New York Law Review

Tag: Merger Clause

  • Behler v. Tao, 2025 NY Slip Op 00803: Merger Clause in LLC Agreement Extinguishes Prior Oral Agreement

    2025 NY Slip Op 00803

    A merger clause in a limited liability company (LLC) agreement, governed by Delaware law, can supersede prior oral agreements between the parties if the subject matter of both agreements is the same.

    Summary

    In Behler v. Tao, the New York Court of Appeals addressed whether a merger clause in an amended LLC agreement extinguished a prior oral agreement. The plaintiff, Behler, invested in Digipac LLC based on an oral agreement with the defendant, Tao, who was also the CEO of Remark Holdings. The oral agreement provided Behler an exit strategy for his investment. Later, Tao amended the Digipac LLC agreement, including a merger clause that superseded prior agreements. The court held that the merger clause in the amended LLC agreement, governed by Delaware law, superseded the prior oral agreement because both concerned the same subject matter: Behler’s investment in Digipac and his ability to exit that investment.

    Facts

    Behler and Tao, long-time friends, entered into an oral agreement concerning Behler’s investment in Digipac LLC, a company controlled by Tao. The oral agreement included a provision for how Behler could exit his investment, either through a sale of Remark Holdings stock or after five years. Behler invested $3 million in Digipac. Subsequently, Tao amended the LLC agreement, including a merger clause. When the exit conditions of the oral agreement were not met, Behler sued Tao for breach of contract and promissory estoppel.

    Procedural History

    The Supreme Court granted Tao’s motion to dismiss the complaint, ruling that the amended LLC agreement, with its merger clause, superseded the oral agreement. The Appellate Division affirmed this decision, applying Delaware law. The Court of Appeals then reviewed the case after Behler appealed as of right.

    Issue(s)

    1. Whether the merger clause in the amended LLC agreement superseded the prior oral agreement.
    2. Whether the breach of contract and promissory estoppel claims were properly dismissed.

    Holding

    1. Yes, because the merger clause in the amended LLC agreement, governed by Delaware law, expressly superseded prior oral agreements related to the same subject matter.
    2. Yes, the lower courts correctly dismissed the breach of contract and promissory estoppel claims.

    Court’s Reasoning

    The Court applied Delaware law, as specified in the LLC agreement. Delaware law prioritizes freedom of contract. The Court held that Behler was bound by the amended LLC agreement. The merger clause explicitly covered the subject matter of the prior oral agreement, and the amended agreement superseded the oral agreement. The court rejected the argument that the oral agreement was made in Tao’s personal capacity and not in his corporate capacity. Further, the promissory estoppel claim failed because the amended LLC agreement constituted a fully integrated contract governing the relevant promise.

    Practical Implications

    This case underscores the importance of merger clauses in written agreements, particularly in LLC contexts. Investors in LLCs must scrutinize the operating agreements, especially any amendments, to fully understand their rights and obligations. Prior agreements, even those made in good faith, may be superseded by a subsequent agreement containing a merger clause. This impacts how breach of contract claims will be assessed. This decision reinforces the importance of including all critical terms in the final written contract, and legal practitioners should advise clients to ensure that their agreements are comprehensive and reflect the complete understanding of the parties involved. Furthermore, the ruling emphasizes that a claim of promissory estoppel will fail if an enforceable contract already exists.

  • Fundamental Long Term Care Holdings, LLC v. Cammeby’s Funding LLC, 21 N.Y.3d 435 (2013): Enforceability of Unambiguous Option Agreements

    Fundamental Long Term Care Holdings, LLC v. Cammeby’s Funding LLC, 21 N.Y.3d 435 (2013)

    An unambiguous option agreement, even if resulting in a seemingly commercially unreasonable outcome, will be enforced according to its terms when executed by sophisticated, counseled parties; extrinsic evidence will not be considered to alter the agreement’s clear meaning.

    Summary

    This case concerns a dispute over the exercise of an option to purchase a one-third membership interest in Fundamental. Cammeby’s Funding LLC (“Cam Funding”) sought to exercise its option for $1,000, as stipulated in the option agreement. Fundamental, however, argued that its operating agreement required a capital contribution equal to the fair market value of the interest (approximately $33 million). The Court of Appeals held that the unambiguous option agreement was enforceable as written. The court reasoned that because the agreement was unambiguous, its commercial reasonableness was irrelevant, and the operating agreement could not override the clear terms of the option agreement, especially given the presence of a merger clause.

    Facts

    Rubin Schron controlled SWC Property Holdings LLC, which owned facilities leased to nursing homes. Leonard Grunstein and Murray Forman later purchased the nursing homes, forming Fundamental. On July 1, 2006, Fundamental and Cam Funding entered an option agreement allowing Cam Funding to acquire one-third of Fundamental’s membership units for $1,000 if exercised by June 9, 2011. The agreement contained a merger clause stating it superseded all prior agreements. On December 20, 2010, Cam Funding notified Fundamental of its intent to exercise the option. Fundamental refused, citing its operating agreement that required a capital contribution equal to the fair market value for any additional membership units issued.

    Procedural History

    Fundamental filed suit seeking a declaration that Cam Funding was bound by the operating agreement’s capital contribution requirement. Cam Funding counterclaimed for breach of contract and moved for summary judgment, which was granted by the Supreme Court. The Appellate Division affirmed. The Court of Appeals granted leave to appeal and affirmed the Appellate Division’s order.

    Issue(s)

    Whether an unambiguous option agreement, executed by sophisticated parties, can be overridden by a separate operating agreement that imposes additional conditions on the exercise of the option.

    Holding

    No, because the option agreement was unambiguous and contained a merger clause, the terms of the option agreement control, and the separate operating agreement cannot impose additional conditions on the option’s exercise.

    Court’s Reasoning

    The Court of Appeals emphasized that the option agreement was unambiguous. The court stated, “[T]he option agreement unambiguously entitled Cam Funding to acquire one third of Fundamental’s membership units for $1,000 ‘without the need for any capital contribution’.” Because the agreement was unambiguous, the court found no need to consider extrinsic evidence, such as the operating agreement, to interpret its terms. The presence of a merger clause further solidified the court’s conclusion that the option agreement was the complete and final agreement between the parties. The court distinguished this case from others where multiple agreements were read together, noting that in those cases, the agreements were “inextricably intertwined.” Here, the option agreement and the operating agreement were independent. The court also rejected Fundamental’s argument that the $1,000 strike price was commercially unreasonable, stating that such an inquiry is only warranted when a contract is ambiguous. The court noted that sophisticated parties enter into option agreements for various reasons, and the agreement should be enforced as written. The court stated, “[P]arties enter into option agreements for all sorts of reasons, and, as noted earlier, this agreement was executed by sophisticated, counseled parties.”

  • SVCare Holdings LLC v. Cammeby’s Equity Holdings LLC, 21 N.Y.3d 432 (2013): Parol Evidence and Enforceability of Option Contracts

    SVCare Holdings LLC v. Cammeby’s Equity Holdings LLC, 21 N.Y.3d 432 (2013)

    A written agreement, clear and unambiguous on its face, must be enforced according to the plain meaning of its terms, and parol evidence is inadmissible to alter or add provisions, especially when the contract contains a merger clause.

    Summary

    SVCare sought to invalidate an option contract, arguing that the consideration was a $100 million loan that was never funded. The New York Court of Appeals held that the option agreement was valid and enforceable. The court reasoned that the contract’s explicit mention of “mutual covenants” as consideration, combined with a merger clause, precluded the introduction of parol evidence to prove that a separate loan agreement constituted the true consideration. The court emphasized the importance of upholding unambiguous written agreements, especially between sophisticated parties represented by counsel.

    Facts

    Leonard Grunstein and Murray Forman (SVCare) sought Rubin Schron’s (Cammeby’s Equity Holdings LLC) participation in acquiring Mariner Health Care, Inc. Schron financed the acquisition. As part of the deal, Cam Equity received an option to acquire 99.999% of SVCare’s membership units, with the consideration stated as “the mutual covenants and agreements hereinafter set forth, and other good and valuable consideration.” A separate loan agreement stipulated Cam III would loan $100 million to SVCare. Cam Equity sought to exercise the option, but SVCare refused, claiming the $100 million loan (allegedly the true consideration) was never paid.

    Procedural History

    SVCare initiated an action (Mich II Holdings LLC v Schron) arguing the option was unenforceable. Cam Equity then sued for specific performance of the option agreement (Schron v Troutman Sanders LLP). Cam Equity moved to exclude parol evidence intended to link the $100 million loan to the option agreement’s consideration. The Supreme Court consolidated the cases and granted Cam Equity’s motions, finding the option and loan were separate agreements. The Appellate Division affirmed. The Court of Appeals granted SVCare leave to appeal.

    Issue(s)

    Whether the lower courts erred in precluding SVCare from introducing extrinsic evidence to show that the phrase “other good and valuable consideration” in the option contract was intended to mean the $100 million loan obligation, and that the loan was never funded.

    Holding

    No, because the option agreement unambiguously provided that the mutually beneficial covenants constituted the consideration, and the introduction of another obligation would violate the parol evidence rule.

    Court’s Reasoning

    The court emphasized that written agreements should be construed according to the parties’ intent, with the best evidence being the writing itself. Parol evidence is only admissible if the contract is ambiguous. Because the option agreement explicitly stated that the “mutual covenants” constituted consideration, it was unambiguous. The court stated, “[A] written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms”. The court also noted the presence of a merger clause, further barring extrinsic evidence. The court reasoned that if the parties intended the loan to be a condition of the option, they could have explicitly included it in the agreement. The court stated: “Such a fundamental condition would hardly have been omitted”. Allowing parol evidence would modify the agreement and negate the merger clause. Thus, the option was deemed a valid, stand-alone contract enforceable upon payment of the $100 million strike price.

  • Jarecki v. Shung Moo Louie, 95 N.Y.2d 665 (2001): Effect of Merger Clause on Option Contract After Exercise

    Jarecki v. Shung Moo Louie, 95 N.Y.2d 665 (2001)

    When parties enter into a formal contract of sale containing a merger clause after an option to purchase real property has been exercised, the terms of the purchase agreement are merged into the written contract, and the bilateral contract to purchase is terminated if the sale is cancelled according to the contract terms.

    Summary

    Jarecki, a sublessee with an option to purchase, exercised his option with the Louies. They then executed a contract of sale, including an anti-assignment provision and a merger clause, subject to co-op board approval. The board rejected Jarecki, cancelling the contract per its terms. Jarecki claimed the option remained and he could assign it to another buyer. The Court of Appeals held that the subsequent contract of sale, with its merger clause, superseded the initial bilateral contract created by exercising the option. When the sale failed, the entire agreement, including the purchase option, was terminated, preventing Jarecki from assigning a non-existent right.

    Facts

    Henry Jarecki entered into a three-year sublease agreement with Shung Moo Louie and Shung Mon Louie for a cooperative apartment in Manhattan, which included an option to purchase the apartment for $600,000, subject to the cooperative board’s approval. In February 1998, Jarecki notified the Louies that he was exercising the option. Thereafter, the parties executed a contract of sale, which included an anti-assignment provision and a standard merger clause, and reiterated that Jarecki’s right to purchase was subject to approval by the co-op board. In May 1998, the board rejected Jarecki’s application. Jarecki then tried to assign his “option” to another buyer.

    Procedural History

    Jarecki sued for specific performance and related claims. The Supreme Court granted the Louies summary judgment, dismissing the complaint, holding Jarecki had no continuing right to purchase after the co-op’s rejection. The Appellate Division reversed, granting Jarecki specific performance, reasoning that the board’s rejection voided the non-assignable contract of sale, but not the original option. The Court of Appeals reversed the Appellate Division and reinstated the Supreme Court’s judgment.

    Issue(s)

    Whether, after an option to purchase is exercised and a subsequent contract of sale is executed containing a merger clause, the original bilateral contract created by the exercised option survives the cancellation of the contract of sale based on a contingency within that contract.

    Holding

    No, because the terms of the purchase agreement were merged into the written contract of sale; therefore, the bilateral contract to purchase the apartment was terminated when the contract of sale was cancelled based on the co-op board’s disapproval.

    Court’s Reasoning

    The Court of Appeals reasoned that while exercising an option creates a bilateral contract, the parties’ subsequent written contract of sale, including a merger clause, superseded the initial agreement. The court stated, ” ‘An option contract is an agreement to hold an offer open; it confers upon the optionee, for consideration paid, the right to purchase at a later date’ ” (Kaplan v Lippman, 75 NY2d 320, 324). Once exercised, it ripens into a bilateral contract. However, the merger clause in the contract of sale indicated the parties’ intent that the written agreement was a complete integration of their understanding. The purpose of a merger clause “is to require the full application of the parol evidence rule in order to bar the introduction of extrinsic evidence to alter, vary or contradict the terms of the writing” (Matter of Primex Intl. Corp. v Wal-Mart Stores, 89 NY2d 594, 599). Since the board disapproved the sale, which terminated the contract per its terms, Jarecki could not rely on a separate agreement that no longer existed. The court emphasized that options in leases are generally not independent of the lease terms and should not create unreasonable results, such as indefinitely undermining the property’s alienability. The court further stated that “It is possible to draft the provision so as to give the lessee an option to purchase as an independent contractual right, separable from the lease, but such a provision would be an unusual one” (Gilbert v Van Kleeck, 284 App Div 611, 616).

  • Primex International Corp. v. Wal-Mart Stores, Inc., 89 N.Y.2d 594 (1997): Enforceability of Arbitration Clauses After Contract Expiration

    Primex International Corp. v. Wal-Mart Stores, Inc., 89 N.Y.2d 594 (1997)

    A general merger clause in a subsequent contract does not automatically nullify an arbitration agreement in a prior contract, especially when the subsequent agreement does not explicitly revoke the arbitration provision of the prior agreement and the claims arise under the prior agreement.

    Summary

    Primex, a buying agent for Wal-Mart, sought to compel arbitration in New York regarding a dispute. Wal-Mart argued that a later agreement without an arbitration clause superseded prior agreements that included one. The New York Court of Appeals held that the arbitration clauses in the earlier agreements remained enforceable for disputes arising under those agreements, even though a subsequent agreement contained a general merger clause and lacked an arbitration provision. The court reasoned that the merger clause did not demonstrate a clear intent to retroactively revoke the arbitration obligations of the earlier contracts.

    Facts

    Primex acted as a buying agent for Wal-Mart, with their relationship governed by three successive service agreements in 1990, 1993, and 1995. The 1990 and 1993 agreements contained arbitration clauses and New York choice of law provisions. The 1995 agreement, however, omitted the arbitration clause, although it retained a general merger clause stating it represented the entire understanding between the parties. Wal-Mart terminated the relationship with Primex and filed suit in Arkansas, alleging Primex accepted kickbacks from vendors during the entire term of the business relationship, including under the 1990 and 1993 agreements. Primex then demanded arbitration in New York based on the arbitration clauses in the 1990 and 1993 agreements.

    Procedural History

    Wal-Mart sued Primex in Arkansas. Primex sought to compel arbitration in New York and stay the Arkansas action. The Supreme Court denied Primex’s petition, holding the 1995 agreement’s merger clause retroactively superseded the prior agreements. The Appellate Division affirmed. The New York Court of Appeals granted Primex leave to appeal.

    Issue(s)

    Whether a general merger clause in a subsequent contract, which does not contain an arbitration clause, supersedes and nullifies the arbitration agreements contained in prior contracts between the same parties, such that disputes arising under the prior contracts are no longer subject to arbitration.

    Holding

    No, because the language of the merger clause was insufficient to establish any intent of the parties to retroactively revoke their contractual obligations to submit disputes arising under the prior agreements to arbitration.

    Court’s Reasoning

    The Court of Appeals reasoned that a general merger clause aims to apply the parol evidence rule, preventing extrinsic evidence from altering the terms of a completely integrated writing. Enforcing the arbitration clauses in the 1990 and 1993 agreements doesn’t violate this principle because it doesn’t vary, contradict, or supplement the 1995 agreement. The 1995 agreement lacked an arbitration clause, indicating an intent to allow judicial resolution for claims arising under it, leaving the arbitration provisions of prior agreements intact for disputes originating under those agreements. The court quoted Champlin Ref. Co. v. Gasoline Prods. Co., 29 F.2d 331 (regarding a similar merger clause), emphasizing that such clauses are intended to “buttress rights accruing under the royalty contract—to cut off defenses otherwise open,” but not to destroy other contracts. The Court also pointed out Wal-Mart’s inconsistent position, as they were suing for breach of the prior agreements in Arkansas while simultaneously arguing those agreements were cancelled. “[I]n point of fact, the appellant does not regard the contract as having been ‘cancelled’ in any real sense, since it is actually suing for its breach in the action now stayed. If the contract had been so ‘cancelled,’ then neither party would have a claim under it, and [appellant’s] lawsuit would be ripe for dismissal” (Matter of Terminal Auxiliar Maritima [Winkler Credit Corp.], 6 NY2d at 298). The court emphasized that, absent a clear indication to abandon arbitration rights, the presumption is that the parties intended the arbitration forum to survive termination of the agreement as to disputes arising under it.

  • W.W.W. Associates, Inc. v. Giancontieri, 77 N.Y.2d 157 (1990): Enforcing Unambiguous Contract Terms Over Extrinsic Evidence

    W.W.W. Associates, Inc. v. Giancontieri, 77 N.Y.2d 157 (1990)

    When parties set down their agreement in a clear, complete document, the writing should be enforced according to its terms, and extrinsic evidence is inadmissible to create an ambiguity in an otherwise unambiguous agreement.

    Summary

    W.W.W. Associates contracted to buy land from the Giancontieris. The contract included a clause allowing either party to cancel if ongoing litigation affecting the property wasn’t resolved by a specific date. W.W.W. argued this clause was solely for their benefit and could be waived. The Giancontieris sought to cancel the contract based on the clause. The Court of Appeals held that because the contract was unambiguous in granting cancellation rights to both parties, extrinsic evidence suggesting the clause was only for W.W.W.’s benefit was inadmissible, thus enforcing the contract as written.

    Facts

    The Giancontieris owned a two-acre parcel of land. On October 16, 1986, they contracted to sell it to W.W.W. Associates, a real estate developer, for $750,000. The contract included a clause (paragraph 31) stating that either party could cancel if litigation concerning the property was not resolved by June 1, 1987. The contract also contained a standard merger clause (paragraph 19), stating that the written agreement constituted the entire agreement between the parties. W.W.W. was also given the sole right to cancel within 10 days of signing, and the option to cancel if the sellers couldn’t deliver building permits at closing.

    Procedural History

    When the litigation remained unresolved close to the June 1, 1987 deadline, W.W.W. declared its intention to close and sued for specific performance. The Giancontieris then canceled the contract. The trial court granted summary judgment to the Giancontieris, dismissing the complaint. The Appellate Division reversed, granting summary judgment to W.W.W., ordering specific performance based on extrinsic evidence. The New York Court of Appeals reversed the Appellate Division’s decision, dismissing W.W.W.’s complaint and reinstating the trial court’s order.

    Issue(s)

    Whether extrinsic evidence should be considered to interpret an unambiguous contract and determine if a reciprocal cancellation provision was intended for the sole benefit of one party.

    Holding

    No, because when parties set down their agreement in a clear, complete document, their writing should be enforced according to its terms. Extrinsic evidence is inadmissible to create an ambiguity in a written agreement that is complete, clear, and unambiguous on its face.

    Court’s Reasoning

    The Court of Appeals emphasized the importance of enforcing clear and complete written agreements according to their terms. The court found the cancellation clause in question to be unambiguous, granting a reciprocal right to both parties. The Court reasoned that considering extrinsic evidence to create an ambiguity would undermine the stability of commercial transactions, particularly in real property dealings. The court stated, “When parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms. Evidence outside the four corners of the document as to what was really intended but unstated or misstated is generally inadmissible to add to or vary the writing.” The court also noted that the contract contained a merger clause, further solidifying the intent to integrate all prior understandings into the written agreement. The Court suggested a logical reason for the seller to want the option to cancel: “A seller taking back a purchase-money mortgage for two thirds of the purchase price might well wish to reserve its option to sell the property for cash on an ‘as is’ basis if third-party litigation affecting the property remained unresolved past a certain date.” The Court rejected W.W.W.’s bad faith claim, finding it was not supported by admissible evidence. In summary, the Court prioritized the written contract’s plain meaning over W.W.W.’s claims of a different intent based on outside evidence.

  • Centronics Financial Corp. v. El Conquistador Hotel Corp., 57 N.Y.2d 1024 (1982): Parol Evidence and Fraudulent Misrepresentation

    Centronics Financial Corp. v. El Conquistador Hotel Corp., 57 N.Y.2d 1024 (1982)

    A general merger clause in a contract is insufficient to bar parol evidence of fraudulent misrepresentation unless the misrepresentation is specifically contradicted by a provision in the agreement.

    Summary

    Centronics Financial Corp. sued El Conquistador Hotel Corp. to recover the balance due on a promissory note. The defendant asserted an affirmative defense and counterclaim based on the plaintiffs’ alleged fraudulent misrepresentations that induced the defendant to enter the agreement. The plaintiffs moved for summary judgment, arguing that a merger clause in the stock purchase agreement barred parol evidence of the alleged fraud. The New York Court of Appeals held that a general merger clause does not bar parol evidence of fraudulent misrepresentation when the representation isn’t specifically contradicted by the contract. Because the defendant raised a triable issue of fact regarding the alleged fraud, the Court affirmed the denial of summary judgment.

    Facts

    El Conquistador Hotel Corp. purchased shares in a corporation from Centronics Financial Corp., executing a promissory note for the balance due. El Conquistador later claimed that Centronics fraudulently misrepresented the corporation’s income to induce the purchase. Specifically, El Conquistador alleged that Centronics stated that the income was higher than reported due to unreported income removed from the corporation weekly.

    Procedural History

    Centronics Financial Corp. sued El Conquistador Hotel Corp. for the balance due on the promissory note. El Conquistador asserted fraud as an affirmative defense and a counterclaim. Centronics moved to strike El Conquistador’s answer and for summary judgment. The lower court denied the motion. The Appellate Division affirmed. The New York Court of Appeals affirmed the Appellate Division’s decision.

    Issue(s)

    Whether a general merger clause in a stock purchase agreement bars parol evidence of fraudulent misrepresentations made by the seller regarding the income of the corporation being sold.

    Holding

    No, because a general merger clause is insufficient to bar parol evidence of a fraudulent misrepresentation unless the fraudulent representation is specifically contradicted by the terms of the agreement.

    Court’s Reasoning

    The Court of Appeals reasoned that a general merger clause, which states that all representations are contained within the four corners of the agreement, is insufficient to preclude parol evidence of fraudulent misrepresentation. The court cited Sabo v. Delman, 3 N.Y.2d 155, for this proposition. The court distinguished the case from Danann Realty Corp. v. Harris, 5 N.Y.2d 317, noting that the fraudulent representation (regarding the corporation’s income) was not specifically contradicted by any of the detailed representations or warranties in the agreement. The court emphasized that El Conquistador’s affidavit raised a triable issue of fact because it alleged that Centronics knowingly made false statements about the corporation’s income to induce the purchase. The court determined that the affidavit allowed for the inference that plaintiffs knew the statements to be false when made. As the defendant raised a triable issue regarding the affirmative defense of fraud, summary judgment was correctly denied. In effect, the court reaffirmed the principle that while parties can disclaim reliance on specific representations, a general merger clause won’t shield a party from liability for fraud.