Exit Strategy, LLC v. Festival Retail Fund BH, L.P.

IN THE SUPREME COURT OF THE STATE OF DELAWARE

§
EXIT STRATEGY, LLC, § No. 318, 2023
§
Plaintiff Below, § Court Below: Court of Chancery
Appellant, § of the State of Delaware
§
v. §
§ C.A. No. 2017-0017
FESTIVAL RETAIL FUND BH, L.P. §
§
Defendant Below, §
Appellee. §

Submitted: May 15, 2024
Decided: July 25, 2024

Before SEITZ, Chief Justice; VALIHURA, TRAYNOR, LEGROW, and
GRIFFITHS, Justices, constituting the Court en banc.

Upon appeal from the Court of Chancery of the State of Delaware. AFFIRMED.

David A. Jenkins, Esquire (argued), Jason Z. Miller, Esquire, SMITH,
KATZENSTEIN & JENKINS LLP, Wilmington, Delaware, for Appellant Exit
Strategy, LLC.

Douglas D. Herrmann, Esquire, James H.S. Levine, Esquire (argued), TROUTMAN
PEPPER HAMILTON SANDERS LLP, Wilmington, Delaware, Andrew W.
Zepeda, Esquire, LURIE, ZEPEDA, SCHMALZ, HOGAN & MARTIN, Los
Angeles, California, for Appellee Festival Retail Fund BH, L.P.

LEGROW, Justice:
The parties to this appeal entered into a partnership agreement that established

the financial conditions under which the appellant would receive a distribution upon

the sale of the partnership’s principal asset. The partnership agreement set a net-

sale-price threshold above which the appellant would receive a distribution, and the

agreement directed the general partner to calculate that net sale price by deducting

certain categories of costs from the gross sales price. The general partner ultimately

determined that the deductions permitted by the partnership agreement reduced the

net sale price below the minimum threshold for a distribution.

Although the appellant challenged several of the deductions at trial, the Court

of Chancery held that one was outcome determinative: the deduction for the costs

that the partnership incurred to defease the interest payments on the mortgage and

thereby remove the encumbrance from the asset so that it could be sold. The court

concluded that this deduction was proper under the partnership agreement and

therefore entered judgment in favor of the partnership. Although the Court of

Chancery mischaracterized the contractual formula applicable to this deduction, we

affirm the court’s judgment because, properly characterized, the plain language of

the partnership agreement and the formula permit the challenged deduction. We

therefore do not reach the effect or correctness of the Court of Chancery’s alternative

holding that the general partner’s good faith in calculating the net sale price

eliminated any breach of contract claim.
I. FACTUAL AND PROCEDURAL BACKGROUND

Unless otherwise noted, the facts are taken from the Court of Chancery’s July

17, 2023 Post-Trial Memorandum Opinion.

A. The Parties

Plaintiff-Below, Appellant Exit Strategy, LLC (“Exit”) is a New York limited

liability company.1 Exit invests in commercial real estate. Defendant-Below,

Appellee Festival Retail Fund BH, L.P. (“Festival”) is a Delaware limited

partnership with its principal place of business in California.2 Defendant-Below

FRFBH, LLC, is a Delaware limited liability company and Festival’s General

Partner (the “General Partner”).3 Defendant-Below Mark Schurgin was the General

Partner’s president and controlled the General Partner through that position.4

Neither Schurgin nor the General Partner is a party to this appeal. Festival’s sole

limited partner is Festival Retail Fund 1, L.P. (the “Limited Partner”), a Delaware

limited partnership and non-party to the action.5

1
App. to Opening Br. at A129 (Joint Pre-Trial Stipulation and Proposed Order).
2
Id.
3
Id.
4
Id.; Exit Strategy, LLC v. Festival Retail Fund BH, L.P., et al, 2023 WL 4571932, at *3 (Del. Ch.
Jul. 17, 2023).
5
App. to Opening Br. at A129 (Joint Pre-Trial Stipulation and Proposed Order).

2
Exit, the General Partner, and the Limited Partner are parties to the Limited

Partnership Agreement of the Partnership (the “LPA”), the governing document in

this litigation.6

B. Acquisition of the Gucci Store and Relevant LPA Provisions
In 2005, Exit acquired an option to purchase property on Rodeo Drive in

Beverly Hills, California, from its then-owner, Elizabeth Luster.7 The property

houses the flagship Gucci store (hereinafter the “Gucci Property”).

Exit, however, did not have the capital to exercise its option. In 2007, Exit

assigned its option to Festival.8 Festival immediately exercised the option and

acquired the Gucci Property for $39 million.9 In exchange for the option’s

assignment, Festival paid Exit over $11 million and Exit became Festival’s “Special

Limited Partner.”10 Although the LPA refers to Exit as a Special Limited Partner,

Exit had “no voting or other rights” except a contingent right to receive an additional

payment if the Gucci Property was later resold (the “Special Limited Partner

Portion”).11 The LPA explains that in the event of a Resale, “the Resale Proceeds

6
Id. at A129 (LPA); Id. at A367 (LPA).
7
Id. at A130 (Joint Pre-Trial Stipulation and Proposed Order).
8
Id.; Id. at A154 (Agreement to Assign and Assume).
9
Id. at A130 (Joint Pre-Trial Stipulation and Proposed Order).
10
Id. at A130 (Joint Pre-Trial Stipulation and Proposed Order); Id. at A359 (LPA).
11
Id. at A130 (Joint Pre-Trial Stipulation and Proposed Order); Id. at A364 (LPA); Id. at A367
(LPA).

3
shall be distributed first, 100% to [Exit] until the cumulative amount distributed to

[Exit] equals [Exit’s] portion.”12 To determine what Exit’s Portion is, if anything,

the LPA provides the following definition:

“Special Limited Partner’s Portion” means, with respect to a Resale,
the amount equal to (i) the Base Resale Distribution Amount (as shown
in Schedule D) for the Applicable Resale Year plus (ii) an amount equal
to 10% of the amount by which the Net Resale Price exceeds the Resale
Price Threshold for such Resale Year.13

Schedule D contains a table listing each Resale year starting in 2007, with a

Resale Price Threshold and corresponding Base Resale Distribution Amount.14

Schedule D also provides that,

If for any Resale, the Net Resale Price is less than the Resale Price
Threshold for the applicable Resale Year, the Base Resale Distribution
Amount shall be reduced by one dollar for each dollar by which the
Resale Price Threshold exceeds the Net Resale Price until the Base
Resale Distribution Amount has been reduced to zero.15

Net Resale Price is then defined as “the gross sales price derived from the

Resale . . . reduced by one of the following [eight] items.”16 We refer to any

reductions in gross sales price as “Deductions.”

12
Id. at A367 (LPA).
13
Id. at A385 (LPA).
14
Id. at A388 (LPA).
15
Id.
16
Id. at A382 (LPA).

4
To summarize a relatively simple concept lost in embedded definitions: if the

Deductions to the gross sales price exceed a certain amount, such that the Net Resale

Price falls below the difference between the Resale Price Threshold and the Base

Resale Distribution Amount for the sale year, Exit receives no Special Limited

Partner Portion. And this is where the friction arose in this case: after the General

Partner calculated the Deductions that it believed were authorized by the LPA, the

Base Resale Distribution Amount was reduced to zero, and Festival advised Exit that

no Special Limited Partner Portion would be paid. Exit disputed the propriety of

certain Deductions and ultimately filed suit. Only certain categories of Deductions

are relevant to the issues raised on appeal, and we conclude that only one category—

Excess Loan Costs—is dispositive of Exit’s claims.

The LPA allows the General Partner to deduct “[a]ny excess costs associated

with any loan on the Property during [Festival’s] ownership.”17 These deductions

are termed as “Excess Loan Costs” and are defined in Subsection (f) to the definition

of “Net Resale Price” as:

loan interest costs, points, loan origination fees, negative accruals, and
similar costs to the extent they exceed the aggregate of the following
items: (i) loan origination fees to the extent actually paid by the Limited
Partner or the Partnership, but not more than $550,000.00; and (ii) the
amount by which aggregate loan interests costs in any year (whether
paid currently or accruing and including any interest that accrues on
interest) exceed Rental Payments . . . for such year, but only to the
extent such excess of such loan interest costs in such year over Rental
17
Id.

5
Payments in such year exceeds $875,000.000 (subject to proration for
any partial year).18

Subsection (f) then defines “Rental Payments” “to mean the aggregate of all

rents collected by [Festival] from Gucci or any other tenant pursuant to the existing

lease or any renegotiated lease with Gucci or such other tenant during such year.”19

Gucci paid rent to Festival during the seven years it owned the property. The trial

court found that Gucci’s rent payments never exceeded $875,000 annually,20 but the

parties agree that the annual rent was approximately $3 million.21

Although the deductions in Subsection (f) are the only type of deduction

discussed in our analysis, two other categories of deductions were raised during trial

and considered by the Court of Chancery as permitting a deduction for defeasance

costs. Subsection (d) allows the General Partner to reduce the gross sales price by

“[a]ny other costs or expenses associated with the ownership, development,

redevelopment, improvement, operation, leasing, management . . ., maintenance,

repair and renovation of the Property reasonably borne by [Festival] during

[Festival’s] ownership, to the extent not reimbursed by Gucci or other tenant.”22

18
Id. at A382–83 (LPA).
19
Id. at A383 (LPA).
20
Exit Strategy, LLC, 2023 WL 4571932, at *14.
21
App. to Opening Br. at A1747 (Emanuel Direct. Exam).
22
Id. at A382 (LPA).

6
Subsection (h) also allows the General Partner to deduct the following costs:

“[a]ll actual documented out-of-pocket closing costs and costs of sale incurred in

connection with such Resale, including without limitation, actual documented out-

of-pocket survey and title costs, documentary transfer taxes, recording fees, escrow

charges and reasonable attorneys’ fees and costs.”23

From January 2007 to January 2014, Festival owned the Gucci Property.24 To

finance the initial purchase, Festival entered into a Loan Agreement with Column

Financial, Inc. and secured a mortgage on the property (the “Loan”).25 Relevantly,

the Loan Agreement allowed Festival to sell the property unencumbered by the Loan

through a process called “defeasance.”26 Defeasance allows a borrower to replace

the collateral on a loan, here the Gucci Property, with a portfolio of low-risk

securities yielding a rate of return that economically replicates the interest due under

the loan.27 Defeasance typically requires the borrower to pay a premium because

the low-risk securities have a lower interest rate than the Loan, so the borrower is

required to purchase securities with a higher cost than the outstanding loan balance.28

23
Id. at A383 (LPA).
24
Id. at A131 (Joint Pre-Trial Stipulation and Proposed Order).
25
Id. at A394 (Loan Agreement).
26
Id. at A422–23 (Loan Agreement).
27
Id. at A1931–32 (P. Avery Direct Exam).
28
Id.

7
C. 2014 Sale and Challenged Deductions

On January 7, 2014, the Partnership sold the Gucci Property to non-party

Ponte Gadea California, LLC for a gross price of $108 million.29 The Purchase and

Sale Agreement required Festival to “remove, by payment, bonding or otherwise . .

. any deeds of trust or mortgages that secure indebtedness against” the Gucci

Property.30 In accordance with this provision, Festival defeased the Loan at a

premium, $6,250,155, thereby removing the mortgage from the Gucci Property in

accordance with the Loan Agreement.31 The General Partner deducted this cost from

the gross sales price when calculating Exit’s Special Limited Partner Portion.

In addition to the $6,250,155 in Defeasance Deductions, the General Partner

also reduced the gross sales price by $4,556,486 in Negative Accruals Deductions,

$1,266,532 in Preferred Return Deductions (together with the Defeasance

Deductions and Negative Accruals Deductions, the “Challenged Deductions”), and

$6,004,579 in miscellaneous, unchallenged deductions, for a total of $18,077,752 in

deductions.32 These deductions resulted in a Net Resale Price of $89,922,248.33

29
Id. at A131 (Joint Pre-Trial Stipulation and Proposed Order); Court of Chancery D.I. 147 at 115
(Post-Trial Oral Argument).
30
App. to Answering Br. at B249 (Purchase and Sale Agreement).
31
Id. at B321–23 (Loan Defeasance Report).
32
App. to Opening Br. at A2001 (Exit’s Post-Trial Opening Br.)
33
Originally, Festival did not take the Negative Accruals Deductions, and the Net Resale Price
was calculated as $94,534,742. App. to Opening Br. at A503 (Gucci Sales Analysis Summary of
8
Because the sale occurred in 2014, the General Partner used the following figures

from Schedule D of the LPA: Resale Price Threshold = $100 million; Base Resale

Distribution Amount = $3.0 million.34 Recall that Exit was not entitled to its Special

Limited Partner Portion under the LPA if the Net Resale Price fell below the

difference between Resale Price Threshold and Base Resale Distribution Amount.35

For a 2014 sale, the Net Resale Price would have had to exceed $97 Million for Exit

to receive any Special Limited Partner Portion. Because the General Partner

calculated the Net Resale Price to be $89,922,248, Exit did not receive any

distribution.36

On January 17, 2014, Exit’s attorney, Andrew Chonoles, sent a letter to

Schurgin in his capacity as the General Partner’s President, inquiring about the 2014

Sale and requesting a distribution of the proceeds provided for under the LPA.37 The

next day, Schurgin responded to Chonoles’s letter, acknowledging that the sale had

occurred but asserting that Exit was not entitled a distribution because the Net Resale

Price was insufficient to trigger payment under Schedule D.38

Accounting for the 2014 Sale). This did not affect Exit’s distribution because the Net Resale Price
was less than the Base Resale Distribution Amount subtracted from the Resale Price Threshold.
34
App. to Opening Br. at A388 (LPA).
35
Id.
36
Id. at A132 (Joint Pre-Trial Stipulation and Proposed Order).
37
Id. at A131 (Joint Pre-Trial Stipulation and Proposed Order); Id. at A549 (Letter from Chonoles).
38
Id. at A131 (Joint Pre-Trial Stipulation and Proposed Order); Id. at A553–54 (Letter from
Schurgin). Schurgin also asserted that Festival was not required to pay the distribution because an
9
D. Procedural History

On January 12, 2017, Exit filed a Verified Complaint in the Court of

Chancery, asserting breach of contract claims against Festival and the General

Partner in relation to the Challenged Deductions.39 Exit then filed its Amended

Verified Complaint on December 22, 2017, adding claims alleging that the General

Partner acted in “bad faith” when it calculated the Challenged Deductions. 40 After

the Court of Chancery denied Festival’s Motion to Dismiss the Amended Complaint

and Request for Leave to Move for Summary Judgment, the court held a three-day

trial in September 2022.41 Exit presented live testimony from four witnesses, and

Festival presented live testimony from three witnesses, including Schurgin.

The parties then engaged in a round of post-trial briefing, and the Court of

Chancery heard argument on the narrowed issues presented in the briefing on April

17, 2023.42 Exit argued that the Challenged Deductions violated the LPA, that

Schurgin calculated the deductions in bad faith, and that the Sale constructively

occurred in 2013–which would lower the Resale Price Threshold by $10 million and

unrelated sale of the Partnership’s interest in 2011 divested Exit of its interest. Because this issue
was not relevant to the trial court’s analysis, we do not address it any further.
39
App. to Opening Br. at A1 (Court of Chancery Docket).
40
App. to Answering Br. at B4 (Amended Verified Complaint).
41
App. to Opening Br. at A29 (Court of Chancery Docket).
42
Court of Chancery D.I. 147 (Post-Trial Oral Argument).

10
thereby obviate the need to resolve whether the Challenged Deductions were

contractually permitted.43

The Court of Chancery published its Post-Trial Memorandum Opinion on July

17, 2023, finding in favor of Festival, the General Partner, and Schurgin on all

counts.44 The trial court only analyzed Exit’s breach claims as to the Defeasance

Deduction because—if properly deducted—the defeasance costs combined with the

unchallenged deductions would reduce the Net Resale Price below $97 million.45

Exit did not dispute that basic mathematical calculation on appeal, and our analysis

therefore follows the same theory. In interpreting the meaning of Subsections (f),

(d), and (h), the Court of Chancery did not consider any extrinsic evidence, holding

that the provisions were unambiguous as to Festival’s deduction of defeasance

costs.46

The trial court held that Festival properly deducted defeasance costs under

either Subsection (f), (d), or (h).47 In its analysis, the trial court mischaracterized the

formula in Subsection (f) as follows: “Excess Loan Costs are deductible if ‘the

amount by which aggregate loan interest costs in any year . . . exceed Rental

43
App. to Opening Br. at A1975–76 (Exit’s Post-Trial Opening Brief).
44
Exit Strategy, LLC, 2023 WL 4571932.
45
Id. at *12.
46
Id. at *16.
47
Id. at *14–15.

11
Payments,’ defined as a threshold amount of payments from the Property’s tenant.

The Rental Payment threshold is fixed at a notional amount of ‘$875,000.00’”48 As

we explain below, the formula establishes that Excess Loan Costs are deductible if

the aggregate loan costs in that year exceed the sum of rental payments and

$875,000, with the latter amount prorated for any partial year.

The trial court also found that the Sale occurred in 2014, not 2013 as Exit

argued, and that Schurgin did not act in bad faith when he took the Challenged

Deductions.49 Exit does not challenge either of these holdings on appeal.

E. Contentions on Appeal

Exit timely filed this appeal only as to its breach of contract claims against

Festival, arguing that the Court of Chancery erred when it held that Subsections (f),

(d), and (h) permitted Festival to deduct defeasance costs from the gross sales price.50

Exit also argues that the trial court committed error when it suggested that the

General Partner’s good faith would bar Exit’s recovery under a breach of contract

claim. In response, Festival contends that despite the trial court’s misinterpretation

of the formula in Subsection (f), defeasance costs were still properly deducted from

the gross sales price when the formula is applied correctly.51 Festival also posits that

48
Id. at *4 (emphasis added).
49
Id. at *10–11.
50
See generally Opening Br. at 34–44.
51
Answering Br. at 38 n.11.

12
Exit’s arguments on appeal are barred because it did not appeal the trial court’s

findings regarding the defendants’ good faith conduct. Specifically, Festival relies

on the Court of Chancery’s holding that Schurgin and the General Partner acted in

good faith when making the deductions and that because Festival acted through those

parties when it made the deductions, the breach of contract claims are barred.52

II. STANDARD OF REVIEW

We review the Court of Chancery’s contractual interpretation de novo.53

Because the argument on appeal, and therefore our analysis, is constrained to

contract interpretation, we do not review the court’s post-trial factual findings and

accept them as accurate.

III. ANALYSIS
To begin, although Exit challenges the Court of Chancery’s interpretation of

Subsections (f), (d), and (h), and its holding that defeasance costs fit within each of

those categories of permitted deductions, our decision only reaches the meaning and

application of Subsection (f). Once we determine that the defeasance costs were

properly deducted under Subsection (f), the inquiry ends because that calculation

reduced Exit’s Special Limited Partner Portion to zero.

52
The parties agree that the LPA identifies “good faith” as the governing standard for the General
Partner’s conduct.
53
Sunline Commercial Carriers, Inc. v. CITGO Petroleum Corp., 206 A.3d 836, 845 (Del. 2016).

13
A. The Defeasance Deduction was proper under Subsection (f).

Exit’s argument that the LPA’s definition of Excess Loan Costs does not

encompass defeasance costs 1) relies on extrinsic evidence, and 2) is entirely at odds

with its admissions that “defeasance was a replacement for the post-sale interest

payments,” “‘loan interest costs’ are one of the possibly-permitted deductions under

that definition,”54 and defeasance costs “could, under certain circumstances fit

within ‘Excess Loan Costs.’”55 Exit’s arguments on appeal never reconcile its

interpretation of Subsection (f) with either the LPA’s plain language or Exit’s

admissions. Because the LPA is unambiguous and the Court of Chancery properly

refused to consider extrinsic evidence,56 we hold that defeasance costs were

deductible as Excess Loan Costs.

First, the Court of Chancery did not err when it refused to consider extrinsic

evidence as to Subsection (f)’s meaning.57 Delaware follows the objective theory of

54
Opening Br. at 39.
55
Id. (citing App. to Opening Br. at A1770 (Emanuel Direct Exam.)); App. to Opening Br. at
A2014 (Exit’s Post-Trial Opening Brief); Court of Chancery D.I. 147 at 48–49; 52 (Post-Trial Oral
Argument Tr.).
56
Although the Court of Chancery excluded extrinsic evidence because it found that Exit conceded
that the LPA’s language was unambiguous, we do not base our decision on this judicial admission
and instead conclude that the plain language of Subsection (f) is unambiguous. See Exit Strategy,
LLC, 2023 WL 4571932, at *12.
57
Id. at *16. The extrinsic evidence that Exit introduced to prove that defeasance costs were not
encompassed by Subsection (f) included testimony from its principal, Steven Emanuel, explaining
Subsection (f)’s evolution through the LPA’s drafting process. Emanuel testified that each of
Excess Loan Costs’s inputs were dictated by Festival’s need to obtain a 16% internal rate of
return—not to deduct additional costs from the gross sales price. App. to Opening Br. at A1755–
57 (Emanuel Direct Exam.).

14
contracts, where the parties’ intent is determined by considering only the “four

corners of the agreement.”58 And where contract terms establish the parties’

common meaning, they control.59 “The parol evidence rule bars the admission of

evidence extrinsic to an unambiguous, integrated written contract for the purpose of

varying or contradicting the terms of that contract.”60 It is the “sole province” of the

court to determine whether a contract is ambiguous, and the parties’ disagreement

over a contract’s interpretation does not render it so.61 Rather, contract terms are

ambiguous only when they “are fairly susceptible of different interpretations or may

have two or more different meanings.”62

Subsection (f) is not ambiguous. The Loan Agreement between Festival and

its mortgage lender expressly defines defeasance costs;63 the LPA gave the General

Partner sole discretion to enter into financing agreements, including the Loan

Agreement;64 and the Sale Agreement between Festival and Ponte Gadea required

58
Salamone v. Gorman, 106 A.3d 354, 368 (Del. 2014).
59
Id.
60
Galantino v. Baffone, 46 A.3d 1076, 1081 (Del. 2012).
61
Weinberg v. Waystar, Inc., 294 A.3d 1039, 1044 (Del. 2023).
62
GMG Capital Investments, LLC v. Athenian Venture Partners, I, L.P., 36 A.3d 776, 780 (Del.
2012) (quoting Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del.
1997)).
63
App. to Opening Br. at A422–23 (Loan Agreement).
64
Id. at A361 (LPA).

15
Festival to clear encumbrances from the Gucci Property, which in turn required

Festival to defease the Loan.65

Defeasance replicated and replaced the remaining interest on the Loan, and

those interest costs were plainly deductible under Subsection (f), which defines

Excess Loan Costs as “loan interest costs, points, loan origination fees, negative

accruals, and similar costs.”66

Exit’s first argument—that Subsection (f) is ambiguous because defeasance

costs are not mentioned by name—is not convincing.67 We find no ambiguity in the

contractual language. Subsection (f) expressly defines Excess Loan Costs as

including “loan interest costs . . . and similar costs.”68 The only reasonable

interpretation is that this includes defeasance costs, which replace interest costs—

something Exit’s own witness admitted—verbatim—during his deposition.69

Moreover, Exit admitted to the Court of Chancery on numerous occasions that

defeasance costs could be loan interest costs within the meaning of Subsection (f).70

65
App. to Answering Br. at B249 (Purchase and Sale Agreement).
66
App. to Opening Br. at A382 (LPA) (emphasis added).
67
Opening Br. at A28.
68
App. to Opening Br. at A383 (LPA).
69
Id. at A944 (Emanuel Dep. Tr.) (“to the extent that the $6.2 million represented treasury
securities that were intended to function, and did function, as a precise replacement for monthly
interest costs that would come due during the final post sale to Ponte Gadea Mortgage, those are
to be treated as interest costs and analyzed under (f)”).
70
Id. at A1770 (Emanuel Direct Exam.); Id. at A2014 (Exit’s Post-Trial Opening Brief); Court of
Chancery D.I. 147 at 48–49; 52 (Post-Trial Oral Argument Tr.).

16
We do not accept Exit’s change in position and, together with the plain meaning of

Subsection (f), hold that Festival could deduct defeasance costs from the gross sales

price as Excess Loan Costs under Subsection (f).

Undeterred, Exit alternatively argues that if defeasance costs constitute

Excess Loan Costs, they nevertheless were not properly deducted under the formula

contained in Subsection (f). Subsection (f) allows Festival to deduct excess loan

costs when they exceed the sum of: (i) “loan origination fees to the extent actually

paid by the Limited Partner or the Partnership, but not more than $550,000.00” and

(ii) “the amount by which aggregate loan interests costs in any year . . . exceed Rental

Payments . . . for such year, but only to the extent such excess of such loan interest

costs in such year over Rental Payments in such year exceeds $875,000.000 (subject

to proration for any partial year).”71 Because Festival did not deduct any loan

origination fees under (i), our focus is on the second half of this formula.

Exit first argues that the Court of Chancery misinterpreted and misapplied the

formula required by Subsection (f) when it held that “[t]he Rental Payment threshold

is fixed at a notional amount of ‘$875,000.00 (subject to proration for any partial

year).’”72 Although we agree with Exit that the trial court misinterpreted Subsection

(f)’s formula, we conclude that the error was harmless because the application of the

71
App. to Opening Br. at A382 (LPA).
72
Exit Strategy, LLC, 2023 WL 4571932, at *4.

17
correct formula yields the same result: loan interest costs—defeasance costs totaling

over $6 million—exceed the rental payments received in 2014—a fraction of $3

million—by more than $875,000.73

To avoid this straightforward mathematical calculation and preserve its

challenge to the Defeasance Deduction, Exit contends that defeasance costs must be

prorated over the remaining term of the Loan, which, by Exit’s calculations, would

reduce loan interest costs to less than the sum of the rental payments and the prorated

portion of $875,000.74 Exit insists that Subsections (f)’s language “subject to

proration for any partial year” applies to all the inputs in the formula, not just the

$875,000 threshold.75 We disagree and find no support for Exit’s position in the

contractual language.

As a matter of the contract’s plain language and straightforward logic, we

conclude that proration applies only to the $875,000 threshold that the formula adds

to the rental payments.76 First, the formula refers to “loan interest costs in such year”

and “Rental Payments in such year,” making any reference to proration both

73
Although the record is unclear regarding the precise amount of annual rent, counsel agreed at
Oral Argument that it was not $875,000 and had increased in 2014 from $1.125 to $3 million.
Supreme Court Oral Argument at 49:50–49:55.
74
Opening Br. at 40.
75
Id.
76
The proration language in Subsection (f) appears only at the end of the clause and in reference
to the $875,000, not earlier in the formula.

18
unnecessary and duplicative. Second, practically speaking there is no need to prorate

costs, which are incurred at a particular time, or rental payments, which are already

separated into monthly amounts and received periodically. Accordingly, the only

reasonable interpretation is that only the $875,000 threshold must be prorated so that

it does not have an outsized effect in any particular year.

Although only a small portion of the 2014 Gucci rent accrued before the Sale

occurred on January 7, Festival incurred the entire defeasance cost on January 7.77

As Exit explained, the formula in Section (f) was intended to “protect Festival

against higher-than-expected loan costs, mainly loan interest costs,”78 which is

exactly what occurred when Festival cleared the Gucci Property’s mortgage in

January 2014 and incurred $6,250,155 in defeasance costs.

Moreover, Subsection (f) contemplated the possibility that Festival would

incur loan interest costs in installments or one single payment. The formula provides

that aggregate loan interest costs can either be “paid currently or accruing and

including any interest that accrues on interest.”79 Ultimately, Exit’s witness testified

that Festival collected only seven days of rent in 2014 and that Festival paid

77
App. to Answering Br. at B321–23 (Defeasance Report).
78
App. to Opening Br. at A1799 (Emanuel Cross Exam).
79
Id. at A382 (LPA).

19
$6,250,155 to purchase the securities that replaced the Gucci Property as collateral

when Festival defeased the Loan.80

Finally, during this Court’s oral argument, Exit’s counsel explained, in

conclusory fashion, that “if you are going to prorate [rent] you have to prorate both

[the rent and defeasance costs].”81 This statement demonstrates Exit’s

misunderstanding as to the purpose of Subsection (f)’s proration, which is to

maintain the same outcome whether the Gucci Property was sold early or late in a

calendar year. At no point during this Court’s proceedings or in the trial court could

Exit explain its position that Festival did not incur the entire defeasance cost in 2014.

Because Festival incurred the entire $6,250,155 defeasance cost in 2014 and

only collected seven days of rent in 2014, Festival’s loan interest costs exceeded the

sum of rental payments and the prorated $875,000, and the defeasance costs were

properly deducted. Accordingly, the net resale price82—the aggregate of the excess

loan costs and unchallenged deductions subtracted from the gross sales price—fell

below the difference between the 2014 Resale Price Threshold and 2014 Base Resale

Distribution Amount.83

80
Id. at A1801 (Emanuel Cross Exam).
81
Oral Argument at 48:45–48:53.
82
$108 Million Gross Sales Price – $12 Million in Proper Deductions = $96 Million Net Resale
Price
83
$100 Million Resale Price Threshold – $3 Million Base Resale Distribution Amount = $97
Million Minimum price for Exit to receive a distribution.

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B. The Court of Chancery’s good faith holdings regarding the General Partner
and Schurgin are not addressed on appeal.
Finally, we do not address Festival’s contention that Exit’s appeal is barred

because it failed to challenge the trial court’s holding as to the General Partner’s and

Schurgin’s good faith. According to Festival, the trial court suggested that the

General Partner’s subjective good faith conduct inherently barred any breach of

contract claim against the partnership itself.84 Because we hold that Festival

properly deducted the defeasance costs under Subsection (f) and Exit therefore is not

entitled to its Special Limited Partner Portion, we do not reach this argument.

IV. CONCLUSION

For the reasons set forth above, we AFFIRM the judgments of the Court of

Chancery set forth in its July 17, 2023 Post-Trial Memorandum Opinion and in its

August 4, 2023 Final Order and Judgment.

84
“Given Exit’s failure of proof [as to the General Partner and Schurgin’s bad faith]—and the
LPA’s broadly enabling provisions animating the General Partner’s discretion to take deductions
and exclusive authority to manage the Partnership—I likely could stop my analysis here.” Exit
Strategy, LLC., 2023 WL 4571932, at *10.

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