Conditional Language Trumps Market Customs in Claims Trading Dispute
Claims traders regularly agree to buy and sell claims based on little more than a series of emails confirming the economic terms of the trade. Trades are later memorialized in definitive documentation, but it is widely accepted in the market that reaching agreement on price and amount represents a binding commitment to close the trade. Disputes may arise, however, when experienced traders transact with one-time or infrequent market participants that may not view the back-and-forth email negotiations as creating any kind of binding agreement between the parties.
The SDNY Bankruptcy Court recently confronted this scenario in the Westinghouse Electric Company bankruptcy case. 588 B.R. 347 (Bankr. S.D.N.Y. 2018). There, seller (“S”), a prepetition vendor of Westinghouse, sought to sell its claim to purchaser (“P”), an alternative investment fund, through a broker (“B”). S offered its claim to B at a particular price, but conditioned its offer on “agreement of terms and execution of documentation.” After conferring with P, B responded to S confirming the claim amount and price, but included in its response new terms that would have required S to make a recourse payment with interest should the claim ultimately be allowed at a reduced amount (B proposed the recourse term because it identified a discrepancy between the amount of S’s filed claim and the claim amount listed in the debtors’ schedules). S sought clarity from B concerning the new terms and reiterated that its legal department would need to review any trade documents. In an effort to reassure S that all parties are “conceptually on the same page regarding terms,” B confirmed to S that the agreement on the sale price was “subject to agreement of terms and execution of documentation.” In response, S stated “sounds good” and requested trade documents to commence the review process. S ultimately abandoned the deal due to the proposed recourse and interest provisions.
P filed claim transfer notices with the court despite S’s refusal to close the trade. S objected to the transfer notices and the bankruptcy court held a trial over whether the parties entered into any kind of binding agreement. At trial, P argued that S entered into a so-called “Type II” agreement, which the Second Circuit described as a “binding agreement as to certain terms and a binding agreement to negotiate in good faith as to other open issues.” S countered that its communications with B made clear that S did not intend to be bound unless and until the parties executed definitive written agreements.
The bankruptcy court’s discussion began with first principles of contract law – in order to create a binding agreement, there must be an offer and “unequivocal acceptance.” Acceptance is not unequivocal if it is “conditioned on additional or different terms;” rather, such a response is “equivalent to a rejection and counteroffer.” The court found that B did not accept S’s offer, but rather made a counteroffer when it introduced terms concerning recourse and related interest payments. B’s own expert underscored the importance of the recourse provision when he testified that “he would usually recommend against doing a deal without such a provision.”
Finding that B’s response was a counteroffer, the court still needed to resolve whether S and B entered into a Type II agreement. The court held that it did not. First, the court found that B’s counteroffer did not even meet the requirements of a valid Type II offer – rather than an explicit “offer to be bound,” the counter was “an offer to accept the price if – and only if – another particular term were included in the deal.” Moreover, the court rejected P’s claim that market participants understood they should negotiate in good faith once they have reached agreement on price. The court was not convinced that such a market practice existed, and even if it did, there was “no evidence that [S]…had any familiarity with the alleged customs of people who more regularly deal with each other in the trading of claims.”
The court further found that S’s conduct throughout the negotiations belied any claim that any agreement was formed. The court acknowledged several cases that ascribed little value to conditional language where other evidence of an intent to be bound existed, but found those cases distinguishable. Here, S “had clearly indicated its intention not to be bound to any term, unless and until a full written agreement on all terms was signed and executed.”