Ab Stable VIII LLC v. Maps Hotels & Resorts One LLC

• Decision Date: 08 December 2021
• Docket Number: 71, 2021
• Citation: 268 A.3d 198
• Parties: AB STABLE VIII LLC, Plaintiff Below, Appellant, v. MAPS HOTELS AND RESORTS ONE LLC, Mirae Asset Capital Co., Ltd., Mirae Asset Securities Co., Ltd., Mirae Asset Global Investments, Co., Ltd., and Mirae Asset Life Insurance Co., Ltd., Defendants Below, Appellees.
• Court: Supreme Court of Delaware

268 A.3d 198

AB STABLE VIII LLC, Plaintiff Below, Appellant,

v.MAPS HOTELS AND RESORTS ONE LLC, Mirae Asset Capital Co., Ltd., Mirae Asset Securities Co., Ltd., Mirae Asset Global Investments, Co., Ltd., and Mirae Asset Life Insurance Co., Ltd., Defendants Below, Appellees.

No. 71, 2021

Supreme Court of Delaware.

Submitted: September 15, 2021

Decided: December 8, 2021

Raymond J. DiCamillo, Esquire, Kevin M. Gallagher, Esquire, Sarah A. Clark, Esquire, John M. O'Toole, Esquire, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Theodore N. Mirvis, Esquire, William Savitt, Esquire (argued), Sarah K. Eddy, Esquire, Ryan A. McLeod, Esquire, WACHTELL, LIPTON, ROSEN & KATZ, New York, New York; Theodore B. Olson, Esquire, Amir C. Tayrani, Esquire, GIBSON, DUNN & CRUTCHER LLP, Washington, D.C.; Adam H. Offenhartz, Esquire, and Marshall R. King, Esquire, GIBSON, DUNN & CRUTCHER LLP, New York, New York; Attorneys for Appellant AB Stable VIII LLC.

A. Thompson Bayliss, Esquire, Michael A. Barlow, Esquire, April M. Kirby, Esquire, Stephen C. Childs, Esquire, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Kathleen M. Sullivan, Esquire (argued), Michael B. Carlinsky, Esquire, William B. Adams, Esquire, Christopher D. Kercher, Esquire, Rollo C. Baker IV, Esquire, Todd G. Beattie, Esquire, Jonathan E. Feder, Esquire, QUINN EMANUEL URQUHART & SULLIVAN, LLP, New York, New York; and Kap-You Kim, Esquire, PETER & KIM ATTORNEYS AT LAW, Seoul, South Korea; Attorneys for Appellees MAPS Hotels and Resorts One LLC, Mirae Asset Capital Co., Ltd., Mirae Asset Securities Co., Ltd., Mirae Asset Global Investments, Co., Ltd., and Mirae Asset Life Insurance Co., Ltd.

Before SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR, and MONTGOMERY-REEVES, Justices, constituting the Court en Banc.

SEITZ, Chief Justice:

MAPS Hotel and Resorts One LLC (the "Buyer") agreed to purchase fifteen hotel properties from AB Stable VIII LLC (the "Seller") for $5.8 billion. A closing delay brought an unexpected problem—the novel coronavirus COVID-19 and the damage it inflicted on the hospitality industry. In response to the pandemic and without securing the Buyer's consent, the Seller made drastic changes to its hotel operations. The transaction was also plagued by problems with fraudulent deeds covering some of the hotel properties. The Buyer eventually called off the deal, relying on the Seller's failure to comply with the sale agreement.

The Seller sued in the Court of Chancery to require the Buyer to complete the transaction. The Court of Chancery concluded that the Buyer could terminate the sale agreement because the Seller breached a covenant and a condition in the sale agreement. First, according to the court, the Seller violated the ordinary course covenant by failing to operate in the ordinary course of its business—closing hotels, laying off or furloughing thousands of employees, and implementing other drastic changes to its business—without the Buyer's consent. And second, a condition requiring title insurance for the hotel properties failed because the title insurers’ commitment letters had a broad exception covering the fraudulent deeds, and the Buyer did not cause the failure.

On appeal, the Seller argues that it satisfied the Ordinary Course Covenant because the covenant did not preclude it from taking reasonable, industry-standard steps in response to the pandemic; the court's ruling negated the parties’ allocation of pandemic risk to the Buyer through the Material Adverse Effect provision; and its breach of the notice requirement in the covenant was immaterial. The Seller also claims that the Court of Chancery gave too expansive a reading to the exception in the title insurance condition, or, alternatively, that the court incorrectly found that the Buyer did not contribute materially to its breach.

We affirm the Court of Chancery's judgment. The court concluded correctly that the Seller's drastic changes to its hotel operations in response to the COVID-19 pandemic without first obtaining the Buyer's consent breached the ordinary course covenant and excused the Buyer from closing. Because the Seller's failure to comply with the ordinary course covenant is dispositive of the appeal, we do not reach whether the Seller also breached the title insurance condition.

I.

Appellee AB Stable VIII LLC is an indirect subsidiary of Dajia Insurance Group, Ltd. ("Dajia").¹ Dajia is a corporation organized under the laws of the People's Republic of China and is the successor to Anbang Insurance Group, Ltd. ("Anbang Insurance")—also a corporation organized under the laws of the People's Republic of China. This decision will refer to Dajia and Anbang Insurance as "Anbang." Anbang, through AB Stable VIII LLC (the "Seller"), owns all the member interests in Strategic Hotels & Resorts LLC ("Strategic" or the "Company"), a Delaware limited liability company. Strategic owns all the member interests in fifteen other LLCs, each of which owns a luxury hotel in the United States.

After leadership changes in 2018 and new regulations restricting Chinese companies from owning overseas investments, Anbang decided to divest itself of its U.S. hotels, and opened bidding for Strategic in April 2019. Anbang received first-round bids from seventeen potential bidders by early May 2019. Mirae Asset Financial Group ("Mirae"), a Korea-based financial services conglomerate with over $400 billion in assets under management, emerged as a potential acquirer. On August 5, 2019, Mirae made its final bid—$5.8 billion to acquire a 100% interest in Strategic. During the sale process, Mirae created a subsidiary, MAPS Hotels and Resorts One LLC, "exclusively for the purpose of acquiring [Strategic]."² This decision will refer to MAPS as the "Buyer."

Unknown to Mirae at the time of its final bid, Anbang and its legal counsel, Gibson Dunn & Crutcher LLP ("Gibson Dunn"), had become aware of fraudulent deeds linked to six of the hotels owned by Strategic. Anbang had been in litigation with the perpetrator of the fraudulent deeds, Hai Bin Zhou, for over ten years in five different countries, and knew about some of the fraudulent deeds as early as December 2018.³ The day after Mirae made its final bid, Anbang, Gibson Dunn, and Strategic exchanged "a flurry of ... communications" about the deeds and how to disclose them, communications that continued throughout the coming days.⁴

On August 16, 2019, Anbang's lead real estate attorney from Gibson Dunn called Mirae's lead counsel at Greenberg Traurig, LLP to tell him Gibson Dunn "had recently learned that a twenty-something-year-old Uber driver with a criminal record had recorded deeds against [some of Strategic's] Hotels."⁵ Despite knowing about the issue for months, and knowing far more about the perpetrator of the fraud than he represented on the call, Anbang's counsel characterized the title issue as a minor problem, a "nuisance."⁶ Shortly after, the Seller shared minimal information about the fraudulent deeds with the Buyer through the data room. On August 20, 2019, the parties entered into an exclusivity agreement.

At the same time, a group of corporations associated with Zhou (the "DRAA Petitioners") filed an action in the Court of Chancery against Anbang and affiliated entities. The Court of Chancery referred to this suit as the "DRAA Chancery Action."⁷ The action centered around a document apparently fabricated by Zhou (the "DRAA Agreement"), containing an elaborate narrative that Anbang leadership had agreed to give the DRAA Petitioners control over certain Anbang assets, including the Strategic hotels claimed in the fraudulent deeds.⁸ Gibson Dunn learned of the DRAA Chancery Action the day it was filed, but did not disclose it to Greenberg Traurig or Mirae.

Meanwhile, the primary title insurer at the time investigated the fraudulent deeds and "deemed the risk uninsurable."⁹ Greenberg Traurig pursued new title insurance, and an agent managed to cobble together a group of title insurers (the "Title Insurers"), who agreed to provide insurance if Anbang could expunge the fraudulent deeds and quiet title to the hotels. At this point, Greenberg Traurig told Mirae's group of debt financing lenders (the "Lenders") about the fraudulent deeds. The Lenders refused to provide financing. They took what they described as "a very hardline position" that the group could not "fund into a deal with a cloud on title."¹⁰ Mirae, therefore, would not have the funds to complete the purchase under the existing timetable.

On September 10, 2019, the Seller and the Buyer executed a Sale and Purchase Agreement (the "Sale Agreement"). In it, the Seller agreed to sell all its member interests in Strategic to the Buyer for $5.8 billion (the "Transaction") at a time to be determined. In light of the fraudulent deeds and lack of debt financing, the Sale Agreement pushed off closing to provide enough time to quiet title and allow the Buyer to obtain financing, added a "Title Insurance Condition" to "enabl[e the] Buyer to obtain title insurance that either did not contain an exception from coverage for the Fraudulent Deeds or which included an exception and then affirmatively provided coverage through an endorsement," and included a "Litigation Plan" for Anbang and Gibson Dunn to address the fraudulent deeds.¹¹

In September 2019, Gibson Dunn filed actions in Alameda, California to quiet title to the hotels subject to the fraudulent deeds, hoping to resolve the issues there. But in October and November 2019, attorneys in Delaware, representing the DRAA Petitioners, filed documents in the DRAA Chancery Action purporting to be arbitration awards. These documents entitled the DRAA Petitioners to billions of dollars secured by Anbang properties, including the hotels owned by Strategic. An attorney then commenced an enforcement action in the Delaware Superior Court using these documents, which he called "confirmed final judgment[s]" from the DRAA Chancery Action.¹²

On December 6, 2019, an attorney...