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

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

EXIT STRATEGY, LLC, )
)
Plaintiff, )
)
v. ) C.A. No. 2017-0017-NAC
)
FESTIVAL RETAIL FUND BH, L.P., )
FRFBH, LLC, and MARK SCHURGIN, )
)
Defendants. )

POST-TRIAL MEMORANDUM OPINION

Date Submitted: April 17, 2023
Date Decided: July 17, 2023

David A. Jenkins, Laurence V. Cronin, Jason Z. Miller, SMITH KATZENSTEIN &
JENKINS LLP, Wilmington, Delaware; Counsel for Plaintiff Exit Strategy, LLC.

Douglas D. Herrmann, James H. S. Levine, TROUTMAN PEPPER HAMILTON
SANDERS LLP, Wilmington, Delaware; Andrew W. Zepeda, LURIE, ZEPEDA,
SCHMALZ, HOGAN & MARTIN, Los Angeles, California; Counsel for
Defendants Festival Retail Fund BH, L.P., FRFBH, LLC, and Mark Schurgin.

COOK, V.C.
 The plaintiff sold to a limited partnership its option to buy a luxury retail store.

In exchange, the plaintiff received a contingent value right to a partial distribution

of the proceeds from a future sale of the property. The distribution depended on

receipt of a threshold amount of net return. In calculating net return, the general

partner had broad discretion to deduct costs incurred by the partnership in the sale.

The general partner owed no fiduciary duties to the plaintiff and its deductions were

governed only by a subjective bad faith standard.

After the partnership sold the property, the general partner deducted several

costs from the proceeds, including the costs of removing a mortgage. Removing the

mortgage was a condition to closing the sale. The deductions resulted in a net return

lower than the applicable threshold. So the plaintiff did not receive a distribution.

At trial, the plaintiff sought to prove that the general partner improperly

deducted three types of costs, including the mortgage removal costs. The plaintiff

also sought to hold the general partner’s controller liable for the deductions.

The parties spent most of trial discussing extrinsic evidence. But they now

agree that their limited partnership agreement is unambiguous. Under its plain

language, the general partner was permitted to deduct the mortgage removal costs.

That deduction alone precludes the plaintiff’s distribution. And because that

deduction was proper, the claim against the general partner’s controller fails.

Judgment is therefore entered in favor of the defendants.
 I. FACTUAL BACKGROUND

The evidence presented at trial supports the following findings of fact.1

A. The Parties Form The Partnership.

Plaintiff Exit Strategy, LLC invests in commercial real estate. In 2005, Exit

purchased for $3 million an option to buy the Gucci flagship store located on Rodeo

Drive in Beverly Hills, California (the “Property”). Exit lacked the capital to

exercise the option. So Exit sold it to an asset management group (“Festival”).

The parties structured the transaction as a partnership. Each side retained

sophisticated counsel to draft the terms.2 During negotiations, one of Exit’s owners,

Steven Emanuel,3 proposed terms that he “invented.”4 Counsel rejected almost all

of them. 5 The operative terms are memorialized in a limited partnership agreement

(the “LPA”).

1
Although the record appears voluminous, the parties’ post-trial arguments helpfully
narrowed the issues. So I limit my findings to the facts relevant to my decision. That said,
I have considered all the evidence and cite to specific documents where appropriate.
Citations in the form of “Tr. — ([Witness])” refer to the transcript of the trial testimony.
Citations in the form of “JX — ([Descriptor])” refer to the exhibits introduced at trial.
Citations in the form of “PTO —” refer to the parties’ pre-trial stipulations of fact.
Citations in the form of “Oral Arg. Tr. —” refer to the post-trial oral argument transcript.
2
See, e.g., Tr. at 26, 195, 398 (Various Witnesses).
3
Emanuel is better known as the creator of the “Emanuel CrunchTime” law school study
aid series. See id. at 7:22–8:7, 262–64 (Emanuel).
4
See, e.g., id. at 110:8–21 (Emanuel).
5
Defendants introduced a redline comparison at trial. See Ex. A to Dkt. 141.

2
 The LPA established a Delaware limited partnership, Defendant Festival

Retail Fund BH, L.P. (the “Partnership”). Defendant FRFBH, LLC served as the

Partnership’s “General Partner.”6 Defendant Mark Schurgin served as the General

Partner’s President. Through that role, Schurgin controlled the General Partner.

With this structure in place, the Partnership acquired the option from Exit. In

exchange, Exit (i) received approximately $11 million in cash; and (ii) became the

“Special Limited Partner” of the Partnership. The Special Limited Partner has no

power within the Partnership. It is instead a title coined under the LPA to reflect

Exit’s receipt of what amounts to a contingent value right. The LPA governs that

right, as well as the roles of the General Partner and the Special Limited Partner.

1. The Role Of The General Partner

The General Partner has “exclusive” authority to manage the Partnership.7

That authority encompasses “the power to do any and all acts necessary, convenient

or incidental to or for the furtherance of” or “in connection with” the Partnership’s

“purposes.”8 The Partnership’s purposes are:

(i) to acquire, own, renovate, finance, refinance, lease, operate, manage,
sell or otherwise dispose of [the Property]; and

6
JX 39 at A-2 (cited as “LPA”). The General Partner is a Delaware limited liability
company. PTO ¶ 3.
7
LPA § 9(a).
8
Id. §§ 7(b), 9(b). See id. § 8.

3
 (ii) to engage in any lawful act or activity and to exercise any powers .
. . related or incidental to and necessary, convenient or advisable for the
accomplishment of the above-mentioned purposes. 9

The General Partner thus may cause the Partnership to “enter into and perform . . .

any [] agreement or arrangement . . . in the sole judgment of the General Partner,”

that is related or incidental to, or for the furtherance of, or in connection with, the

Partnership’s purposes of acquiring, owning, and selling the Property.10

The General Partner owes no fiduciary duties to the Special Limited Partner.

To the fullest extent permitted by law, including . . . Section 17-1101(d)
of the [Delaware Revised Uniform Limited Partnership] Act . . . [t]he
Special Limited Partner hereby waives any and all fiduciary obligations
owed by the General Partner to the Special Limited Partner . . . . 11

The General Partner is exculpated for breaching the LPA unless it fails to act in

“good faith on behalf of the Partnership[.]”

To the fullest extent permitted by applicable law, neither the General
Partner . . . nor any employee, representative, manager, [or] agent . . .
of the General Partner . . . shall be liable . . . by reason of any act or
omission performed or omitted . . . in good faith on behalf of the
Partnership and in a manner reasonably believed to be within the scope
of the authority conferred . . . by [the LPA.] 12

9
Id. § 7(a).
10
Id. § 7(b).
11
Id. § 10.
12
Id. § 18(a). This provision maintains liability for “damage” only if the General Partner
engages in “gross negligence” or “willful misconduct.” Id.

4
 2. The Role of the Special Limited Partner

In contrast to the General Partner, the Special Limited Partner has no “part or

role in the operation or management of the Partnership[.]” 13 It has no voting or

liquidation rights either.14 The Special Limited Partner instead holds a minority

interest in the Partnership that operates as a contingent value right to receive a partial

distribution of the proceeds from a future sale of the Property (the “Special Limited

Partner’s Portion”). 15 The LPA specifies the “limited circumstances” under which

Exit receives the Special Limited Partner’s Portion. 16 Those limited circumstances

are reflected in a formula.

3. The Special Limited Partner’s Portion

The LPA defines the Special Limited Partner’s Portion mathematically as:

with respect to a Resale, the amount equal to (i) the Base Resale
Distribution Amount . . . 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. 17

Based on this formula, Exit receives “100%” of the “Resale Proceeds . . . until the

cumulative amount distributed equals the Special Limited Partner’s Portion[.]”18

13
Id. § 9(b).
14
Id. §§ 10, 23.
15
PTO ¶ 12. See also LPA § 15(b).
16
LPA § 10.
17
Id. at A-6.
18
Id. § 15(b).

5
The Special Limited Partner’s Portion thus is tied to a glossary of interrelated

definitions: “Resale,” “Base Resale Distribution Amount,” “Resale Price

Threshold,” “Resale Year,” “Net Resale Price,” and “Resale Proceeds.” These terms

intersect with the General Partner’s broad discretion to manage the Partnership.

a. “Resale”

The LPA defines a Resale as:

a bona fide arm’s-length-sale . . . by the Partnership at any time of all
of its interest in the Property to an unaffiliated third party; provided,
however, . . . that the Base Resale Distribution Amount and the Resale
Price Threshold . . . shall be prorated . . . (as determined by the General
Partner in its good faith discretion) by the same proportion that the
portion of the Property sold under the Resale bears to the Property.19

b. “Base Resale Distribution Amount”; “Resale Price
Threshold”; “Resale Year”

The Base Resale Distribution Amount and the Resale Price Threshold are

defined using fixed figures that vary by Resale Year: 20

19
Id. at A-5 (underlining in original) (emphasis added).
20
See id. at Schedule D. The “Resale Year” is the “calendar year in which any Resale
occurs.” Id. at A-5.

6
The Resale Price Threshold is a potential bar to Exit’s receipt of the Special Limited

Partner’s Portion:

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.21

If the applicable Resale Price Threshold exceeds the “Net Resale Price” by $3

million or more, 22 then Exit does not receive the Special Limited Partner’s Portion.

c. “Net Resale Price”

The LPA defines Net Resale Price as “the gross price derived from [a] Resale,

as shown in the Resale Contract,” minus deductions for “one or all” of eight

21
Id. at Schedule D & note.
22
The parties agree that either the 2013 or 2014 Resale Price Threshold applies. Both
Resale Years specify $3 million as the Base Resale Distribution Amount. Id.

7
categories of costs incurred by the Partnership in a Resale.23 The parties have

focused on three of those categories: Subsections (d), (f), and (h). 24

Subsection (d) permits deductions for “costs or expenses associated with the

ownership . . . of the Property reasonably borne by . . . the Partnership during the

Partnership’s ownership[.]”25

Subsection (f)26 permits deductions for “excess costs associated with any loan

on the Property . . . during the Partnership’s ownership.” These “Excess Loan Costs”

include “loan interest costs . . . negative accruals and similar costs[.]” In relevant

part, Excess Loan Costs are deductible if “the amount by which aggregate loan

interest costs in any year . . . exceed Rental 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 (subject to proration for any partial year[.])”

Subsection (h) permits deductions for:

[a]ll . . . out-of-pocket closing costs and costs of sale incurred in
connection with [a] Resale, including without limitation . . . out-of-
pocket survey and title costs, documentary transfer taxes, recording
fees, escrow charges and reasonable attorneys’ fees and costs.27

23
Id. at A-3 to A-4. “Resale Contract” is defined as the purchase agreement. Id. at A-5.
24
The parties also have focused on Subsection (g), which permits deductions for equity-
based “fees.” Id. at A-4. Subsection (g) implicates one of the deductions in this case. See
infra Part I. Section D. I do not reach that deduction, so I do not discuss Subsection (g).
25
LPA at A-3.
26
Id. at A-3 to A-4.
27
Id. at A-4.

8
 d. “Resale Proceeds”

The LPA defines Resale Proceeds as “any proceeds received by the

Partnership upon a Resale less the portion thereof used to pay all Partnership

expenses [or] indebtedness . . . all as determined by the General Partner.”28 The

LPA elsewhere specifies that the General Partner has “sole discretion” to allocate all

“income, gain, loss, deduction or credit” in accordance with the partners’ “economic

interests in the Partnership[.]”29

Read together, the Special Limited Partner’s Portion is not distributable at or

above the Base Resale Distribution Amount unless there is (i) a Resale that generates

(ii) Resale Proceeds equating, after the General Partner’s deductions, to a (iii) Net

Resale Price above or not $3 million or more below (iv) the Resale Price Threshold

for (v) the applicable Resale Year.

B. The Partnership Secures The CMBS Loan On The Property.

In 2007, the Partnership exercised the option and acquired the Property for

$39 million. In financing the call price, the Partnership secured a mortgage on the

Property (the “CMBS Loan”). The Partnership obtained the CMBS Loan under a

loan agreement with Column Financial, Inc. (the “Loan Agreement”).30 Before it

28
Id. at A-5 (emphasis added).
29
Id. § 14.
30
JX 41 (cited as “Loan Agreement”).

9
sold the option to the Partnership, Exit itself considered obtaining the CMBS Loan

from Column Financial. 31

The Loan Agreement addresses “defeasance.” 32 Defeasance is the process by

which a borrower replaces collateral with a portfolio of securities, e.g., low-risk

bonds, that yields a rate of return sufficient to economically replicate the interest due

to the lender.33 Defeasance thus strips a security interest off the asset, allowing the

borrower to sell it unencumbered, while maintaining the lender’s right to repayment.

Without defeasance, the borrower would be forced to service the debt using cashflow

generated by the sale, reducing return, or face default or contractual penalties.34

Defeasance costs vary with the lender’s interest rate and market conditions, but

usually amount to a premium. 35 The Loan Agreement required the Partnership to

defease the CMBS Loan at its own “expense[]” if the Partnership sold the Property

before November 2016.36

The LPA incorporates these terms. The LPA provides that the General Partner

may cause the Partnership to execute the “Basic Documents.”37 The Basic

31
Tr. at 172–73 (Emanuel).
32
Loan Agreement § 2.5.
33
See Tr. at 547–51 (Defs.’ Expert).
34
See id. (Defs.’ Expert).
35
See id. at 550 (Defs.’ Expert).
36
Loan Agreement § 2.5.1.
37
LPA § 7(b).

10
Documents include the “Loan Documents.” 38 The Loan Documents include the

Loan Agreement. 39 The LPA prohibits the Partnership from amending the LPA’s

definitions—including the terms governing the Special Limited Partner’s Portion—

without Column Financial’s approval. 40

C. The Partnership Sells The Property.

The Partnership collected rent from the Property’s tenant. The rent varied by

year, but never exceeded the $875,000 figure identified in Subsection (f). 41 Still, the

Property’s overall value increased. So the Partnership resolved to sell it.

On September 26, 2013, the Partnership agreed in principle to sell the Property

for $108 million to Ponte Gadea California, LLC (the “Ponte Gadea Sale”). The

Ponte Gadea Sale is memorialized in a purchase agreement (the “PGSA”).42 The

PGSA set a closing date of December 10, 2013. 43 The Partnership, however, could

extend that date by thirty days.44 Either way, the PGSA required the Partnership “to

38
Id. at A-1.
39
Id. at A-2.
40
Id. § 9(c)(ii); see id at A-2 (defining “Lender” as Column Financial).
41
JX 117 (Summary Accounting Statement).
42
JX 74 (cited as “PGSA”).
43
Id. § 18.
44
Id.

11
remove, by payment, bonding or otherwise any . . . mortgages that secure

indebtedness against” the Property before closing the Ponte Gadea Sale.45

In October 2013, Ponte Gadea placed a $6 million deposit on the Property.46

At the time, the Partnership had been searching for a “1031 Exchange” property. A

1031 Exchange is shorthand for a federal tax procedure allowing a property seller to

roll sale proceeds into a substitute property to defer capital gains tax on the sale. 47

Given holidays and related practical constraints, a December 2013 closing

would not have allowed the Partnership enough time to complete a 1031 Exchange.

So the Partnership invoked its extension right. The Ponte Gadea Sale ultimately

closed on January 7, 2014. Before closing, the Partnership defeased the CMBS Loan

at a premium to the CMBS Loan’s interest costs. 48

D. The General Partner Takes The Challenged Deductions.

In calculating the Resale Proceeds from the Ponte Gadea Sale, the General

Partner deducted $18,077,752 in costs from the purchase price. 49 The deductions

resulted in a Net Resale Price of $89,922,248. Of the total deductions: (i) $6,250,155

represents the costs of defeasing the CMBS Loan (the “Defeasance Deduction”); (ii)

45
Id. § 6(c). See also Ex. 3 to id.
46
See, e.g., JX 77 (e-mail from Schurgin to the Partnership’s banker).
47
See generally 26 U.S.C. § 1031(a)(3).
48
See JX 86 (Defeasance Report).
49
JX 117 (Summary Accounting).

12
$4,556,486 represents “negative accruals” costs (the “Negative Accruals

Deduction”);50 and (iii) $1,266,532 represents “preferred return on equity” costs

(the “Preferred Return Deduction” and together with the Defeasance Deduction and

Negative Accruals Deduction, the “Challenged Deductions”).51

In taking the deductions, the General Partner relied on the LPA’s definition

of Net Resale Price and reviewed the Partnership’s books and records, including the

Loan Agreement and the PGSA. 52 The General Partner’s process followed the

accounting procedures that Festival always had used for distributions. Based on this

information and its experience, the General Partner took the Defeasance Deduction

because, among other things, defeasance was required to close the Ponte Gadea Sale

and to avoid a breach of the Loan Agreement.53

The 2014 Resale Price Threshold exceeded the Net Resale Price by more than

$3 million. So Exit did not receive the Special Limited Partner’s Portion.

50
Negative accruals comprise a type of Excess Loan Costs. LPA at A-3. It is one of the
terms Emanuel “invented.” Tr. at 110:8–21 (Emanuel). Evidence at trial established that
“negative accruals” has no meaning in the commercial real estate industry and that
Emanuel did not communicate his definition to Exit’s deal counsel. Exit’s deal counsel
could not even remember why the parties included the term in Subsection (f). Tr. at 202.
For the reasons below, the history surrounding negative accruals and the Negative Accruals
Deduction is not relevant to my analysis.
51
Exit does not contest the remaining $6,004,579 in deductions.
52
See, e.g., Tr. at 479–97 (Festival Accountant) (describing deduction process).
53
See, e.g., id. at 491–96, 509:12–15 (Festival Accountant).

13
E. Exit Sues.

Exit brought this action to invalidate the Challenged Deductions. At trial, Exit

sought to prove that the Partnership and the General Partner breached the LPA by

taking the Challenged Deductions. 54 Exit also sought to prove that Schurgin directed

the Challenged Deductions in “bad faith.” Defendants raised various defenses to

Exit’s claims, including that the Defeasance Deduction was proper under the LPA.55

The parties submitted post-trial briefing and presented oral argument. Their

efforts narrowed the record to the LPA’s plain language and the principles governing

Delaware limited partnerships. My analysis turns on those sources of authority.

II. LEGAL ANALYSIS

Exit bore the burden to prove its claims by a preponderance of the evidence.56

As explained below, Exit failed to meet that burden. The LPA exculpates the

54
Exit also brought a declaratory claim. “The Delaware Declaratory Judgment Act does
not create substantive rights of any sort; it merely offers a procedural means for securing
judicial relief . . . .” 250 Exec., LLC v. Christina Sch. Dist., 2022 WL 588078, at *4 (Del.
Ch. Feb. 28, 2022) (internal quotation marks omitted). So the Court must focus on the
substance of the allegations to determine what type of “rights” or “status” the claimant
seeks declared. 10 Del. C. § 6501. Here, Exit sought a declaration as to contractual rights
or status. Dkt. 12 ¶¶ 76–78. My analysis of the breach of contract claims therefore
subsumes the declaratory claim.
55
Defendants’ other defenses included laches and a contractual defense based on a
purported Resale involving the Partnership’s sole limited partner. Because I find that
Exit’s claims fail under its own theory of the case, I assume, without deciding, that its
claims are timely and need not reach Defendants’ alternative contractual defenses.
56
See, e.g., Metro Storage Int’l LLC v. Harron, 275 A.3d 810, 841, 859 (Del. Ch. 2022)
(breach of fiduciary duty); Zimmerman v. Crothall, 62 A.3d 676, 691 (Del. Ch. 2013)
(breach of contract).

14
General Partner for breaches of the LPA unless the General Partner acts in subjective

bad faith. Exit overlooked that standard. Even so, Defendants are not liable under

Exit’s presentation of the case, because the Defeasance Deduction fits within the

LPA’s plain language. Based on the applicable Resale Price Threshold, the

Defeasance Deduction alone precludes Exit from receiving the Special Limited

Partner’s Portion. Exit’s breach of contract claims therefore fail. The claim against

Schurgin consequently fails because the General Partner complied with the LPA.

Accordingly, judgment is entered in Defendants’ favor.

A. Exit Failed To Prove Its Breach Of Contract Claims.

Exit’s contract claims are based on the LPA. Delaware law governs the

LPA. 57 In Delaware, the goal of contract interpretation is to “effectuate the parties’

intent.”58 “To determine what contractual parties intended, Delaware courts start

with the text.” 59 And if the text is unambiguous, Delaware courts end there too.

“Contract terms themselves will be controlling when they establish the parties’

common meaning so that a reasonable person in the position of either party would

have no expectations inconsistent with the contract language.”60

57
LPA § 28.
58
Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006).
59
Sunline Com. Carriers, Inc. v. CITGO Petro. Corp., 206 A.3d 836, 846 (Del. 2019).
60
Salamone v. Gorman, 106 A.3d 354, 368 (Del. 2014) (quoting Eagle Indus., Inc. v.
DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997)).

15
 Even the most “steadfast disagreement over interpretation will not, alone,

render the contract ambiguous.”61 Instead, “a contract is ambiguous only when the

provisions in controversy are reasonably or fairly susceptible of different

interpretations or may have two or more different meanings.” 62 By contrast, a

contract is unambiguous if “the plain, common, and ordinary meaning of [its] words

lends itself to only one reasonable interpretation[.]”63 An unambiguous contract

must be enforced “as written and not as hoped for by litigation-driven arguments.”64

“The presumption that the parties are bound by the language of the agreement

they negotiated applies with even greater force when the parties are sophisticated

entities that have engaged in arm[’]s-length negotiations.”65 “It is not the court’s

role to rewrite [a] contract between sophisticated market participants . . . to suit the

court’s sense of equity or fairness.” 66 Nor is it “the job of a court to relieve

sophisticated parties of the burdens of contracts they wish they had drafted

61
Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1160 (Del. 2010).
62
Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del.
1992).
63
Sassano v. CIBC World Mkts. Corp., 948 A.2d 453, 462 (Del. Ch. 2008).
64
Urdan v. WR Cap. P’rs, LLC, 244 A.3d 668, 675 (Del. 2020).
65
W. Willow-Bay Ct., LLC v. Robino-Bay Ct. Plaza, LLC, 2007 WL 3317551, at *9 (Del.
Ch. Nov. 2, 2007), aff’d, 985 A.2d 391 (Del. 2009) (TABLE).
66
Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 872 A.2d 611, 624 (Del. Ch. 2005), aff’d in
part, rev’d in part on other grounds, 901 A.2d 106 (Del. 2006).

16
differently but in fact did not.”67 “Even if the bargain they strike ends up a bad deal

for one or both parties, the court’s role is to enforce the agreement as written.”68

These principles cannot be applied in a vacuum, because “the commercial

context between the parties . . . give[s] sensible life to [their] contract.” 69 In the

limited partnership context, courts assume the parties had optionality and

nevertheless chose to form a limited partnership “with full knowledge of the

significance of [its] operational framework[.]” 70 Indeed, “the decision to adopt and

operate under a [limited partnership] is [a] fundamental business decision that courts

routinely protect.”71 Based on this conceptual paradigm, courts afford “significant

deference” to the terms of limited partnership agreements.72

Delaware’s contractarian focus reflects the dualistic nature of its limited

partnerships. “A limited partnership is a creature of both statute and contract.”73 By

67
DeLucca v. KKAT Mgmt., L.L.C., 2006 WL 224058, at *2 (Del. Ch. Jan. 23, 2006).
68
Glaxo Gp. Ltd. v. DRIT LP, 248 A.3d 911, 919 (Del. 2021).
69
Chi. Bridge & Iron Co. v. Westinghouse Elec. Co., 166 A.3d 912, 926–27 (Del. 2017);
accord OptiNose AS v. Currax Pharms., LLC, 264 A.3d 629, 638 (Del. 2021).
70
In re Marriott Hotel Props. II L.P. U’holders Litig., 1996 WL 342040, at *5 (Del. Ch.
June 12, 1996) (Allen, C.) (internal quotation marks omitted).
71
Sonet v. Timber Co., L.P., 722 A.3d 319, 323 (Del. Ch. 1998) (Chandler, C.).
72
JER Hudson GP XXI LLC v. DLE Invs., L.P., 275 A.3d 755, 782 (Del. Ch. 2022) (internal
quotation marks omitted).
73
Cantor Fitzgerald, L.P. v. Cantor, 2001 WL 1456494, at *5 (Del. Ch. Nov. 5, 2001)
(Steele, J., sitting by designation) (emphasis added).

17
statute, limited partnerships promote “freedom of contract.” 74 To discharge

contractual freedom, Delaware courts strictly “regard[] and enforce[]” limited

partnership agreements. 75 “Our strict approach to contract interpretation and

enforcement puts [parties] on notice regarding the primacy of [limited] partnership

agreements . . . .” 76 A court “will not [be] tempted by the piteous pleas of limited

partners who are seeking to escape the consequences of their own decisions to [join]

in a [limited] partnership[.]”77 Even less when the limited partners are sophisticated

entities that bilaterally negotiated the very agreement they now seek to avoid. 78

Against this background, I turn to the LPA.

1. Exit Offered No Evidence That The General Partner Took Any Of
The Challenged Deductions In Subjective Bad Faith.

Exit starts with the Challenged Deductions. But this approach ignores who

took them: the General Partner. Under the LPA, the General Partner cannot be liable

for breach of contract unless it acts in subjective bad faith. Exit failed to prove that.

74
6 Del. C. § 17-1101(c).
75
JER Hudson, 275 A.3d at 782.
76
Boardwalk Pipeline P’rs, LP v. Bandera Master Fund LP, 288 A.3d 1083, 1108 (Del.
2022) (internal quotation marks omitted).
77
Miller v. Am. Real Est. P’rs, L.P., 2001 WL 1045643, at *8 (Del. Ch. Sept. 6, 2001)
(Strine, V.C.).
78
See, e.g., New Enter. Assocs. 14, L.P. v. Rich, --- A.3d ----, 2023 WL 3195927, at *33
(Del. Ch. May 2, 2023) (“‘Sophisticated parties’ can and should ‘make their own
judgments about the risk they should bear,’ and Delaware courts are ‘especially chary about
relieving sophisticated entities of the burden of freely negotiated contracts.’” (quoting
ABRY P’rs V, L.P. v. F&W Acq. LLC, 891 A.2d 1032, 1061–62 (Del. Ch. 2006))).

18
 A general partner owes fiduciary duties to the partnership and its limited

partners 79 and is liable for breaching the partnership agreement. 80 But these default

rules are not immutable. The Delaware Revised Uniform Limited Partnership Act

(the “DRULPA”) “allows a partnership to eliminate ‘any and all liabilities for breach

of contract and breach of duties (including fiduciary duties) of a partner or other

person to a limited partnership or to another partner or to another person that is a

party to or is otherwise bound by a partnership agreement[.]’”81

The DRULPA also permits the partnership to “replace [fiduciary duties] with

contractual duties.” 82 In that setting, “investors [cannot] hold the general partner to

fiduciary standards of conduct, but instead must rely on the express language of the

partnership agreement to sort out the rights and obligations among the general

partner, the partnership, and the limited partner investors.” 83 The appropriate

contractual standard varies with the partnership agreement’s “precise language.”84

79
See, e.g., JER Hudson, 275 A.3d at 783–84.
80
See, e.g., Gotham P’rs, L.P. v. Hallwood Realty P’rs, L.P., 817 A.2d 160, 172 (Del.
2002).
81
Boardwalk, 288 A.3d at 1108 (quoting 6 Del. C. § 17-1101(f)).
82
Brinckerhoff v. Enbridge Energy Co., 159 A.3d 242, 252 (Del. 2017) (citing 6 Del. C. §
17-1101(d)).
83
Dieckman v. Regency GP LP, 155 A.3d 358, 366 (Del. 2017).
84
Allen v. Encore Energy P’rs, L.P., 72 A.3d 93, 100 (Del. 2013). See DV Realty Advisors
LLC v. Policemen’s Annuity & Benefit Fund, 75 A.3d 101, 110 (Del. 2013) (The court
discerns a contractual standard of conduct by focusing on the agreement’s “overall

19
One word can make all the difference.85

Word choice often matters most when drafters choose a good faith standard.

When a partnership agreement replaces fiduciary duties with a contractual duty to

act with a “good faith belief” that the challenged action is in the partnership’s best

interests, the standard governing breach is “subjective bad faith.” 86 Subjective bad

faith is “conduct motivated by an actual intent to do harm.” 87 As a result, a claimant

cannot prove a breach under a subjective bad faith standard unless it introduces

evidence sufficient to support a finding that the actor “consciously disregarded” its

duties or did not subjectively believe its action was in the partnership’s best

interests.88 “Quibbles” with a managerial decision “are not sufficient” to satisfy this

scheme” and the “larger provision—or value—[the duty] sought to protect.” (internal
quotation marks omitted)).
85
Compare Norton v. K-Sea Transp. P’rs L.P., 67 A.3d 354, 361–62 & n.34 (Del. 2013)
(inclusion of the word “reasonably” to qualify the general partner’s “beliefs” regarding the
partnership’s “best interest” heightened an otherwise “purely subjective” standard of good
faith to an objective standard of good faith), with Allen, 72 A.3d at 104–06 (absence of the
word “reasonably” had the opposite effect), and DV Realty, 75 A.3d at 109–10 (same).
86
See, e.g., DV Realty, 75 A.3d at 109–10; accord ev3, Inc. v. Lesh, 114 A.3d 527, 539–
40 (Del. 2014); Fox v. CDX Hldgs., 2015 WL 4571398, at *25 (Del. Ch. July 28, 2015)
(“When a contract governed by Delaware law calls upon a party to act or make a
determination in good faith, without any qualifier, it means that the party must act in
subjective good faith.”), aff’d, 141 A.3d 1037 (Del. 2016).
87
In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 64 (Del. 2006).
88
Allen, 72 A.3d at 106. The scope of the subjective bad faith standard differs from the
scope of an objective standard, which applies when the agreement requires the actor to act
with a “reasonable belief” that its actions are in the Partnership’s best interests. See id. at
101–02, 104, 106–07; Norton, 67 A.3d at 361–62 & n.34.

20
standard. 89 Instead, “an extraordinary set of facts” generally is required.90

The LPA adopted a subjective bad faith standard. The LPA eliminates the

General Partner’s default fiduciary duties to the Special Limited Partner.91 The LPA

then replaces those duties with a contractual duty to act “in good faith on behalf of

the Partnership” when “performing” a function “reasonably believed[92] to be within

the scope of authority conferred” on the General Partner.93 The Delaware Supreme

89
Morris v. Spectra Energy P’rs (DE) GP, LP, 2017 WL 2774559, at *14 (Del. Ch. June
27, 2017). See, e.g., Allen, 72 A.3d at 104–06 (allegations that a conflicts committee may
have negotiated poorly did not suggest subjective bad faith); Brinckerhoff v. Enbridge
Energy Co., 2011 WL 4599654, at *10 (Del. Ch. Sept. 30, 2011) (dismissing claim that
conflicts committee acted in subjective bad faith where committee relied on independent
advisors), aff’d, 67 A.3d 369 (Del. 2013); In re Atlas Energy Res., LLC U’holder Litig.,
2010 WL 4273122, at *14 (Del. Ch. Oct. 28, 2010) (dismissing claim based on allegation
that management “failed to even look at all of its options or to negotiate the best deal
available” because such failures did “not suggest . . . subjective bad faith”); Foley v.
GlidePath Power Sols., LLC, C.A. No. 2021-0891, at 19–20 (Del. Ch. May 30, 2023)
(TRANSCRIPT) (dismissing claim for failure to well-plead subjective bad faith where
plaintiff alleged that management’s determination of a company’s fair market value was
“mathematically wrong” based on plaintiff’s competing arithmetic).
90
Allen, 72 A.3d at 106.
91
LPA § 10.
92
Id. § 18(a). In contrast to “reasonable best interests” language in cases imposing an
objective standard of conduct, the reasonableness language in the LPA is attached to the
General Partner’s beliefs about the scope of its authority, rather than its beliefs about what
is in the interests for the Partnership. Cf. Norton, 67 A.3d at 361–62 & n.34.
93
Id. § 18(a). See Allen v. El Paso Pipeline GP Co., 113 A.3d 167, 179 (Del. Ch. 2014)
(“The contractual standard of ‘best interests of the Partnership’ departs from the fiduciary
standard of conduct that applies in the corporate arena and which would apply by default
absent the contractual modification or elimination of fiduciary duties in an alternative
entity agreement.”), aff’d, 2015 WL 803053 (Del. Feb. 26, 2015) (TABLE).

21
Court has interpreted this precise language to embody the elements constituting the

subjective bad faith standard. 94

Here, Exit has offered no evidence—let alone extraordinary evidence—

suggesting the General Partner took the Challenged Deductions in subjective bad

faith. To the contrary, Exit’s “bad faith” evidence attempts to target Schurgin

personally, not the General Partner’s process for taking the Challenged

Deductions. 95 In contrast, Defendants have offered considerable evidence

supporting a finding that the General Partner took the Challenged Deductions based

on standard accounting principles, the Partnership’s books and records and

outstanding obligations, and its prior experience in distributing proceeds to Festival

investors. Nothing in the record suggests the General Partner took the Challenged

Deductions believing they were not in the Partnership’s best interests. So it does

not matter that they had the effect of precluding Exit’s distribution.96

94
See Gatz Props., LLC v. Auriga Cap. Corp., 59 A.3d 1206, 1216–17 (Del. 2012)
(construing this language to require proof of a “conscious disregard” of the relevant duty).
Although the Gatz decision involved a limited liability company, it interpreted the exact
same exculpatory provision adopted under the LPA. Moreover, LLC parties, like limited
partnership parties, may eliminate fiduciary duties and replace them with contractual
duties. See 6 Del. C. § 18-1101(e).
95
See Dkt. 134 at 58–59. Exit also alleged Defendants manufactured the Negative Accruals
Deduction in response to litigation. As support, Exit cited to an isolated page of the trial
transcript. Id. at 59. The page contains testimony that the General Partner updated its
books after realizing it missed the Negative Accruals Deduction. Tr. at 444:4–7. In any
event, as discussed below, the Negative Accruals Deduction is not essential to my analysis.
96
See, e.g., In re Kinder Morgan Corp. Reorganization Litig., 2015 WL 4975270, at *8
(Del. Ch. Aug. 20, 2015) (dismissing claims under comparable provision because, among

22
 Given Exit’s failure of proof—and the LPA’s broadly enabling provisions

animating the General Partner’s discretion to take deductions and exclusive authority

to manage the Partnership 97—I likely could stop my analysis here. 98 For

completeness, however, I will examine the individual deductions.

2. The Defeasance Deduction Was Proper Under Any Analysis.

The General Partner cannot be liable for breaching the LPA unless it acts in

subjective bad faith. But even if a lower standard applied, Exit would fare no better.

other things, “the Committee did not have to believe that the MLP Merger was in the best
interests of the limited partners. [It] rather had to believe in good faith that the MLP
Merger was in the best interests of the Partnership.” (emphases added)), aff’d sub nom.
Haynes Fam. Tr. v. Kinder Morgan G.P., 135 A.3d 76 (Del. 2016) (TABLE); accord El
Paso Pipeline, 113 A.3d at 181; see also In re CVR Ref., LP U’holder Litig., 2020 WL
5066680, at *10 (Del. Ch. Jan. 31, 2020) (“When considering whether [action] is in the
‘best interests of the partnership,’ the Court generally takes a holistic approach, considering
the effects on the partnership as an entity.” (quoting Norton, 67 A.3d at 367)).
97
See, e.g., LPA § 7(b) (enabling the General Partner to take all acts necessary and
advisable “in its sole judgment” to discharge the Partnership’s purposes); LPA § 14
(enabling the General Partner to allocate “deductions” in its “sole discretion”); LPA at A-
5 (enabling the General Partner to “determine” “all” the Partnership’s “expenses” or
“indebtedness” in calculating “Resale Proceeds” distributable to the Special Limited
Partner); LPA at A-5 (enabling the General Partner to “prorate” the Base Resale
Distribution Amount and Resale Price Threshold in its “good faith discretion”); see also
Brinckerhoff, 159 A.3d at 259 (undefined term good faith must be interpreted consistently
throughout the LPA).
98
See, e.g., Gelfman v. Weeden Invs., L.P., 792 A.2d 977, 984–87 (Del. Ch. 2001) (Strine,
V.C.) (examining “sole discretion” provisions in a limited partnership agreement against
an analogous exculpatory provision and concluding that conduct falling short of a breach
of the general partner’s contractual duties would be exculpated entirely); Mehra v. Teller,
2021 WL 300352, at *24 (Del. Ch. Jan. 29, 2021) (explaining that the purely subjective
standard requires deference to the challenged decision if the decision-maker determined in
good faith that the decision was in the partnership’s best interests); see also Kinder
Morgan, 2015 WL 4975270, at *8 (dismissing claims because, among other things, the
plaintiff failed to identify a violation of the contractual duty).

23
Under its preferred framework, Exit sought to prove that the Challenged Deductions

fit nowhere within Subsections (d), (f), or (h).99 I resolve that theory in two steps.

First, I determine the applicable Resale Price Threshold. Second, I measure the Net

Resale Price against that threshold. At this step, I also decide whether any or all the

Challenged Deductions are proper. Based on these determinations, Exit is not

entitled to a distribution of a Special Limited Partner’s Portion.

a. The 2014 Resale Price Threshold Applies.

The parties agree that the Ponte Gadea Sale was a Resale. 100 The distribution

of the Special Limited Partner’s Portion depends on a Resale Price Threshold. The

applicable Resale Price Threshold, in turn, depends on a Resale Year. The Resale

Year is “the calendar year in which [the] Resale occurs.”101 Here, the Ponte Gadea

Sale closed on January 7, 2014. The Resale Price Threshold for 2014 is $100

million. So the applicable Resale Price Threshold is $100 million. It is that simple.

To complicate things, Exit invokes the doctrine of “constructive receipt.”102

In Exit’s view, the 2013 Resale Price Threshold of $90 million applies because Ponte

Gadea deposited on the Property in 2013. Exit thus treats a partial payment on a

property as a full-blown acquisition of the property. That equation does not add up.

99
Focused on this express breach analysis, Exit does not argue an implied covenant theory.
100
PTO ¶ 18.
101
LPA at A-5.
102
Dkt. 134 at 51–54.

24
 For one, constructive receipt is a “technical [income] tax” doctrine. 103 Exit

cites no authority, and could not find any, 104 applying it outside the tax context.

More fundamentally, the Partnership’s duty to pay income tax on Ponte Gadea’s

deposit has nothing to do with the Partnership’s duty to close on the Ponte Gadea

Sale. The PGSA addresses that duty, not the Internal Revenue Code.

For another, Exit overlooks the Partnership’s extension right. The PGSA

envisioned a closing on December 10, 2013. But it also allowed the Partnership to

extend closing by thirty days.105 The Partnership did so. End of story.106

103
In re TransPerfect Glob., Inc., 2018 WL 904160, at *22 (Del. Ch. Feb. 15, 2018). See
also Hampshire Gp., Ltd. v. Kuttner, 2010 WL 2739995, at *26–29 (Del. Ch. July 12,
2010); see generally 26 C.F.R. § 1451-2; Leavens v. Comm’r of Internal Revenue, 467 F.2d
809, 813–14 (3d Cir. 1972).
104
Oral Arg. Tr. at 85:16–23.
105
PGSA § 18.
106
Exit concedes that the Partnership had no duty to close in December. See Oral Arg. Tr.
at 83:1–3. Despite this, Exit also has suggested that the Partnership extended closing to
2014 for the bad faith purpose of inflating the Resale Price Threshold. Dkt. 134 at 54–56.
But the evidence did not back this up. Credible testimony instead supports a finding that
the Partnership deferred closing to complete a 1031 Exchange and thus prevent the
Partnership from recognizing unwanted gains in the Ponte Gadea Sale. Properly
understood, then, Exit’s theory amounts to little more than timing-based innuendo. The
preponderance of the evidence standard, however, requires a claimant to do more than waft
smoke into the courtroom. See, e.g., Martin v. Med-Dev Corp., 2015 WL 6472597, at *10
(Del. Ch. Oct. 27, 2015) (“Proof by a preponderance of the evidence . . . means that certain
evidence, when compared to the evidence opposed to it, has the more convincing force and
makes you believe that something is more likely true than not. By implication, the
preponderance of the evidence standard also means that if the evidence is in equipoise, [the
party carrying the burden] lose[s].” (internal quotation marks and citations omitted)).
Based on the evidence presented at trial, Exit failed to prove that a 1031 Exchange, or its
timing, was a ruse to undercut the Special Limited Partner’s Portion.

25
 The 2014 Resale Price Threshold is $100 million. And the 2014 Base Resale

Distribution Amount is $3 million.107 So Exit is not entitled to the Special Limited

Partner’s Portion unless the Net Resale Price of the Ponte Gadea Sale is greater than

$97 million.108 Determining the Net Resale Price first requires an understanding of

how the Challenged Deductions interact with the $97 million floor.109

Net Resale Price is the purchase price minus eight types of costs, e.g., those

specified in Subsections (d), (f), and (h).110 The purchase price was $108 million.

The General Partner deducted $18,077,752 from that total, for a Net Resale Price of

$89,922,248. The Challenged Deductions comprise $12,073,173 of the deductions.

Assuming all the Challenged Deductions were improper, the Net Resale Price

would be $101,995,421. On that benchmark, the only Challenged Deduction that, if

proper, would put the Net Resale Price below $97 million is the Defeasance

Deduction.111 If proper, that deduction would result in a Net Resale Price of

107
LPA at Schedule D & note.
108
See id. (explaining that Base Resale Distribution Amount must be reduced dollar for
dollar by the amount at which the applicable Resale Price Threshold exceeds the Net Resale
Price of a Resale); accord Oral Arg. Tr. at 135:2–8 (Pl.’s Couns.).
Although I discuss the mathematics for clarity, Exit did not seek to quantify any of its
109

damages, at trial or afterward. See infra note 163.
110
LPA at A-3 to A-4.
111
If the Preferred Return Deduction were the only proper deduction, it would result in a
Net Resale Price of $100,728,889 and thus, a distribution of approximately $3,072,889.
See id. at A-6, Schedule D. If Negative Accruals Deduction were the only proper
deduction, it would result in a Net Resale Price of $97,438,935 and thus, a distribution of
$438,935. Id.

26
$95,745,266, or a Base Resale Distribution Amount of $0. 112 If the Defeasance

Deduction is proper, Exit does not receive the Special Limited Partner’s Portion.

Given these mathematical realities, I will assume for analytical purposes that

the Negative Accruals and Preferred Return Deductions are improper and focus

solely on the Defeasance Deduction. The parties agree that the LPA is

unambiguous.113 And under the LPA’s plain language, the General Partner properly

took the Defeasance Deduction.

b. Defeasance Costs Are Deductible Under Subsections (d), (f),
And (h).

“A limited partnership’s purpose [provision] circumscribes” a general

partner’s authority, so I begin there.114 The Partnership’s purpose is to take any

action that is “related to or incidental to” the acquisition, ownership, and sale of the

Property.115 The phrase “related to” is “paradigmatically broad.” 116 It captures

anything that “touches on” the subject.117 The phrase “incidental to” is similarly

vast. It captures anything “having a minor role” in the subject.118 From the start,

112
See id. at Schedule D & note.
113
See, e.g., Dkt. 134 at 33–35, 40–41; Dkt. 141 at 31–33.
114
JER Hudson, 275 A.3d at 784.
115
LPA § 7(a).
116
Fla. Chem. Co. v. Flotek Indus., 262 A.3d 1066, 1083 (Del. Ch. 2021) (internal
quotation marks omitted).
117
See id.; Parfi Hldg. AB v. Mirror Image Internet, Inc., 817 A.2d 149, 155 (Del. 2002).
118
Incidental, Black’s Law Dictionary (11th ed. 2019).

27
then, the LPA enables the Partnership to do just about anything “necessary,

convenient, or advisable” for acquiring, owning, and selling the Property.119

The General Partner’s authority is equally broad. The LPA permits the

General Partner to do anything “incidental to,” “in connection with,” or “for the

furtherance of” the Partnership’s purposes. 120 The phrase “in connection with” is a

phrase that “lawyers use when they wish to capture the broadest possible

universe.”121 The phrase “for the furtherance of” achieves the same objective. It

covers anything that “facilitat[es]” the subject or makes it “more likely to

occur[.]”122 The General Partner therefore may do just about anything, “in its sole

judgment,” to advance the Partnership’s purpose of acquiring, owning, or selling the

Property.123

Consistent with that wide latitude, the General Partner may bind the

Partnership to contracts that touch on or facilitate the acquisition, ownership, or sale

of the Property.124 The LPA identifies the Loan Agreement as one of those

contracts. 125 That is “significant,” because when a “transaction is itself within the

119
LPA § 7(a).
120
Id. §§ 7(b), 8, 9(b).
121
DeLucca, 2006 WL 224058, at *10 (Strine, V.C.).
122
Furtherance, Black’s Law Dictionary (11th ed. 2019).
123
LPA § 7(b).
124
Id.
125
Id. §§ 7(b), 9(a); id. at A-1 to A-2.

28
[stated] purpose of the [P]artnership . . . the [G]eneral [P]artner may lawfully

authorize and effectuate the transaction.”126 Exit does not argue otherwise. After

all, Emanuel testified that Exit itself would have financed the call price using the

CMBS Loan if it had the working capital to exercise the option. 127

The LPA also contemplated a contract like the PGSA. The PGSA plainly is

an “agreement or arrangement” that relates to, is incidental to, or furthers the sale of

the Property. 128 The General Partner, then, “lawfully authorize[d]” it.129 Exit does

not dispute that either.

Both the Loan Agreement and the PGSA address defeasance. The Loan

Agreement required the Partnership to defease the CMBS Loan at its own

“expense[]” if the Partnership sold the Property before November 2016.130

Similarly, the PGSA required the Partnership “to remove, by payment, bonding or

otherwise any . . . mortgages that secure indebtedness against” the Property before

closing the Ponte Gadea Sale.131 By expressly incorporating the Loan Agreement,

JER Hudson, 275 A.3d at 786–87 (alteration omitted) (quoting Kan. RSA 15 L.P. v.
126

SBMS RSA, Inc., 1995 WL 106514, at *2 (Del. Ch. Mar. 8, 1995) (Allen, C.)).
127
Tr. at 172–73.
128
LPA §§ 7(a)–(b), 9(a).
129
JER Hudson, 275 A.3d at 787 (quoting Kan. RSA, 1995 WL 106514, at *2).
130
Loan Agreement § 2.5.1.
131
PGSA § 6(c).

29
the LPA incorporated defeasance.132 By allowing the General Partner to secure the

CMBS Loan and the PGSA’s mortgage terms, the LPA plainly contemplated that

the costs of defeasance would be related to, incidental to, imposed in connection

with, or would further the Partnership’s purpose of selling the Property.

The Special Limited Partner’s Portion did too. The LPA defines the Special

Limited Partner’s Portion as a priority distribution of Resale Proceeds. 133 Resale

Proceeds are “any proceeds received by the Partnership upon a Resale” minus

deductions for the costs of paying for “all Partnership expenses [or] indebtedness”

incurred in a Resale, “all as determined by the General Partner.” 134 Defeasance

plainly is a Partnership “expense” and cost of “indebtedness” incurred in connection

with the Ponte Gadea Sale. The LPA thus permitted the General Partner to factor

132
See Town of Cheswold v. Cent. Del. Bus. Park, 188 A.3d 810, 818–19 (Del. 2018)
(“Other documents or agreements can be incorporated by reference where a contract . . .
refers to another instrument and makes the conditions of such other instrument a part of it.
When that occurs, the two will be interpreted together as the agreement of the parties.”
(cleaned up)). The Loan Agreement is not merely referenced; it is defined in the LPA, was
executed contemporaneously with it, and regulates some of the LPA’s terms. For instance,
the Partnership cannot amend the LPA’s definition schedule without Column Financial’s
approval. LPA § 9(c)(ii). Plus, Defendants have repeatedly relied on all three agreements,
and Exit has never argued that they may not be considered together. See Flotek, 262 A.3d
at 1081 (explaining that contemporaneous contracts are generally interpreted together).
133
LPA § 15(b).
134
Id. at A-5 (emphasis added).

30
defeasance into its deductions. After all, the General Partner always has “sole

discretion” to allocate “income” and “deductions” within the Partnership.135

To calculate Resale Proceeds, the General Partner works through the

definition of Net Resale Price. There, the General Partner may deduct Partnership

expenses or indebtedness under “one or all” of the cost categories, including

Subsections (d), (f), and (h). In this case, the Defeasance Deduction fits all three.

To begin, the Defeasance Deduction was proper under Subsection (d).

Subsection (d) permits deductions for “costs or expenses associated with the

ownership . . . of the Property reasonably borne by . . . the Partnership during the

Partnership’s ownership[.]”136 “Ownership” means the “bundle of rights” that

enable the owner to “use, manage, and enjoy” the asset, and to “convey” it to

someone else. 137 Consistent with the expansive phrases defining the Partnership’s

purpose, the phrase “associated with” in this context means “related” or “connected”

to ownership.138

Here, the LPA indisputably permitted the Partnership to acquire the Property

with the CMBS Loan. Once secured, the CMBS Loan became related or connected

to the Partnership’s right to use, manage, and enjoy the Property. By the same token,

135
Id. § 14.
136
Id. at A-3.
137
Ownership, Black’s Law Dictionary (11th ed. 2019).
138
Associated, Merriam-Webster (online ed.).

31
defeasing the CMBS Loan became related or connected to the Partnership’s right to

convey the Property to Ponte Gadea. Accordingly, defeasance costs are

unambiguously costs of ownership.

The Defeasance Deduction was proper under Subsection (h) as well.

Subsection (h) permits deductions for “[a]ll . . . out-of-pocket closing costs and costs

of sale incurred in connection with” a Resale.139 In the real estate context, a

“closing” is “the final transaction between the buyer and seller, whereby the

conveyancing documents are concluded and the money and property transferred.”140

Unsurprisingly, then, “closing costs” have been defined in the real estate context to

mean “[t]he expenses that must be paid” to complete the sale.141

Here, the Partnership was required under the Loan Agreement to defease—

and did defease—the CMBS Loan at its own expense because the Partnership sold

the Property before November 2016. Those costs touch on the Ponte Gadea Sale.

Ponte Gadea would not have accepted title to the Property if it had remained

encumbered by the CMBS Loan post-close. 142 And Column Financial would not

have released the CMBS Loan if it were not defeased pre-close. Accordingly,

defeasance costs are unambiguously closing costs or costs of sale incurred in

139
LPA at A-4 (emphasis added).
140
Closing, Black’s Law Dictionary (11th ed. 2019).
141
Closing Costs, in id.
142
PGSA § 6(c).

32
connection with the Ponte Gadea Sale.

Finally, the Defeasance Deduction is proper under Subsection (f). Subsection

(f) permits deductions for “[a]ny excess costs associated with any loan on the

Property . . . during the Partnership’s ownership.”143 These Excess Loan Costs

include costs that are “similar” to, among other things, “loan interest costs[.]”144 As

discussed, defeasance costs are “similar” to loan interest costs, because defeasance

economically replicates the cost of interest due on a loan. 145 Defeasance costs

“exceeded” the interest costs on the CMBS Loan because the Partnership defeased

the CMBS Loan at a premium to its previous interest payments. 146 And because

Rental Payments never exceeded Subsection (f)’s $875,000 threshold, the General

Partner properly determined that the tenant’s rent was insufficient to cover

defeasance costs. 147 Accordingly, defeasance costs plainly are Excess Loan Costs.

One or all, the upshot is the same. The LPA plainly permitted the Defeasance

Deduction. To contend otherwise, Exit advances four arguments. None succeeds.

143
LPA at A-3.
144
Id.
145
See, e.g., Similar, Merriam-Webster (online ed.) (“having characteristics in common;
alike in substance or essentials”).
146
See, e.g., JX 86 (Defeasance Report); Excess, Black’s Law Dictionary (11th ed. 2019)
(“The amount or degree by which something is greater than another”); Excess, Merriam-
Webster (online ed.) (“more than the usual [or] specified amount”).
147
LPA at A-3 to A-4.

33
 Exit first argues that the Defeasance Deduction is improper as a matter of plain

language because the LPA does not specifically use the word “defeasance.”148 Plain

meaning rules require courts to enforce a contract’s words as written. But they do

not require contract drafters to use every word in the English language. The LPA is

broad enough to capture defeasance. So it did not need to say it too. 149

Exit next contends that, even if the Defeasance Deduction is proper, its size is

not. According to Exit, defeasance costs must be prorated to reflect the specific date

in the Resale Year—here, January 7, 2014—on which the Ponte Gadea Sale

occurred. But Exit misreads the LPA. In defining Resale, the LPA requires the

General Partner to prorate costs by the “proportion that the portion of the Property

sold under the Resale bears to the Property.” 150 The LPA thus ties proration to how

much of the Property is sold, not when it is sold. Here, the Partnership sold the entire

148
See, e.g., Dkt. 134 at 33–35.
149
Exit cites no authority for the proposition that a contract does not capture a term unless
that term is named explicitly. Nor could it. It is not “cognitively possible” for contract
drafters to cover every base. Credit Lyonnais Bank Nederland v. Pathe Commc’ns Corp.,
1991 WL 277613, at *23 (Del. Ch. Dec. 30, 1991) (Allen, C.). That is one reason why, as
Defendants point out, drafters use constructions like “including, but not limited to,” as the
LPA drafters did here. See LPA at A-6 § B. Exit responds with expert testimony
suggesting that the parties would have used the word “defeasance” if they intended to factor
defeasance costs into the deductions. That extrinsic evidence is not admissible here,
because the LPA is unambiguous. Regardless, as explained, the LPA incorporated
defeasance by incorporating the Loan Agreement. So the parties did address defeasance.
150
Id. at A-5 (emphasis added).

34
Property. So the General Partner properly determined, “in its good faith

discretion,”151 that all the defeasance costs were deductible.152

Unable to pierce Subsections (d) or (h), Exit tries to joust at Subsection (f).

Exit says the Defeasance Deduction fits only under Subsection (f) because it is more

“specific” than the other two. 153 It is true that specific language controls general

language. But that canon applies only if the general “conflicts” with the specific.154

And no conflict exists here. Each Subsection specifies a different cost category and

the Defeasance Deduction fits into at least three. 155 Plus, the LPA permits the

151
Id. As discussed, the General Partner based the Defeasance Deduction on standard
accounting principles, the Partnership’s books and records, and Festival’s ordinary
distribution procedures. The process was mechanical and the General Partner’s accountant
credibly testified that only these objective facts were considered in the analysis. See Allen,
72 A.3d at 106–07 (credible reliance on objective facts constitutes competent evidence that
the decision-maker acted consistently with a contractual duty of subjective good faith).
152
Exit also suggests that, if defeasance is a “closing cost,” it is an impermissibly large
closing cost subject to proration. But as Defendants persuasively argue, Subsection (h)
contemplated large expenses, because it also expressly covers costs like attorney’s fees.
Id. at A-4. Yet, on Exit’s theory, a January real estate attorney’s fee must be prorated,
whereas (presumably) a December real estate attorney’s fee does not.
153
Dkt. 134 at 38.
154
DCV Hldgs. v. ConAgra, Inc., 889 A.2d 954, 961 (Del. 2005).
155
See, e.g., ITG Brands, LLC v. Reynolds Am., Inc., 2022 WL 4678868, at *17 (Del. Ch.
Sept. 30, 2022) (no conflict where the two provisions “address[ed] different situations[,]”
and explaining that “the fact that one subsection of § 2.01(c) does not make something an
Assumed Liability does not mean that it cannot be an Assumed Liability under another
subsection. Even agreements tailored to particular transactions include overlapping or
redundant or meaningless provisions.” (emphases in original) (cleaned up)); Pilot Air
Freight v. Manna Freight Sys., 2020 WL 5588671, at *13 (Del. Ch. Sept. 18, 2020) (no
conflict where one provision addressed a specific “subset” of indemnification obligations
addressed in a “more general” provision governing indemnification obligations); Ivize of

35
General Partner to take deductions under “one or all” of the Subsections. 156 So,

“specific” or not, the General Partner was not limited to Subsection (f) anyway.

Having found no support in the LPA, Exit last seeks to redraft it. Exit glosses

Subsection (f) using Emanuel’s “invented” terms and his personal view that, in his

mind, the LPA was not meant to cover defeasance costs. But Emanuel’s subjective

intent is irrelevant. Delaware follows the objective theory of contracts, a framework

familiar to Emanuel. 157 “Under the objective theory, ‘intent’ does not invite a tour

through the plaintiff’s cranium, with the plaintiff as the guide.”158 Instead, the Court

determines intent by looking to “the four corners of the agreement[.]”159 And where,

as here, the agreement is unambiguous, “extrinsic evidence may not be used to

interpret the intent of the parties, to vary the terms of the contract or to create an

ambiguity.”160 So I will not consider Emanuel’s “philosophies” behind the LPA.161

Milwaukee, LLC v. Compex Litig. Support, LLC, 2009 WL 1111179, at *9–10 (Del. Ch.
Apr. 29, 2007) (no conflict where “neither section” was “structured to govern the other”).
156
LPA at A-3.
157
Defendants introduced at trial a chapter from Emanuel CrunchTime. See Ex. C. to Dkt.
141 at 6 (“The doctrine that only the parties’ acts, and not their subjective thoughts, are
relevant in determining [intent], stems from the objective theory of contracts . . . . Because
neither contracting parties nor courts are mind-readers . . . a party’s intentions are to be
gauged objectively, rather than subjectively.” (emphases in original)).
158
Progressive Int’l Corp. v. E.I. du Pont de Nemours & Co., 2002 WL 1558382, at *7
(Del. Ch. July 9, 2002) (Strine, V.C.) (cleaned up).
159
Salamone, 106 A.3d at 368 (internal quotation marks omitted).
160
Eagle Indus., 702 A.2d at 1232.
161
Dkt. 134 at 13. As observed earlier, Emanuel’s conception of the LPA is based on terms
he “invented” and that he did not explain to Exit’s deal counsel. As a result, Exit’s deal

36
 In the end, Exit turned a quick $8 million profit on an option it lacked the

capital to exercise. It also obtained a contingent—not guaranteed—right to a future

distribution. As the definition of Net Resale Price makes clear, any distribution

would have resulted from the Partnership’s costs in raising the Property’s value.

Based on the LPA’s plain terms and management structure, it would be

commercially unreasonable to conclude that the parties agreed at the time of

contracting that Exit would receive a distribution before deductions for the

Partnership’s costs when those costs would make Exit’s distribution possible in the

first place. Contract “interpretations that are commercially unreasonable . . . must

be rejected.”162 For that reason, and all the others explained, judgment is entered in

favor of Defendants as to Exit’s breach of contract claims.163

counsel could not communicate them to Festival’s deal counsel. Accordingly, even if the
LPA were ambiguous, Emanuel’s extrinsic evidence would not be a viable source for
determining the parties’ intent at the time of contracting. See, e.g., SI Mgmt. L.P. v.
Wininger, 707 A.2d 37, 43 (Del. 1998) (“A court considering extrinsic evidence assumes
that there is some connection between the expectations of contracting parties revealed by
that evidence and the way contract terms were articulated by those parties. Therefore,
unless extrinsic evidence can speak to the intent of all parties to a contract, it provides an
incomplete guide with which to interpret contractual language.” (emphasis in original));
Oral Arg. Tr. at 138:20–22 (Pl.’s Couns.) (conceding, with admirable candor, that relying
on Emanuel’s interpretation of the LPA would “not be consistent with Delaware law”).
162
Manti Hldgs. v. Authentix Acq. Co., 261 A.3d 1199, 1211 (Del. 2021).
163
Although I need not reach damages, I note that Exit has never sought to quantify them.
As discussed, the LPA has a formula for deriving the Special Limited Partner’s portion.
Exit did not mention that formula until post-trial argument. See Oral Arg. Tr. at 89:1–6,
134:20–135:9. In litigation for money damages, it is hard to understand why a plaintiff
would decline to quantify damages and instead leave this task to the court. See, e.g., Beard
Rsch., Inc. v. Kates, 8 A.3d 573, 613 (Del. Ch. 2010) (The Court “may not set damages . .

37
B. Exit Failed To Prove Its Claim Against Schurgin.

Finally, I consider Exit’s claim against Schurgin. This one is confusing.

Exit first concedes that the LPA eliminates the General Partner’s default

fiduciary duties.164 It then observes that a partnership cannot disclaim the implied

covenant.165 Without further elaboration, Exit next posits that Schurgin can be liable

for “willful misconduct.”166 Based on this logical chain, Exit ultimately concludes

that Schurgin “can be jointly and severally liable with the [G]eneral [P]artner for

aiding and abetting the [G]eneral [P]artner’s breach of fiduciary duties.”167

Given this hodgepodge of concepts, it is not clear which analytical framework

is appropriate here. But it is clear that Schurgin is not personally liable for anything.

. where a plaintiff fails to adequately prove” them.), aff’d sub nom. ASDI Rsch., Inc. v.
Beard Rsch., Inc., 11 A.3d 749 (Del. 2010); eCommerce Indus. v. MWA Intel., Inc., 2013
WL 5621678, at *19 (Del. Ch. Sept. 30, 2013) (damages are a necessary element of a
breach of contract claim and require proof by a preponderance of the evidence); VH5 Cap.,
LLC v. Rabe, 2023 WL 4305827, at *21–23 (Del. Ch. June 30, 2023) (awarding nominal
damages where the plaintiff failed to prove damages and collecting authority); Smart Sand,
Inc. v. US Well Servs. LLC, 2021 WL 2400780, at *13–14 (Del. Super. June 1, 2021)
(Wallace, J.) (finding a plaintiff failed to prove damages where plaintiff did not provide a
“comprehensible explanation” for its damages calculation and introduced “scant
testimony” on damages); see also Balooshi v. GVP Glob. Corp., 2022 WL 576819, at *13
(Del. Super. Feb. 25, 2022) (rejecting defenses based on recoupment and setoff because
both theories “require some proof of loss” but defendant failed to offer any “evidence of a
quantifiable injury”), aff’d, 285 A.3d 839 (Del. 2022) (TABLE).
164
Dkt. 134 at 56.
165
Id. at 56–57.
166
Id. at 57. Exit appears to premise its argument on inclusion of Schurgin within the
exculpatory provision’s definition of “Covered Persons.” See LPA § 18(a).
167
Dkt. 134 at 57.

38
 Most obviously, the General Partner does not owe fiduciary duties to Exit.

Schurgin cannot “knowingly participate[]” in a breach of a duty that does not

exist. 168 That should be the end of this.

To the extent Exit’s “bad faith” claim is an implied covenant claim, I note that

Exit’s amended complaint referenced the covenant once, in passing, and without

alleging how anyone breached it. 169 Even if fairly raised, though, the claim would

fail as an attempt to rewrite the LPA.

The implied covenant is a gap-filling device that addresses unanticipated

developments by inferring terms in an agreement’s express language to which the

parties would have agreed at the time of contracting had they considered them.

“Existing contract terms control, however, such that implied good faith cannot be

used to circumvent the parties’ bargain, or to create a free-floating duty unattached

to the underlying legal document.”170 As a result, limited partners that contractually

168
Malpiede v. Townson, 780 A.2d 1075, 1096 (Del. 2001) (internal quotation marks
omitted). Exit does not argue that Schurgin breached his default fiduciary duties as the
General Partner’s controller. That theory was potentially available under In re USACafes,
L.P. Litig., 600 A.2d 43 (Del. Ch. 1991). I say “potentially” because Exit has not addressed
whether the LPA’s fiduciary duty disclaimer is broad enough to capture Schurgin. See
Fannin v. UMTH Land Dev., L.P., 2020 WL 4384230, at *18 (Del. Ch. July 31, 2020)
(observing that the DRULPA enables partnerships to contract around USACafes).
169
Dkt. 12 ¶ 82. As noted earlier, Exit does not argue, or devote any of its briefing to
analyzing the contractual question of whether, the General Partner breached the implied
covenant. As a result, Defendants have argued that Exit’s passing reference to the covenant
is insufficient to provide notice of, let alone prove, an implied covenant claim.
170
Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 441 (Del. 2005) (cleaned up).

39
agree to eliminate fiduciary duties cannot “re-introduce fiduciary review through the

backdoor of the implied covenant[.]”171 As Vice Chancellor Laster has explained:

When an LP agreement eliminates fiduciary duties as part of a detailed
contractual governance scheme, Delaware courts should be all the more
hesitant to resort to the implied covenant . . . .

When parties exercise the authority provided by [the DRULPA] to
eliminate fiduciary duties, they take away the most powerful of a
court’s remedial and gap-filling powers . . . . After all, if the parties
wanted courts to be in the business of shifting losses after the fact, then
they would not have eliminated the most powerful tool for doing so.

Respecting the elimination of fiduciary duties requires that courts
not bend an alternative and less powerful tool into a fiduciary
substitute. The nature of the implied covenant of good faith and fair
dealing is “quite different from the congeries of duties that are assumed
by a fiduciary” . . . . To use the implied covenant to replicate fiduciary
review “would vitiate the limited reach of the concept of the implied
duty of good faith and fair dealing.”172

Exit cannot use the implied covenant to resurrect the fiduciary duties it interred.173

171
Lonergan v. EPE Hldgs., 5 A.3d 1008, 1019 (Del. Ch. 2010).
172
Id. at 1017–19 (first quoting Katz v. Oak Indus., 508 A.2d 873, 879 n.7 (Del. Ch. 1986)
(Allen, C.); and then quoting Nemec v. Shrader, 991 A.2d 1120, 1128 (Del. 2010)).
173
See, e.g., Nationwide Emerging Managers, LLC v. Northpointe Hldgs., 112 A.3d 878,
897 (Del. 2015) (“An interpreting court cannot use an implied covenant to re-write the
agreement between the parties, and should be most chary about implying a contractual
protection when contract could easily have been drafted to expressly provide for it.”
(internal quotation marks and citations omitted)); Buck v. Viking Hldg. Mgmt. Co., 2021
WL 673459, at *5 (Del. Super. Feb. 22, 2021) (LeGrow, J.) (“A contracting party may not
use the implied covenant to vary a contract’s express terms . . . . As a result, where the
express terms of an agreement govern a particular matter, an implied covenant claim
regarding that matter is not viable . . . .” (citations omitted)); see also Brinckerhoff, 159
A.3d at 252–53 (“If fiduciary duties have been validly disclaimed, the limited partners
cannot rely on [them] to regulate the general partner’s conduct. Instead, they must look
exclusively to the LPA’s complex provisions to understand their rights and remedies.”).

40
 Moreover, Exit impermissibly conflates the LPA’s express good faith

standard with the implied covenant. A limited partner who agrees to replace

fiduciary duties with an express contractual duty of good faith cannot invoke the

implied covenant’s good faith “concept” to rewrite that contractual duty.174 As

former Chief Justice Strine has explained:

[W]hen a trial court is addressing an express contractual provision
requiring the exercise of good faith, it must focus the breach inquiry on
whether the party bound by the provision had acted in subjective bad
faith based on the circumstances existing at the time of its alleged
breach, within the context defined by the terms of the parties’
contractual bargain. Accordingly, when a contract’s express terms
incorporate a good faith requirement, the trial court should focus on the
meaning of that express contractual duty . . . .

[A] trial court must avoid conflating the standard for breach of an
express contractual duty to exercise good faith with the implied
covenant of good faith and fair dealing, which acts as a check on the
behavior of contracting parties and must be used cautiously.175

Consistent with this distinction, “[a] party does not act in bad faith by relying on

174
See, e.g., DV Realty, 75 A.3d at 108–10; accord ev3, 114 A.3d at 539–40. Contrary to
Exit’s suggestion, see Oral Arg. Tr. at 145–47 (suggesting that Exit’s implied covenant
theory involves an element of “scienter”), the implied covenant “does not depend on [a]
mental state[,]” see ASB Allegiance Real Est. Fund v. Scion Breckenridge Managing
Member, LLC, 50 A.3d 434, 440–45 (Del. Ch. 2012), aff’d in part, rev’d in part on other
grounds, 68 A.3d 655 (Del. 2013); see also NAMA Hldgs. v. Related WMC LLC, 2014 WL
6436647, at *14 (Del. Ch. Nov. 17, 2014) (“[T]he implied covenant does not require that
a party act in subjective bad faith[.]”); Martin I. Lubaroff & Paul M. Altman, Delaware
Limited Partnerships § 14.03[B] at 14-62 to 14-64 (2d ed. 2022) (further distinguishing
contractual duties of good faith, which focus on the time of breach, from the implied
covenant, which focuses retrospectively on the time of contracting).
175
ev3, 114 A.3d at 539 (citation omitted).

41
contract provisions for which that party bargained where doing so simply limits

advantages to another party.”176 Exit fails to recognize these differences. 177

Boiled to its core, Exit’s theory reduces to a complaint about the Special

Limited Partner’s narrow role in the Partnership’s governance structure. But the

implied covenant is not “an equitable remedy for rebalancing economic interests

after events that could have been anticipated, but were not, that later adversely

affected one party to a contract.”178 Exit agreed that the General Partner could

manage the Partnership free from fiduciary obligations to the Special Limited

Partner. Exit cannot now use the covenant to reclaim the obligations it released. 179

176
Nemec, 991 A.2d at 1128. See Gerber v. Enter. Prods. Hldgs., 67 A.3d 400, 419 (Del.
2013) (The implied covenant’s concept of “‘good faith’ does not envision loyalty to the
contractual counterparty, but rather faithfulness to the scope, purpose, and terms of the
parties’ contract . . . . Express contractual provisions always supersede the implied
covenant . . . .” (emphasis omitted) (quoting ASB Allegiance, 50 A.3d at 440–41)),
overruled in part on other grounds by Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 815 n.13
(Del. 2013); El Paso Pipeline, 113 A.3d at 182–83 (“Despite the appearance in its name of
the terms ‘good faith’ and ‘fair dealing,’ the covenant does not establish a free-floating
requirement that a party act in some morally commendable sense.”); see also Boardwalk,
288 A.3d at 1099 (explaining that, in the absence of fiduciary duties, a general partner can
take action “to the disadvantage” of a limited partner).
177
Indeed, Exit appears to believe that the LPA’s exculpatory provision is simply
contractual confirmation that the parties maintained the implied covenant. Dkt. 142 at 30.
Oxbow Carbon & Min. Hldgs. v. Crestview-Oxbow Acq., LLC, 202 A.3d 482, 507 (Del.
178

2019) (internal quotation marks omitted).
179
See Nationwide, 112 A.3d at 881 (“Delaware law . . . prevents a party who has after-
the-fact regrets from using the implied covenant of good faith and fair dealing to obtain in
court what it could not get at the bargaining table.”); see also Murfey v. WHC Ventures,
LLC, 236 A.3d 337, 350 (Del. 2020) (“Implying terms that the parties did not expressly
include risks upsetting the economic balance of rights and obligations that the contracting
parties bargained for in their agreement.”); Paul M. Altman & Srinivas M. Raju, Delaware

42
 At bottom, Exit had to show in light of the LPA’s broadly enabling terms a

breach of the contractual duty of good faith. Exit’s generalized assertions of bad

faith do not shoulder that burden. And under any analysis, the General Partner

properly took the Defeasance Deduction. Schurgin, then, cannot be liable, as an

accomplice or otherwise, for a breach that the General Partner did not commit.

Judgment is therefore entered in Defendants’ favor as to Exit’s “bad faith” claim.

III. CONCLUSION

For the foregoing reasons, I find in favor of Defendants on all counts. The

parties shall submit a form of order implementing this decision as a final judgment.

Alternative Entities and the Implied Covenant of Good Faith and Fair Dealing under
Delaware Law, 60 Bus. Law. 1469, 1484 (2005) (“The inclusion of [] sole discretion
language in an LP [] agreement, in addition to eliminating any fiduciary duties that a person
would otherwise have when exercising discretion, should have a significant impact on
analyzing any claim that the general partner . . . violated the implied covenant . . . . [G]iven
that the purpose of the implied covenant is to enforce the reasonable expectations of the
parties to a contract, the inclusion of [] sole discretion language should have a significant
bearing on the reasonable expectations of the parties.” (defined terms omitted)).

43