HNA Holdings 422 Fulton (GP) LP et al. v TSCE 2007 422 Fulton GP, L.L.C.
Attorneys and Parties
Brief Summary
This real estate development dispute concerned whether, under a limited partnership agreement (LPA), equity partners who defaulted on mandatory capital contributions lost their contractual consent rights over major project decisions.
The lower court held that plaintiffs retained their right under LPA section 6.01(e) to consent to major decisions despite their default, granted plaintiffs summary judgment on liability for breach of contract, and dismissed defendant's counterclaims.
The Appellate Division reversed the grant of summary judgment to plaintiffs, denied plaintiffs' motion, granted defendant summary judgment dismissing the breach of contract claim, reinstated defendant's counterclaims, and remanded for further consideration of whether those counterclaims should ultimately be dismissed on other grounds.
Applying Delaware law, the court held that the penalty provision in LPA section 3.02(e), which states that a nonfunding partner permanently loses all rights to vote on or approve any matters otherwise requiring approval, unambiguously included plaintiffs' consent rights over major decisions.
Background
The parties entered into the limited partnership agreement (LPA) in 2016 to redevelop a Macy's store in Brooklyn. Plaintiffs were responsible for providing most of the project's equity funding, while defendant served as managing partner with broad authority to manage the partnership. Section 6.01(e) gave plaintiffs consent rights over 21 specified major decisions, including changes to the development budget or business plan. Section 3.02(e) imposed consequences for failing to fund mandatory capital calls, including the permanent loss of all rights to vote on or approve matters under the agreement and loss of a board seat. After plaintiffs defaulted on mandatory capital contributions, a dispute arose over whether they still had the right to block major decisions.
Lower Court Decision
Supreme Court, New York County, held that the major decisions provision prevailed over the penalty provision, reasoning that defendant still needed plaintiffs' prior written consent for major decisions even after plaintiffs' funding default. Based on that interpretation, the court denied defendant's summary judgment motion, granted plaintiffs summary judgment on liability for breach of contract, and dismissed defendant's counterclaims for breach of contract and attorneys' fees under a guaranty.
Appellate Division Reversal
The Appellate Division unanimously reversed. It held that the broad language of section 3.02(e) plainly stripped plaintiffs of all approval rights after their default, including their section 6.01(e) consent rights over major decisions. The court rejected the lower court's reliance on differing "notwithstanding" clauses and its narrow reading of the word "herein," noting that Delaware courts interpret "herein" to refer to the entire contract. The court therefore denied plaintiffs' motion for summary judgment, granted defendant summary judgment dismissing plaintiffs' breach of contract claim, reinstated defendant's counterclaims, and remanded for determination on the merits of whether plaintiffs may still obtain dismissal of those counterclaims, including issues related to the guaranty and nonrecourse default loans.
Legal Significance
The decision underscores that under Delaware contract law, broadly drafted default penalty provisions in partnership agreements will be enforced according to their plain meaning. A provision causing a defaulting partner to lose all rights to vote on or approve matters can override otherwise existing consent or veto rights, especially where the agreement does not expressly preserve those rights after default. The case also illustrates that repeated use of general "notwithstanding" language will not necessarily create priority if the contract, read as a whole, clearly allocates rights and penalties.
A partner that defaults on mandatory capital contributions may lose even significant governance protections if the agreement says those rights are permanently forfeited; parties who want major-decision consent rights to survive default must say so explicitly.