Zohar CDO 2003-1, LLC v. Patriarch Partners, LLC
CA 12247-VCS
| Del. Ch. | Oct 26, 2016Background
- Plaintiffs: Zohar I, II, III (CLO issuers); Defendants: Patriarch entities (longtime Collateral Manager) and Lynn Tilton (owner). AMZM was appointed successor Collateral Manager on March 3, 2016.
- Patriarch resigned as Collateral Manager effective March 1, 2016; dispute arose over whether Patriarch must turn over books, records and property "relating to the Collateral" to the Zohar Funds or their successor.
- Zohar Funds sued seeking specific performance of document-production obligations under the Patriarch Collateral Management Agreements (CMAs); trial was held after expedition was granted.
- Court found the CMAs unambiguous and governed by New York law; Sections 5.7 (Action Upon Termination), 6.3 (books/records/inspection), and the survival clause require post-termination production and inspection rights.
- The court ordered Patriarch to produce a broad range of documents (debt documents, equity-related documents including equity kickers and workout securities, new-deal/closing docs, trade tickets, waivers/forbearances, restructurings, trustee/third-party reports, related-party transaction docs, portfolio financials, tax/accounting docs, and other execution documents), excluding internal proprietary work product and privileged materials.
- Court denied defendants’ attempts to condition production on a confidentiality agreement, excused performance due to alleged nonpayment, or to treat production obligations as immaterial; an implementing order (rolling production, special master, timing, format) was directed.
Issues
| Issue | Zohar (Plaintiff) Argument | Patriarch (Defendant) Argument | Held |
|---|---|---|---|
| Do the Patriarch CMAs require production of documents upon end of services? | Sections 5.7 and 6.3 unambiguously require delivery/access to "all property and documents" and books/records "relating to the Collateral" upon termination or end of duties. | Section 5.7 applies only to "termination" (removal), not voluntary resignation; 6.3 obligations end when manager ceases being current manager. | Court held CMAs unambiguous; resignation terminated duties and survival clause keeps §§5.7/6.3 operative — production required. |
| Scope of "Collateral" and "relating to Collateral" — what documents must be produced? | Collateral (per Indentures) is broadly defined; "relating to" is interpreted broadly to include documents connected to current or historical holdings and rights the Funds may exercise. | Patriarch sought to limit to documents evidencing current holdings, exclude certain "equity upside" docs as non-collateral or Tilton personal property. | Court held Collateral definition broad; required production of documents evidencing debt, equity kickers, workout securities, new-deal closings, transfers, restructurings, trustee and third-party reports, related-party transactions, portfolio financials, tax/accounting and execution documents; avoided ruling ownership disputes over some equity upside interests but required related docs. |
| May Patriarch condition production on a confidentiality agreement or otherwise impose post-hoc conditions? | Zohar: CMAs contain no general purpose or confidentiality limitation for post-termination production; no condition should be read into the contract. | Patriarch: seeks to require standard confidentiality agreement before producing additional documents. | Court held no contractual basis to impose a confidentiality condition (except where the CMA expressly provided one for removal scenario); production cannot be conditioned on a new agreement. |
| Do threshold defenses (improper purpose, plaintiffs’ nonpayment, nonmateriality) bar specific performance? | Zohar: contract controls; no implied proper-purpose limitation; obligations material and enforceable; payment dispute irrelevant to interpretive breach ruling. | Patriarch: production should be limited by allowable purposes (analogy to §220), performance excused if Zohar withheld fees, and document obligations are not material so specific performance is inappropriate. | Court rejected these defenses as dispositive: not a §220 case; no textual purpose limit; payment dispute reserved for New York forum; document obligations are material to transition — specific performance ordered. |
Key Cases Cited
- Chimart Assoc. v. Paul, 489 N.E.2d 231 (N.Y. 1986) (courts interpret unambiguous contract provisions from the four corners).
- Pellaton v. Bank of New York, 592 A.2d 473 (Del. 1991) (same principle under Delaware law).
- Ellington v. EMI Music, Inc., 21 N.E.3d 1000 (N.Y. 2014) (give words their plain meaning; interpret contract as whole).
- Brad H. v. City of New York, 951 N.E.2d 743 (N.Y. 2011) (contract must be read in context; give effect to all provisions).
- Frank Felix Assocs., Ltd. v. Austin Drugs, Inc., 111 F.3d 284 (2d Cir. 1997) (New York law on material breach: a breach is material if it substantially defeats the purpose of the contract).