Thank You Very Much, Do We Have a Contract? Not So, Says Judge Gerber

Contributed by Julio C. Gurdian
Excluded from the exit financing arranged in the Lyondell Chemical case, Highland Capital sued UBS Securities, one of the lead arrangers of Lyondell’s exit facility, for tortious interference with an existing contract and tortious interference with prospective contractual relations.  In his opinion in Highland Capital Management, L.P. v. UBS Securities LLC (In re Lyondell Chemical Company), Judge Gerber of the United States Bankruptcy Court for the Southern District of New York ruled that both counts against UBS should be dismissed for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6).  On the first count, Judge Gerber ruled that there was no contract between Highland and Lyondell, and, thus, there could not have been interference.  On the second count, he ruled that UBS and Lyondell had the absolute right to not deal with Highland Capital.
According to the complaint, in March 2010, Lyondell distributed to Highland a confidential information memorandum related to its prospective exit facility.  The memorandum “offered participation” in a $1 billion senior secured term loan.  The form letter that was to be returned by prospective lenders and that was attached to the confidential memorandum stated that “Subject only to satisfactory documentation, we are pleased to commit: $__million to the $1.0 billion [exit] Facility.”  Highland, thereafter, issued a commitment letter in the form attached to the confidential memorandum related to the facility and agreed to participate in the loan syndicate.  On the same day, Lyondell sent out a responsive email to Highland that read “Thank you very much, [sic] we look forward to successfully clos[ing] this financing.”  When executing the final loan agreement on the exit facility, however, UBS, as lead arranger, did not include Highland as one of the exit lenders.  Subsequently, Highland commenced an adversary proceeding in the bankruptcy court against UBS.  In its complaint, Highland argued that each of the confidential memorandum, commitment letter and email had legal significance that created a contractual relationship between Highland and Lyondell, and, even if the documents did not create a contractual relationship, they evidenced the prospect of a contractual relationship.  It also argued that UBS interfered with such relationships.
After laying out the foundation for failure to state a claim under Rule 12(b)(6) in accordance with Bell Atlantic Corp. v. Twombly, and Ashcroft v. Iqbal, the court tackled the two issues before it: whether UBS tortiously interfered with Highland’s existing contract with Lyondell and whether UBS tortiously interfered with Highland’s prospective contractual relations.  The parties agreed on at least one thing; each issue was governed by New York law.
Tortious Interference with Existing Contract
On the first issue, the court first outlined the basic rule under New York law.  Tortious interference with an existing contract requires “the existence of a valid contract between plaintiff and a third party, defendant’s knowledge of the contract, defendant’s intentional procurement of the third-party’s breach of the contract without justification, actual breach of the contract, and damages resulting therefrom.” (internal quotations omitted).  Here, Highland’s claim, according to the court, failed because Highland’s complaint did not show a valid agreement between it and Lyondell.  To have an enforceable contract in New York, “there must be an offer, acceptance, and consideration, as well as a showing of a meeting of the minds, demonstrating the parties mutual assent and mutual intent to be bound.” (internal quotations omitted).
The court expressed its confusion as to what Highland was claiming formed the contract; was it the confidential memorandum together with the commitment letter, or was it the commitment letter with the return email from Lyondell?  In either case, the court noted that only one definitive loan agreement was executed by Lyondell, and that agreement excluded Highland.  The court ultimately concluded that neither scenario described by Highland constituted a contract.
Under the theory that the confidential memorandum constituted an offer, the court noted that the confidential memorandum was for informational purposes only, and the document so stated.  The court also recited part of the confidential memorandum to conclude that its intended purpose was not to create a binding agreement.  The confidential memorandum stated that until a definitive agreement is reached “the Recipient will be under no legal obligation of any kind whatsoever with respect to the Facility by virtue of the Notice and Undertaking except for the matters specifically agreed to herein and in the Special Notice.”  The court ultimately concluded that the confidential memorandum did not manifest an intent by Lyondell to be bound to anyone that submitted a commitment letter.  In fact, the court pointed out that the confidential memorandum specifically noted that lenders would be chosen later by Lyondell and UBS, and the document gave UBS the right to choose which lenders would participate in the loan.  In concluding this point, the court also cited to the commitment letter returned by Highland, which stated that “[Highland] understand[s] that allocations will be made at the discretion of [Lyondell] and [UBS].”
The court then applied New York law to these facts.  New York law attempts to prevent trapping a party into a surprise contractual relationship.  Thus, in New York, there is a “strong presumption against finding binding obligations in agreements which include open terms, call for future approvals and expressly anticipate future preparation and execution of contract documents.” (internal quotations omitted).  This presumption may be overcome if an initial agreement states that the parties intend to be bound by such agreement, pending a more definitive agreement.  Because the court concluded that the confidential memorandum did not have language in it binding the parties, the court also concluded Lyondell did not intend to be bound absent complete loan documentation.
The court cited Amcan Holdings, Inc. v. Canadian Imperial Bank of Commerce in support of its conclusion.  In that case, the parties negotiated a terms sheet with precise terms, but, as with the confidential memorandum in the Lyondell case, the term sheet included language that stated that the “Credit Facilities will only be established upon completion of definitive loan documentation . . . .”  Finding the Amcan court’s reasoning sound, the court concluded that a term sheet that is subject to more definitive documentation does not create a contract between the parties.
Highland relied on Teachers Insurance & Annuity Association of America v. Tribune and Lazard Freres & Co. v. Protective Life Insurance Co. to argue that the confidential memorandum constituted an offer and the commitment letter an acceptance, but the court found each case distinguishable.  In Tribune, the court noted that the parties there did intend to be bound by the commitment letter because it stated that a returned counterpart would form an agreement.  With respect to Lazard, the court found that it was inapposite because the initial communications at issue there, as per industry custom, indicated the parties intended to be bound.
The court, because it was helpful, expounded on Judge Leval’s description in Tribune of types of preliminary agreements that may form a binding contract.  The first type relates to a “complete agreement (including the agreement to be bound) on all the issues perceived to require negotiations.” (internal quotations omitted).  The second type is “more skeletal (involving mutual commitment to a contract on agreed major terms, requiring negotiations in good faith to agree on other terms and to reach final agreement).” (internal quotations omitted).  Indeed, the New York Court of Appeals, in IDT Corp. v. Tyco Group, S.A.R.L., while not fully adopting Judge Leval’s categories, noted that the conclusion of whether a preliminary agreement constitutes a contract turns on “whether the agreement contemplated the negotiation of later agreements and if the consummation of those agreements was a precondition to a party’s performance.” (internal quotations omitted).
Ultimately, the Lyondell court was unconvinced that the confidential memorandum and the commitment letter formed an agreement by which the parties intended to be bound. Likewise, the court held that the commitment letter could not have been the offer because it did not guarantee that Highland would receive any part of the exit facility, and the commitment letter expressly stated that it was subject to more definitive documentation.  The court also noted that the email response from Lyondell could not have been an acceptance because it is more accurately described as an acknowledgement, and New York law holds that more than mere acknowledgment is necessary to constitute acceptance.
Because the court held that no contractual relationship existed between Lyondell and Highland, the court dismissed Highland’s first count of tortious interference with a contract.
Tortious Interference with Prospective Contractual Relations
Once the court dismissed Highland’s first count, it turned to the second count, tortious interference with prospective contractual relations.  To survive a motion to dismiss, a challenge on such a claim, the plaintiff “must allege that (1) it had a business relationship with a third party; (2) the defendant knew of that relationship and intentionally interfered with it; (3) the defendant acted solely out of malice . . . or used dishonest, unfair, or improper means; and (4) the defendant’s interference caused injury to the relationship.”  UBS alleged two defenses with respect to the claim.  First, it argued that it was free to “act in the manner at issue because such was in its economic interest.”  Second, it claimed that it has the right to choose its deal counterparties. 
The court rejected the first defense as a ground for dismissal of the complaint under Rule 12(b)(6) because it would require too much external evidence.  To avail itself of such a defense UBS would have to prove that it “acted to protect its own legal or financial stake in the business of the entity with whom the plaintiff might otherwise have had an economic relationship.”  Once such a defense is established, it can only be defeated by a showing of malice.  On the face of the complaint, there were some showings that UBS had economic relations with Lyondell, but not enough to show that it was in UBS’s economic interest to leave Highland out of the financing.  The court also couldn’t conclude that the face of the complaint showed any malice by UBS.  While the court noted that UBS and Highland are subject to other very contentious suits against each other, such suits do not automatically mean that there were malicious intentions on UBS’s part.
On the second defense (privilege not to do business), however, the court concluded that it could dismiss Highland’s second count.  In New York, the “privilege to do business” defense provides that “every person may exercise lawfully, for reasons he deems sufficient or for no reasons whatever, and it is immaterial whether such refusal is based upon reason or is the result of mere caprice, prejudice or malice.”  Thus, the court dismissed the second count because it was the prerogative of UBS and Lyondell as to whether they should deal with Highland.
By rejecting both of Highland’s claims, the court acknowledged that parties who intend to be bound by their communications and preliminary agreements, such as the confidential memorandum and the commitment letter here, must make those intentions clear.  Where there is ambiguity as to parties’ intentions, a court is unlikely to find the existence of a contract.