Opinion ID: 2394569
Heading Depth: 1
Heading Rank: 9

Heading: Ambiguity Precludes 12(b)(6) Lesh Action's Dismissal

Text: In the Lesh Action, the Superior Court dismissed the complaint under Rule 12(b)(6) for failure to state a claim upon which relief may be granted, finding that Lesh lacked standing. Specifically, the Superior Court stated that [t]he former shareholders of Appriva, including Lesh, irrevocably relinquished and irrevocably and exclusively delegated their rights to act independently in bringing claims under the Agreement. [39] Lesh argues that the contract language upon which the Superior Court based its decision is ambiguous and that extrinsic evidence was needed to interpret the contractual terms. Lesh cites Vanderbilt Income and Growth Associates v. Arvida/JMB Managers, Inc . for the proposition that [o]n a motion to dismiss for failure to state a claim, a trial court cannot choose between two differing reasonable interpretations of ambiguous documents. [40] Where the provisions in controversy are reasonably susceptible to different interpretations, ambiguity exists and [d]ismissal is proper only if the defendants' interpretation is the only reasonable construction as a matter of law. [41] Section 2.3 of the Shareholder Representative Agreement or SRA provides that: the Shareholder Representatives shall together have full power and authority on behalf of the [shareholders] to (i) interpret all of the terms and provisions of this Agreement, the Merger Agreement and the Escrow Agreement; (ii) to the extent of the Escrow Deposit (as defined in the Escrow Agreement) and the total limit of liability set forth in Section 15.2(d) of the Merger Agreement, compromise or settle any claims asserted under the Merger Agreement or the Escrow Agreement or otherwise in connection with the transactions contemplated by the Merger Agreement. . . . The Merger Agreement provides: 15.5 Shareholders' Agent. By approving the Merger and adopting and approving this Agreement, each shareholder of the Company has designated, and approved the designation of, Michael Lesh, M.D. and Erik van der Burg to jointly act as the agent for all shareholders of the Company and holders of Vested Options (the Shareholders' Agent) and as the attorney in fact and agent for and on behalf of the company shareholders and holders of Vested Options with respect to the taking any an [sic] all actions and the making of any decisions required or permitted to be taken by the Shareholders' Agent under this Agreement and the Escrow Agreement, including without limitation the power to (i) arbitrate, resolve, settle or compromise any dispute regarding indemnification claims or matters arising out of the calculation of the Cash Shortfall Amount and the Initial Per Share Amount and (ii) take all actions necessary in the judgment of the Shareholders' Agent for the accomplishment of the foregoing. Each shareholder of the Company and each holder of Vested Options will be bound by all actions taken and all documents executed by the Shareholders' Agent in connection with any of the foregoing matters. In performing the functions specified in this Agreement, the Shareholders' Agent will not be liable to any shareholder of the Company or holder of Vested Options in the absence of fraud or willful misconduct on the part of the Shareholders' Agent. If the Shareholders' Agent shall resign or become unable to fulfill his or her duties as such, then the Person with the then largest interest in the Contingent Payment Obligations who is willing to appoint a new Shareholders' Agent shall be entitled to make such appointment. Expenses of the Shareholders' Agent shall be the obligation of the holders of the Company Shares, provided, however, that the Surviving Corporation will, until the earlier of (i) the achievement of Milestone # 1, or (ii) January 1, 2004, pay on such holders' behalf (up to a maximum of $250,000) to the Shareholders' Agent the actual, reasonable fees of such Shareholders' Agent as such fees are incurred, provided, further, that the Surviving Corporation shall be entitled to deduct any such advanced fees from any Contingent Payment due after the date of any such advance. Lesh argues that the relevant language of the Merger Agreement and the SRA does not unambiguously prohibit what occurred here, namely, that one Shareholder Representative (van der Burg) elected to form an LLC to fund and pursue an action against ev3 on behalf of some shareholders, while the other Shareholder Representative (Lesh) hired different counsel and sued individually and on behalf of other shareholders. In opposition, the defendants argue the relevant language in the Shareholder Agreement and the Merger Agreement unambiguously provides that the Shareholder Representatives are not permitted to file separate actions on behalf of separate groups of stockholders against ev3 and the other defendants. The Superior Court agreed with the defendant's interpretation of those documents. It is significant that the Shareholder Agreement contains language expressly providing that the Shareholder Representatives have full power to interpret the terms of this [Shareholder Representative] agreement and the Merger Agreement. That is, Lesh and van der Burg may interpret the agreements to allow the exercise of their authority for the shareholders in the manner that they deem appropriate. According to the plaintiffs, their interpretation that separate actions are permitted is grounded, in part, upon the wording of the relevant provision stating that the two representatives together have full power and authority, implying that the power to sue is divisible between them. [42] In opposition, the defendants argued and the Superior Court held that joint action had a single separate legal meaning by which the plaintiffs were prohibited from pursuing these actions, and that even if the court were to consolidate the [two] cases pursuant to Superior Court Civil Rule 42, the parties are still not acting jointly as required by the Merger Agreement. The issue of standing is concerned only with the question of who is entitled to mount a legal challenge. [43] Lesh and van der Burg each have alleged his own standing to maintain a separate action, individually and as agent and attorney-in-fact for shareholders who were listed in their respective complaints. Their capacity to maintain these separate actions and defendants' arguments to the contrary depend on the parties' interpretations of the controlling documents. If there is more than one reasonable interpretation of a disputed contract term, consideration of extrinsic evidence is required to determine the meaning the parties intended. In Klair v. Reese, [44] this Court held: In interpreting an integrated agreement, attention is directed to the meaning of the written terms in light of the surrounding circumstances. As long as the court is aware that doubts and uncertainty lurk in the meaning and application of agreed language, it will consider testimony pertaining to antecedent agreements, communications and other factors which bear on the issue. The primary search is for the common meaning of the parties, not a meaning imposed on them by law. [45] In Klair, this Court concluded that the trial court had erroneously interpreted the meaning of a contract term without considering the extrinsic evidence bearing on the issue. [46] The interpretation in Klair that excluded consideration of extrinsic evidence was reversed on appeal, because the meaning that the trial court had found clear was only one of two reasonable interpretations. In deciding a motion to dismiss, the trial court cannot choose between two differing reasonable interpretations of ambiguous provisions. [47] The Superior Court's interpretation of the term joint action to prohibit separate lawsuits by the two Shareholder Representatives is not the only reasonable interpretation of the Shareholder Agreement. Courts routinely admit extrinsic evidence to interpret contractual terms regarding joint activities. [48] The Superior Court, however, summarily rejected the interpretation argued by Lesh and van der Burg, i.e., that the agreement authorizes each of them to assert claims on behalf of those shareholders who have separately chosen to be represented by one of them  without affording either Lesh or van der Burg an opportunity to explain how they had separately reached that conclusion in exercising their express authority to interpret the documents. [49] In holding that, as a matter of law, ev3's interpretation was the only reasonable construction of the contract language, the Superior Court erred where Lesh and van der Burg, had separately arrived at the identical contrary construction of the language of the Merger Agreement and the SRA. Even if the Superior Court considered the defendants' interpretation more reasonable than the plaintiffs', on a Rule 12(b)(6) motion it was error to select the more reasonable interpretation as legally controlling. [50] Consequently, the judgment of dismissal in the ASLC Action must be reversed. Upon remand, the Superior Court shall admit extrinsic evidence to ascertain what the parties intended with respect to the Shareholders' Representatives exercise of authority pursuant to the Merger Agreement and the SRA.