Scion Breckenridge Managing Member, LLC v. ASB Allegiance Real Estate Fund, No. 437, 2012 (Del. May 9, 2013)

In this en banc opinion, the Delaware Supreme Court affirmed the Court of Chancery’s reformation of three real estate joint venture agreements, based on unilateral mistake by one joint venture party and knowing silence by the other party.  However, holding that the prevailing party did not incur any payment obligation to its attorneys because its attorneys agreed to represent it without charge, the Supreme Court reversed the Court of Chancery’s award of attorneys’ fees under the disputed agreements, where the applicable fee-shifting provisions were limited to reimbursement of fees “incurred.” 

The underlying dispute arose out of a series of five real estate joint ventures between affiliates of The Scion Group, LLC (collectively, “Scion”) and affiliates of, and pension funds advised by, ASB Capital Management, LLC (collectively, “ASB”).  ASB’s president, Robert Bellinger (“Bellinger”), oversaw the negotiations of, and personally approved, the economic terms of each of the five joint ventures.  However, ASB relied on its outside counsel (the “Law Firm”) to negotiate and draft the joint venture agreements to reflect the economic structures to which ASB and Scion had previously agreed (the “Economic Structures”).  Bellinger read the first joint venture agreement, but relied on the Law Firm to advise him of changes to subsequent agreements. 

The joint venture agreements for the third, fourth and fifth joint ventures (the “Disputed Agreements”) contained errors in their waterfall provisions.  As a result, the Disputed Agreements did not reflect the Economic Structures for the third, fourth and fifth joint ventures, to Scion’s benefit and to ASB’s detriment.  Scion and ASB adopted an amendment (the “Amendment”) to one of the Disputed Agreements (the “Lofts Agreement”), but the Amendment did not address the errors in the waterfall provisions.  The Amendment included a provision ratifying and confirming all other provisions of the Lofts Agreement. 

Scion exercised its put right in one of the Disputed Agreements, basing its buyout price on the erroneous waterfall provisions.  Bellinger then examined the Disputed Agreements and identified the scrivener’s errors in the waterfall provisions.  ASB then put the Law Firm on notice of a malpractice claim.  Following Scion’s exercise of its put right under another of the Disputed Agreements, ASB filed suit in the Court of Chancery seeking an order reforming the waterfall provisions in each of the Disputed Agreements to reflect the Economic Structures.  The Law Firm represented ASB in the litigation free of charge.  Nonetheless, ASB invoked the Disputed Agreements’ fee-shifting provisions in connection with the litigation. 

After trial, the Court of Chancery found in favor of ASB and reformed the Disputed Agreements to reflect the Economic Structures.  Further, the Court of Chancery awarded ASB over $3.2 million in attorneys’ fees under the Disputed Agreements’ fee-shifting provisions.  Scion appealed the Court of Chancery’s ruling, arguing that the Court of Chancery erred by: (1) failing to recognize that failure to read a contract bars a claim for equitable reformation, (2) misapplying Delaware law (a) when it granted reformation based on unilateral mistake in the absence of finding concealment, trickery, or a duty to speak, and (b) when it ruled that a ratifying party must have actual knowledge of the mistake for ratification to bar reformation, and (3) awarding ASB attorneys’ fees and interpreting the fee-shifting provisions in a manner inconsistent with their plain language. 

In its opinion, the Supreme Court first affirmed the Court of Chancery’s ruling that, even if Bellinger read none of the Disputed Agreements and instead relied on employees and advisors to inform him of any changes to those agreements, his failure to read them would not bar a reformation claim.  The Supreme Court acknowledged that Delaware case law has been unclear as to: (1) whether a mistaken party’s misconduct could bar a reformation claim and (2) what “misconduct” means in that context.  To resolve those matters, the Supreme Court adopted the standard in Restatement (Second) of Contracts § 157 (“Restatement § 157”), which provides that a mistaken party that fails to know or discover the facts before making a contract is not barred from making a reformation claim “unless his fault amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing.”  By reading the first joint venture agreement and then relying on his employees and advisors to alert him to any significant changes in the later agreements, Bellinger, the Supreme Court held, satisfied the standard of Restatement § 157.  Agreeing with the Court of Chancery, the Supreme Court noted that Delaware courts do not require senior decision-makers to read every word of every agreement.  The Supreme Court further clarified that the standard of Restatement § 157 applies only to reformation claims—not to claims for avoidance or rescission.   

Second, the Supreme Court rejected Scion’s contention that, under Delaware law, reformation based on unilateral mistake by one party and knowing silence by the other party, without more, is insufficient to support reformation.  In doing so, the Supreme Court expressly overruled the existing line of Court of Chancery decisions permitting reformation based on unilateral mistake only in “exceptional” cases.  The Supreme Court clarified that reformation based on unilateral mistake is available in “appropriate” cases.  A case is “appropriate,” the Supreme Court explained, when a party can show, by clear and convincing evidence, that the existing writing erroneously expresses the parties’ true agreement. 

Third, the Supreme Court affirmed the Court of Chancery’s holding that, to bar reformation, a party ratifying a contract subject to reformation must have actual knowledge of the error, rather than imputed or constructive knowledge.  Though Scion appealed the Court of Chancery’s holding regarding the applicable knowledge standard, Scion did not appeal the Court of Chancery’s finding that ASB did not have actual knowledge of the errors in the Lofts Agreement when Scion and ASB adopted the Amendment.  Therefore, the Supreme Court affirmed the Court of Chancery’s judgment reforming the Lofts Agreement. 

Fourth, the Supreme Court reversed the Court of Chancery’s award of attorneys’ fees to ASB under the fee-shifting provisions of the Disputed Agreements.  In its analysis, the Supreme Court focused on the plain meaning of the language of the fee-shifting provisions, which provided that the non-prevailing party had to “reimburse” costs “incurred” in connection with enforcing the agreements.  Because the Law Firm agreed to represent ASB without charge, the Supreme Court reasoned, ASB did not incur any payment obligation to the Law Firm.  Further, the Supreme Court rejected ASB’s contention that the Supreme Court should award fees to ASB for policy reasons, noting that doing so would effectively reward the Law Firm for successfully litigating an action to correct its own mistakes.  However, the Court of Chancery remanded the issue of attorneys’ fees to the Court of Chancery to consider whether to award fees under the Court of Chancery’s inherent equitable powers.  In doing so, the Supreme Court clarified that, though some previous decisions combined the Court of Chancery’s inherent equitable power to award fees with the statutory authority to award costs under 10 Del. C. § 5106, a party cannot seek attorneys’ fees under 10 Del. C. § 5106. 

Last, because ASB made an informal, rather than a formal, request for attorneys’ fees in connection with its appeal to the Supreme Court, the Supreme Court refused to consider the request.

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