Rights of First Refusal: Bankruptcy “Infotapes” Titan Wins Michigan Avenue Penthouse Dispute – IL 1st Dist.

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In today’s installment of High Class Problems, I feature Peter Francis Geraci, the Chicago bankruptcy lawyer whose pervasive television presence is doubtlessly familiar to weekday afternoon viewers.  Geraci and his wife recently won their real estate dispute with a company controlled by a foreign investor over rights to a 40th floor penthouse (“Penthouse”) in Chicago’s tony Michigan Avenue (“Magnificent Mile”) shopping district.

Reversing the trial court – who sided with the investor plaintiff- the First District appeals court in First 38, LLC v. NM Project Company, LLC, 2015 IL App (1st) 142680-U, expands on some recurring contract interpretation principles as applied to a high-dollar real estate dispute.

The plaintiff, a company associated with Mexican mining impresario and billionaire German Larrea, held a right of first refusal (“ROFR”) that required the Penthouse seller defendant to notify the plaintiff of any bona fide offer to buy the Penthouse that was accepted by the owner.  The owner was required to provide a copy of the signed offer (with certain identifying information blacked out) to the plaintiff who then had one (1) business day to match the offer.

When the owner sent the offer with the Geracis’ information redacted and failed to provide a copy of the earnest money check (a cool $860K, approx.), the plaintiff sued to block the sale of the Penthouse to the Geracis claiming the owner failed to adhere to the terms of the ROFR.  The Geracis eventually counter-sued for injunctive relief and specific performance and asked the court to require the owner to sell the Penthouse to them.

After a bench trial, the court ruled in plaintiff’s favor and the Geracis appealed.

Reversing, the First District discussed the operative contract law principles that framed the parties’ dispute.

A right of first refusal is a restraint on alienation and is strictly construed against the holder;

– An Illinois court’s primary goal in interpreting a contract is to give effect to the parties’ intent by imputing the plain and ordinary meaning to the contract terms;

– A contract will not be deemed ambiguous just because the parties disagree on its meaning; instead, ambiguity requires words that are reasonably susceptible to more than one meaning;

– When a contract contains an ambiguity, a court may consider evidence of the parties intent (“your honor, this is what we meant….”);

– An “offer” in the context of contract law is a “manifestation of willingness to enter into a bargain made in such a way that another person’s assent to that bargain is invited and will conclude it’;

– An offer must be definite as to its material terms such that the parties are reasonably certain as to what the offer entails;

– A court cannot alter, change or modify terms of a contract or add new ones that the parties didn’t agree to and there is a presumption against provisions that could have easily been included in a contract;

A bona fide offer is one where the purchaser can command the funds necessary to accept an offer.
(¶¶ 47-48, 51-52, 63)

Here, the court found the ROFR’s plain text unambiguous.  It provided that upon defendant notifying the plaintiff of an accepted and bona fide offer, the plaintiff’s ROFR obligations were triggered. (Plaintiff had one day to match the accepted offer.)  By its clear terms, the ROFR did not require the owner defendant to divulge the third-party buyer’s identity nor did it require proof of the third-party’s earnest money deposit.

According to the court, had the parties wished to require more offer specifics, they could have easily done so.  (¶ 54).  As a result, the First District reversed the trial court and held that the owner defendant complied with its ROFR notice requirements.  Since plaintiff failed to match the Geracis’ offer for the Penthouse within one business day of notice, it relinquished its rights to match the offer.

Take-aways:

For such expensive and unique subject matter, the main legal rules relied on by the court are simple.  The court applies basic contract formation and interpretation rules to decipher the ROFR and determine whether the parties adhered to their respective obligations under it.

From a drafting standpoint, the case cautions sophisticated commercial entities to take pains to spell out key contract terms as specifically as possible to avoid future disputes over what the contract says and means.

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PaulP

Litigation attorney at Bielski Chapman, Ltd. representing businesses and individuals in business litigation, post-judgment enforcement, collections and real estate litigation.