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Posted: January 15, 2020

Plaintiffs’ Obligation to Perform Not Excused by Defendant’s Alleged Non-Material Breaches of Agreement

On December 24, 2019, Justice Cohen of the New York County Commercial Division issued a decision in Aktiv Assets LLC v. Centerbridge Partners, L.P., 2019 NY Slip Op. 33736(U), holding that a plaintiff’s obligation to perform was not excused by the defendant’s alleged non-material breach of the agreement, explaining:

Even if the agreements were viewed as a single intertwined agreement, however, the claimed breaches of the Partnership Agreement are not material. Under New York law, a nonbreaching party’s obligation to perform is excused only when there is a material breach by the other party- i.e., where the breach is so substantial and fundamental as to strongly tend to defeat the object of the parties in making the contract. Conversely, technical non-compliance with a contractual condition does not excuse performance.

The materiality of a breach is a matter of law for the court to decide where, as here, the evidence concerning the materiality is clear and substantially uncontradicted.

In determining if Centerbridge’s breach defeated the object of the parties’ agreements, considered together, we must consider the special purpose of the contract. At issue are two provisions in the Partnership Agreement – the written notice requirement under § 16.4(a), and the good-faith discussion provision under § 15.13 – designed to preserve Plaintiffs’ financial interest in the business venture with Centerbridge and its affiliates. Section 16.4, an anti-dilution device, ensures that Plaintiffs have an opportunity to co-invest when the Partnership proposes to issue additional Units or other equity securities. And Section 15.13 instructs that, when the Limited Partners’ Capital Contributions exceed $100 million, each Limited Partner agrees that at such time the Limited Partners shall discuss in good faith the treatment of distributions with respect to Capital Contributions in excess of such $100,000,000 threshold. Based on the undisputed facts in the record, the Court finds that Centerbridge’s alleged breaches of these two provisions are not material and thus they do not excuse Plaintiffs from performing its obligations under the Call Option Agreement.

First, the form of notice set out in § 16.4(a) is not substantial and fundamental to the object of the parties in making the contract. Plaintiffs do not dispute that they had actual notice of the Additional Unit Sales. Because Plaintiffs had actual notice, they still could have exercised their right to co-invest in order to avoid dilution. That right was not contingent on Plaintiffs’ receiving written notice. And in fact, Plaintiffs did receive a belated written notice which included an offer to retroactively co-invest, effectively placing Plaintiffs in the same, if not better, position as under § 16.4( a). As a result, the original failure to provide written notice had little or no practical impact upon Plaintiffs.

While Plaintiffs allege that Centerbridge intentionally and permanently diluted their ownership interests, that purported dilution cannot be ascribed to the manner of notice.

The absence of any identified harm to Plaintiffs resulting from the alleged failure to provide written notice distinguishes this case from Special Situations Fund IIL L.P. v. Versus Tech., Inc., 227 A.D.2d 321 (1st Dep’t 1996). There, the defendant materially breached, inter alia, the anti-dilution provision of the parties’ warrant agreement by reason of defendant’s admitted failure to adjust the purchase price of the warrant before privately selling shares of the common stock for less than the current fair market value. Critically, uncontroverted evidence in that case showed lost profits sustained by plaintiff as a result of defendant’s material breach, establishing that the alleged loss was directly related to the breach. No such evidence is presented here, nor is there any genuine issue of fact to be tried.

Second, the alleged breach of the good-faith discussion provision in the Partnership Agreement does not justify excusing Plaintiffs’ obligations under the Call Option Agreement. The object of this provision is to grant Plaintiffs a right to negotiate, in good faith, favorable treatment of distributions if and when the Limited Partners’ Capital Contributions exceed $100 million. The provision provides no definite time frame in which these good-faith discussions should occur – at such time” could mean at any time after the Capital Contributions exceed $100 million, before a distribution occurs. And when that distribution occurs is also beyond Plaintiffs’ control. Plaintiffs do not have the right under § 15.13 – or any other provision – to influence the timing or amount of a future distribution. That right is entrusted to the sole discretion of the General Partner under § 15.1. And of course, § 15.13 could be followed to the letter and still not lead to any change in the treatment of distributions, as long as good-faith negotiations took place. All told, the sole benefit offered to Plaintiffs by§ 15.13 – an advantageous treatment of a distribution – materializes only if a distribution occurs, which indisputably it has not. Without a distribution, Plaintiffs cannot claim a material breach stemming from its right to negotiate favorable treatment of that distribution.

Plaintiffs’ contention that, had the Defendants complied with their contractual obligation to negotiate the appropriate treatment of distributions those discussions may well have resulted in an agreement to make distributions to Aktiv and the Management Team from the proceeds of third-party financing, is thus completely speculative. Plaintiffs’ argument appears to use the alleged breach of § 15.13 as a vehicle for advancing a broader grievance – the source of money infusions into the Partnership. As laid out in their separate claim for breach of fiduciary duty, which is not subject to the present motion, Plaintiffs object to Centerbridge’s rejection of third-party financing agreements to acquire additional auto loans after the initial investment of $100 million. Whatever the merits of that argument, it is apparent that the harm Plaintiffs claim to have suffered results from the Partnership’s decisions about capital contributions and third party financing, not from a failure to negotiate the treatment of distributions (which, again, have not occurred) in good faith.

(Internal quotations and citations omitted).

Part of the reason parties to commercial contracts choose to have those contracts governed by New York law is that New York courts typically enforce contracts as written. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the breach of a contract under New York law.

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