JD Holdings, L.L.C., et. al. v. The Revocable Trust of John Q. Hammons, et. al., C.A. 7480-VCL (Laster, V.C.)

By Masha Trainor and Ryan Drzemiecki

This case involves a dispute over interpretation of a right of first refusal clause. In 2005, John Q. Hammons, a hotel entrepreneur, entered into a complex transaction (the “2005 Transaction”), structured as a triangular merger, in which Hammons’ publicly traded company, John Q. Hammons Hotels, Inc., emerged as indirect wholly-owned subsidiary of JD Holdings, LLC, which is controlled by Jonathan Eilian. As part of the 2005 Transaction, Hammons granted Eilian a right of first refusal (the “ROFR”) to purchase any interest in a hotel or other real property described therein (each a “JQH Subject Hotel”).

The plaintiffs, entities affiliated with Eilian (“Plaintiff”), originally filed suit to obtain a declaration regarding the meaning of certain provisions of the ROFR Agreement. Subsequently, Hammons died. The parties agreed that, pursuant to the ROFR Agreement, Hammons’ death triggered a 90-day period during which Eilian would negotiate exclusively with JQH Trust and Hammons’ estate (“Defendant”) to determine whether Eilian would buy the JQH Subject Hotels. However, they disagreed about the JQH Trust’s obligations following the expiration of the exclusivity period. Plaintiff argued that the ROFR clause required the JQH Trust to liquidate all of the JQH Subject Hotels for cash within a certain period after Hammons’ death even if the parties did not agree on a transaction during the exclusivity period, and the ROFR would apply to any such sale. In the answer and counterclaim to the amended complaint, Defendant rejected this interpretation of the ROFR, contending, among other things, that the ROFR failed to create any affirmative obligation to sell and, even if it did, would be void under the rule against perpetuities. The parties have cross-moved for judgment on the pleadings on this and other claims and counterclaims.

In its decision on the various claims and counterclaims, the court emphasized the principles of contract interpretation and the obligation to focus on the plain meaning of the contract. Absent an ambiguity, a court has to construe the terms based on their plain meaning and may not change the language. For a term to be ambiguous, “it may be fairly or reasonably susceptible to more than one meaning” (citation omitted). A term is not ambiguous simply because parties disagree as to its meaning.

With the above principles in mind, the court agreed with Plaintiff’s plain reading of the ROFR clause. It held that the clause created an affirmative obligation on JQH Trust to sell the JQH Subject Hotels for cash within a defined period of time after Hammon’s death. The court further held that, even if the parties did not agree on a transaction during the 90-day exclusivity period, the ROFR applied to any subsequent sale.

The court also ruled against the Defendant’s claim that he ROFR clause did not create an affirmative obligation to sell because it did not contain any specific material terms. The court held that the clause did, in fact, contain the time period during which the JQH Subject Properties must be sold and the requirement that they be sold for cash.

With regard to defendants’ claim that the ROFR clause violates the rule against perpetuities, the court disagreed. Under Delaware law, the rule against perpetuities is applied differently to commercial transactions, allowing parties to negotiate a mutually acceptable time period within which rights must be exercised. Thus, because the parties contemplated an end to their relationship upon expiration of the mandatory sale period, the ROFR clause will not violate the rule against perpetuities.

Defendant also counterclaimed that the ROFR clause was an unreasonable restraint on alienation. Delaware courts use a fact intensive approach to determine whether a restraint on alienation is unreasonable. Accordingly, the court held that the ROFR clause was not an unreasonable restraint on alienation because the restraint (i) is not capricious, (ii) was not imposed for spite or malice, (iii) is limited in duration, and (iv) does not exclude a large number of potential buyers.

Finally, the court denied Plaintiff’s motion for judgement on the pleadings seeking a declaration that three specific properties fall within the scope of the ROFR clause as JQH Subject Hotels because further factual development is required.

JDHoldingsvDowdy

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