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Simon-Mills II, LLC v. Kan.Am USA XVI Limited Partnership

Court of Chancery of Delaware

September 30, 2014

SIMON-MILLS II, LLC, ARUNDEL MILLS MEZZANINE GP, L.L.C., GRAPEVINE MILLS OPERATING COMPANY, L.L.C., and CONCORD MILLS MALL GP, L.L.C., Plaintiffs/ Counterclaim Defendants,
v.
KAN AM USA XVI LIMITED PARTNERSHIP, KAN AM USA XII LIMITED PARTNERSHIP, KAN AM USA XIV LIMITED PARTNERSHIP, KAN AM USA XIX LIMITED PARTNERSHIP, KAN AM USA XVIII LIMITED PARTNERSHIP, KAN AM USA TIER II LIMITED PARTNERSHIP, and KAN AM USA XV LIMITED PARTNERSHIP, Defendants/ Counterclaim Plaintiffs.

Date Submitted: June 30, 2014

Donald J. Wolfe, Jr., Matthew E. Fischer, Timothy R. Dudderar, J. Matthew Belger, and Jacqueline A. Rogers, of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware, Attorneys for the Plaintiffs and Counterclaim Defendants.

Jon E. Abramczyk and Christopher P. Quinn, of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; OF COUNSEL: L. Joseph Loveland, Letitia A. McDonald, Emily S. Newton, and Jordan T. Stringer, of KING & SPALDING LLP, Atlanta, Georgia, Attorneys for the Defendants and Counterclaim Plaintiffs.

MEMORANDUM OPINION

GLASSCOCK, Vice Chancellor

The year is 1985. Two sophisticated parties enter a joint venture that allows the first party to exercise a call right ten years in the future, and provides for consideration in Soviet Rubles. The contract further provides that these Rubles must satisfy certain criteria, including that they be the official currency of the Soviet Union. However, when that party attempts to exercise the call right in 1995, the Soviet Union has collapsed and Soviet Rubles, while still physically to be found, are no longer an official currency. Russian Rubles—the official currency of the Russian Federation—are, however, at least according to the party making the call, an appropriate substitute for Soviet Rubles. The second party disagrees, and the contract does not address what to do if and when Soviet Rubles satisfying the characteristics of the contract become unavailable.

The scenario above is a fiction, but the matter before me is strikingly similar. The facts, laid out below, are complicated, but the issues presented are as straightforward as those above: The Plaintiffs seek to specifically enforce a call which provides that the currency to be exchanged for the Defendants' interest is shares in a limited partnership, with the number of shares to be determined by market value. The partnership, however, no longer exists. The Plaintiffs have tendered shares in a successor partnership. The Defendants argue that the contract cannot be specifically enforced because the Plaintiffs cannot tender the consideration bargained for, and that in any event shares in the current partnership are less valuable to it than the shares specified in the contract. The matter is before me on cross-motions for summary judgment. As with any contract, the intent of the parties, as expressed in the contract, controls, and where ambiguities exist, I must resort to extrinsic evidence to determine the parties' intent. Because factual questions remain, the cross-motions for summary judgment must be denied.

I. FACTS

The Plaintiffs in this matter—Simon-Mills II, LLC; Arundel Mills Mezzanine GP, LLC; Grapevine Mills Operating Company, LLC; and Concord Mills Mall GP, LLC (collectively, the "Simon Parties")—are Delaware limited liability companies either directly or indirectly wholly-owned by Simon Property Group, LP ("Simon Group").[1] Simon Group[2] is a limited partnership that "owns, develops, and manages retail real estate properties."[3]

Simon Group's sole general partner is Simon Property Group, Inc. ("Simon, Inc."), a real estate investment trust ("REIT"), structured as an umbrella partnership real estate investment trust ("UPREIT"). As an UPREIT, all of Simon Inc.'s assets are owned by Simon Group;[4] Simon, Inc., in turn, owns a majority interest in Simon Group.[5] Simon, Inc. stock trades on the New York Stock Exchange ("NYSE"). Moreover, partnership units of Simon Group ("Simon Group Units") are convertible into cash or the publicly traded stock of Simon, Inc. at the option of Simon, Inc.[6]

The Defendants in this matter are Delaware limited liability companies affiliated with the Kan.Am Group ("Kan Am"): Kan.Am USA XVI LP; Kan.Am USA XII LP; Kan.Am USA XIV LP; Kan.Am USA XVIII LP; Kan.Am USA Tier II LP; and Kan.Am USA XV LP (collectively, the "Kan Am Parties"). Through its various real estate funds, Kan.Am facilitates global investment opportunities for Germany-based private and institutional investors.[7] Kan.Am's holding company, Munich-based Kan.Am International GmbH, "direct[s] most of the activities connected with the closed-end Kan.Am real estate funds, " and is responsible for Kan.Am's accounting, data-processing, taxation, personnel, media, and public relations functions.[8]

A. The JV Limited Partnerships

The Simon and Kan.Am Parties, and their affiliates, hold ownership interests in four Delaware limited partnerships relevant to this action, the Orange City Mills Mezzanine II Limited Partnership ("Orange City LP"), Arundel Mills Mezzanine Limited Partnership ("Arundel Mills LP"), Grapevine Mills Limited Partnership ("Grapevine Mills LP"), and Concord Mills Mall Limited Partnership ("Concord Mills LP, " and collectively with the Orange City, Arundel Mills, and Grapevine Mills Limited Partnerships, the "JV Limited Partnerships").[9]

The joint venture relationship among Simon, Inc., Kan.Am, and their affiliates dates back to the mid-1990s when The Mills Corporation ("Mills Corp."), a "developer, owner, and manager" of a portfolio of retail properties, [10]"approached [Simon, Inc.] about participating in a series of joint ventures for the purpose of developing and owning various shopping centers in metropolitan areas across the United States."[11] Mills Corp., like Simon, Inc., was a REIT structured as a UPREIT; its operating partnership was The Mills Limited Partnership ("Mills Partnership"). Mills Corp. owned a majority of Mills Partnership and also served as its general partner.[12] Mills Corp. common stock was publicly traded on the NYSE and Mills Partnership units ("Mills Units") were convertible into the publicly traded stock of Mills Corp. or cash, at the option of Mills Corp.[13]

Thereafter, Mills Corp. and Simon, Inc., through affiliates of their respective operating partnerships, and Kan.Am, through its various funds, began fostering a business relationship that involved the pursuit of real estate joint ventures.[14]Among the joint ventures developed during the mid- to late-1990s were the Grapevine Mills, Arundel Mills, and Concord Mills Limited Partnerships.[15]Grapevine Mills LP, which was formed in July 1996, was the first joint venture where Simon, Inc., Mills Corp., and Kan.Am were all involved at inception; its governing limited partnership agreement was executed in 1996 (the "Grapevine Mills Agreement").[16] The Concord Mills LP was formed and the agreement governing the parties' relationship was executed (the "Concord Mills Agreement") in July 1997.[17] In 1999, the Arundel Mills LP was formed and the agreement governing the parties' relationship was executed (the "Arundel Mills Agreement, " and collectively with the Grapevine Mills and Concord Mills Agreements, the "Original JV Agreements").[18] In each joint venture project, "the managing general partner . . . was an entity co-owned by [Simon Group] and [Mills Partnership] or their respective affiliates."[19]

Under the Original JV Agreements, involved affiliates of Simon Group and Mills Partnership had a call right, while affiliates of Kan.Am received a put right. The buy/sell provisions, however, could not be invoked until the tenth anniversary date of the "Grand Opening, " as that term was defined in the Agreements.[20]Essentially, this buy/sell right could not be exercised until ten years after each respective project became operational. Each year after the initial ten-year period, and upon proper notice during a specified ten-day window, Simon Group- and Mills Partnership-affiliated entities could purchase the interests of the Kan.Am affiliates in these partnerships. If the call right was exercised, the consideration to be paid was Mills Units and Simon Group Units pro rata in proportion to Mills Partnership's and Simon Group's respective interests in the relevant partnership's general partner, unless the Kan.Am affiliate opted to receive all cash, or a portion of its interest in cash and the remainder in pro rata Mills Units and Simon Group Units.[21]

Conversely, the Kan.Am-affiliated entities could require affiliates of Simon Group and Mills Partnership to purchase their interests. If a Kan.Am entity exercised its put right under the Original JV Agreements, it would receive cash unless the Mills Partnership and Simon Group affiliates elected to pay for its interest entirely in Mills Units and Simon Group Units, in a proportion that Mills Partnership and Simon Group agreed upon, or a combination of cash and an agreed-upon proportion of Mills Units and Simon Group Units.[22]

Under these Agreements, the Mills Units and Simon Group Units were valued at "the gross proceeds which would have been obtained if such units were converted into freely tradeable common stock of Mills Corp. or [Simon, Inc.] as the case may be, and sold at the average closing price of Mills Corp. common stock or [Simon, Inc.] common stock, as the case may be, on the fifteen (15) most recent trading days preceding the date of the Buy/Sell Notice."[23] The Original JV Agreements also outlined the characteristics that Mills Units and Simon Group Units were required to possess. Specifically, these agreements provided that:

Any [Mills Units] received by [Kan Am] pursuant to this [buy/sell provision] shall have substantially the same rights (including redemption, conversion, registration and anti-dilution protection) as attached to units issued in connection with the formation transactions of [Mills Partnership], as more fully described in the Registration Statement for Mills Corp. dated April 14, 1994 and the exhibits thereto, as amended through the date of this Agreement. Any [Simon Group Units] received by [Kan Am] pursuant to this [buy/sell provision] shall have at least the same rights (including redemption, conversion, registration and anti-dilution protection) as are attached to [Simon Group Units] issued to other limited partners of [Simon Group] as of the date of receipt of the [Simon Group Units] by [Kan Am].[24]

Importantly, because both Mills Corp. and Simon, Inc. were structured as UPREITs, under Section 721 of the Internal Revenue Code, "the contribution of real property or interests in a partnership owning real property to the operating partnership solely in exchange for the operating partnership's units may qualify as a tax-deferred transaction."[25] Consequently, contributions of real property or interests to Mills Partnership or Simon Group in exchange for Mills Units or Simon Group Units, respectively, had the potential to qualify as a tax-deferred transaction.[26] The Original JV Agreements evinced the parties' intent to conduct transactions that qualified for tax deferral under Section 721, providing:

In the event that [Kan Am] is to receive [Mills Units] and/or [Simon Group Units], then that portion of the transaction shall be cast as a contribution to [Mills Partnership] and [Simon Group], ratably in accordance with the value of units received from each, of that portion of [Kan Am's] Entire Interest which is being exchanged for [Mills Units] and/or [Simon Group Units], and is intended to be a tax-free transaction under Section 721 of the Code.[27]

The Plaintiffs also contend that the parties intended the buy/sell provisions to serve as a dispute resolution mechanism.[28] The Defendants dispute this contention.[29]

In 2002, Simon, Inc., pursuant to a separate buy/sell arrangement with Mills Corp., "offer[ed] to either sell [its] interests in the relevant joint ventures [including the four at issue here] or buy [Mills Corp.'s] interests in the relevant joint ventures at a stated price."[30] This would mean that either Simon, Inc. or Mills would be exiting the joint partnership, and consequently, that either Simon Group Units or Mills Units, both of which served as buy/sell consideration under the relevant limited partnership agreements, would be rendered unavailable.

On March 4, 2002, Kan.Am executive James Braithwaite sent a letter to Simon, Inc.'s CEO, David Simon, and Mills Corp.'s CEO, Laurence Siegel, communicating that:

The Partnership Agreement for Ontario Mills calls for the purchase price for Kan.Am's interests to be paid in units of limited partnership in [Mills Corp.] or [Simon, Inc.] in certain circumstances. We would be interested in discussing with you how [the buy/sell provision] of the Ontario Mills Agreement might be implemented if there has been a buy/sell between [Mills Corp.] and [Simon, Inc.] of your interests in Ontario Mills, L.L.C.[31]

At the time, if the Simon Group- or Mills Partnership-affiliates were to exercise their call rights under the Ontario Mills LP Agreement, the Kan.Am affiliates were to receive two-thirds of their interest in Mills Units and one-third in Simon Group Units, unless they elected to receive cash.[32] On March 5, Simon responded that:

With respect to your question on Ontario, the only impact of our buy/sell with [Mills Corp.] would be that if the buyer between us later decided to call your interest, you would have the right to request OP [Operating Partnership] Units of that entity or cash. If you put your interest, it is the acquirer that elects whether to use cash or its OP Units. In either case, the OP units would be of whichever of [Mills Corp.] or [Simon, Inc.] was your partner.[33]

Braithwaite did not respond to Simon.

In 2002, Simon, Inc. sold its interest to Mills Corp.[34] Thereafter, Mills Corp. continued to operate real estate joint ventures with Kan.Am. On May 31, 2002, following Simon, Inc.'s exit, the Original JV Agreements were amended to remove all references to Simon, Inc. and its affiliates.[35] The amendment to the Grapevine Mills Limited Partnership Agreement, for example, included the following provision:

References to "[Simon Group]" or its Affiliates in the Partnership Agreement are hereby deleted to the extent no longer operative following transfer of the Simon Interest. References to "[Simon Group]" or its Affiliates in the Partnership Agreement that pertain to rights or obligations of [Simon Group] or its Affiliates that survive the transfer of the Simon Interest shall be deemed to be references to [Mills Partnership], Kan.Am XV and Kan.Am XXI, severally, in their respective capacities as transferees of the Simon Interest, in accordance with their Allocable Percentages.[36]

The agreements governing the Arundel Mills and Concord Mills Limited Partnerships contained similar provisions.[37]

Orange City LP, the fourth partnership involved here, was formed in February 2004—that is, after Simon, Inc. had exited the partnership—as part of the reorganization of the Orange City Mills Mezzanine LP.[38] The governing partnership agreement was executed in 2004 (the "Orange City Agreement, " and collectively with the Original JV Agreements, the "JV Agreements"). Like the Original JV Agreements, the Orange City Agreement also contains a buy/sell provision whereby the default consideration for a call is Mills Units.[39] Unlike the Original JV Agreements, however, Section 11.2(a) of the Orange City Agreement provides that "for purposes of this Section 11.2 and Section 11.3 [the buy/sell provisions] [Mills Partnership] shall be deemed to include [Orange City Mills Mezzanine II GP, LLC] and any other Mills Partners."[40] The term Mills Partners is defined as "[c]ollectively, [Mills Partnership] and [Orange City Mills Mezzanine II GP, LLC] and their respective Affiliates, successors and/or assigns who or which become Partners in accordance with this Agreement."[41]

B. Trouble at Mills Corp.

In early 2005, Mills Corp. began to experience accounting and liquidity issues. Mills Corp. disclosed that, due to accounting errors, it needed to restate financial results for 2000 through 2004.[42] Thereafter, the SEC began an inquiry into Mills Corp.'s accounting practices and, in March 2006, launched a formal investigation.[43] Around this time, the deadlines for repaying approximately $2 billion in debt were also approaching, and Mills Corp.'s "auditor believed that there was 'substantial doubt' that Mills Corp. could stay in business because of [these] looming deadlines."[44]

On March 17, 2006, Mills Corp. announced that it would be filing its 2005 annual report late.[45] Mills Corp., in fact, never filed this 10-K nor any subsequent quarterly or annual reports, following its 10-Q for the third quarter of 2005.[46] As a result, Mills Corp. became unable to "register any common stock and therefore could not provide stock in the event holders of [Mills Units] sought conversion."[47]

Between October 2005 and January 2007, as these accounting and liquidity issues were unfolding, Mills Corp. common stock "los[t] over half of its market value."[48] In February 2007, Mills Corp. entered into an agreement with SPG-FCM Ventures, LLC ("SPG Ventures"), whereby SPG Ventures would acquire Mills Corp. for approximately $7.9 billion (the "Merger Agreement"). SPG Ventures was a joint venture between a Simon Group subsidiary and funds managed by Farallon Capital Management, LLC (collectively, "Farallon").[49] The Simon Group subsidiary and Farallon each held a 50% interest in SPG Ventures.

Pursuant to the Merger Agreement, a tender offer was conducted; thereafter, a subsidiary of SPG Ventures merged into Mills Partnership, with Mills Partnership surviving. As a result of this transaction, holders of Mills Units generally received $25.25 in cash, while certain holders received the option of exchanging these Units for Simon Group Units. Holders of 319, 022 Mills Units took advantage of this option.[50]

As a result of this merger, Simon Group "acquired a 50% indirect ownership interest in [Mills Partnership], and thereby acquired an indirect ownership interest in a number of joint venture projects between affiliates of [Mills Partnership] and Kan.Am, including the JV Limited ...


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