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Proper Termination of LLC Agreement Results in Claim Disallowance for Rejection Damages

By GianClaudio Finizio

On July 9, 2012, Judge Mary F. Walrath issued an opinion sustaining the debtor’s claim objection and disallowing the claim filed by Santa Anita Associates Holding Co. LLC and Santa Anita Associates, LLC (collectively, the “Claimant”) in In re Magna Entertainment Corp. (Case No. 09-10720 (MFW)).

The claim arose as a result of a limited liability company agreement between a non-debtor affiliate and a third party to develop a shopping center on real property owned by the debtor. Pursuant to the terms of the LLC agreement, the debtor was to enter into a ground lease with the LLC if certain conditions were met, including obtaining certain entitlements and entering into a reciprocal easement agreement (“REA”). The non-debtor affiliate terminated the LLC agreement because the conditions were not timely satisfied. The Claimant contested the termination and filed the bankruptcy claim in excess of $21 million for damages resulting from the debtor’s failure to enter into a ground lease.

The Court found termination of the LLC agreement to be permitted based on the undisputed fact that the Claimant had failed to negotiate an acceptable REA prior to the agreed upon deadline. The Court rejected the Claimant’s force majeure argument that the deadlines to satisfy the LLC conditions were extended due to litigation which prevented the Claimant from satisfying such conditions. In rejecting the Claimant’s force majeure argument, the Court found that the Claimant failed to follow the proper force majeure notice requirements under the LLC agreement and concluded that the Claimant’s delay (i) in seeking arbitration of its dispute regarding termination of the LLC agreement, (ii) in seeking stay relief in connection with the litigation, and (iii) in entering into an REA (which was not affected by the litigation) was not reasonable under the circumstances.

The Court also rejected Claimant’s argument that Claimant was entitled to damages for the rejection of the agreement to enter into a ground lease which Claimant alleged preceded the termination of the LLC agreement. The Court found it unnecessary to determine the timing of the contract rejection because the release in the LLC agreement encompassed the rejection damages whenever the rejection arose. Therefore, in sustaining the debtor’s claim objection and disallowing the claim in its entirety, the Court concluded that the LLC agreement was properly terminated and, pursuant to its terms, resulted in a release of all claims which the Claimant may have had against the debtors or any affiliate.

A copy of the bankruptcy court’s opinion is available here.

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