To sue for breach of contract, there has to be a contract. A recent opinion from the federal Fifth Circuit Court of Appeals illustrates that it’s not always clear whether an enforceable contract existed or not—even when a deal involves sophisticated parties and more than $15 million.
In late 2009, Highland Capital and Bank of America entered negotiations seeking to reach an agreement whereby Bank of America would sell its interest in certain bank debt (the “Regency Loan”) to Highland Capital. On December 3, 2009, Highland Capital’s representative called Bank of America’s representative to finalize the agreement and its terms.
According to the allegation in Highland Capital’s lawsuit, the parties agreed in the phone conversation to all material terms of the debt trade, including the description, amount, and price of the debt to be sold, namely, $15,500,000 of the Regency Loan at the price of 93.5% of par. Highland Capital further alleges that, pursuant to industry practice, the agreement also incorporated standard terms and conditions published by the Loan Syndications and Trading Association, Inc. (“LSTA”) providing that an oral debt-trade agreement is binding on the parties, so long as the agreement includes all material terms. According to Highland Capital, Bank of America did not reserve any non-LSTA, non-industry terms or conditions during the December 3 phone call.
Following the December 3 phone conversation and on that same day, Highland Capital sent an email to Bank of America confirming that the debt-trade agreement was complete. The Bank of America representative responded shortly thereafter with an email confirming the agreement and adding that it was “subject to appropriate consents and documentation.” As alleged in their complaint by Highland Capital, this “subject to” language called for the incorporation of the LSTA’s standard terms in the agreement, but did not undermine the enforceability of the original oral agreement, nor did it permit either party to demand the inclusion of non-industry or non-LSTA standard terms in the agreement.
Bank of America later refused to settle the debt trade unless Highland Capital agreed to include additional terms in the agreement relating, among other matters, to indemnification, legal fees, and waiver of legal claims. According to Highland Capital, these additional terms departed from the standard terms governing the December 3 oral agreement.
Highland Capital filed suit against Bank of America for breach of contract and promissory estoppel, alleging that the terms sought by Bank of America did not conform to the parties’ oral agreement.
The district court granted Bank of America’s motion to dismiss the lawsuit. The district court agreed with Bank of America that there was no enforceable contract because the deal was “subject to appropriate consents and documentation” and the parties never reached an agreement on “appropriate consents and documentation.”
The Fifth Circuit disagreed, reversed the district court, and reinstated the breach of contract claim. According to the Fifth Circuit, the “subject to appropriate consents and documentation” e-mail did not defeat the breach of contract claim because Highland Capital pleaded facts which, when accepted as true, defined this language in a manner that preserved the claim. Most notably, Highland Capital’s complaint asserted that “the consents and documentation referenced in [Bank of America]’s email to Highland Capital were constrained by the LSTA Standard Terms, and any specific terms that deviated from the LSTA Standard Terms were required to be expressly reserved in [Bank of America]’s confirmation of the trade at the time the binding agreement was reached telephonically.” Specifically, Highland Capital alleged that, within the industry, all debt trades are typically subject to the borrower’s consent, and “even if the borrower does not consent, the LSTA Standard Terms still require the parties to close the transaction as a participation rather than an assignment.” Therefore, “the borrower’s consent is not a condition precedent to the formation of a binding and enforceable trade.”
Similarly, with respect to the reference to “documentation” in the email, the complaint alleged that “bank debt trades conducted under the LSTA Standard Terms typically involve the execution of a standard trade confirmation to close the transaction,” but the execution of a confirmation “is not a condition precedent to the formation of a binding and enforceable trade once the parties agree to the material terms of the sale.” Accordingly, because Highland Capital asserted in its complaint that the parties did not reserve any non-industry, non-LSTA standard terms, but Bank of America nonetheless demanded non-standard terms, Highland Capital presented a viable claim for breach of contract.
In addition, Highland Capital’s complaint alleged that Highland Capital and Bank of America had entered into past trades governed by the LSTA standard terms, such that any future trades between them were bound by those terms. Thus, the Fifth Circuit determined that it appeared from Highland Capital’s allegations regarding the LSTA standard terms that the parties were bound once they orally agreed to the material terms of their transaction, even if the later written confirmation would contain additional “subject to” conditions.
The Fifth Circuit noted that Bank of America may argue that the parties never agreed on all material terms, but that is an issue of fact, and it should not be a basis for dismissing the claim. The full opinion in Highland Capital Capital Management, L.P. v. Bank of America, — F.3d —- (5th Cir. October 2, 2012) is available online here
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