New York Court of Appeals Reaffirms Binding Nature of Oral Agreements to Trade Loans – Stonehill Capital Management, LLC v. Bank of the West, 28 N.Y.3d 439, 2016 WL 7348990 (2016).
In this case, the New York Court of Appeals reaffirmed the binding nature of oral agreements to trade loans. In a unanimous decision, the court ruled that even though a final agreement had not been executed, the totality of the parties’ actions and communications reflected an agreement to trade that was binding, and that a seller of a loan in an auction was bound after it had accepted a winning bid for the loan.
The defendant, Bank of the West (“BOTW”), worked with a broker to conduct an auction for the sale of a syndicated loan. The plaintiff submitted the winning bid, and several days later, BOTW sent a written confirmation of trade that included the price, quantity and other material terms. BOTW’s written confirmation specifically noted that the trade was “subject to mutual execution of an acceptable [loan sale agreement]” and payment of a 10% deposit. BOTW initially suggested a form of loan sale agreement to document the trade, but the plaintiff responded that the Loan Syndications and Trading Association’s (“LSTA”) standard syndicated loan transfer document would be more appropriate. Although both parties ultimately agreed to use the LSTA’s standard form, no final loan sale agreement was ever executed. Shortly after the parties confirmed the trade, the loan substantially increased in value and BOTW sought to back out of the trade, arguing that because no agreement was executed and the deposit never paid, there was no binding trade.
The trial court initially ruled in favor of the plaintiff, but this decision was reversed by a panel of the Appellate Division, New York's interim appeals court. Subsequently, the New York Court of Appeals, on summary judgment, reversed the interim appellate court's decision, finding that the offering memorandum documenting the auction contained terms that were effectively pre-set and that at no point did BOTW indicate it was unwilling to proceed with the transaction. The Court of Appeals held that BOTW’s “subject to” language was insufficient to express an intent not to be bound to the sale of the loan. The court explained that there was a distinction between conditions precedent to consummation of the transfer and those prefatory to the formation of a binding contract, and noted that “[l]ess ambiguous and more certain language is necessary to remove any doubt of the parties’ intent not to be bound absent a writing.” According to the court, the fact that the parties exchanged correspondence about further documentation merely indicated that they “anticipate[d] and identif[ied] future events necessary to close the sale [, which] is not the legal equivalent of an intent to delay formation of a binding contract.” This ruling also represents a victory for the LSTA, which had submitted an amicus brief in support of the plaintiff.