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UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
SCION 2040 MANAGING MEMBER LLC,
Plaintiff,
v.                                                                                                       Case No. 10-C-825
EBREF HODLING COMPANY, LLC and
ASB ALLEGIANCE REAL ESTATE FUND,
Defendants.
ORDER DENYING MOTION TO DISMISS COUNTERCLAIM
I. FACTS AND PROCEDURAL HISTORY
Currently pending before this court is the motion of plaintiff Scion 2040 Managing Member
LLC  (“2040”)  to  dismiss  the  counterclaim  of  defendants  ASB  Allegiance  Real  Estate  Fund
(“Allegiance”)  and  EBREF  Holding  Company  LLC  (“EBREF”)  (Docket No.  23.) This court
previously  denied  the  defendants’  joint  motion  to  stay  the  present  proceedings  pending  the
resolution of related proceedings currently pending in the Delaware Court of Chancery. (Docket No.
19.)
Although the factual history of this litigation is extensive, the court shall focus here upon
only the facts necessary to resolve the present motion. ASB Capital Management, LLC (“ASB”)
and The Scion Group, LLC (“Scion”) joined together to develop student housing near universities
across the country. (Docket No. 7 at 3.) Allegiance is managed by ASB, (Docket No. 9-1 at ¶2), and
EBREF is wholly owned by ASB (Docket No. 9-1 at ¶3). Allegiance’s trustee is Chevy Chase Trust




Company, which was formerly known as the Chevy Chase Trust Company Collective Investment
Trust Employee Benefit Real Estate Fund. (Docket No. 9-1 at ¶2.)
For each property development, a separate Delaware limited liability company (“LLC”) was
created with one ASB member, which provided nearly all the capital, and one Scion member, which
provided the remaining capital and was tasked with management. (Docket No. 9-1 at ¶8.) In the
present case, the Scion member is the plaintiff, Scion 2040 Managing Member, LLC (“2040”), an
Illinois LLC,  (Docket No.  1 at  ¶1).  2040 joined with Chevy Chase Trust Company Collective
Investment Trust Employee Benefit Real Estate Fund to form 2040 Lofts, LLC, a Delaware LLC,
(Docket No. 1 at 15), to develop housing near the Marquette University campus in Milwaukee,
Wisconsin.
The LLC agreement forming  2040 Lofts, LLC, lies at the heart of this litigation. The
agreement permits 2040 to demand that it be bought out by the other LLC member and provides a
mechanism for calculating the amount of 2040’s buyout. (Docket No. 1 at 49-50.) 2040 exercised
its right and calculated the amount due in accordance with the LLC agreement. (Docket No. 1 at
¶34.) Defendants refused to pay this amount, instead contending that the buyout provisions in the
LLC agreement do not reflect the parties’ actual agreement. (Docket No. 1 at ¶37.) 2040 filed suit in
this district based upon diversity seeking relief for defendants’ alleged breach, or anticipatory
breach, of the LLC agreement. (Docket No. 1.) Other Scion entities have filed suit in the Middle
District of Florida and the Northern District of Illinois seeking similar relief of the enforcement of
LLC agreements they entered into with ASB entities. (Docket No. 16 at 7 (citing M.D. Fla. Case
No. 10-C-2136; N.D. Ill. Case No. 10-C-6118).)
A day after 2040 filed the present action, defendants filed suit in the Delaware Court of
Chancery seeking reformation of the 2040 Lofts, LLC agreement and the LLC agreements related to
the two projects at issue in the cases pending in the Middle District of Florida and the Northern
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District of Illinois. (Docket No. 16 at 7; Docket No 9-1.) The three Scion entities that are plaintiffs
in the three federal court actions, including 2040, are named as defendants in the Delaware action;
all relevant ASB entities are named as plaintiffs in that action. (Docket No. 9-1.)
II. ANALYSIS
A counterclaim, like a civil complaint generally need contain only  “a short and plain
statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). “The
Rule reflects a liberal notice pleading regime, which is intended to ‘focus litigation on the merits of
a claim’ rather than on technicalities that might keep plaintiffs out of court.” Brooks v. Ross, 578
F.3d 574, 2009 U.S. App. LEXIS 18711 (7th Cir. 2009) (quoting Swierkiewicz v. Sorema N.A., 534
U.S. 506, 514 (2002)). At a minimum, a complaint or counterclaim
must provide notice to defendants of her claims. Second, courts must accept a
plaintiff's factual allegations as true, but some factual allegations will be so sketchy
or  implausible  that  they  fail  to  provide  sufficient  notice  to  defendants  of  the
plaintiff's claim. Third, in considering the plaintiff's factual allegations, courts should
not accept as adequate abstract recitations of the elements of a cause of action or
conclusory legal statements.
Brooks v. Ross, 578 F.3d 574, 581 (7th Cir. 2009).
However, in recognition of the fact that a defendant requires more detailed notice of the
nature of a party’s claim in order to properly prepare a defense against certain varieties of claims,
Fed. R. Civ. P.  9(b) requires that when a party alleges a mistake, the  “party must state with
particularity the circumstances constituting [the] mistake.” Fed. R. Civ. P. 9(b); Tomera v. Galt, 511
F.2d 504, 508 (7th Cir. 1975). Thus, because the present defendants’ counterclaim rests upon an
alleged mistake, the court must consider Rule 9(b) in conjunction with Rule 8(a) to determine
whether, with respect to the alleged mistake, the defendants have satisfied the requirement of Rule
9(b) to demonstrate “slightly more” than what would be required under Rule 8(a). See Tomera, 511
F.2d at 508.
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The  defendants’  counterclaim  seeks  equitable  reformation  of  the                                   2040  Lofts  LLC
agreement. The plaintiff contends that dismissal is appropriate because even if the defendants’
allegations are true, these allegations are insufficient to establish a claim for reformation. (Docket
No. 24 at 6.)
The parties’ LLC agreement contains a choice of law provision stating that it is governed by
Delaware law. (Docket No. 1 at 56.) Therefore, the parties agree that it is Delaware law that governs
the  defendants’  counterclaim  for  reformation.  See,  e.g.,  Auto-Owners  Ins.  Co.  v.  Websolv
Computing, Inc., 580 F.3d 543, 547 (7th Cir. 2009).
Parties, especially experienced and sophisticated parties, are generally held strictly to the
terms of an unambiguous contract; thus, failing to read or understand a contact is usually no defense
against its terms. However, the equitable remedy of reformation, which “by definition involves a
party who has not read, or thought about, the provisions in a contract carefully enough,” Cerberus
Int'l, Ltd. v. Apollo Mgmt., L.P., 794 A.2d 1141, 1154 (Del. 2002), is a narrow exception to this
general principle.
There are two doctrines that allow reformation. The first is the doctrine of mutual
mistake. In such a case, the plaintiff must show that both parties were mistaken as to
a material portion of the written agreement. The second is the doctrine of unilateral
mistake. The party asserting this doctrine must show that it was mistaken and that the
other party knew of the mistake but remained silent. Regardless of which doctrine is
used, the plaintiff must show by clear and convincing evidence that the parties came
to a specific prior understanding that differed materially from the written agreement.
Id. at 1151-52 (footnotes omitted). The clear and convincing evidentiary standard is necessary
The  clear  and  convincing  evidentiary  standard  is  an  intermediate  evidentiary
standard, higher than mere preponderance, but lower than proof beyond a reasonable
doubt. The Delaware Court on the Judiciary has described this standard as requiring
evidence which produces in the mind of the trier of fact an abiding conviction that
the truth of the factual contentions are highly probable. Authorities also say that, to
meet this burden, the evidence must produce in the mind of the fact-finder a firm
belief or conviction that the allegations in question are true. The Superior Court’s
civil jury instructions on clear and convincing evidence require the proof to be highly
probable, reasonably certain, and free from serious doubt.
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Id. at 1151 (footnotes and internal quotation marks and brackets omitted).
The defendants present alternative grounds for relief in their counterclaim, alleging that
either a mutual or unilateral mistake occurred here. (Docket No. 20 at 7.) Lying at the heart of this
dispute are the terms of the “sales proceeds waterfall,” which provides how each party will be
compensated in the event that 2040 exercised its right to be bought out by the defendants. (Docket
No. 20 at 9.) It is undisputed that after the first two ventures, the parties began negotiating terms for
subsequent ventures. As a result of these negotiations, numerous changes to the “sales proceeds
waterfall” were made.  (Compare Docket No.  20 at  15-16 with Docket No  20-1 at  10.) The
defendants acknowledge that certain of these changes were intended.
In  simplistic  terms,  what  the  defendants  allege  happened  was  that  in  the  process  of
negotiating  certain  revisions  to  the  agreement  after  two  ventures  using  essentially  the  same
agreement, the order of distributions was mistakenly switched. (Docket No. 20 at 9.) The earlier
agreements provided that in the event of a sale, each member of the LLC would first receive a
return of the capital it invested in the venture before moving on to the next step of the waterfall.
(Docket No.  20 at  9.) At this next step, the Scion member would then receive a  “promote
percentage.” (Docket No. 20 at 9.) The present agreement, and the other two similar agreements that
are the subject of litigation in other courts, reversed this order so that the Scion member, in this case
2040, would receive the “promote percentage” before each member received a return of its capital.
(Docket No. 20 at 9.) The defendants contend that it was the intent of the parties to maintain the
payment order set forth in the earlier agreements, and thus seek reformation of the agreement to
appropriately reflect this understanding. (Docket No. 20-1 at 15.)
The plaintiff contends that the defendants’ counterclaim fails to state a claim for relief and
the defendants, in effect, “pled themselves out of court” by admitting that the parties made certain
negotiated changes to the relevant provision of the agreement and acknowledging that the parties
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never discussed the order of the promote.  (Docket No.  28 at  7.) In the plaintiff’s view, the
contentions are mutually exclusive. Because reformation requires proof of a prior agreement, the
defendants’ admission that the order of the promote was never discussed precludes a finding the
parties had an agreement contrary to what the final written agreement reflects.
There plainly were prior agreements, namely the LLC agreements for the first two ventures.
“[D]ocumentary evidence of a prior agreement is particularly persuasive in” sustaining a party’s
burden of clear and convincing evidence, Cerberus Int'l, 794 A.2d at 1153, and thus it is hardly
surprising that the defendants discuss these prior agreements at length. However, the plaintiff
contends that these agreements are irrelevant because they relate to wholly distinct transactions and
moreover  did  not  involve  the  same  legal  parties,  but  instead  merely  affiliated  entities.  The
defendants respond that on the defendants’ side, the entity was the same and although a different
Scion entity was technically the party to each transaction, in each instance the Scion entity was
created solely for the venture and was wholly owned by Scion. Additionally, irrespective of any
variation  of  legal  entities  that  were  parties  to  the  transactions,  the  real  persons  involved  as
representatives in the contract negotiations were the same. In the view of the defendants, because an
agreement requires a meeting of the minds, it is sufficient that the persons with the minds were the
same  even  if  there  was  technically  a  variation  in  the  legal  entities  whom  the  real  persons
represented in the transactions.
The court finds the technical dissimilarity in the parties to be inconsequential for present
purposes and the court need not now discuss the consequences of this distinction. Although the
relatedness of the parties is relevant to the context of this case, the prior LLC agreements are not
necessarily central elements to the defendants’ reformation claim. Rather, this case is analogous to a
situation in which two sophisticated parties choose to utilize a form book for the template to
memorialize the product of their negotiations. Parties may negotiate at length about numerous
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contractual provisions and change the pre-selected template to reflect those negotiated agreements
while never discussing, much less intending to change, the standard provisions of the template. But
if in the process of writing up the final draft, certain standard provisions of the template are
inadvertently  changed  or  reordered,  surely  reformation  is  not  barred  simply  because  these
provisions were never discussed in the parties’ negotiations. In such a case, the agreement to utilize
a standard template may constitute the requisite agreement to satisfy this element of a reformation
claim.
Here, the parties did not turn to a form book for a template, but they instead utilized a prior
agreement with which all persons negotiating were familiar as the foundation for the parties’
present agreement. The defendants allege that they agreed to change certain terms but contend that
other provisions, including the order of the waterfalls, were never discussed. The acknowledgment
that certain provisions were never discussed does not bar a reformation claim; reformation requires
merely an agreement on a term, not necessarily a discussion of that term.
The points made by the plaintiff, (see, e.g., Docket No. 28 at 7), are hurdles the defendants
must overcome to sustain their burden of proof of clear and convincing evidence at summary
judgment or at trial. However, the standard at this early stage is much different. Given the factually
intensive nature of a reformation claim, such claims are rarely resolved on motions to dismiss. This
difference in procedural posture is a significant factor that distinguishes W. Willow-Bay Court,
LLC v. Robino-Bay Court Plaza, LLC, 2009 Del. Ch. LEXIS 181 (Del. Ch. Oct. 6, 2009), a case
heavily relied upon by the plaintiff, from the present matter. Reformation became an issue in
Willow-Bay only after remand following appeal and the decision relied upon most heavily by the
plaintiff is the chancery court’s decision following a court trial, not an order on a motion to dismiss
or even an order on summary judgment. The chancellor in Willow-Bay ultimately concluded that
reformation  was  not  appropriate  despite  certain  evidence  of  a  different  agreement  and
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understanding, but this finding was largely a product of the facts found in that case, id., and thus
that case is of minimal relevance to the present case.
Another case relied upon by the plaintiff does involve a reformation claim at the motion to
dismiss stage, but again this court finds this non-binding authority readily distinguishable. In Envo,
Inc. v. Walters, 2009 Del. Ch. LEXIS 216 (Del. Ch. Dec. 30, 2009), the court granted a motion to
dismiss the party’s claim that a contract should be reformed to change the entity named as a party to
the contract and the names on certain promissory notes. Id. Although the plaintiff sought to
characterize these mistakes as a mere “scrivener’s error,” the court concluded that dismissal was
appropriate because, in part, the names of the parties was so fundamental to the parties’ transaction
that the sophisticated business entitles would not be expected overlook such a “scrivener’s error.”
Id. In the present case, the defendant may be able to argue that the precise error that occurred in this
case was of a nature that it would not necessarily have been detected had it been accidentally
changed.
Accepting the defendants’ allegations as true, as this court must at this preliminary stage, the
court concludes that the defendants’ counterclaim adequately alleges that the parties had agreed to
re-propose the standard language from the prior agreements and make changes only where they
were explicitly discussed. (See, e.g., Docket No. 20-1 at 2.) Under the circumstances of this case,
the court concludes that amidst the detailed factual allegations included in its counterclaim, the
defendants have adequately alleged that the parties had a prior agreement to not alter the order of
the waterfalls and either through mutual mistake or the knowing silence of the plaintiff, the order of
the waterfalls was changed in the final written agreement.
III. CONCLUSION
For the reasons set forth above, the court shall deny the plaintiff’s motion to dismiss the
defendants’ counterclaim. The defendants have alleged with requisite particularity the details of the
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alleged mistake and the parties’ prior agreement. Accepting the defendants’ allegations as true, a
reasonable finder of fact could conclude that reformation of the LLC agreement is appropriate, and
thus the motion to dismiss must be denied.
Finally, this case has been identified for inclusion in the Seventh Circuit’s E-Discovery Pilot
Program. Accordingly, the court shall issue an amended scheduling order incorporating the Seventh
Circuit Electronic Discovery Committee’s Principles Relating to the Discovery of Electronically
Stored Information.
IT IS THEREFORE ORDERED that the plaintiff’s motion to dismiss the defendants’
counterclaim, (Docket No. 23), is denied.
Dated at Milwaukee, Wisconsin this 15th day of April, 2011.
s/AARON E. GOODSTEIN
U.S. Magistrate Judge
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