A unanimous New York Court of Appeals recently held that the acceptance of an auction bid for the sale of a syndicated loan may constitute a final and binding trade, even if there is language indicating that the agreement is “subject to” the execution of a mutually acceptable, written agreement. The ruling overturns a New York Appellate Court decision that would have permitted parties to change their minds after agreeing to trades during a competitive online auction. The holding of New York’s highest court establishes that oral and electronic agreements in the debt and equity market can be sufficient under certain circumstances to form final and binding agreements.

In Stonehill Capital Management, LLC, et al. v. Bank of the West, Bank of the West (BOTW) solicited Mission Capital Advisors, LLC (Mission) to manage a competitive online sealed-bid auction of certain non-performing mortgage loans. As part of the bid process, Mission issued a memorandum, which announced its solicitation of indicative bids for the purchase of the loans and invited non-contingent final offers. Following an initial expression of interest, Stonehill Capital Management, LLC (Stonehill) submitted a final bid to Mission to purchase a loan known to the parties as the “Goett Loan.” Mission later notified Stonehill by telephone that it had submitted the winning bid for the Goett Loan, and confirmed in a follow up email that “subject to the mutual execution of an acceptable Loan Sale Agreement,” BOTW had accepted Stonehill’s bid.

Thereafter, the parties exchanged drafts of a proposed final agreement in a series of email exchanges. However, before a final sales agreement could be executed, Mission notified Stonehill that BOTW had decided not to proceed with the sale of the Goett Loan. Stonehill sued BOTW and Mission, alleging breach of contract and breach of the implied covenant of good faith and fair dealing. The trial court granted Stonehill’s motion for summary judgment on the breach of contract action, finding that there was a binding agreement.  The First Department reversed, holding that Stonehill had failed to establish valid acceptance on the contracts issue.

Finding that the totality of the parties’ actions and communications reflected an agreement to trade, the New York Court of Appeals unanimously reversed the First Department’s order. Notably, the Court held that BOTW’s and Mission’s telephonic and electronic communications with Stonehill largely established that the parties intended to enter into a binding agreement. The Court also rejected BOTW’s argument that an agreement was not formed because the transaction was “subject to” the execution of a final, written agreement. Reviewing precedent concerning the use of “subject to” language, the Court held that “less ambiguous and more certain language [was] necessary” to demonstrate that the parties intended to be bound only by a written agreement. “To adopt BOTW’s argument,” according to the Court, “would mean that the auction was neither final nor binding – in direct contravention of the auction sales terms and the usual manner in which reserve auctions proceed.”

As the buying and selling of syndicated loans is generally done through an auction process that is fast moving, thereby allowing buyers and sellers to obtain the best price before market forces shift, the ruling of the Court of Appeals is consistent with the position of the Loan Syndications and Trading Association (LTSA) that a final, written agreement is not required to enter into a binding trade. While Stonehill is not the first decision in New York to recognize the formation of a contract absent a written agreement, it establishes that ordinary contract principles apply equally to the sale of debt and equity instruments. Moreover, it reinforces that trial courts should analyze the “totality of the parties’ actions and communications” in determining whether an enforceable agreement concerning the sale of a syndicated loan exists.

Stonehill also instructs parties that the use of the language “subject to” will not necessarily permit a party to withdraw its acceptance to a binding agreement concerning the sale of a syndicated loan. A party will only be able to rely on such language if it “clearly expresses an intent not to be bound” absent a written agreement. Simply providing that such a sale is “subject to [the] mutual execution of an acceptable [agreement]” may not be enough.