America's Cup: Another Setback, This Time in Court

Here's a silver lining for the America's Cup: After everything the beleaguered regatta has been through -- plans falling through; lowered expectations; fund-raising nightmares; and, most seriously, a sailor's death -- this latest setback won't seem so bad. 

The Supreme Court of the state of New York's appellate division last week ruled that a spurned would-be America's Cup challenger can now launch a court trial against San Francisco's Golden Gate Yacht Club. 

Last year, America's Cup Event Authority CEO Stephen Barclay told SF Weekly he was confident this suit would be dismissed -- and he was right. The Empire State's Supreme Court in January tossed the claim by a racing team known as African Diaspora Maritime. But last week two of three judges on the appellate panel reversed portions of that decision, stating the suit could move forward. 

"We find that plaintiff has alleged the existence of an enforceable contract between the parties and bad faith on defendant's part sufficiently to state a breach of contract cause of action," reads the majority ruling. "...Given the rules of the race, submission of an entry application with the appropriate fee binds defendant to review the application in good faith, and its failure to do so is a breach of contract."

SF Weekly reported on the African Diaspora Maritime suit in a 2012 cover story: 

An eye-opening suit filed with the New York State Supreme Court by a sailing team called African Diaspora Maritime, spurred by the rejection of its race entry, alleges that [Oracle CEO Larry] Ellison's arrangement to extract exclusive use of real-estate in exchange for bringing the race to San Francisco -- the very core of the deal -- violates the founding deed of the America's Cup. ... Team skipper Charles Kithcart has admitted to the media that some of the money required to engage the prestigious law firm McDermott Will & Emery came from "people who don't like Ellison."

This suit was filed in New York because that is where the "Deed of Gift" governing the America's Cup is a "trust instrument" under that state's law. Golden Gate Yacht Club is the home club of Ellision's Team Oracle. 

African Diaspora Maritime claims the Golden Gate Yacht Club "exhibited a pattern of continuing avoidance," blowing off its attempts to glean information and submit its $25,000 entry fee. 

After submitting the fee and application on the last possible day on March 31, 2011, African Diaspora Maritime claims Golden Gate used "technical" and "groundless" claims to reject it, and "falsely and repeatedly claimed that its application was deficient due to the lack of a signature and the lack of a document that evidenced payment of the $25,000 fee." The spurned yachting team is claiming that a contract was formed when it accepted Golden Gate's offer to participate in the America's Cup by completing an entry form and paying the necessary fees -- and that contract was breached by Golden Gate's "failure to review the application in good faith." 

From last week's decision: 

ADM alleges that GGYC had no basis to claim a lack of "satisfaction" with its application, since ADM stated that it would provide further details upon request, and GGYC never attempted to verify the status of ADM's team, its proposed funding sources, or its proposed team's experience. ADM alleges that GGYC knew that potential competitors typically do not draw funding until they are granted competitor status. ADM also alleges that GGYC had provided material and financial help to some struggling competitors, such as yachts or design packages, but not to all competitors, thus breaching its duty to treat all competitors equally. ADM seeks compensatory damages and numerous forms of equitable relief, including an order directing GGYC to accept its application.

The appellate decision further found that "ADM accepted GGYC's offer by timely submitting its 'Application of Defense' in the required form along with the required fee, thus creating an enforceable contract ... ADM's acceptance of GGYC's offer obligated GGYC to review ADM's application in 'good faith.'"

The decision concludes that, "Although plaintiff does not have the right to be deemed a challenger, it is entitled to have its timely submitted application reviewed in good faith." 

While the winner of the America's Cup will be decided on the waters of San Francisco Bay, just what constitutes "good faith" appears to be a contest that will be decided in a New York courtroom. 

Messages left for America's Cup personnel have been forwarded to Golden Gate Yacht Club vice commodore Tom Ehman, who has not yet contacted us. 

Update, 4:50 p.m.: The Golden Gate Yacht Club sent the following statement regarding the June 25 ruling: 

We are pleased to report that the Appellate Division of the New York Supreme Court ruled today on Golden Gate Yacht Club's motion to dismiss Africa Diaspora Maritime's lawsuit against GGYC. 

The Appellate Division upheld the lower court's decision dismissing ADM's claims for breach of trust and breach of fiduciary duty. It reversed the decision of the lower court on ADM's breach of contract claim. 

The issue before the court was a preliminary issue of whether the complaint - if true - states a cause of action. As the court noted, "whether the plaintiff can ultimately establish its claim is irrelevant at this juncture". Essentially the court ruled that the one remaining claim - breach of contract - presents factual issues that cannot be decided on a motion to dismiss. 

GGYC looks forward to proving, in the appropriate forum at the appropriate time, that it acted in good faith and that ADM's claims are meritless. 

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