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Patriarch Partners, LLC v. Zohar CDO 2003-1, LLC

Supreme Court of Delaware

June 19, 2017

ZOHAR CDO 2003-1, LLC, ZOHAR CDO 2003-1 LTD., ZOHAR II 2005-1 LLC, ZOHAR II 2005-1 LTD., ZOHAR III, LLC and ZOHAR III, LTD., Plaintiffs Below, Appellees.

          Submitted: June 14, 2017

         Court Below: Court of Chancery of the State of Delaware C. A. No. 12247

          Before VALIHURA, VAUGHN, and SEITZ, Justices


          Karen L. Valihura, Justice

         This 19th day of June 2017, having considered this matter on the oral arguments and briefs of the parties, it appears to the Court that:

         (1) Pending before this Court is an appeal brought by Patriarch Partners, LLC and associated entities (collectively, "Patriarch") from the Court of Chancery's October 26, 2016 Memorandum Opinion[1] and November 3, 2016 Amended Order and Judgment, [2] ordering Patriarch to produce documents to Zohar CDO 2003-1, LLC and associated entities (collectively, the "Zohar Funds" or the "Funds"). Patriarch's obligation to produce the documents arose from a series of agreements pursuant to which Patriarch managed collateral held by the Funds (the "Collateral Management Agreements" or "CMAs"). Following Patriarch's resignation as collateral manager, the Zohar Funds sued Patriarch, seeking declaratory judgment and specific performance. The Court of Chancery found in the Funds' favor on both fronts, and Patriarch has appealed.

         (2) We AFFIRM on the basis of the Court of Chancery's Memorandum Opinion and Amended Order and Judgment. We address one issue, namely, Patriarch's argument that the Zohar Funds failed to prove their own performance and thus have failed to satisfy their burden of proof as to an essential element of their breach of contract claims under New York law.[3] In his Memorandum Opinion, the Vice Chancellor stated that the question of the Zohar Funds' performance "was not tried before me and I have no basis in this record to conclude one way or the other whether the Zohar Funds have wrongfully withheld payment from Patriarch for services rendered under the Patriarch CMAs."[4] He observed that the question was "squarely before a court in New York."[5]

         (3) Patriarch contends on appeal that, under New York law, plaintiffs were required to prove their own performance as an essential element of a breach of contract claim. Patriarch argues that, because the Vice Chancellor held that he had "no basis" to rule on the Funds' obligation to pay Patriarch's fees, the Funds failed to meet their burden. Further, Patriarch asserts that the Court of Chancery conflated Patriarch's counterclaims with an element that the Zohars had to prove affirmatively. Patriarch asks that this Court reverse the specific performance ruling or, alternatively, remand for a determination of whether the Funds adequately performed.[6]

         (4) The Zohar Funds defend the Court of Chancery's specific performance ruling on two grounds. First, they contend that the Vice Chancellor found that an April 1, 2016 letter written by Patriarch principal Lynn Tilton ("Tilton") constituted breach by Patriarch, and that this finding excuses the Funds' performance under the contract.[7] Second, the Zohar Funds contend that Patriarch failed to litigate the issue of the Zohar Funds' performance below.

         (5) Based upon our review of the record on appeal, we are convinced that the trial court did not misapprehend the elements of breach of contract under New York law. Rather, the Vice Chancellor, with input from the parties, narrowed the issues to be tried in the expedited proceedings and trial. The record fairly clearly suggests that the parties did not view the Funds' performance as an issue to be litigated at trial. The Vice Chancellor communicated to the parties that he would maintain a narrow focus and avoid making rulings that might impact the parties' disputes in other jurisdictions.[8] The Vice Chancellor also stated that the trial would focus on "the limited question" of Patriarch's obligations under the CMAs.[9] The manner in which Patriarch participated in framing the issues before the Court of Chancery reflects its understanding that the Funds' performance was not among the issues to be resolved in the expedited proceedings.

         (6) No mention of the issue appears in the summary judgment briefing. To the limited extent the subject of the Funds' performance was discussed, Patriarch's briefs before the Court of Chancery presented the Funds' alleged nonperformance primarily as a defense.[10] Patriarch did not assert that the Funds could not affirmatively prove their own performance as required by New York law until its post-trial brief[11]

         (7) Moreover, the issue of the Zohar Funds' performance was raised directly in Patriarch's counterclaims, [12] and, as the Vice Chancellor noted, "Patriarch agreed to defer prosecution of its counterclaim until after its document production under the Patriarch CMAs was litigated."[13] The Vice Chancellor observed further that "Patriarch's counterclaim was not included in the Pretrial Stipulation and Order as an issue of fact or law to be litigated in this action and Patriarch's statement for relief in the Pretrial Stipulation and Order requested only that the Court dismiss the Zohar Funds' claims."[14]Indeed, the Pretrial Stipulation and Order provided that "[t]he non-expedited portions of this action are not addressed herein."[15]

         (8) Finally, we note that in his Order Denying Defendants' Motion for a Stay Pending Appeal, the Vice Chancellor noted that "the issue of whether the Zohar Funds were first to breach the Patriarch CMAs, thereby excusing Patriarch's performance under New York law . . . was not tried as part of the expedited trial in this case."[16]

         (9) Thus, we reject Patriarch's invitation to find fault with the trial court's post-trial decisions based upon what was obviously a decision by the parties as to how to frame and narrow the issues to be tried during the expedited phase of the proceedings. Patriarch's contention now that the trial court's ...

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