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 The agreement contained a merger clause stating it superseded all prior agreements.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.”