When are Joint Ventures Divorced?

By John S. Mrowiec

Joint ventures are common in construction. That is especially true regarding requests by a public entity to design and construct a project.

As we know, the request-for-proposal process does not always run smoothly. Sometimes a proposal is conditionally accepted, but later the bidder is unable to satisfy the condition. That might result in the public entity requesting amended, renewed or sometimes new proposals.

If one of the original bidders was a joint venture and the joint-venture agreement does not provide a termination event, some important questions arise: Are the original venturers bound to continue to work together if the purchasing entity solicits new proposals and one of the venturers wants the venture to submit a new proposal? Or, may a venturer choose a new partner with whom to submit a proposal? If one of the venturers finds a new partner and submits a successful proposal, does the former venturer have any rights?

Those were the issues in the case of Lauth Indiana Resort & Casino, LLC v. Lost River Development, LLC, 889 N.E.2d 915, 2008 Ind. App. LEXIS 1506 (Ct. App. Ind. July 15, 2008).

RFP Issued for Casino

In Lost River Development, the Indiana Gaming Commission issued a request for proposals for an “Operating Agent Contract” to construct and manage a casino development project in Orange County, Indiana. The RFP required that proposals be accompanied by a $50,000 application fee and include proof of ability to fund a multi-million-dollar capital budget.

One of the three submissions was by Lost River Development LLC. Lost River included as a member an entity composed of the founders of Empress Entertainment LLC, which had operated casinos in Hammond, Ind., and Joliet, Ill.

After Lost River had submitted its proposal, Lauth Indiana Resort & Casino LLC, a commercial developer, asked to join the proposal. Lost River and Lauth agreed and signed a “Letter Agreement.”

The agreement provided that Lauth would obtain a 50% interest in an entity which owned a 50% interest in Lost River. The Letter Agreement was not particular as to when, or under what circumstances, the joint venture would end.

Thereafter, the Commission held a hearing to choose the successful proposal. The decision was close but the Commission did not choose the Lost River proposal.

Nevertheless, the Commission remained concerned about the ability of the chosen offeror, Trump Indiana Casino Management LLC, to obtain financing. Therefore, the Commission did not award the contract outright but provided the award was “contingent on the negotiation and execution of the Operating Agreement Contract.”

‘Why No Award?’

After their proposal had not been selected, the Lost River venturers continued to discuss what had gone wrong with their proposal. They hoped that if the winning offeror could not procure financing, the Commission would accept Lost River’s proposal.

Eventually, the original winning bidder not only failed to gain financing but filed for Chapter 11 reorganization. Yet, the Commission did not award to Lost River. Instead, the Commission voted to issue a new Request for Proposals.

After the Commission voted to issue a new RFP but before the Commission issued the RFP, Lauth sent the other Lost River members a letter advising that Lauth would not be working with those members in submitting a new proposal.

Instead, Lauth joined with a new partner, Cook Group Inc., to form a new entity, Blue Sky Casino LLC. That new entity submitted a proposal providing for a capital budget of more than $240 million and included ownership of two existing hotels where the casino would be located. The Lost River remaining venturers were unable to submit a new proposal despite being granted an extension.

The Commission held a hearing and conditionally awarded the contract to Blue Sky. That entity obtained the requisite financing, entered into the Operating Agreement Contract and built the casino.

Former Partners Sue

The former venturers sued their former partner, Lauth, alleging that it had violated fiduciary duties by usurping an opportunity that belonged to the joint venture. The former venturers also alleged intentional misrepresentation of the facts and that those who had formed with the former venturer had tortiously interfered with the original joint venture agreement.

Lauth moved for partial summary judgment. The former venturer’s argument was that the Letter Agreement formed a joint venture which terminated when the Commission chose Trump Indiana’s proposal.

The trial court found there was an issue of fact that required a trial: Did the parties’ actions after conditional award to Trump mean they though the contract was impossible or impracticable after that date?

The trial court allowed an appeal of the denial of summary judgment. On appeal, the Lost River appellate court distinguished a joint venture from a partnership: “A joint venture is similar to a partnership except that a joint venture contemplates only a single transaction,” Lost River, 2008 Ind. App. LEXIS 1506, *12 quoting Byrd v. E.B.B. Farms, 796 N.E.2d 747, 753 (Ind. Ct. App. 2003), trans denied (emphasis omitted).

Noting there were no Indiana cases setting forth no rule of law to govern the fact situation, Lost River adopted the apparent consensus rule from other jurisdictions that “[a] joint venture without a termination date remains in force until its purpose is accomplished or that purpose becomes impracticable,” Lost River, 2008 Ind. App. LEXIS 1506, *11 quoting Scandinavian Airlines Sys. Denmark – Norway – Sweden v. McDonald’s Corp., 129 F.3d 971, 973 (7th Cir. 1997).

Reviewing the Letter Agreement, the Lost River appellate court conceded that the agreement provided that the joint venture was formed to construct, manage and operate a casino and hotel. Nevertheless, the Letter Agreement continued on to provide in its text that the venturers would use their best efforts to seek the Commission’s approval to submit an amended proposal but if the Commission did not approve the submittal of an amendment, the Letter Agreement would terminate. The Lost River court interpreted the Letter Agreement as contemplating only an amended proposal, not a solicitation by the Commission of a new proposal.

The suing venturers argued that the parties anticipated that the conditional awardee would be unable to procure financing and, consequently, submission of a new proposal might be necessary. Lauth argued post-conditional award conduct was irrelevant; once the Commission did not allow an amended proposal, the joint venture terminated.

The Lost River court agreed with Lauth, holding that “once the [Commission] rejected the [initial] proposal, the joint venture terminated, and the former venturers then were “free to pursue other opportunities, either with each other or with other parties,” Lost River, 2008 Ind. App. LEXIS 1506, *16 citing McDonald’s Corp., 129 F.3d at 973-74; Electrical Contractors, Inc. v. Goldberg & O’Brien Electric Co., 331 N.E.2d 238 (Ill. App. Ct. 1975).

The key to Lost River was that the court defined the joint venture as being established for a “single bid process,” rather than “partnerships of indeterminate duration . . . expending resources long after their initial bid was rejected,” Lost River, 2008 Ind. App. LEXIS 1506, *18-19. The court emphasized that its holding applied only where a joint-venture agreement is silent regarding when the venture terminated and might have been different if the RFP indicated that non-selected proposals remained valid if the originally selected proposal failed to secure the contract, Lost River, 2008 Ind. App. LEXIS 1506, *19.