Beware When Buying Claims

           In the multi-billion-dollar claims-trading market, your offer and acceptance might not be what you thought it was. While the bankruptcy court in its recent decision In re Westinghouse Electric Company LLC et al.[1] would not establish terms of custom in the industry of claims trading, especially when dealing with nonindustry players, the bankruptcy court did provide guidance as to what would not constitute a binding agreement or a Type II contract.

            Before the bankruptcy court was an objection to the notice of transfer of claims for three proofs of claim filed in the Westinghouse bankruptcy. The proofs of claim were filed by Landstar Global Logistics Inc., Landstar Inway Inc. and Landstar Express American Inc. (collectively, Landstar). Landstar was initially approached by Seaport Global Holdings LLC (Seaport), who was acting on behalf Whitebox Advisors LLC and Whitebox Asymmetric Partners L.P. (collectively, Whitebox). Whitebox alleged that the transfer agreement was fully binding and enforceable, while Landstar contended that there had not been an offer and inequitable acceptance.

            The bankruptcy court agreed with Landstar, but why? The bankruptcy court’s analysis paid particular attention to the intent of the parties and exact language in the email exchange between Landstar and Seaport, as well as witness testimony at the evidentiary hearing.

Industry player Seaport had suggested the initial sell order language to nonindustry player Landstar as follows:

“Landstar agrees to sell its unsecured claims against Westinghouse,” amount to be filled in by Landstar. “This offer shall be subject to terms and conditions and execution of documentation by both Buyer and Landstar.”[2]

Landstar had made it clear that they could only agree on the price and that the legal department would have to review all of the terms and conditions, and sent the following sell order to Seaport:

Landstar agrees to sell its unsecured claims...; this offer shall be subject to agreement of terms and execution of documentation by both Buyer and Landstar... (emphasis added).[3]

Seaport’s response, as the bankruptcy court explains in great detail (and for good reason), was not in fact an acceptance or a Type II contract but a counteroffer:

This email confirms that we are “done’; Seaport’s client “Buyer” buys and Landstar “Seller” sells,... subject to:

* Agreement of terms and execution of documentation agreeable to both Buyer and Seller

* Buyer’s satisfactory due diligence on the claims being sold

* Landstar providing recourse as to the national amount of the claims; any repayment under such provisions shall include 5% interest

Please respond to this email in the affirmative confirming the above, after which I will provide Trade Confirmation for your review....[4]

As one could guess, Landstar’s response was not in the affirmative:

James, I just want to get some clarity here. Why am I agreeing to the terms below? Does this commit Landstar to the deal before we see the actual trade confirmation? My legal department will need to review any documents that need to be signed.[5]

After the party engaged in discussions, Seaport sent the following email:

This commits both you (and my client) to the 78% Purchase Price, subject to agreement of terms and execution of documentation. We just want to make sure we are all conceptually on the same page regarding the terms before spending additional efforts (including time/money on attorneys).[6]

            While Landstar’s responded, “Sounds good. Please send the documents so I can get the review process started,” two days later, Landstar’s counsel informed Seaport that “Landstar is going to have to remove itself from this offering at this time. We did a risk analysis and the figures and calculations didn’t work for us.”[7] Landstar’s reasons were clearly the interest and recourse provisions added by Seaport, which had never been discussed or agreed upon.

            It was no surprise that the bankruptcy court held that Seaport’s email constituted a counteroffer, not an acceptance to Landstar’s sale offer, and as a counteroffer Landstar was free to either accept or reject the counteroffer, and the counteroffer was clearly rejected. As a result, there was no contract between Seaport and Landstar.[8]

            Whitebox asserted that this was a Type II contract, that there was an agreement on price and that the parties agreed to act in good faith to come to an agreement on the other terms. The bankruptcy court rejected this argument as well. A Type II contract requires an agreement to be legally bound on certain terms and to work together in good faith on other open items, clearly not the case here when at all times the language contained “subject to.” The bankruptcy court determined that had Seaport intended there to be a binding Type II contract, it should have explicitly asked Landstar to confirm that the parties had an enforceable agreement as to price and enforceable agreement to negotiate other terms in good faith.

            The bankruptcy court rejected the contention of an industry standard, in large part because of the precedent before it, as well as Seaport’s every own arguments in the Luxor Capital Group L.P. v. Seaport Group LLC[9] case. In that case, Seaport argued that the “subject to” language gave them an out, and the court agreed. Here, the bankruptcy court would endorse Whitebox’s position given the position Seaport took in Luxor.

            The bankruptcy court warned that claims traders should take note that if they want to deal with nonprofessionals, it is incumbent that they do so in a clear and unequivocal way, and not to set traps for the innocent and unwary.

            On a similar note, the Second Circuit Court of Appeals recently weighed Winston[10] factors when it upheld the bankruptcy court’s decision to enforce a settlement agreement not finalized in writing.[11] In this case, the chapter 11 plan administrator (Lehman) filed an adversary proceeding to “claw back” transfers to hundreds of noteholder defendants, including Shinhan Bank. The parties engaged in mediation, which resulted in an email exchange regarding settlement. Shinhan’s email indicated that the parties agreed to the terms of the settlement, and the mediator’s email confirmed that they accepted his proposal and agreed on the settlement payment amount. While the parties were formalizing the settlement, the bankruptcy court ruled on a motion to dismiss and dismissed Lehman’s claims against Shinhan.

            As one could guess, Shinhan asserted that a settlement had not been reached and refused to pay the settlement amount. Lehman filed a motion to enforce the settlement agreement, which was granted by the bankruptcy court. The Second Circuit applied the Winston factors, and, indicating that this was a close case, held that there was a binding and enforceable contract, as there was no express reservation of rights to be bound or outstanding material terms to be negotiated.

            Although the Second Circuit’s rulings by summary order may not have perceptual effect, it provides guidance to parties that they should be mindful of settlement communications and intentions to be bound.