Acceptance of Bid at Auction Created Binding Agreement Notwithstanding Lack of Final Writing

On December 20, 2016, the Court of Appeals issued a decision in Stonehill Capital Management, LLC v. Bank of the West, 2016 NY Slip Op. 08481, granting plaintiff's motion for summary judgment for breach of contract notwithstanding that the contract envisioned that it would be memorialized in a later, never-executed, writing.

In Stonehill Capital Management, Defendant BOTW put non-performing loans up for auction, including one syndicated loan (the "Goett Loan"), which had a principal value of $8.7 million. The terms of the auction provided that acceptance of any bid would "require immediate execution of pre-negotiated Asset Sale Agreement(s) by Prospective Bidder accompanied by a 10% non-refundable wire funds deposit." The asset sale agreement would be made available for review to bidders. BOTW also "reserve[d] the right, in their sole and absolute discretion, to withdraw any or all of the assets from the loan sale, at any time . . . ."

Plaintiff Stonehill expressed interest and was given a copy of the asset sale agreement (known as the LSA). Stonehill submitted a bid of $2.3 million on the Goett Loan, and also informed BOTW that the LSA should either be modified or replaced with an alternate form, the LSTA. BOTW then informed Stonehill that it had submitted the winning bid, and the parties exchanged markups of the LSA. BOTW also sent Stonehill an email stating that, "subject to mutual execution of an acceptable [LSA], [BOTW] has agreed to the Stonehill bid . . . ." The email included the purchase price, the terms for closing (including a signed agreement and a 10% non-refundable deposit), and wiring instructions for the money.

BOTW and Stonehill continued to negotiate over the terms of the LSA/LSTA, also exchanging other agreements and obtaining third-party authorizations.

Then, BOTW found out that Stonehill was refinancing the Goett Loan, increasing its value. BOTW decided to withdraw from the transaction, citing the provisions permitting it to "withdraw any or all of the assets," and conditioning acceptance on an executed agreement and a 10% deposit.

Due to the refinancing, BOTW was able to sell the Goett Loan elsewhere for $4.1 million, an increase of approximately $1.8 million over Stonehill's bid.

Stonehill sued BOTW, and both parties moved for summary judgment. Supreme Court granted Stonehill's motion for summary judgment on its breach of contract claim, but the First Department reversed, granting summary judgment to BOTW on the grounds that Stonehill had not establish a valid acceptance. The Court of Appeals in turn reversed the Appellate Division and granted summary judgment to Stonehill.

The essential question of law to be decided was whether a binding contract had ever been formed.

As the Court of Appeals construed the facts, BOTW had solicited bids that were to be "non-contingent final offers that, if accepted by [BOTW] required execution by the bidder of a pre-negotiated asset sale agreement and an accompanying 10% deposit . . . . Thus, the terms of the sale were pre-set." Stonehill submitted a bid and requested modifications to the pre-set agreement. BOTW then accepted Stonehill's offer "in a correspondence setting 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. BOTW in no way indicated that the LSTA form or any modifications were unacceptable." The Court of Appeals held that "the totality of the parties' conduct and the 'objective manifestations' of their intent . . . . established [their] intent to enter a binding agreement in which BOTW would sell the Goett Loan to Stonehill at the accepted final price."

The Court of Appeals rejected BOTW's reliance on the "subject to mutual execution of an acceptable [LSA]" disclaimer in its email to Stonehill:

Certainly, when a party gives forthright, reasonable signals that it means to be bound only by a written agreement, courts should not frustrate that intent.

Such a forthright, reasonable signal is not obvious from the mere inclusion in an auction bid form of such formulaic language that the parties are "subject to' some future act or event. Less ambiguous and more certain language is necessary to remove any doubt of the parties' intent not to be bound absent a writing . . . .

We disagree with BOTW that the 'subject to' language in the April 27th email clearly expresses an intent not to be bound to the sale of the Goett Loan. This email stated that closure of the transaction required execution of a signed document and Stonehill's tender of the 10% deposit. That, however, is not the same as a clear expression that the parties were not bound to consummate the sale and that BOTW could withdraw at any time, for any reason. Nor did BOTW make known its desire for an unrestricted exit from the deal before accepting Stonehill's bid . . .

This was never made explicit before the bid was accepted either. There is a difference between conditions precedent to performance and those prefatory to the formation of a binding agreement . . . . 'Most conditions precedent describe acts or events which must occur before a party is obliged to perform a promise made pursuant to an existing contract, a situation to be distinguished conceptually from a condition precedent to the formation or existence of the contract itself.' Here, the signed writing and deposit were post-agreement requirements necessary for the consummation of the transfer, as established by the continued exchange of documents necessary to the asset transfer.

The Court of Appeals distinguished the present facts from those found in Truman Capital Advisors LP v. Nationstar Mortgage LLC, 599 Fed.Appx. 6 (2d Cir. 2015), where the applicable auction terms stated that "no obligation to sell shall be binding on Seller unless and until a written contract of sale or loan sale agreement is signed and delivered by Seller," because BOTW’s terms were not "affirmative declarations foreclosing a sale," merely "post-agreement requirements the parties were obliged to perform pursuant to an existing agreement."

The Court of Appeals also noted that this was not a case where disputes concerning the parties intentions gave rise to questions of fact:

The clear objective of both parties upon the acceptance of the offer was to sell the Goett Loan to Stonehill for the bid amount. While that objective remained unchanged for Stonehill, BOTW reconsidered the sale—not because of the failure to execute a written agreement or because Stonehill had not tendered the 10% deposit, but because BOTW concluded that it would make more money by reneging on the sale. That choice was a breach of its agreement with Stonehill.

Finally, in a footnote, the Court of Appeals brushed aside BOTW's claimed "right to withdraw" assets, stating that, "read in context, the disclaimer concerns BOTW's ability to withdraw assets from the 'sale,' and not whether it may withdraw an acceptance of an offer."

The Stonehill case should be of interest to practitioners because it shows that commercial parties' frequently-assumed belief that there is no deal until a contract is signed can be in error. As a precedential matter it remains to be seen what effect the case will have—will lower courts look at Stonehill's "bid plus proposed modifications" followed by BOTW's non-objecting email setting forth the essential terms of the deal, as a counteroffer followed by an acceptance, thereby waiving the "no deal without a writing" term of the original offer, or will they focus on BOTW's fairly blatant admission that the deal did not fail over any disputed contract term, and treat this case as an example of a party failing to negotiate a writing in good faith? Time will tell.