In Uncategorized on 06/14/2017 at 16:56

Read the Contract – The “F” is For Emphasis

I said this in this blog a long time ago; see my blogpost “RTFC,” 3/9/16. I say it quite often on the NYSBA Real Property Section listserve.

Clients seem to think contracts are rather like The Pirate’s Code: “Guidelines – Aspirational goals.” Well, maybe so, for those of them that are pirates…but that’s another story.

Judge Nega, a rather old-fashioned sort, seems to think that contracts are made to be read and followed. Here’s Thomas E. Watts and Mary E. Watts, 2017 T. C. Memo. 114, filed 6/14/17.

Except it’s really the story of RW, the partnership between la famille Watts and Wellspring, hedgefundamentalists.

The Watts gang were big-time pro-shop operators, employing hundreds, having locations all along the sunbelt, making big bucks. Wellspring offers a buyout, and to keep the Watts gang managing (and collecting rent on the pro shops they owned themselves but leased to their golfing selves), they set up a preferred-common duality in their LLC.

It’s got the usual preferred payout at dissolution or sale of all assets, guaranteed payments for interest on the cash they gave the Watts gang, various kickers, all subordinate only to creditors. The excerpts quoted by Judge Nega show a professional job of the usual sort where big buck investors bankroll canny but low budget operators.

Comes along another hedgefundamentalist, which I’ll call “fundie,” who sees the boodle raked in by the golfers and makes them an offer, and a national sporting goods chain who offers even bigger bucks.

Per the contract, Wellspring has the call, and can drag the Watts gang (kicking and screaming as they will) whithersoever the Wellspringers want to go. But the Watts gang claim the chain gang will wreck the brand, steal the locations, and fire the loyal brigade of workers who made Watts what they are.

So Wellspring sells to fundie, for $35 million less than they would have gotten from the national chain. There follows an extraordinary footnote from Judge Nega.

“Other than petitioners’ uncorroborated testimony, the record does not indicate what motivated Wellspring’s decision to sell to [fundie].  No representative of Wellspring was called to testify, and no documentation reflecting bids, proposals, negotiated terms, or agreements were entered into evidence.

“Petitioners’ theory of the case does not reconcile the $35 million difference between the purported [chain]’s and [fundie] bids.  Wellspring held exclusive power to sell all of Partnership, to drag along the common partners.  Petitioners avoided discussion of Wellspring’s drag-along rights and did not address any potential damage the Watts brothers’ protests and holdout threats may have inflicted on any potential sale to [chain], and whether this may have resulted in [fundie]’s effectively being the buyer of last resort.” 2017 T. C. Memo. 114, at p. 13, footnote 10 (names omitted).

Must’a been a helluva lotta howling from Watts gang, to say nothing of their selfless love of the working stiffs peddling their nine irons, to get a preferred, front-seat, last-dollar-in and first- dollar-out hedge fund partner to walk from $35 million. I’d love to know how they did it, given that they weren’t able to prove how they were getting any part of that money in any event. Well, maybe so a couple hundred K (hi, Judge Holmes).

Howbeit, relying on trusty accountant HG, the Watts gang claims they abandoned their partnership interests and got an ordinary loss.

Watts wants Judge Nega to buy the idea that Watts had a right to money, which they gave to Wellspring to get Wellspring to do the fundie deal and not the chain. You can do that, maybe, with the substance-over-form argument that Watts is trying, but you need strong proof. Judge Nega is “unmoved.” 2014 T. C. Memo. 114, at p. 17.

Watts has nothing but the Michael Corleone ploy.

Judge Nega walks the walk of ex-Ch J Michael B (“Iron Mike”) Thornton, but instead of “chewin’ de stuffin’ out’n de dictionary,” in O. Henry’s felicitous phrase, he chows down on the contract between Watts and Wellspring. At great length.

Watts claims no preferential treatment for Wellspring. Judge Nega has had it with that argument.

“In fact petitioners–at trial and on brief–entirely avoid discussing section 10 of the agreement.  Petitioners similarly avoid discussing section 3.4, the liquidation priority provisions, or the impact of any relevant defined terms or Wellspring’s $85.5 million initial capital account.  They made no effort to address, examine, construe or even allege any ambiguity within the terms of the agreement.  Petitioners did not even offer testimony as to their own personal knowledge and understanding of these provisions.  They offered no Partnership balance sheets, books, audit statements, or other accounting records as evidence or exhibit.  Petitioners called no members of Wellspring or [fundie] to testify and corroborate their theory at trial.

“Petitioners’ argument begins with a conclusion:  They were entitled to a pro rata share of the cash proceeds from the [fundie] sale.  It ends there, too.  Petitioners’ conclusory presumption runs contrary to the unambiguous wording of the agreement.” 2014 T. C. Memo. 114, at pp. 24-25.

Trusty accountant HG saves the Watts gang the negligence chops.

Takeaway- Read the contract, even without the “F” for emphasis.

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