Macquarie Electronics USA, Inc. v. Globalfoundries U.S. Inc.

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
MACQUARIE ELECTRONICS USA,
INC.,
Plaintiff,
)
)
)
)
)
v. ) C.A. No. N16C-08-165 MMJ-CCLD
)
GLOBALFQUNDRIES U.S. INC., )
)
)
Defendant.
Submitted: October 5, 2016
Decided: December 22, 2016
Upon Plaintiff Macquarie Electronics USA, Inc.’s Motion for Summary Judgment
GRANTED IN PART, DENIED IN PART
Upon Defendant Globalfoundries U.S. Inc.’s Motion for Summary Judgment
GRANTED IN PART, DENIED IN PART
OPINION
David A. Jenkins, Esq. (Argued), Smith, Katzenstein and Jenkins LLP, Bijan
Amini, Esq., Noam M. Besdin, Esq., Attorneys for Plaintiff Macquarie Electronics
USA, Inc.
Albert H. Manwaring, Esq. (Argued), Lewis H. Lazarus, Esq., Albert H. Carroll,
Esq., Morris James LLP, Attorneys for Defendant Globalfoundries U.S. Inc.
JOHNSTON, J.
PROCEDURAL CONTEXT
This litigation arises from an alleged breach of an equipment lease in
January of 2016, On February 16, 2016, Plaintiff Macquarie Electronics USA, Inc.
(“Macquarie”) filed suit against Defendant Globalfoundries, U.S., Inc.
(“Globalfoundries”) in the Delaware Court of Chancery. Macquarie alleged breach
of contract and unlawful conversion. The parties filed cross motions for summary
judgment.
On August 8, 2016, the Court of Chancery dismissed the case for lack of
jurisdiction On August l9, 2016, Macquarie flled its Election to Transfer Action
to Superior Court.
This Court heard oral argument on the previously-briefed cross motions on
October 5, 2016. The Court Will decide Whether Macquarie is entitled to rent,
attomeys’ fees, and equipment retum, or Whether Macquarie’s damages are limited
to interest. At this stage of the proceedings, the Court will not decide whether
Globalfoundries actually breached the leasing contract by failing to pay the
purchase price timely.
STATEMENT OF FACTS
On July 24, 2012, the parties entered into the Master Lease Agreement
(“MLA”). Under the MLA, Globalfoundries agreed to lease from Macquarie
certain equipment related to semiconductor manufacturing The leasing term
(“Lease Term”) expired on December 3 l, 2015.
Upon the expiration of the Lease Term, Globalfoundries could elect to return
the equipment to Macquarie, or to exercise the “End Term Purchase Option” under
Section 22(d) of the MLA and purchase the equipment. The MLA provides that if
Globalfoundries elected to exercise the purchase option, the purchase price would
be the lesser of two amounts: the “Fair Market Value” and the “Purchase Cap.”
The Purchase Cap set the value of the equipment at $4,810,250. Globalfoundries
timely elected to exercise the End Term Purchase Option.
Section 22(f) of the MLA establishes an appraisal process for determining
the Fair Market Value of the equipment. First, the MLA provides the parties with
an opportunity to agree on an appraiser to set the F air Market Value of the
equipment. If the parties cannot agree on an appraiser, then each party selects one
appraiser. The two appraisers then appoint a third, independent appraiser. The
three appraisers independently value the equipment. The two appraisals that are
closest in value are averaged to establish the Fair Market Value of the equipment.
The parties were unable to agree on a single appraiser to set the F air Market
Value of the equipment. As a result, the parties each selected an appraiser. The
two appraisers selected a third, independent appraiser. On December 24, 2015, the
appraiser selected by Macquarie valued the equipment at $16.635 million. On
December 3l, 2015, the independent appraiser valued the equipment at $l6.07
million. On January 31, 2016, the appraiser selected by Globalfoundries valued
the equipment at $7.274 million. The purchase price was set at $4,810,250
because the Purchase Cap value was lesser than the Fair Market Value.
On January 12, 2016, Macquarie notified Globalfoundries that it was in
default under the MLA because Globalfoundries had failed to remit payment to
Macquarie. On January 20, 2016, Macquarie again contacted Globalfoundries and
demanded return of the equipment and rent due, including a per diem payment for
the rent payable through the end of January 2016 pursuant to Section 22(c) of the
MLA. Globalfoundries paid the purchase price on February 17, 2016,
STANDARD OF REVIEW
Summary judgment is granted only if the moving party establishes that there
are no genuine issues of material fact in dispute and judgment may be granted as a
matter of law.l All facts are viewed in the light most favorable to the non-moving
party.2 Summary judgment may not be granted if the record indicates that a
material fact is in dispute, or if there is a need to clarify the application of law to
the specific circumstances3 When the facts permit a reasonable person to draw
only one inference, the question becomes one for decision as a matter of law.4 If
the non-moving party bears the burden of proof at trial, yet “fails to make a
l Super. Ct. Civ. R. 56(c).
2 Hammona' v. Colt !ndus. Operating Corp., 565 A.2d 558, 560 (Del. Super. 1989).
3 super. ct. Civ. R. 56(c).
4 Wootten v. Kiger, 226 A.2d 238, 239 (Del. 1967).
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showing sufficient to establish the existence of an element essential to that party’s
case,” then summary judgment may be granted against that party.5
Where the parties have filed cross motions for summary judgment, and have
not argued that there are genuine issues of material fact, “the Court shall deem the
motions to be the equivalent of a stipulation for decision on the merits based on the
record submitted with the motions.”6 Neither party’s motion will be granted unless
no genuine issue of material fact exists and one of the parties is entitled to
judgment as a matter of law.7
ANALYSIS
The parties have agreed that the Court will not address liability for alleged
breach of the MLA at this time. The only issue before the Court is the proper
method to measure damages, should Globalfoundries be found in breach of the
MLA on the basis of its failure to make timely payment of the purchase price.
Globalfoundries ’ Rent Obligations Afier Lease Term Purchase Date
New York law applies in this case pursuant to the MLA. Under New York
law, “[u]pon accepting an option to buy contained in a lease, the option becomes a
binding contract to sale, and the tenant becomes a purchaser in possession.”8
When a tenant exercises an option to purchase, the lessor/lessee relationship
5 Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
6 super. ct. civ. R. 56(h).
7 Emmons v. Hartfora' Underwriters Ins. Co., 697 A.2d 742, 744-45 (Del. 1997).
8 Sid Farber Hemstead Corp. v. Buckley, 317 N.Y.S.2d 30, 32-33 (N.Y. Dist. Ct. 1970).
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dissolves “absent an intent to the contrary . . . .”9 The exercise of an option to
purchase merges the landlord/tenant relationship into a vendor/vendee
relationship.10 This merger doctrine is well established in New York.ll
Section 22(a) of the MLA establishes Globalfoundries’ irrevocable option to
purchase the equipment at the conclusion of the Lease Term, The first alternative
is return of the equipment. lf Globalfoundries fails to exercise the option to
purchase the equipment, Section 22(c) of the MLA provides that Globalfoundries
must return the equipment at the end of the Lease Term. If Globalfoundries fails to
timely return the equipment, then the Lease Term is extended and additional rent
must be paid.
The second alternative is purchase of the equipment. Section 22(d) of the
MLA provides the Lease Term Purchase Option:
Lessee shall have the option to purchase all (but not less than all) the
Equipment on any date for the payment of rent during the Lease Term
(the “Lease Term Purchase Option”) and on the last day of the Lease
Term (the “End Term Purchase Option”). If Lessee wishes to exercise
the Lease Term Purchase Option, Lessee shall notify Lessor of its
election to exercise the Lease Term Purchase Option, specifying the
date on which it will purchase the Equipment (the “Lease Term
9 Koppelman v. Barrett, 17 N.Y.S.3d 584, 585 (N.Y. App. Term 2015).
1° See Kaygreen Really Co., LLC v. IG Second Generation Partners, L.P., 912 N.Y.S.2d 246, 251
(N.Y. App. Div. 2010) (“Generally, a tenant’s exercise of an option to purchase contained in a
lease merges the landlord/tenant relationship into the vendor/vendee relationship serving to
terminate the landlord-tenant relationship unless the parties intend otherwise . . . .”)
lt See. e.g., id. (stating that generally, the exercise ol" an option to purchase merges the
landlord/tenant relationship into the vendor/vendee relationship); In re Merkel, Inc. , 269
N.Y.S.2d 190, 191 (N.Y. App. Div. 1966) (finding that exercising an option to purchase
transformed the leasing agreement to a conditional bill of sale).
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Purchase Date”) at least 60 days before the Lease Term Purchase Date
and, once given, Lessee may not withdraw such notice without
Lessor’s consent. If Lessee wishes to exercise the End Term Purchase
Option, Lessee shall notify Lessor as provided in Section 22(a) and, in
the event Lessee exercises or is deemed to have exercised the End
Term Purchase Option, the purchase date shall be the last day of the
Lease Term, If the Lease Term Purchase Option is exercised, Lessee
shall pay to Lessor on the Lease Term Purchase Date the Stipulated
Loss Value for the Equipment determined as of the Lease Term
Purchase Date. F or the avoidance of doubt, the Stipulated Loss Value
of any item of Equipment shall have no bearing or influence on the
determination of the Fair Market Value determined pursuant to this
Section 22. If the End Term Purchase 0ption is exercised or
deemed to have been exercised, Lessee shall continue the payments
of rent through the Lease Term and pay to Lessor on the last day of
the Lease Term the lesser of the Fair Market Value (as determined
pursuant to Section 22(f)) and the Purchase Cap. Upon payment in
full of the above amounts, Lessor shall transfer to Lessee the
Equipment free from all Lessor Liens, but otherwise on an “AS-IS,
WHERE-IS” basis with all faults and without recourse and without
any other representation or warranty of any kind, express or implied.
[emphasis added]
Section 22(f) of the MLA outlines the appraisal procedure for the equipment.
Macquarie argues that the MLA demonstrates the parties’ intent to continue
in a lessor/lessee relationship. Macquarie contends the fact that Globalfoundries
continued to make rental payments, after electing to purchase the equipment,
evidences the intent to continue in a lessor/lessee relationship Macquarie also
argues that the Section 22(d) provision of the MLA, which provides that title to the
equipment only transfers to Globalfoundries upon payment, demonstrates that the
parties intended to continue their lessor/lessee relationship after the conclusion of
the Lease Term. Macquarie also cites Section 25(f) of the MLA, which sets forth
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that all obligations survive the end of the Lease Term, in support of its contention.
The Court finds Macquarie’s argument unpersuasive Here, the issue is the
parties’ intent regarding the nature of their relationship if the purchase price was
not paid by December 31, 2015. The Court must decide whether the lessor/lessee
relationship became a seller/purchaser relationship when the End Term Purchase
Option was exercised. The Court must determine whether the parties intended that
the two relationships exist simultaneously.
The express terms of the MLA do not indicate a clear intention of the parties
that there be a co-existence of the two relationships. Pursuant to New York law,
upon the exercise of the Lease Term Purchase Option, the parties formed a binding
sale contract. The parties’ relationship became that of a seller and purchaser in
possession.
Had the parties clearly intended that rent continue in a circumstance where
the purchase price was not timely paid, they could have included such a provision
in Section 22(d) of the MLA, as they did in Section 22(c), which states: “If the
Equipment is not returned on the date it is required to be retumed, the Lease Term
shall at Lessor’s option be extended until the Equipment is so returned . . . .”
Therefore, the Court finds that Globalfoundries’ duty to continue to pay rent
on the equipment was terminated as of December 31, 2015 by Globalfoundries’
exercise of the Lease Term Purchase Option.
Damages for Breach of Master Lease Agreement
The parties reasonably contemplated that the Section 22(f) appraisal
procedure in the MLA could be completed in time to enable payment of the
purchase price by the Lease Term Purchase Date on December 31, 2015, Payment
was not made until February 17, 2016,
Pursuant to Section l3(a) of the MLA, failure by the lessee “to pay any rent
or other amount due under the Lease within 10 days of its due date” will constitute
an “Event of Default.” If Globalfoundries breached the MLA by failing to remit
timely payment of the purchase price, then that failure would be an Event of
Default. The Court’s finding - that the parties’ relationship converted to that of a
seller and purchaser in possession - does not mean that the MLA itself was
terminated. The Lease Term Purchase Option is still governed by the express
terms of the MLA. Other relevant MLA terms remain valid and applicable.
Section 18 of the MLA addresses “Late Charges” payable by
Globalfoundries to Macquarie:
LATE CHARGES. If any rent or other amount payable under the
Lease is not paid within 5 days of its due date, then as compensation
for the administration and enforcement of Lessee’s obligation to make
timely payments, Lessee shall pay with respect to each overdue
payment on demand, interest on the overdue amount until the same is
paid at the Overdue Rate, plus any collection agency fees and
expenses. The failure of Lessor or Transferee to collect the foregoing
will not constitute a waiver of Lessor’s right with respect thereto.
[emphasis added]
Section 2 of the MLA, in part, defines “Lease” as the MLA.
The Court finds that an “other amount payable under the Lease”
includes the purchase price. Therefore, Late Charges apply, including
interest at the defined Overdue Rate of 12%.
Section 14 of MLA provides remedies available to the Lessor in an
Event of Default. Section 14(e) allows Macquarie to collect “attorney fees”
if an Event of Default exists.
lf Globalfoundries is in breach of the MLA, Macquarie is entitled to
attorneys’ fees “attributable to [Globalfoundries’] actions” in the Event of
Default. However, that does not mean Macquarie is entitled to all attomeys’
fees involved in this litigation. The only fees Macquarie may recover are
those expended in connection with prosecuting the issue of breach of the
MLA. For purposes of Section l4(e), this issue does not include that portion
of the litigation in which Macquarie seeks payment of holdover rent and
repossession of the equipment.
By limiting Macquarie’s damages for Globalfoundries’ purported
breach of the MLA to those attributable to its failure to make timely
payment of the purchase price, Macquarie will be made whole. If the parties
had contemplated rental payments during the time of delinquency, the MLA
could have contained a provision, similar to that set forth in Section 22(c).
The Court further notes that the MLA does not provide a “time is of the
essence” clause.
CONCLUSION
The Court finds that Globalfoundries’ duty to pay rent was terminated
as of December 31, 2015. The parties’ relationship shifted from that of a
lessor and lessee to that of a seller and purchaser in possession upon
Globalfoundries’ exercise of the Lease Term Purchase Option.
The Court also finds that if Globalfoundries is determined to have
breached the MLA, Macquarie is entitled to attorneys’ fees attributable to
Globalfoundries’ actions in the Event of Default. The attorneys’ fees shall
be limited to those in connection with prosecuting the issue of breach of the
MLA.
THEREFORE, Macquarie’s Motion for Summary Judgment is
hereby GRANTED IN PART and DENIED IN PART. Globalfoundries’
Motion for Summary Judgment is hereby GRANTED IN PART and
DENIED IN PART.
IT IS SO ORDERED
norabWaW M. Johnston
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