Contract – LLCs – Parol evidence

Listen to this article

Where a Superior Court judge entered summary judgment for the plaintiff, ruling that two 38-page limited liability company 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, the ruling must be upheld despite the defendants’ arguments that (1) it was always understood that the agreements were not to take effect until certain financing and property acquisitions were in place, (2) email exchanges between the parties raise genuine issues of material fact whether integration was intended and (3) the plaintiff is not entitled to damages under the terms of the agreements.

“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.’ … More than four months of negotiations followed from the time [Kambiz] 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 competent counsel, to read the documents and remedy the omission before signing off on the papers.’ …

“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. …

“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 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.’ …

“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. … 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 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. …

“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. …

“As defined in the amended agreements, the ‘preferred member’ refers to the plaintiff, and the ‘required distribution’ 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, ‘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.”

Realty Finance Holdings, LLC v. KS Shiraz Manager, LLC, et al. (Lawyers Weekly No. 11-110-14) (17 pages) (Katzmann, J.) (Appeals Court) Case heard by Spurlock, J., in Superior Court; a hearing on the assessment of damages was had before Ball, J., and entry of final judgment ordered by her. Jeffrey P. Allen and Maria Galvagna Mesinger, both of Lawson & Weitzen, for the defendants; Paul S. Samson, Riemer & Braunstein, for the plaintiff (Docket No. 13-P-252) (Sept. 5, 2014).