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When Is A Trade A Trade. Let The Argument Begin

November 17, 2016 - On Monday the New York State Court of Appeals heard oral arguments in a case in which the LSTA filed an amicus brief because a bad decision could have serious negative ramifications for the loan trading market.  At issue in Stonehill Capital Management v. Bank of the West are whether (i) a seller at auction can withdraw a loan after it has accepted a winning bid for that loan, and (ii) an oral loan trade is enforceable so long as it identifies the material terms of the trade even if it is subject to documentation. 

In March 2012, BOTW (the “bank”) engaged a broker to conduct an auction to sell a loan portfolio including the loan at issue.  The auction offering memo set out the terms for bidding and stated that final bids would be “non-contingent offers (the acceptance of which by seller will require immediate execution of a pre-negotiated Asset Sales Agreement)” and that the “seller reserves the right, at their sole and absolute discretion, to withdraw any or all assets from the loan sale at any time.”  The parties agreed, on the day that Stonehill submitted its bid, to use standard LSTA documentation.  Two days later, the broker informed Stonehill that its bid had been accepted, and followed up a week later with an email confirming that the bank accepted Stonehill’s offer “subject to mutual execution of an acceptable” loan sale agreement.  The email also contained the material terms of the trade, including a description of the loan asset, the purchase price, the closing date and the manner of payment.  Subsequently, the bank informed Stonehill that it would not proceed with the sale; internal documents from the bank appear to show that it withdrew the loan because it determined that it would make more money holding the loan (which it discovered would be partially refinanced). 

The Supreme Court of New York (which is the state's trial court), in a very thoughtful opinion, concluded that a seller could not withdraw a loan asset once a bid had been accepted and that an oral trade is, indeed, binding.  Unfortunately, a panel of the Appellate Division, New York's interim appeals court, reversed and the Court of Appeals, the state’s highest court, agreed to review the case. 

The panel was very engaged and pressed counsel for the bank and the broker very aggressively on whether a seller can actually withdraw an asset from an auction “after the gavel falls” and wondering why a contract did not exist if the seller and buyer already agreed to the form of sale agreement.  While it is unwise to predict the outcome of a case based on oral arguments, members of the Court certainly seemed to favor the position espoused by Martin Eisenberg, counsel for Stonehill. 

For a deeper dive into the facts and issues in this case, please see our January 29, 2016 semi-annual review.

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