
sufficient showing of the required elements of waiver.
2. Quasi-Estoppel
Simon has also asserted that KanAm is estopped from insisting on the
contractually required default consideration.407 Specifically, Simon argues that the
doctrine of quasi-estoppel prevents KanAm from asserting a position “inconsistent
with a position it has previously taken.”408 Generally, quasi-estoppel “precludes a
party from asserting, to another's disadvantage, a right inconsistent with a position
it has previously taken.”409 Importantly, unlike traditional estoppel, this Court has
explained that a “party does not need to show reliance for quasi-estoppel to apply.”410
However, the standard remains high, as our Supreme Court has explained “the
doctrine of quasi-estoppel applies when it would be unconscionable to allow a person
407
See Simon’s Post-Trial Opening Br. 73–75; Dkt. No. 115. While the doctrine of equitable
estoppel was specifically pled, it was not clearly pursued in post-trial briefing and to the extent it
is not deemed waived, the elements have not been proven. Reasonable reliance, an element of
equitable estoppel, is lacking under the facts here.
408
Simon’s Post-Trial Opening Br. 73.
409
Pers. Decisions, Inc. v. Bus. Planning Sys., Inc., 2008 WL 1932404, at *6 (Del. Ch. May 5,
2008) (internal quotations omitted).
410
Barton v. Club Ventures Investments LLC, 2013 WL 6072249, at *6 (Del. Ch. Nov. 19, 2013)
(citation omitted).
97
to maintain a position inconsistent with one to which he acquiesced, or from which
he accepted a benefit.”411 Further, quasi-estoppel requires a showing that the “party
against whom the estoppel is sought must have gained some advantage for himself
or produced some disadvantage to another.”412
In support of its quasi-estoppel argument, Simon again points to the Goebel
email exchange and the Dusseldorf Meeting.413 Again, Simon’s reliance is not at
issue, so the fact that these representations were not made to Simon is of little
moment. The record, including the Denver West negotiation, shows, however, that
there was a legitimate disagreement at the time, between these parties, regarding
non-cash consideration. I decline to find that KanAm’s conduct here, via certain
statements to investors, rises to the level of unconscionability needed to invoke the
doctrine of quasi-estoppel. KanAm, while strategically silent at certain points, has
not engaged in a shocking shift in position amounting to unconscionable action; in
other words, a decision to stand on the bargained-for language of the contracts does
not shock the conscience. I find there is an absence of the type of “self-interested
180 degree turn” which has led to the application of the doctrine in prior cases.414
Enforcing the contracts as written here would not offend equitable principles.
411
RBC Capital Markets, LLC v. Jervis, 129 A.3d 816, 872–73 (Del. 2015) (internal quotations
omitted) (emphasis added).
412
Id. at 873 (internal quotations omitted).
413
See Simon’s Post-Trial Opening Br. 74.
414
See Pers. Decisions, Inc., 2008 WL 1932404, at *7.
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E. KanAm’s Counterclaim
I now turn to KanAm’s Counterclaim.415 The Counterclaim alleges breach of
contract by Simon for knowingly providing invalid buy/sell notices in breach of the
buy/sell provisions of the JV Agreements and seeks a declaratory judgment.416
KanAm seeks damages arising from this purported breach, including but not limited
to the cost of the appraisal process that was triggered following Simon’s delivery of
the notices.417 Finally, in addition to a request for damages, KanAm seeks fees
pursuant to the JV Agreements along with pre- and post-judgment interest.418 Each
remaining aspect of the Counterclaim is briefly addressed below.
1. Breach of Contract and Damages
KanAm bears the burden of proving every element of its breach of contract
claim, including damages, by a preponderance of the evidence. KanAm’s theory for
breach appears to be as follows: the buy/sell notices were defective because Simon
could not tender the default consideration, the notices still triggered the mandatory
appraisal process, and KanAm incurred the costs of that appraisal process.419 But
KanAm has not demonstrated breach of the agreement. KanAm acknowledges that
Simon had the right to call, which it did. A contractual appraisal of KanAm’s interest
415
I need not address KanAm’s affirmative defenses in light of my findings above.
416
See Dkt. No. 110 ¶¶ 44–54. I note the timeliness of the Concord Mills notice was not pursued
in post-trial briefing.
417
See id. at ¶ 50.
418
Id. at Prayer For Relief; Pretrial Stip. 33.
419
See KanAm’s Post Trial Sur Reply Br. 51.
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resulted. At that point, KanAm had the option to accept cash or demand Mills Units.
It elected the latter. Simon was unable to perform, triggering KanAm’s right to void
the call. No breach occurred. Similarly, the costs of the appraisal are not “damages”
but rather an expense of the JV triggered pursuant to contract.
While this is a legal, not an equitable, claim, I note that KanAm, like Simon,
avoided bringing the consideration issue to a head by its strategic silence; it can
hardly complain equitably that Simon sought to tender Simon Units.
Finally, the Counterclaim seeks declaratory relief on two remaining points
which were litigated to conclusion:420 first, that the JV Agreements require Simon to
pay in Mills Units unless KanAm elects cash, and second, that Simon cannot enforce
its call right by tendering Simon Units.421 In light of my discussion above, and
setting aside the Orange City JV, KanAm’s request for declaratory relief is granted.
2. Fees and Interest
Each side has sought fees in connection with this action pursuant to the fee
shifting provisions in the JV Agreements.422 The fee provision both parties rely on
provides “[i]n the event the Partnership or any Partner (or its Affiliates) institutes
litigation” which asserts a claim arising out of the JV Agreements or relating to the
project, or the partnerships, “the parties hereto agree that the prevailing party in such
420
See Dkt. No. 110 at ¶ 54.
421
Id.
422
See Simon’s Post Trial Opening Br. 76–77; KanAm’s Post Trial Sur Reply Br. 52–53.
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litigation or administrative action shall be entitled to recover its out-of-pocket costs
and expenses of defending or maintaining such litigation or administrative action,
including without limitation, attorneys’ fees.”423
The JV Agreements thus provide a broad fee-shifting provision to a covered
party who is successful in litigating issues arising out of the JV Agreements. Both
sides assert that the present litigation is covered by the provision.424 Our Supreme
Court has explained that:
[u]nder the American Rule and Delaware law, litigants are normally
responsible for paying their own litigation costs. An exception to this
rule is found in contract litigation that involves a fee shifting provision.
In these cases, a trial judge may award the prevailing party all of the
costs it incurred during litigation. Delaware law dictates that, in fee
shifting cases, a judge determine whether the fees requested are
reasonable.425
KanAm, as the prevailing party, is entitled to fees with respect to the bulk of Simon’s
claims. Simon, in turn, prevailed on the Counterclaim and may yet prevail on the
Orange City claim. If, after resolution of the Orange City matter, the parties cannot
agree on a fee award, they should so inform me, and I will address the issue.
423
See JX0066 § 14.9 (emphasis added). See also Simon’s Post Trial Opening Br. 77 (citing
JX0066 § 14.9). Because the parties have not differentiated the fee provisions in the JV
Agreements, I assume they are sufficiently similar to the above cited language by the Plaintiffs.
424
See Simon’s Post Trial Opening Br. 76–77; KanAm’s Post Trial Sur Reply Br. 52–53.
425
Mahani v. Edix Media Grp., Inc., 935 A.2d 242, 245 (Del. 2007) (citations omitted).
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IV. CONCLUSION
For the reasons set forth above, I find that the Plaintiffs’ request to enforce its
call right (setting aside the Orange City JV) is denied; that the Defendants’ request
for declaratory judgment is granted, and that the Counterclaim is otherwise
dismissed. The parties should confer and agree on a method to address the
outstanding issues regarding the Orange City JV, as well as fees and costs.
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