Chancery Court Denies Cross-Motions for Partial Summary Judgment Due to Ambiguities in Contract Language of LLC Agreement Governing Joint Venture
By Scott E. Waxman and Rachel Cheasty Sanders
In AM General Holdings LLC v. The Renco Group, Inc., C.A. No. 7639-VCS and The Renco Group, Inc. v. MacAndrews AMG Holdings LLC, C.A. No. 7668-VCS (Del. Ch. May 17, 2017), the Delaware Court of Chancery denied cross-motions for partial summary judgment after reviewing the LLC Agreement of AM General Holdings LLC, which governs the joint venture relationship between Plaintiff, The Renco Group, Inc. (“Renco”), and Defendant, MacAndrews AMG Holdings LLC (“MacAndrews”), both members of AM General Holdings LLC (the “Company”). Renco brought suit against MacAndrews alleging that MacAndrews, the managing member of the Company, caused the Company to distribute $72.8 million to MacAndrews in breach of the Company’s LLC Agreement. Renco contended that, according to the LLC Agreement, the $72.8 million should have been distributed to Renco instead. Both parties pointed to several provisions of the LLC Agreement governing the distribution at issue, and both parties contended that these provisions were clear and unambiguous. After reviewing the provisions, however, the Court determined that the provisions were, in fact, ambiguous and thus, the case could not be disposed of through summary judgment proceedings.
In December 2012 and February 2013, MacAndrews caused the Company to distribute $72.8 million to itself. Before the distribution occurred, MacAndrews valued the Company at a fair market value of between $1.489 and $1.759 billion, attributing approximately $1.164 to $1.434 billion of the fair market value to the equity in AM General, a subsidiary of the Company that designs, engineers and manufactures military and special purpose vehicles such as the Humvee. When Renco disagreed with MacAndrews’ valuation, the parties began the appraisal procedure set out in the LLC Agreement whereby an independent appraiser appointed by the Court determined the Company’s fair market value to be $314 million, attributing only $27.5 million to the equity in AM General. Renco argued that MacAndrews used its inflated valuation to justify the $72.8 million in distributions to which it was not otherwise entitled under the lower valuation provided by the court-appointed appraiser.
The LLC Agreement provides a complex process for the distribution of the joint venture’s profits and losses and the allocation of the profits and losses between the Members. Although the parties agreed which provisions govern the distribution process, they disagreed as to the interaction of these provisions with each other. Renco argued that, according to Section 9.4(c), the Company “shall not make any distributions to [MacAndrews] . . . if it would cause [MacAndrews’] Revalued Capital Accounts to be equal to or less than 20% of the aggregate Revalued Capital Accounts of all Members in [the Company].” The LLC Agreement defines “Revalued Capital Accounts” (“RCA”) as “the Capital Account balance such Member would have if all of the assets of [the Company] were sold for their respective gross fair market values . . . and the resulting Profits, Losses and all other items of income, gain, loss and deduction were allocated to the Members pursuant to Sections 8.1, 8.2, 8.3 and 8.4.” Renco then pointed to Section 8.3(b) which provides that “Renco can elect to cause [the Company] to make a distribution to Renco in order to reduce or eliminate any excess in Renco and its Affiliates’ aggregate [RCA] over the Renco 80% Capital Account Cap as defined in Section 8.3(a).” Renco argued that no provision in Section 8.3 provides that Section 8.3(b) applies only after Section 8.3(a)’s distributions have been made. Instead Renco argued that Sections 8.3(a) and (b) offered two alternatives to ensure both that Renco’s capital account remained below Renco’s 80% Capital Account Cap as required by Section 8.3(a), and that MacAndrews did not receive distributions if they would cause MacAndrew’s RCA to be equal to or less than 20% of the aggregate Revalued Capital of all Members in the Company pursuant to Section 9.4(c). Thus, Renco contended that, according to the independent appraisal, MacAndrews’ RCA was below 20% prior to the distribution, and therefore the LLC Agreement prohibited MacAndrews from receiving the distribution. Rather, Renco contended it was permitted to elect to receive the distribution to decrease its balance below the Renco 80% Capital Account Cap under Section 8.3(b).
On the other hand, MacAndrews pointed to the definition of RCA set out in Section 4.4 and contended that the value of the Company’s assets “if sold for their respective gross fair market values” was noted in the appraisal process and thus the hypothetical gains and losses from the hypothetical sale of these assets must be allocated according to Sections 8.1, 8.2, 8.3 and 8.4. MacAndrews argued this was a mandatory allocation. Thus the hypothetical losses must be allocated away from MacAndrews under Section 8.3(a) to prevent Renco’s RCA balance from hitting the Renco 80% Capital Account Cap. Further, MacAndrews contended that the prohibition in Section 9.4(c) against distributions to MacAndrews allowed MacAndrews to prevent distributions that would cause its RCA to fall below 20%. Therefore, by preventing its RCA from dropping below 20%, would keep Renco’s RCA from increasing over 80% in breach of the Renco 80% Capital Account Cap provision. MacAndrews contended that 8.3(b) was intended to remedy any imbalances in Members’ actual capital account balances that could not be fixed by Section 8.3(a)’s method.
The Court then applied standard rules of contract construction to the provisions and the parties’ views to determine whether summary judgment was appropriate. According to Delaware law, “summary judgment is appropriate only if the contract in question is unambiguous.” The Court will determine that contract language is ambiguous only if it is “reasonably or fairly susceptible of different interpretations.” Moreover, when cross-motions for summary judgment have been filed, one of the parties “must establish that its construction is the only reasonably interpretation” in order to prevail over the other party. If both parties offer reasonable constructions, the Court has discretion to deny summary judgment so that it may inquire into or develop the record more completely at trial.
The Court first determined that Renco’s interpretation of the distribution provisions was reasonable. The Court noted that Renco’s interpretation gave meaning to language in Section 9.4(c) that seemingly prohibited distributions to MacAndrews when its RCA fell below the 20% threshold in violation of the Renco 80% Capital Account Cap. Moreover, Renco’s interpretation of Section 8.3(b) was reasonable “as an option to remedy any imbalance to the parties’ capital accounts to restore the agreed-upon limits.” Further, as Renco correctly pointed out, Section 8.3 failed clearly to state that Section 8.3(a) must be applied prior to the application of Section 8.3(b), thus supporting a reasonable construction of Section 8.3 that provided “Renco with the option to elect to receive a distribution in order to re-align the RCA balances.”
The Court next determined that MacAndrews’ interpretation of the same distribution provisions was also reasonable. The Court noted that the definition of RCAs required MacAndrews, as managing member, to determine RCA balances of the Members by applying Sections 8.1, 8.2, 8.3 and 8.4. As MacAndrews argued, Section 8.3(a) could be “read to require the managing member to apply the allocation limits of Section 8.3(a) before determining whether Renco [was] entitled to receive any distributions.” Moreover, the Court noted that, although Section 9.4(c) clearly restricted MacAndrews from receiving distributions under certain circumstances, Section 9.4(c) could be reasonably construed as requiring loss reallocation before Renco was entitled to take any distributions, because whether the right of Renco to elect to receive distributions was immediate was unclear.
Because the Court found both Renco and MacAndrews’ interpretations of the distribution provisions of the LLC Agreement to be reasonable, the Court determined the LLC Agreement to be ambiguous. Thus, the issue of breach of contract between the parties would not be properly disposed of by summary judgment.
AM General Holdings LLC v. The Renco Group, Inc. C.A. No. 7639-VCS and The Renco Group, Inc. v. MacAndrews AMG Holdings LLC, C.A. No. 7668-VCS (Del. Ch. May 17, 2017)