When Actions Speak Louder Than Words — A Trade Is a Trade Despite Formulaic “Subject To” Language

On Dec. 20, 2016, the New York Court of Appeals in Stonehill Capital Management LLC, et al., v. Bank of the West issued a unanimous decision that a valid contract was formed for the sale of a syndicated loan in an auction, even though the terms were subject to a partial deposit and the execution of a written agreement by both the seller and the buyer. In this decision, the court emphasized the importance of the “totality of the parties’ conduct” and the parties’ “clear objective” in forming a binding contract. The holding cautions parties to a transaction to state clearly any conditions precedent to a binding contract. The court held that actions can speak louder than ambiguous contractual terms.

Background

Bank of the West (the “Seller”) offered a portfolio of nonperforming syndicated loans for sale in an online auction run by Mission Capital Advisors. Mission Capital delivered an Offering Memorandum to potential bidders that described the loans and the bid process, including:

“[a]fter receipt of the indicative bids, Mission, in conjunction with the Seller, will select Final Bidders to complete final due diligence before submitting non-contingent offers on the Final Bid Date (the acceptance of which by Seller will require immediate execution of pre-negotiated Asset Sale Agreement(s) by Prospective Bidder accompanied by a 10% non-refundable wire funds deposit).”
In the Offering Memorandum, the Seller reserved the right in its “sole and absolute discretion, to withdraw any or all of the assets from the loan sale, at any time.” The Seller added that “only those representations and warranties that are made by the Seller to a prospective bidder in a definitive, executed loan sale agreement shall have any legal effect.”

On April 16, 2016, Stonehill Capital expressed interest in purchasing one of the syndicated loans, known as the Goett Loan, with a value of $8,787,141. Mission Capital sent Stonehill a loan sale agreement for its review. In response, Stonehill offered to edit the loan sale agreement or to use an LSTA syndicated loan document, “whichever the Seller prefers.”

On April 20, Mission called Stonehill to confirm that Stonehill won the bid. Three days later, Stonehill sent comments to the loan sale agreement. A few days later, Mission again confirmed to Stonehill that Stonehill had won the bid, this time by email, and subject to the mutual execution of an acceptable loan sale agreement, the Seller agreed to Stonehill’s bid price. The email also included instructions for the deposit and closing.

That same day, the Seller’s counsel emailed Stonehill that the Seller preferred the LSTA form agreement and expected an early May closing. A few days later, Stonehill returned the LSTA form to Seller’s counsel and advised that it was delivering forms to the administrative agent in advance of the transfer of the loan. Thereafter, Stonehill advised Seller’s counsel that the administrative agent approved the credit transfer forms.

The Seller then learned that Stonehill intended to refinance the Goett Loan, which would apparently increase its value. In an internal memorandum, the Seller debated whether or not to proceed with the sale to Stonehill and admitted that the Seller orally agreed to the sale to Stonehill.

On May 16, Mission informed Stonehill by telephone that the Seller would not proceed with the transaction because the Offering Memorandum permitted the Seller to withdraw any loan from the auction at any time. The Seller subsequently refinanced the Goett Loan and canceled the sale to Stonehill.

Stonehill commenced an action against the Seller alleging breach of contract and breach of the implied covenant of good faith and fair dealing. Stonehill demanded indemnification and $1.5 million in damages.

The Decision

The Court held that Stonehill met its prima facie burden on summary judgment for a breach of contract claim because the Seller accepted Stonehill’s bid to purchase the Goett Loan and the parties’ exhibited “object manifestations” of intent to enter into a binding contract. Not only was Stonehill “ready, willing and able to close,” the emails between Stonehill and the Seller’s counsel “indicated the sale was moving ahead and included references to documents necessary for closing the transaction.”

The Seller accepted Stonehill’s offer and confirmed the bid in correspondence that clearly set forth “the sale price, the specific loan to be sold, the timing of the closing, and the manner of payment and wire transfer instructions — terms material to the agreement.” The Seller never indicated that the LSTA form of agreement or any proposed changes to the Seller’s loan sale agreement were unacceptable. In fact, the Seller’s counsel agreed that the LSTA documentation was the proper agreement to close the transaction.

The court concluded that “based on the totality of the parties’ actions and communications that they agreed to an enforceable contract, with express material terms and post-formation requirements.” In the event that the Seller desired this sale to be conditioned upon the execution of a written agreement, the Seller needed to clearly express such requirement without ambiguity. The court held that “the mere inclusion in an auction bid form of such formulaic language that the parties are ‘subject to’ some future act or event” was not sufficient. In fact, “less ambiguous and more certain language is necessary to remove any doubt of the parties’ intent not to be bound absent writing.”

Observations

This case is a cautionary tale for participants in the private loan trading and auction markets. In a dispute arising from circumstances occurring between an agreement on material terms and a closing, courts will take account of the totality of the parties’ conduct and communications. Furthermore, a party requiring that a sale be conditioned on the execution and delivery of definitive documents must make such condition clear, unambiguous and a material part of the bargain.