Opinion ID: 618830
Heading Depth: 1
Heading Rank: 20

Heading: KPG's withdrawal rights under the Sale Contract

Text: HV contends that it is entitled to summary judgment on its claim that KPG breached the Sale Contract because, although the Sale Contract allowed KPG to withdraw under certain conditions, those conditions were not met and the terms of the Management Contract between KPG and the Lottery Commission were, as a matter of law, reasonably acceptable to KPG. a. Applicable principles of Kansas substantive law Before examining the relevant provisions of the Sale Contract, we first review the principles of Kansas substantive law that apply to this dispute. The interpretation and legal effect of written instruments are matters of law .... Carrothers Constr. Co. v. City of South Hutchinson, 288 Kan. 743, 207 P.3d 231, 239 (2009). The primary rule for interpreting written contracts is to ascertain the parties' intent. Id. If the terms of the contract are clear, the intent of the parties is to be determined from the contract language without applying rules of construction. Id. Ambiguity in a contract does not appear until two or more meanings can be construed from the contract provisions. Id. b. Section 13.1 of the Sale Contract Turning to the Sale Contract, the key provision, for purposes of this case, is Section 13.1. As we have previously noted, that section, which fell under the general heading Buyer's Representations and Covenants, provided as follows: 13.1 Buyer [KPG] shall use good faith commercially reasonable efforts to be designated the Lottery Gaming Facility Manager for and enter into a Lottery Gaming Facility Management Contract with respect to the Southeast Gaming Zone. Without limitation, Buyer shall make a complete and timely application for such designation and with respect to the Subject Property to the Kansas Gaming Authority by no later than the date set by the Kansas Gaming Authority as the due date for such application (subject to extensions of time that may be granted by the Kansas Gaming Authority), and shall thereafter provide such further information requested by the Kansas Gaming Authority and respond to such inquiries of the Kansas Gaming Authority regarding the application. Upon such designation, Buyer shall diligently proceed to negotiate and execute a Lottery Gaming Facility Management Contract with respect to the Subject Property. If, despite compliance with the covenants contained in this Section 13.1, Buyer is not designated the manager of the Gaming Operations in the Southeast Gaming Zone and does not receive from the Kansas Gaming Authority a fully executed final, unappealed and unappealable Lottery Gaming Facility Management Contract reasonably acceptable to Buyer, Buyer's obligation to pay the Contingent Payment pursuant to Section 3.3 shall cease and be of no further force and effect. Buyer shall own the Subject Property free and clear, subject, however, to Seller's Purchase Option (as defined in Section 28 hereof) and Buyer shall have no further obligation to Seller whatsoever under this Agreement or otherwise. Aplt.App. at 186-87. All five sentences of Section 13.1 are relevant to this dispute. The first sentence of Section 13.1, by its express terms, imposed upon KPG the duty of acting in good faith and exercising commercially reasonable efforts in (a) seeking designation as the lottery gaming facility manager for the southeast zone, and (b) entering into a management contract with the Lottery Commission. [3] The only potential ambiguity in the first sentence arises out of its use of the phrase enter into. The word enter is commonly defined, in the context of contracts, to mean [t]o become a party to a contract or agreement. Black's Law Dictionary (9th ed. 2009). The question in this case is whether the word enter, and in turn the phrase enter into, was intended by the parties to refer simply to an executed contract (i.e., one signed by KPG and the Lottery Commission, but not yet approved by all three of the state lottery agencies) or to a final, binding, unappealed or unappealable contract that was approved by all three of the state lottery agencies. Because other sentences of Section 13.1 use the phrase execute in reference to a management contract, we conclude that the parties intended for the phrase enter into, as used in the first sentence, to mean something other than KPG's mere execution of a management contract with the Lottery Commission. In other words, we conclude that the parties intended for KPG to act in good faith and use commercially reasonable efforts to become a party to a final, binding, unappealed or unappealable management contract with the Lottery Commission. The second and third sentences of Section 13.1 discuss in more detail two of the specific steps KPG was required to take in achieving the goals outlined in the first sentence. The second sentence (the meaning of which is not disputed by the parties) required KPG to make a complete and timely application to be designated as the lottery gaming facility manager for the southeast gaming zone (a step that KPG undisputedly accomplished). The third sentence of Section 13.1 required KPG, upon designation as the lottery gaming facility manager for the southeast gaming zone, to negotiate and execute a ... [m]anagement [c]ontract [with the Lottery Commission] with respect to the Subject Property (something that, again, KPG undisputedly accomplished). The third sentence did not require KPG to obtain a final, binding management contract with the Lottery Commission. Both the Sale Contract and KELA make clear that an executed management contract is not the same as a final, binding management contract. An executed management contract is simply one that has been finally negotiated and signed by the Lottery Commission and the prospective lottery gaming facility manager. A final, binding management contract is one that has both been executed and subsequently approved by all three of the requisite Kansas gaming agencies. The third and fourth sentences of Section 13.1 distinguish between these two forms of the management contract: the third sentence refers simply to a Lottery Gaming Facility Management Contract, while the fourth sentence refers to a fully executed final, unappealed and unappealable Lottery Gaming Facility Management Contract. Importantly, for purposes of the dispute now before us, the fourth sentence of Section 13.1 expressly afforded KPG the opportunity to withdraw its application for the southeast gaming zone, prior to the management contract becoming final and binding by way of approval from all three lottery agencies, if the terms of the executed management contract were not reasonably acceptable to KPG. In other words, the fourth sentence, through its use of the phrase reasonably acceptable to Buyer, indicated that KPG was not unconditionally bound to proceed under the management contract that it negotiated and executed with the Lottery Commission. The absence of that same phrase in the third sentence indicates that KPG was not unconditionally bound by the terms of any such executed management contract. The fifth and final sentence of Section 13.1 provided that if KPG's obligations ceased for the reasons outlined in the fourth sentence of Section 13.1, KPG would own the Subject Property, subject to HV's right to repurchase it, and would have no further obligation to [HV] whatsoever under the Sale Contract. c. The Repurchase Agreement Our interpretation of Section 13.1, particularly our conclusion that KPG retained the right to withdraw if the executed-but-not-yet-final management contract was not reasonably acceptable to it, is bolstered by a key provision of the Repurchase Agreement, which was attached as an exhibit to the Sale Contract. Specifically, the Repurchase Agreement defined the phrase Notice of Termination as follows: If, after KPG has applied for the necessary management contracts/agreements, licenses and/or other regulatory approvals necessary for KPG to operate a destination lottery gaming facility under Kansas Law, and KPG, prior to being awarded a Lottery Gaming Facility Management Contract by the Kansas Gaming Authority, determines not to proceed with developing a destination lottery gaming facility on the Subject Property, KPG shall give HV[] written notice of such intent not to proceed .... Aplt.App. at 218. This language confirms that KPG retained the right, prior to being awarded a final, binding management contract with the Lottery Commission (i.e., one approved by all three gaming agencies), to determine[] not to proceed with developing a ... lottery gaming facility on the Subject Property .... d. HV's interpretation of the Sale Contract Although HV concedes that the Sale Contract afforded KPG the right to determine if the terms of its casino management contract with the Lottery Commission were reasonably acceptable, HV contends that the Sale Contract required this determination by KPG to occur before KPG and the Lottery Commission executed the casino management contract. In turn, HV argues that KPG received a reasonably acceptable management contract (evidenced, HV argues, by KPG's execution of the management contract), the threat and even existence of competition were known [to KPG] at the time of contracting, and KPG should not be excused because its management contract included terms mandated by KELA. Aplt. Br. at 31. HV's assertion that KPG was required to make its reasonably acceptable determination prior to executing a management contract with the Lottery Commission is contradicted by the plain language of Section 13.1. As we have explained, the language of Section 13.1 afforded KPG the right to decide whether the negotiated and executed management contract was reasonably acceptable, and in turn to withdraw if necessary, prior to final approval by all three gaming agencies. [4] Although HV argues that this interpretation effectively add[s] the word `proposed' to the third sentence in [S]ection 13.1, we disagree. Under the terms of both the Sale Contract and KELA, an executed management contract is not the same as a final, binding management contract, and thus the reference in the third sentence of Section 13.1 to KPG's execution of a management contract clearly meant something short of a final, binding management contract. That leaves only HV's arguments that KPG, in making a determination whether the management contract was reasonably acceptable to it, was precluded from considering either (a) any contract terms mandated by KELA, or (b) competition from other casinos (or proposed casinos) near the southeast gaming zone. The phrase reasonably acceptable is not defined in the Sale Contract. Consequently, it must be accorded its ordinary meaning. Shutts v. Phillips Petroleum Co., 222 Kan. 527, 567 P.2d 1292, 1317 (1977). The term reasonably is commonly defined as [a]ccording to reason; with good reason; legitimately; justly, properly, fairly. Oxford English Dictionary (3d ed. 2009 & online version 2011). In turn, the term acceptable is commonly defined as [c]apable, worthy, ... pleasing, agreeable, gratifying, or welcome. Oxford English Dictionary (2d ed. 1989 & online version 2011). Together, the terms mean legitimately or fairly worthy or agreeable, or, stated differently, worthy or agreeable with good reason. This definition is quite broad, and does not, as a matter of law, preclude the consideration of KELA-mandated terms of a management contract or the impacts of competition on the negotiated terms of a management contract. Indeed, we conclude as a matter of law that competition from other nearby casinos, or the threat of such competition, would have, under the terms of the Sale Contract, been a valid consideration for KPG in assessing the reasonable acceptability of the terms of the Management Contract it executed with the Lottery Commission. HV asserts, however, that the phrase reasonably acceptable could only have referred to the terms of the management contract that were negotiable, i.e., those terms that were not otherwise mandated by KELA. In support, HV argues that KPG was fully aware of the statutory requirements when it signed the [Sale] Contract.... Aplt. Br. at 40. For the reasons already discussed, however, the phrase reasonably acceptable has a broad meaning, and thus cannot be narrowly construed to have excluded KPG's consideration of KELA-mandated terms. Lastly, and relatedly, HV argues that if KPG could reject the [executed] management contract due to th[e] terms [of KELA], that would remove[] all meaning from the first, third and fourth sentences of [S]ection 13.1 because under the circumstances it would have been impossible for [KPG] to negotiate and receive a reasonably acceptable management contract. Id. at 41. But that is quite clearly not the case. According to the uncontroverted evidence in the record, it was the combination of certain KELA-mandated terms, plus the significant threat of competition (and, in turn, the reduced revenues that would flow from a casino on the Subject Property), that ultimately led KPG to reject the terms of the executed management contract and withdraw from the project. Thus, in sum, we conclude that the language of the Sale Contract did not, as a matter of law, mandate the entry of summary judgment in HV's favor or preclude the entry of summary judgment in KPG's and Penn National's favor.