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Seaboard Towers Development Company, LLC v. AC Holding Corp.

June 10, 2008

SEABOARD TOWERS DEVELOPMENT COMPANY, LLC, PLAINTIFF-APPELLANT,
v.
AC HOLDING CORP., II, DEFENDANT-RESPONDENT.



On appeal from the Superior Court of New Jersey, Chancery Division, Atlantic County, C-118-04.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued April 21, 2008

Before Judges Lintner, Graves and Sabatino.

Seaboard Towers Development Company, LLC (Seaboard) appeals from a Chancery Division judgment dismissing its complaint for specific performance and damages for breach of contract and the duty of good faith and fair dealing. On February 7, 2007, after eleven days of trial spanning January 3 through January 26, 2007, Judge William C. Todd, III, placed his factual findings and conclusions of law on the record. The dispute centered on Seaboard's $22,000,000 option to purchase a fourteen-plus-acre parcel of undeveloped property located in Atlantic City's marina district and owned by AC Holding Corporation II, a wholly owned subsidiary of MGM Mirage (ACH/MGM), a resort and entertainment company, which owns the Renaissance Point Resort complex also located in the marina district. ACH does not act independently of the MGM Board of Directors (Board) or Management Committee (Committee).*fn1

On appeal, Seaboard contends that Judge Todd erred in finding that there was no binding agreement to extend the option and that ACH/MGM properly terminated the option agreement. Additionally, Seaboard contends that Judge Todd erred in denying its November 1, 2006, recusal motion based on its contention that the judge participated in inappropriate ex parte communications with ACH/MGM's counsel. We reject Seaboard's contentions and affirm.

I.

We first identify the parties' principal representatives. Seaboard is a real estate development company. In March 2004, when the parties entered into the option agreement to purchase the subject property, Seaboard was owned by Mark Robinson and Thomas Scannapieco. One year earlier, Seaboard submitted a proposal, eventually culminating in a successful transaction, to purchase a parcel of property owned by MGM and located on the boardwalk.*fn2 Robinson retained Barbara Casey as transactional counsel to assist in the negotiations of the earlier purchase, as well as the option to purchase the subject property.

During the subject transaction, Terry Lanni was MGM's Chairman and Chief Executive Officer and Gary Jacobs was MGM's Executive Vice President, Corporate Secretary, and General Counsel. Lanni and Jacobs were also members of the Board and Committee. Negotiations and sales details for both the boardwalk property and the subject transaction were handled by MGM's manager, John Redmond, and its Senior Vice-President and Assistant General Counsel, Bryan Wright. Wright and Redmond were assisted by transactional counsel, William Downey, and Atlantic City real estate broker, William Rafferty.

The following relevant facts were developed at trial. While the option-exercise period for the purchase of the boardwalk property was pending, Robinson contacted Rafferty and broached the possibility of Seaboard purchasing the marina property. Toward that end, Robinson had Casey prepare an option contract to purchase the marina property for $16,500,000, which Robinson submitted to Rafferty on January 5, 2004. Rafferty, in turn, sent the proposed agreement to MGM's Redmond for review. Later that same month, Robinson revised his proposal, increasing the purchase price to $22,000,000. Again, Robinson submitted the revised proposal to Rafferty, who passed it on to Redmond. Negotiations followed, with Robinson and Casey acting on behalf of Seaboard and Rafferty, Downey, and Redmond on behalf of ACH/MGM. In early March 2004, the parties entered into the Option Agreement giving Seaboard the option to purchase the marina property from ACH/MGM.

Redmond executed the agreement on behalf of ACH/MGM. However, he overstepped his authority by not obtaining the prior consent of the Board or Committee. Despite Redmond's failure to obtain Board approval and, at some embarrassment to Jacobs and Lanni, the Board ratified and approved the Option Agreement at its meeting on March 16, 2004.

Under the Option Agreement, Seaboard tendered an initial deposit of $250,000 and was given a ninety-day "due diligence period," during which it could conduct environmental and other studies to determine whether it wanted to exercise its option to purchase the marina property for $22,000,000. The due diligence period was to commence on March 22 and end on the "Due Diligence Date" of June 21, 2004, at 5:00 p.m. The Option Agreement provided that Seaboard could cancel the agreement at any time prior to the Due Diligence Date and have its $250,000 deposit returned. If Seaboard did not cancel, then it was required to make an additional payment of $250,000 within three days following the Due Diligence Date and the $500,000 paid would be released immediately to ACH/MGM and be nonrefundable. Seaboard would then have thirty days from the Due Diligence Date to exercise its option to purchase and close on the sale, although the closing date could be extended through Seaboard's purchase of as many as three one-month periods, at a set price for each period.

Significantly, the Option Agreement deemed "[a]ll times, dates and deadlines" in the agreement to be "of the essence." Another provision required that "[t]his Agreement can only be changed by an agreement in writing signed by both Buyer [Seaboard] and Seller [ACH/MGM]."

Following the commencement of the ninety-day due diligence period, Seaboard's investigation uncovered information raising environmental concerns about the marina property. Consequently, on May 25, 2004, Robinson had Casey send a letter to Downey, asking that the Due Diligence Date be extended by three months to September 19, 2004, with closing to occur no later than December 31, 2004. ACH/MGM rejected Seaboard's request for an extension.

Subsequently, out of concern for certain additional environmental, regulatory, and competitive problems, Robinson prepared a letter to Rafferty on June 13, asking that the due diligence period set to end on June 21, 2004, be extended first by 120 days and thereafter, at Seaboard's option, for another sixteen months. He proposed that, at the end of the existing due diligence period, the $250,000 deposit would be released to the seller. He also proposed that if Seaboard exercised its sixteen-month option it would pay an additional $250,000, which would be released to ACH. In his letter, Robinson noted that "[o]ur equity partners have expressed their unwillingness to fund the acquisition of land with such serious threats to its underlying value."

Meanwhile, MGM's upper-management personnel, including Redmond, were in the process of acquiring a multi-billion-dollar company. Consequently, MGM's management was not able to address Robinson's request on behalf of Seaboard at that time.

In response to this timing problem, Redmond approved an extension of the existing, but soon to expire, due diligence period for an additional week so that MGM's management would have the opportunity to properly consider Seaboard's request for an extension. Despite the earlier rebuke for his unauthorized involvement in the Option Agreement, Redmond approved the one-week extension (bridge agreement) of the due diligence period without first obtaining the prior approval of the Board or Committee. He did so because there was a "general consensus" among those he consulted that such a "relatively de [minimis]" bridge agreement did not require approval from upper management.

On June 18, 2004, Downey sent a letter to Wright, noting that Redmond had approved the one-week extension of the due diligence period to "June 28, 2004 for all purposes under the Option Agreement." On June 21, 2004, Wright executed the bridge agreement and returned it to Downey. That same day, Robinson and Downey exchanged countersigned copies of the bridge agreement.

Before executing the bridge agreement on June 21, 2004, Robinson asked Casey, "[d]o we [Seaboard] have to deliver a cancellation notice [pursuant to the option contract] to get the [$250,000 initial payment] money back or is not delivering the rest of the deposit money [the second $250,000 payment due three days after the Due Diligence Date] considered a cancellation?"

Responding to Robinson later that day, Casey advised him that "[y]ou have to deliver a cancellation notice or else the money goes hard.*fn3 You get to go forward [under the option contract] if you pay the extra $[the second $250,000 payment] or else you are in breech [sic] of the [option] agreement." Thus, Robinson was aware that Seaboard's payment of the second $250,000 three days after the end of the due diligence period was necessary in order for Seaboard to avoid breaching the option contract.

On June 24, 2004, Downey sent an e-mail to Casey, outlining "the terms that MGM will offer" to Seaboard concerning an extension of the due diligence period. Downey's e-mail proposed that: (1) Seaboard release the initial $250,000 payment to ACH/ MGM immediately; (2) the due diligence period be extended by about six months to December 31, 2004, for an additional payment by Seaboard to ACH/MGM of $500,000; (3) the closing be held on February 1, 2005, with further provision that Seaboard may extend the closing date for up to three consecutive months at a price of "$125K [for] each" month; (4) Seaboard will "diligently pursue" its environmental and other investigations of the marina property; and (5) "all due diligence materials, plans and permits [are to be] delivered and assigned to MGM if agreement terminates without closing." Downey closed his e-mail by inquiring of Casey whether they "should move to document this."

Early on the next day, June 25, 2004, Casey responded to Downey's e-mail, seeking more information as to whether the extension payments were to be credited to the purchase price, and indicating that she would pass ACH/MGM's proposal on to Robinson. Later that day, Downey provided the requested information to Casey.*fn4 Subsequently, Casey or Robinson requested that Downey "document" ACH/MGM's proposal.

At 3:55 p.m. on June 25, 2004, Downey sent an e-mail to Casey and Robinson that included his "first cut at" a written agreement to amend the Option Agreement by extending the due diligence period until December 31, 2004, and setting the closing date at February 1, 2005. In addition to the provisions previously set out in Downey's e-mail of June 24, 2004, Downey included two new provisions, one would make any wetlands found on the marina property a "Permitted Encumbrance[]" and the other would make Seaboard responsible for certain real estate transfer taxes.

In his e-mail, Downey noted that his "client has not reviewed this document, so I must reserve the right to make such changes as I am directed." In line with that statement, Downey forwarded a copy of the proposed agreement to Redmond and Wright, asking for their comments and noting his perception that Seaboard appeared ready to accept the proposal as written. Later that evening, Casey responded to Downey's e-mail, asserting essentially that the proposed provision concerning real estate transfer taxes was unfair to Seaboard.

Nothing noteworthy concerning contract-modification negotiations occurred over the weekend of June 26-27, 2004, despite the fact that the extended due diligence period was set to expire at 5:00 p.m. on Monday, June 28, 2004.

At some point on June 28, 2004, Robinson and Scannapieco entered into an agreement, by which Robinson agreed to buy out Scannapieco's interest in Seaboard if Robinson was unable to negotiate an extension of the closing date under the proposed amendment to the Option Agreement from February 1 to July l, 2005.

In line with his agreement with Scannapieco, Robinson faxed a letter to Rafferty at 2:33 p.m., on June 28, 2004, requesting that the closing date under the proposed extension agreement be changed to July 1, 2005, and objecting to the provision that Seaboard pay certain real estate transfer taxes. In his letter, Robinson referenced his previous letter of June 13, 2004, and noted his concern for the many obstacles impeding Seaboard's attempt to investigate, analyze, and eventually purchase the marina property. Robinson also indicated that Seaboard anticipated expending $1,000,000 on the transaction by the end of 2004, and was having difficulty with an "equity partner," who was losing interest in the marina property project.

Robinson closed his letter by requesting that, "[i]f [Rafferty's] client finds these terms acceptable, please have Mr. Downey make the necessary changes to the [proposed extension agreement] so that we may execute same by the deadline of '5:00 p.m. Eastern Standard Time,' of this day." Rafferty forwarded Robinson's letter to Redmond, who indicated to Downey a short time later that the real estate transfer tax provision of the proposed amendment could be removed, but that the closing date of February 1, 2005, was firm. Additionally, with an eye toward his earlier rebuke for overstepping his authority in executing the option contract, Redmond insisted that Downey include a provision in the proposed extension agreement requiring approval of the Board.

Accordingly, Downey sent Casey an e-mail at 3:44 p.m. on June 28, 2004, advising her, "Ok on removing the tax language. . . 30 day closing [date of February 1, 2005] . . . has to stay . . . [and m]ust condition deal upon board approval. Not a big deal, but I'll explain later." At that juncture, Downey assumed that any Board approval provision would be "straightforward" and provide for a "window of time" within which the Board could "accept or reject the deal."

Upon receiving Downey's e-mail, Casey forwarded it to Robinson at 3:47 p.m. on June 28, 2004. A short time later, Casey and Downey had a telephone conversation in which Casey decried the purported unfairness of the Board approval provision contemplated by Downey and insisted, instead, that any such provision be crafted so that Seaboard would have an opportunity to close on the deal, even if the Board disapproved of the proposed extension agreement.

In response, at 4:56 p.m. on June 28, 2004, with the bridge agreement's 5:00 p.m. extended Due Diligence Date deadline impending, Downey sent an e-mail to Casey with the proposed extension agreement, explaining, "Here's my cut at it. Let me have your thoughts. Thanks."

According to Downey, it was unlikely that he reviewed the proposed extension agreement with any ACH/MGM manager before submitting it to Casey and Robinson. Downey explained that he did not bother to present the proposal to ACH/MGM because of the time constraints imposed on him by the impending Due Diligence Date deadline and because he wanted to be sure that the terms of the proposed extension were acceptable to Seaboard. He was later confronted with his deposition testimony that indicated that he believed or suspected that he had been given authorization by Redmond to initially float the terms to Robinson.

Under the terms of the final version of the proposed extension agreement, the Due Diligence Date was set at December 31, 2004, with closing to occur on February 1, 2005, and a payment of $500,000 to be made by Seaboard on or before the Due Diligence Date. The proposed extension agreement did not have any provision requiring that Seaboard would be responsible for certain real estate transfer taxes.

Significantly, the proposed extension agreement included a Board approval provision that reflected Casey's input. Under that provision, "the terms of this letter and the amendments to the Option Agreement contemplated hereby are subject to the approval of the Seller's Board of Directors." However, if the Board failed "to approve this letter and the amendments to the Option Agreement . . . by July 26, 2004 at 4:00 p.m., then (1) the amendments to the Option Agreement contemplated hereby shall be of no force or effect, and (2) on or before August 6, 2004 at 4:00 p.m., [Seaboard] may either elect to" deliver the additional $500,000 payment to ACH and close on the deal at an extended closing date of September 6, 2004, or terminate the Option Agreement at that time and receive a refund of its initial $250,000 payment.

Casey forwarded Downey's proposed extension agreement to Robinson for his consideration, following which she contacted Downey and asked that, in the event the Board failed to approve, the provision's closing date of September 6, 2004, be changed to September 8, 2004, because of timing problems with the Labor Day holiday. Downey made the change and sent the proposed extension agreement back to Casey and Robinson at 5:03 p.m. on June 28, 2004.

Robinson determined that the proposed extension agreement was acceptable to Seaboard. He and Casey engaged Downey in a telephone conference on the matter. At trial, Robinson and Casey testified that during that conference Downey indicated that Seaboard and ACH/MGM had a binding agreement to amend the Option Agreement, thus giving Seaboard the elective rights set forth in the document, depending upon whether the Board approved the extension or not. For his part, Downey denied saying that any binding agreement had been reached between the parties.

Following the telephone conference, Robinson signed his copy of the final revision and now partially executed proposed extension agreement and faxed it to Downey at 5:19 p.m. In the accompanying "Facsimile Cover Sheet," Robinson asked that Downey "[p]lease fax [him] the counter signed [sic] copy from MGM." According to Robinson, Downey indicated during the telephone conference that he would provide the countersigned extension agreement to Seaboard "as soon as he could."

Downey forwarded the proposed extension agreement by e-mail to Redmond and Wright. After noting that it was "a revised version of the letter agreement providing the 6-month extension for the Marina parcel deal," Downey indicated that "[i]n this draft, we have deleted any change to the realty transfer fee obligations . . . and added a requirement for ...


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