• Bankruptcy Court Disallows Claim for Damages Relating To Real Estate Development Agreement Because Claim Had Been Released Upon Termination of LLC Agreement
  • July 26, 2012
  • Law Firm: Morris James LLP - Wilmington Office
  • In re: Magna Entertainment Corp., Case No. 09-10720 (MFW) (July 9, 2012)

    Magna Entertainment Corp. and its affiliates (the “Debtors”) objected to the claim of Santa Anita Associates Holding Co. (“Caruso”) and Santa Anita Associates, LLC (“Associates”) seeking in excess of $21 million for damages resulting from debtor The Santa Anita Companies, Inc.’s (“SAC”) failure to enter into a ground lease associated with a joint venture between Caruso, Associates and Santa Anita Enterprise, Inc. (“Enterprise”), a non-debtor affiliate of the Debtors, to develop a shopping center adjacent to the Santa Anita Racetrack on property (the “Property”) owed by SAC. The agreement was encompassed in an LLC Agreement (SAC was not a party to the LLC Agreement).

    During the course of the bankruptcy, the assets of SAC and their interest in the joint venture with Caruso were marketed for sale. Caruso was aware of these efforts. In January 2010, an agreement was reached allowing MI Developments US Financing, Inc. to acquire certain assets of the Debtors including the Property and the Santa Anita Racetrack. Debtors filed their plan of reorganization (the “Plan”) incorporating the settlement. The Plan was confirmed on April 29, 2010. On April 12, 2010, Enterprise sent written notice to Caruso that it was terminating the LLC Agreement effective thirty days later (May 12, 2010). Caruso disputed the ability of Enterprise to terminate the LLC Agreement.*

    The Debtors objected to the claim arguing that any claim against them had been released as a result of the termination of the LLC Agreement. The LLC Agreement provided that the agreement could be terminated if certain “Recapture Conditions” were not achieved (or waived). The LLC Agreement defined Recapture Conditions to include (1) obtaining certain entitlements, including zoning and other governmental approval necessary to develop and construct the Project on the Property with all applicable appeal and challenge periods having expired and (2) entering into a Reciprocal Easement Agreement (“the “REA”) within 90 days of the Agreement’s effective date. Caruso conceded that it did not obtain a final REA and all the entitlements necessary to construct the Project by April 30, 2010, but argued that the time to obtain the entitlements was extended by the applicable ”Force Majeure” clause. The Court concluded that the LLC Agreement was properly terminated by the Debtors effective May 12, 2010 because Caruso did not comply with the requirements of the Agreement by giving the requisite notice in order to obtain an extension for Force Majeure. The Court pointed to delays such as the failure to seek arbitration over the termination of the LLC Agreement, failing to seek relief from the automatic stay to proceed with litigation and failing to negotiate an acceptable REA in reaching its conclusion.

    The Court next decided the issue as to whether there was an enforceable ground lease. The Court concluded that even if there was an enforceable agreement with SAC , the LLC Agreement had been terminated. Section 8.04(d)(iii) of the LLC Agreement provided in relevant part:

    If a Termination Election is delivered by pursuant to the foregoing provisions, . . . the Members shall be deemed to have released each other and their respective Affiliates . . . from any claims or obligations of any nature relating to [Associates], the Ground Lease, the Property and the Project.

    Because the LLC Agreement had been terminated, the Court sustained the objection and disallowed the claim filed by Caruso and Associates.

    *Prior to this decision, the Court previously issued its January 30, 2012 opinion on a preliminary “gating” issue as to whether the Court had jurisdiction to decide the objection to the claim because Caruso was entitled to arbitration with Enterprise under the LLC Agreement. The Court concluded that it had jurisdiction because the arbitration provision did not apply and the merits of the claim were therefore ripe for decision.