Schron v. Troutman Sanders LLP

• Decision Date: 14 February 2013
• Citation: 20 N.Y.3d 430,963 N.Y.S.2d 613,2013 N.Y. Slip Op. 00952,986 N.E.2d 430
• Parties: Rubin SCHRON et al., Plaintiffs, v. TROUTMAN SANDERS LLP et al., Defendants. Mich II Holdings LLC et al., Plaintiffs, and SVCare Holdings, LLC, Appellant, v. Rubin Schron et al., Defendants, and Cammeby's Equity Holdings LLC, Respondent.
• Court: New York Court of Appeals Court of Appeals

20 N.Y.3d 430

986 N.E.2d 430

963 N.Y.S.2d 613

2013 N.Y. Slip Op. 00952

Rubin SCHRON et al., Plaintiffs,

v.TROUTMAN SANDERS LLP et al., Defendants.

Mich II Holdings LLC et al., Plaintiffs,

and

SVCare Holdings, LLC, Appellant,

v.Rubin Schron et al., Defendants,andCammeby's Equity Holdings LLC, Respondent.

Court of Appeals of New York.

Feb. 14, 2013.

Zuckerman Spaeder LLP, New York City (Paul Shechtman and Christina P. Skinner of counsel), for appellant.

Dechert LLP, New York City (Andrew J. Levander and Steven A. Engel of counsel), for respondent.

OPINION OF THE COURT

GRAFFEO, J.

In this case, we conclude that the option contract at issue is valid and enforceable and that the optionor may not introduce parol evidence to import a separate obligation as consideration for the agreement. We therefore affirm the order of the Appellate Division.

Leonard Grunstein and Murray Forman manage and indirectly own plaintiff SVCare Holdings LLC (SVCare), which operates nursing homes through a subsidiary. Rubin Schron, a real estate investor, controls a number of entities, including defendant Cammeby's Equity Holdings LLC (Cam Equity).¹ For years, Grunstein was Schron's attorney and Forman was his investment banker.

In 2004, Grunstein and Forman sought Schron's participation in the acquisition of Mariner Health Care, Inc., a publicly held company engaged in the nursing home business.² Schron agreed to finance the $1.3 billion purchase of Mariner; Grunstein and Forman did not contribute any funds to the buyout. The deal was structured to provide that Schron, through a corporate entity (SMV Property Holdings LLC), would own the underlying real estate and a separate company would manage the facilities. SVCare and its operating subsidiary, SavaSeniorCare LLC (Sava), were formed to carry out the operating and administrative functions. In other words, Schron's company was to hold title to the properties and Grunstein's and Forman's companies (SVCare and Sava) were to manage the nursing homes.

The transaction closed in December 2004 and involved two written agreements relevant to this appeal, both of which were amended in June 2006.³ First, Cam Equity (the Schron entity) received an option to acquire 99.999% of the membership units of SVCare. The consideration given by Cam Equity to SVCare for the option was described in the contract as “the mutual covenants and agreements hereinafter set forth, and other good and valuable consideration (the receipt and adequacy of which is hereby acknowledged by the Parties).” Under the terms of the agreement, Cam Equity had until June 2011 to exercise the option at the strike price of $100 million. In the event that Cam Equity exercised the option but later sold the company, the contract specified that Cam Equity could retain no more than $400 million of the sale proceeds, with any remaining moneys to be assigned to SVCare. The option agreement also contained a merger clause, which stated:

“This Agreement contain[s] the entire agreement and understanding of the Parties ... and supersedes and completely replaces all prior and other representations, warranties, promises, assurances and other agreements and understandings (whether written, oral, express, implied or otherwise) among the Parties with respect to the matters contained in this Agreement.”

The second pertinent contract related to the Mariner transaction was a loan agreement under which another of Schron's entities—Cammeby's Funding III LLC (Cam III)—agreed to lend $100 million to SVCare for the purpose of capitalizing its subsidiary, Sava. The loan agreement and the option contract were executed on the same date in December 2004 and amended on the same day in June 2006 as part of a refinancing of the Mariner transaction. At some point after the refinancing, the relationship between the parties deteriorated.

In anticipation that Cam Equity would exercise the option, Grunstein, Forman and their related companies (including SVCare) commenced this action in March 2010 under the caption Mich II Holdings LLC v. Schron.⁴ The only claim relevant to this appeal is the fifteenth cause of action in the complaint, wherein SVCare alleges that the option is unenforceable because the consideration underlying its agreement to offer the option was contingent on Cam III loaning it $100 million, which SVCare claims was never paid.

Despite the pending litigation, Cam Equity gave written notice to SVCare of its intent to exercise the option in June 2010. When SVCare refused to honor the option, Schron and his affiliated entities (including Cam Equity) brought a separate lawsuit— Schron v. Troutman Sanders LLP—seeking specific performance of the option agreement.

Cam Equity later moved in limine in the Schron suit for the exclusion of any parol evidence by SVCare intended to show that the $100 million loan was the “other good and valuable consideration” referenced in the option agreement. In the Mich II action, Cam Equity also filed a motion to dismiss SVCare's fifteenth cause of action that asserted similar claims.

Supreme Court consolidated and granted both motions in favor of Cam Equity, concluding that the option and loan were entirely separate agreements; that the option was supported by consideration, namely, the mutual covenants cited; and that SVCare could not offer extrinsic evidence regarding the $100 million loan obligation that was not mentioned in the option agreement (32 Misc.3d 231, 917 N.Y.S.2d 820 [2011] ). The Appellate Division affirmed (97 A.D.3d 87, 945 N.Y.S.2d 25 [1st Dept.2012] ), and we granted SVCare leave to appeal from so much of the Appellate Division order that affirmed the dismissal of the fifteenth cause of action in the Mich II litigation (19 N.Y.3d 811, 951 N.Y.S.2d 721, 976 N.E.2d 250 [2012] ).

In the meantime, following a 10–day bench trial in the Schron action, Supreme Court issued a decision in September 2012 determining that Cam III had, in fact, fully funded the $100 million loan to SVCare pursuant to the loan agreement (36 Misc.3d 1238[A], 2012 N.Y. Slip Op. 51730[U], 2012 WL 3887665 [2012] ). SVCare has taken an appeal to the Appellate Division. ⁵

On this appeal, SVCare no longer presses its argument raised below that the option and loan agreement—involving separate subject matters, different parties and without any cross-references—are inextricably intertwined and must be read together. Instead, SVCare maintains that the courts below erred in precluding it from introducing extrinsic evidence regarding the meaning of the phrase “other good and valuable consideration” in the option contract. SVCare asserts that the language is ambiguous and that it should be permitted to adduce parol evidence showing (1) the parties intended the “other consideration” to mean the $100 million loan obligation between Cam HI and SVCare and (2) the loan was never funded. Cam Equity responds that the “mutual covenants” set forth in the option agreement suffice for consideration and objects to SVCare's attempt to change the terms of the option by imposing an additional $100 million condition on the parties' agreement. We conclude that Cam Equity's position better comports with our well-established contract jurisprudence.

Option contracts, like any other agreement, are subject to basic contract interpretation principles. Under New York law, written agreements are construed in accordance with the parties' intent and “[t]he best evidence of what parties to a written agreement intend is what they say in their writing” ( Greenfield v. Philles Records, 98 N.Y.2d 562, 569, 750 N.Y.S.2d 565, 780 N.E.2d 166 [2002] [internal quotation marks and citation omitted] ). As such, “a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms” ( id.).

Parol evidence—evidence outside the four corners of the document—is admissible only if a court finds an ambiguity in the contract. As a general rule, extrinsic evidence is inadmissible to alter or add a provision to a written agreement. This rule gives “stability to commercial transactions by safeguarding against fraudulent claims, perjury, death of witnesses ... infirmity of memory ... [and] the fear that the jury will improperly evaluate the extrinsic evidence” ( W.W.W. Assoc. v....