Unambiguous Language Prevails Over Evidence Of The Parties’ Intent—After Full Trial
Earlier this year, in Cantor Fitzgerald v. Ainslie, the Delaware Supreme Court reiterated that “[t]he courts of this State hold freedom of contract in high—some might say, reverential—regard” in interpreting alternative entity agreements. A recent case, Mehra v. Teller, starkly illustrates the court’s strict enforcement of unambiguous contract language. After a full trial, Chancellor Kathaleen McCormick upheld an LLC agreement’s plain language despite a conflict with the extrinsic evidence of the parties’ true intent presented at trial.
Background
At the heart of the Mehra decision was an “Equal-Sharing Provision” in the latest LLC agreement between the litigating parties. The plaintiff, Mehra, and the defendant, Teller, formed an LLC in 2011. Mehra and Teller respectively contributed 15% and 85% of the LLC’s initial assets. The 2011 LLC agreement provided for pro rata distributions based on the parties’ respective contributions. In 2014, the parties amended the agreement to provide for (1) equal sharing of operating proceeds and (2) pro rata sharing of the first $250 million in extraordinary proceeds before such proceeds would be equally distributed.
In 2016, the parties further amended the agreement to eliminate the distinction between operating and extraordinary proceeds and to introduce an equal-sharing provision that would apply once the “aggregate Distribution” exceeded the “Threshold.” The term “Threshold” was defined as “$188,767,785 less the sum of all distributions made by the Company to the members between July 29, 2014” and the latest distribution. The term “aggregate Distribution,” however, was undefined.
The Dispute
The plaintiff, Mehra, argued that the term “aggregate Distribution” referred to all distributions ever made by the LLC since its formation. Mehra noted that while the term “Threshold” was limited to distributions made after July 29, 2014, “aggregate Distribution” had no such temporal constraint. Therefore, the equal-sharing provision would be triggered when all distributions ever made by the LLC exceeded the Threshold. This interpretation, in effect, would result in double counting of distributions made after July 29, 2014, as they were added to the “aggregate Distribution” side and subtracted from the “Threshold” side of the equation.
The defendant, Teller, contended that “aggregate Distribution” was intended to be interpreted consistently with the latter part of the definition of “Threshold,” i.e., all distributions made after July 29, 2014. Teller explained that, in executing the 2016 amendment, the parties intended to modify the 2014 amendment as if it contained no distinction between operating and extraordinary proceeds. Therefore, the fixed number, $188,767,785, was, in part, the result of deducting all operating proceeds that had been distributed to the parties between 2014 and 2016 from the initial $250 million threshold. Per this interpretation, the equal-sharing provision in the 2016 amendment would be triggered only after all kinds of distributions made after July 29, 2014, exceeded $188,767,785.
Teller further protested that under Mehra’s interpretation, the equal-sharing provision would have been triggered before the execution of the 2016 amendment. Had the parties intended such an effect, there would have been no need for a complicated formula.
The Decision
The court agreed with Mehra’s interpretation that the term “aggregate Distribution” encompassed all distributions made by the LLC since its formation because the text of the agreement included no temporal limitation on that term. Chancellor McCormick reasoned that Teller’s interpretation would effectively reduce “Threshold” to $188,767,785, contradicting the plain language of the 2016 amendment. If the parties wished to define “aggregate Distributions” as distributions made after July 29, 2014, they could have done so.
Moreover, finding that the term “aggregate” was unambiguous in itself, the court declined to look into the extrinsic evidence offered by Teller at trial. Based on the plain language of the contract, the court held that double-counting was not inherently absurd as the parties might have intended to reach the Threshold faster. Nor did the court find any absurdity in the triggering condition that had already been satisfied at the time of the amendment’s execution. Instead, it reasoned that (1) the parties could have overlooked the amount of distribution already made at the time of the execution, and (2) the definition of Threshold, in itself, contemplated a historical calculation reaching back in time prior to the 2016 agreement.
Conclusion
Mehra was resolved after a full trial, during which extrinsic evidence was presented showing that the written agreement might not have reflected the parties’ intent. Even so, the court’s ruling nonetheless favored a plain language reading, rather than a reading informed by the extrinsic evidence presented. Mehra serves as a reminder of the importance of careful drafting and negotiation — especially in alternative entity agreements — because a party may use unambiguous language to its advantage even if it conflicts with extrinsic evidence regarding the parties’ original intent.
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