Realty Finance Holdings, LLC v. KS Shiraz Manager, LLC

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13-P-252 Appeals Court
REALTY FINANCE HOLDINGS, LLC1 vs. KS SHIRAZ MANAGER, LLC, &
others.2
No. 13-P-252.
Suffolk. January 9, 2014. - September 5, 2014.
Present: Katzmann, Fecteau, & Milkey, JJ.
Contract, What constitutes, Condition precedent, Choice of law
clause, Damages. Evidence, Parol evidence. Practice,
Civil, Summary judgment. Damages, Breach of contract.
Civil action commenced in the Superior Court Department on
August 21, 2008.
The case was heard by Charles T. Spurlock, J., on a motion
for summary judgment; a hearing on the assessment of damages was
had before Carol S. Ball, J., and entry of final judgment was
ordered by her.
1
We use the plaintiff's name as it appears on an assented-
to motion to reflect the plaintiff's change of name in
subsequent pleadings, which was allowed by a judge in the
Superior Court on February 5, 2009. The assented-to motion also
required changes in the names of certain of the defendants, and
those changes are also reflected in our caption.
2
KS Shiraz Equity Partners, LLC; KS-RFC Shiraz, LLC; KS GS
Manager, LLC; KS GS Equity Partners, LLC; and KS-RFC GS, LLC.
2
Jeffrey P. Allen (Maria Galvagna Mesinger with him) for the
defendants.
Paul S. Samson for the plaintiff.
KATZMANN, J. In this appeal, the parties dispute whether
two thirty-eight page limited liability company agreements,
negotiated and drafted with the assistance of counsel and each
containing an integration clause, should be enforced as written.
A Superior Court judge entered summary judgment for the
plaintiff, ruling that the agreements were fully integrated
contracts and that the parol evidence rule prohibited
consideration of the parties' negotiations to show that the
agreements were subject to contingencies. A final judgment then
entered awarding damages to the plaintiff. On appeal, the
defendants argue that it was always understood that the
agreements, though fully executed, were not to take effect until
certain financing and property acquisitions were in place and
that electronic mail message (e-mail) exchanges between the
parties raise genuine issues of material fact whether
integration was intended. The defendants further maintain that
the plaintiff is not entitled to damages under the terms of the
agreements. We affirm.
1. Facts. We take the undisputed facts from the judge's
February 1, 2010, "Memorandum and Order on the Plaintiff's
Motion for Summary Judgment on Liability" and from the parties'
3
statement of undisputed facts. We also add material from the
record for purposes of background and discussion, as noted.
During the relevant events of this case, the plaintiff was a
Delaware limited liability company involved in real estate
specialty finance.3 The defendants are related Massachusetts
entities involved in real estate acquisition and management.
Kambiz Shahbazi is the principal of KS GS Manager, LLC; KS GS
Equity Partners, LLC; KS Shiraz Manager, LLC; and KS Shiraz
Equity Patners, LLC, the entities that control the daily
operations of the real estate portfolios owned by KS-RFC GS, LLC
(GS Company), and KS-RFC Shiraz, LLC (Shiraz Company)
(collectively, the defendants). Shahbazi has a master's degree
in business from Columbia University and twenty-five years of
experience in real estate development.
a. The amended agreements. On March 6, 2006, the
plaintiff and the defendants, GS Company and Shiraz Company,
entered into the limited liability company agreements (2006
agreements), pursuant to which the plaintiff acquired an equity
interest in the companies. Subsequently, the parties set out to
restructure their relationship from equity to debt. The
defendants agreed to pay the plaintiff's interest as a monthly
3
The plaintiff's president, Kenneth Witkin, described a
specialty finance company as one involved in project-based,
noncommercial banking.
4
obligation.4 To that end, the parties set about to negotiate and
execute amended agreements.5 The process leading up to their
execution took several months, Shahbazi first submitting term
sheets to the plaintiff on November 30, 2007. The parties were
assisted in their negotiations by their respective counsel, who
were experienced in complex real estate transactions and who
drafted the amended agreements.
As described by the judge, "[t]he [a]mended [a]greements
are detailed, comprehensive documents that address all major
issues that arose in connection with the real estate partnership
between the plaintiff and the KS defendants." Relevant here,
the amended agreements contain provisions requiring the
4
By way of background, according to Witkin, the gist of the
restructuring that Shahbazi proposed was "changing our agreement
so we are no longer his partner and he would be responsible
going forward for all leasing and all tenant improvements and we
would simply just be in the equivalent of a mezzanine loan,"
which he defined as "a loan that is subordinate to a senior
loan." The attorney negotiating the restructuring on the
defendants' behalf, Sally Michael, confirmed that under the
restructuring, the plaintiff's investment was becoming
effectively a mezzanine loan.
5
On April 1, 2008, KS Shiraz Manager, LLC, and KS Shiraz
Equity Partners, LLC, signed and delivered the "Amended and
Restated Limited Liability Company Agreement of KS-CBRE Shiraz,
LLC" (the amended Shiraz agreement). Also on April 1, 2008, KS
GS Manager, LLC, and KS GS Equity Partners, LLC, signed the
"Amended and Restated Limited Liability Company Agreement of KS-
CBRE GS, LLC" (the amended GS Agreement), and the "First
Amendment," which were delivered on April 11, 2008. The amended
Shiraz agreement, the GS agreement, and the first amendment are
referred to collectively as the amended agreements.
5
defendants to make monthly distribution payments to the
plaintiff. In addition, both the amended GS agreement and the
amended Shiraz agreement contain an integration clause, which
provides as follows:
"Entireties; Amendments. This Agreement and its exhibits
constitute the entire Agreement between the Members
relative to the formation of the Company. Except as
otherwise provided herein, no amendments to this Agreement
shall be binding upon any member unless set forth in a
document duly executed by such Member."
The amended agreements also both contain a detailed
provision affording the defendants a one-time right to refinance
their primary loan, referred to as the PNC loan, upon
satisfaction of enumerated conditions. A governing law
provision provided that Delaware law would apply in construing
the amended agreements and the obligations of the parties.6 The
first amendment set forth the addition of two properties in
Marlborough to the assets of GS Company.
b. Execution of the amended agreements. From the record
we add the following. It is undisputed that on March 12, 2008,
the plaintiff signed and delivered the amended GS agreement and
the amended Shiraz agreement to the defendants' attorney, Sally
Michael. According to an April 2, 2008, e-mail from Michael,
the defendants signed the amended agreements, which she dated
6
The amended agreements also included a subordination
clause, which we set out and discuss, infra.
6
"as of April 1, 2008." On April 2, 2008, Michael sent the
signed signature pages to the plaintiff, but stated by
accompanying e-mail that none of the agreements would go into
effect unless she received three signed documents from the
plaintiff concerning the property acquisitions and a loan that
the defendants were pursuing with General Electric Capital
Corporation (the GE loan). The documents requested were (1) the
signed first amendment; (2) a signed consent vote authorizing
the GE loan; and (3) a signed Patriot Act Certificate in
connection with the GE loan. It is undisputed that the
plaintiff supplied the requested documents. On April 11, 2008,
according to an accompanying letter, Michael delivered to the
plaintiff the "fully executed original" of the signature pages
for the amended agreements, without stating any further express
conditions.
According to the defendants, at some point after signing
and delivering the amended agreements to the plaintiff, they
learned that the GE loan had been terminated. The plaintiff did
not receive the payments allegedly due under the amended
agreements, and subsequently filed this action in Superior
Court. The plaintiff's motion for summary judgment followed.
c. Evidence of the parties' negotiations. In opposing the
summary judgment motion, the defendants argued that evidence of
the parties' negotiations raised an issue of fact whether the
7
plaintiff understood and agreed that the amended agreements were
subject to two conditions: first, that the defendants obtain
the GE loan, and second, that the defendants acquire two
properties in Marlborough. Although those transactions are not
identified as conditions precedent in the amended agreements,
the defendants maintain that they were integral to the amended
agreements' effectiveness. They rely on evidence of the
parties' e-mail correspondence in late March and early April,
2008, to establish the parties' understanding of the inclusion
of the two conditions in the deal.
In particular, the defendants point to several e-mails
between Shahbazi and Paul Martin, Shahbazi's primary contact at
RFC, in which Shahbazi linked the Marlborough property
acquisitions to his ability to refinance the PNC loan through
GE, and thereby fund the restructure. The judge took note of
the following exchange in his memorandum. On April 7, 2008,
Martin e-mailed Shahbazi regarding delivery of the executed
amended agreements and the status of the GE loan, stating "why
you won't sign at least Shiraz unconditionally is beyond
comprehension."7 Shahbazi responded that the property
7
For context, we add that, according to the plaintiff,
Shahbazi was seeking to acquire the Marlborough properties for
the GS Company's portfolio, and not for the Shiraz Company's
portfolio. Hence, the reference in Martin's e-mail is
presumably to the amended Shiraz agreement.
8
acquisitions were necessary to obtain the GE loan, and that the
GE loan "is where I get my comfort that I would have the funds
necessary to service your approx[imately] $27mm preferred equity
in GS/Shiraz."
The judge ruled that, under either Delaware or
Massachusetts law, the amended agreements were fully integrated
and that the parol evidence rule barred admission of the
parties' e-mail correspondence to vary the amended agreements'
terms. The plaintiff's motion for summary judgment motion was
allowed, a final judgment entered awarding damages to the
plaintiff, and the defendants filed this appeal.
2. Choice of law. As noted, the amended agreements
provided in their governing law provisions that Delaware law be
applied to "construe and enforce the 2008 agreements."
Accordingly, the plaintiff argues that Delaware law should apply
to the controversy here. The defendants counter that the
amended agreements never took effect, hence the contract's
choice of law provision is without effect, and Massachusetts law
should apply. Both parties assert their respective positions in
perfunctory fashion, without supporting argument or authority,
and both maintain that they should prevail under the laws of
either jurisdiction in any event.
Massachusetts will give effect to a choice of law provision
in a contract dispute, if to do so is fair and reasonable. See
9
Morris v. Watsco, Inc., 385 Mass. 672, 674 (1982); Stagecoach
Transp., Inc. v. Shuttle, Inc., 50 Mass. App. Ct. 812, 817-818
(2001). Our courts make an exception in situations where the
validity of the contract's formation is challenged, as with a
claim of precontract misrepresentation or fraud in the
inducement, in which case it is less likely that the contract's
choice of law provision will be honored. See, e.g., Jacobson v.
Mailboxes Etc. U.S.A., Inc., 419 Mass. 572, 578 (1995);
Northeast Data Sys., Inc. v. McDonnell Douglas Computer Sys.
Co., 986 F.2d 607, 610-611 (1st Cir. 1993).
Whether that principle applies here is a question we need
not decide, as we agree that the choice of law does not affect
the outcome. Both jurisdictions approach the issue of
integration by considering the nature of the writing, and in
particular, whether the parties included an integration clause.
As Massachusetts cases on the topic admit to more complexity,
and in the interest of fairness and finality, we focus our
discussion there.8
8
Under Delaware law, an integration clause gives rise to a
rebuttable presumption that the writing contains the parties'
complete agreement. Webber v. Anderson Homes LLC, 908 A.2d 616,
620 (Del. Super. Ct. 2006). "[T]his presumption can be overcome
by a showing of fraud, bad faith, unconscionablity, negligent
omission or mistake in fact." Ibid., quoting from Kronenberg v.
Katz, 872 A.2d 568, 592 (Del. Ch. 2004). Indeed, absent
unconscionable or other extraordinary circumstances, "the
existence of such a clause in a formal written contract between
sophisticated parties" is conclusive evidence that the contract
10
3. Integration. This court recently observed that an
integration clause is evidence of integration, but is not
dispositive. Chambers v. Gold Medal Bakery, Inc., 83 Mass. App.
Ct. 234, 243 (2013). Generally, contracting parties are
understood to have included an integration clause in their
written agreement with the intent "to preclude the subsequent
introduction of evidence of preliminary negotiations or side
agreements." Id. at 244, quoting from Security Watch, Inc. v.
Sentinel Sys., Inc., 176 F.3d 369, 372 (6th Cir. 1999).
However, the nature of the writing or the situation of the
parties may warrant consideration of the parties' negotiations
in order to determine whether they intended that the written
agreement, even one containing an integration clause, be fully
integrated. See Wang Labs., Inc. v. Docktor Pet Centers, Inc.,
is the parties' complete agreement. J.A. Moore Constr. Co. v.
Sussex Assocs. Ltd. Partnership, 688 F. Supp. 982, 987 (D. Del.
1988). On the undisputed facts, the defendants have not made
the requisite showing.
Nevertheless, the defendants argue that evidence of the
parties' negotiations was admissible to prove that the
integration clause, along with the rest of the agreement, was
not intended to take effect unless the conditions precedent were
met. However, in Aetna Ins. Co. v. Newton, 274 F. Supp. 566,
572 (D. Del. 1967), the court ruled that where the parties'
written contract contained an integration clause, the parol
evidence rule was a bar to the parties' alleged oral agreement
that a condition precedent was to be fulfilled before the
contract was to take effect. Here, under Delaware law, the
defendants' assertion of an oral condition precedent is not
sufficient to overcome the presumption in favor of the
integration clause in the parties' written agreement.
11
12 Mass. App. Ct. 213, 219 (1981). Whether an agreement is
fully integrated turns on the intention of the parties and "is
an issue of fact for the decision of the trial judge, entirely
preliminary to any application of the parol evidence rule."
Green v. Harvard Vanguard Med. Assocs., Inc., 79 Mass. App. Ct.
1, 9 (2011), quoting from Wang Labs., Inc. v. Docktor Pet
Centers, Inc., supra.
The defendants argue that the prior negotiations of the
parties in this case are admissible to establish that the
amended agreements were not intended to be fully integrated.
But where, as here, sophisticated business people, represented
by counsel, have negotiated and executed a complex written
document touching on all significant aspects of their
transaction, and have included an integration clause, we need
not resort to their prior negotiations concerning the
transaction at hand "to divine the intention of the parties on
the question of integration." USTrust v. Henley & Warren Mgmt.,
Inc., 40 Mass. App. Ct. 337, 341 (1996). More than four months
of negotiations followed from the time Shahbazi proposed the
restructuring to the plaintiff until he executed and delivered
the amended agreements. Had there been an omission of a
refinancing contingency, "it was the responsibility of the
borrower, which has not disclaimed having had the advice of
12
competent counsel, to read the documents and remedy the omission
before signing off on the papers." Id. at 342.
Moreover, the amended agreements specifically addressed the
issue of refinancing the PNC loan and delineated the terms and
conditions for that refinancing. The fact that the amended
agreements expressly included a one-time right to refinance the
PNC loan cuts against the notion, suggested by the defendants,
that the parties simply "didn't bother to craft such language,"
to include the GE loan contingency, because it was understood as
integral to the deal. See, e.g., Bendetson v. Coolidge, 7 Mass.
App. Ct. 798, 802 (1979) (comparing detailed contract that
addressed specific issue raised by parties' dispute with
contracts that "failed to speak one way or the other to an
essential question raised by the subject matter of the
agreement"). Compare Wang Labs., Inc. v. Docktor Pet Centers,
Inc., 12 Mass. App. Ct. at 219-220 (failure of lease to address
equipment's performance supported judge's finding of collateral
agreement). "Where the writing shows on its face that it is the
entire agreement of the parties and 'comprises all that is
necessary to constitute a contract, it is presumed that they
have placed the terms of their bargain in this form to prevent
misunderstanding and dispute, intending it to be a complete and
final statement of the whole transaction.'" Bendetson v.
13
Coolidge, supra at 802-803, quoting from Glackin v. Bennett, 226
Mass. 316, 319-332 (1917).9
We contrast cases dealing with agreements where the form of
the writing is brief or boilerplate, or where the parties are
mismatched. It is true that in such instances, "proof could be
received ranging beyond the writing proper" to determine whether
the parties intended full integration. Antonellis v. Northgate
Constr. Corp., 362 Mass. 847, 849 (1973). For example, in Wang
Labs., Inc. v. Docktor Pet Centers, Inc., 12 Mass. App. Ct. at
218, no integration was found where a lease agreement, though
containing an integration provision in fine print, consisted of
a standardized printed form. See Antonellis v. Northgate
Constr. Corp., supra at 849-850 (no integration intended in
parties' one-page agreement and "evident design to mesh" with
contingency); Ryder v. Williams, 29 Mass. App. Ct. 146, 150
(1990) (promissory notes in unusual form found not integrated).
Also distinguishable are agreements involving parties of
dissimilar bargaining power or sophistication in the matter at
hand. See Tilo Roofing Co. v. Pellerin, 331 Mass. 743, 745-746
9
The defendants also point to the first amendment, which
addresses the addition of the Marlborough properties to the GS
portfolio, as evidence that the acquisitions were intended as a
condition precedent to the deal. The language of the first
amendment does not support that view, and further provides that
the company is governed pursuant to the April 1, 2008, amended
agreement and that "all other terms and conditions of the
[amended] Agreement shall remain in full force and effect."
14
(1954) (contract pressed on homeowner by "insistent" salesman
found to be subject to condition precedent); Green v. Harvard
Vanguard Med. Assocs., Inc., 79 Mass. App. Ct. at 9-11 (employee
claimed he signed release of his discrimination claim against
employer in exchange for oral promise of another job).10 Those
cases, in which prior negotiations were considered to determine
the parameters of the parties' agreement, do not bear on the
very different circumstances here.
The defendants counter that, despite the presence of an
integration clause and the absence of express conditions, it was
understood that the amended agreements, upon delivery, were to
be held in escrow pending completion of the GE loan and property
acquisitions, and that the amended agreements, including the
integration clause itself, never became operative when those
transactions failed to occur. Even were we to consider the e-
mail exchanges and construe them in the defendants' favor, the
10
Another situation in which we may look beyond the writing
is where the agreement is ambiguous on the issue of integration,
even in the presence of an integration clause. See, e.g.,
Holmes Realty Trust v. Granite City Storage Co., 25 Mass. App.
Ct. 272, 275-276 (1988) (despite integration clause, ambiguity
found in meaning of lease agreement where parties simultaneously
executed a second agreement dealing with improvements to leased
premises); Kobayashi v. Orion Ventures, Inc., 42 Mass. App. Ct.
492, 496 (1997). Though the defendants' brief makes a passing
reference to the principle that an ambiguous contract raises an
issue of fact, they asserted at oral argument that they were not
claiming that the integration clause gave rise to an ambiguity,
but rather that the integration clause did not take effect until
the conditions precedent were satisfied.
15
evidence does not show that this understanding was shared by
both parties as a condition to the amended agreements'
effectiveness. Rather, the e-mails indicate that the plaintiff
was aware that Shahbazi was attempting to obtain the GE loan and
acquire the Marlborough properties, and cooperated in that
effort, but "that anticipation was never made a part of the
agreement reflecting the contract between them." Winchester
Gables, Inc. v. Host Marriott Corp., 70 Mass. App. Ct. 585, 593
(2007).
While the defendants may have intended that the executed
amended agreements not take effect upon delivery, it is well-
established that "[t]he unexpressed intent of one party cannot
control the legal effect" of the parties' written agreement and
explicit integration clause. Winchester Gables, Inc. v. Host
Marriott Corp., supra, quoting from Quirk v. Smith, 268 Mass.
536, 543 (1920). Whatever the defendants may have hoped, the
communications fail to raise a question of fact as to whether
the plaintiff understood and agreed to hold the fully executed
amended agreements in escrow once they were delivered, without
express conditions, on April 11, 2008.
Based on the foregoing, the defendants' conclusory
assertion that it was understood that the amended agreements
were not to take effect until the certain oral contingencies
were met does not create an issue of fact concerning
16
integration. The judge properly ruled that the amended
agreements were fully integrated, and as such, properly declined
to consider parol evidence to contradict their plain terms. "A
judge uses summary judgment for the purpose for which it was
intended when, as in this case, a party seeks to alter what the
agreement provides by saying, in effect, 'that was not what we
meant at all.'" USTrust v. Henley & Warren Mgmt., Inc., 40
Mass. App. Ct. at 343.
4. Damages. Following the entry of summary judgment, a
second judge awarded the plaintiff damages in the amount due in
accordance with the amended agreements. The defendants maintain
that pursuant to the amended agreements' subordination clause.
no damages are owed. The subordination clause appearing in the
amended agreements provided as follows:
"Subordination. All payments due to the Members pursuant
to this Agreement shall be fully subordinate to any
payments due under any Approved Loan, but payments of the
Required Distributions to the Preferred Member shall be
permitted in the absence of the declaration of a continuing
event of default by the subject Lender under the new first
mortgage loan by the Lender thereunder, unless such payment
would result in a required debt service payment not being
made to the Lender when due as a result of insufficient net
Operating Income. Any payments due pursuant to this
Agreement shall be paid only after periodic payments of the
principal and interest and all other payments under all
Approved Loans have been made as required pursuant to the
terms thereof."
As defined in the amended agreements, the "preferred
member" refers to the plaintiff, and the "required distribution"
17
refers to the mandatory monthly payments the defendants were to
make to the plaintiff. We reject the defendants' argument that
because they were in default of the PNC loan, the above language
relieved them of the obligation to pay the plaintiff. Even
assuming, without deciding, that "the new first mortgage loan"
refers to the PNC loan,11 "payments of required distributions to
the preferred member" must be read in the context of the
immediately preceding phrase, "all payments due to members
pursuant to this agreement shall be fully subordinated." It is
clear, from the subordination clause read as a whole, that it
merely sets forth the priority of the defendants' obligations
and does not excuse or extinguish them in the event of the
defendants' default on the primary loan. There is no reasonable
interpretation of the subordination clause that would relieve
the defendants of their obligations to the plaintiff.
Judgment affirmed.
11
As the plaintiff points out, the phrase "new first
mortgage loan" is employed elsewhere in the amended agreements
to refer to the defendants' one-time right to refinance the PNC
loan and utilized similar subordination language in the event
the defendants refinanced with a new lender.