Keep Sticking to the Four Corners - Extrinsic Evidence of Parties' Prior Conduct Cannot Alter the Interpretation of an Unambiguous Contract

by Sheppard Mullin Richter & Hampton LLP
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In BDCM Fund Advisor, L.L.C. v. Zenni, No. 602116/08 (N.Y. Sup. Ct. Nov. 15, 2012), Judge Eileen Bransten granted a motion for partial summary judgment for the defendants/counterclaim-plaintiffs, James J. Zenni (“Zenni”) and his group of investment firms (collectively “Defendants”), who were seeking a percentage of the profits from the sale of a fund managed by Stephen H. Deckoff (“Deckoff”), BDCM Fund Advisor, L.L.C., and Black Diamond Capital Holdings, L.L.C. (collectively “Plaintiffs”).

In 1995, Zenni and Deckoff co-founded Black Diamond Capital Management (“Black Diamond”), an asset management firm. In 2006, Zenni left Black Diamond to open a competing firm. In connection with the departure, the parties entered into a Membership Interest Redemption Agreement (“MIRA”) containing, among other things, a provision that Plaintiffs pay Zenni a set percentage of profits earned from the management of a specific fund (the “Carried Interest”). In 2008, Plaintiffs sued Zenni for breaching confidentiality and competition provisions of the MIRA and refused to pay the Carried Interest due to Zenni. Zenni counterclaimed alleging, among other claims, that Plaintiffs breached the MIRA by failing to pay him his portion of Carried Interest. Zenni then filed a motion for summary judgment for that claim. On August 20, 2009, the court denied his motion, holding that his right to the Carried Interest was “inextricably intertwined” to a determination on whether he breached the MIRA.

Following discovery, in March 2011, Plaintiffs moved to amend their complaint to include additional alleged breaches of the MIRA that occurred after the filing of the original complaint. Judge Bransten denied Plaintiffs’ motion (that decision, and the First Department’s subsequent affirmation, are detailed here). Accordingly, on July 1, 2011, Plaintiffs commenced a separate action (the “2011 Action”) alleging that Zenni breached the nondisparagement clause of the MIRA.

In April 2012, the court granted Zenni’s motion to dismiss Plaintiffs’ original complaint. Zenni thereafter filed a second summary judgment motion seeking payment of the Carried Interest. Zenni argued that the MIRA was clear and unequivocal regarding Plaintiffs’ obligation to pay the Carried Interest as the MIRA detailed the specific variables needed to determine the exact amount owed. Plaintiffs disagreed, arguing that genuine issues of material fact existed in assessing what interest was owed, if any. In particular, Plaintiffs claimed that the parties’ prior conduct illustrated that there were varying interpretations of the contract’s language. The court rejected Plaintiffs’ argument and granted Zenni’s motion for summary judgment.

The court held that when a motion for summary judgment is based on clear contractual language, evidence of prior practice that implies an alternate reading of the contract will not be sufficient to defeat the motion. Specifically, “[e]vidence outside the four corners of the document as to what was really intended but unstated or misstated is generally inadmissible to add to or vary the writing.” Judge Bransten noted that the MIRA provided clearly the formula necessary to calculate what interest was owed, and the fact that prior conduct demonstrated an alternate interpretation of the contract was irrelevant.

Judge Bransten also rejected Plaintiffs’ assertion that the law of the case doctrine barred consideration of Zenni’s motion. Plaintiffs argued that because the court held earlier that Zenni’s entitlement to Carried Interest was “inextricably intertwined” with whether he breached the MIRA, Zenni’s current motion could not be heard until the court ruled on the breach claims in the separate 2011 Action. Judge Bransten disagreed, holding that the law of the case doctrine did not apply: in light of the court’s dismissal of Plaintiff’s complaint, the condition upon which Zenni could successfully motion for repayment had been met, and his counterclaim was therefore ripe for review.

The court also rejected Plaintiff’s contention that arbitration was the appropriate venue to settle the dispute. Judge Bransten found that the plaintiffs waived their right to enforce an arbitration clause of the MIRA when they decided to fully participate in over four years of litigation.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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