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Litigation-Standstill Agreement Reached to Permit Wachovia Settlement Talks
New York Law Journal
October 07, 2008
A standstill in formal litigation activity was declared late Monday by Citigroup Inc., Wachovia Corp. and Wells Fargo Corp., as the three sides tried to work out a settlement last night on the sale of Wachovia.
The standstill, which puts a temporary halt to competing state and federal actions in Manhattan, expires at noon Wednesday, giving the parties time to complete an arrangement dividing the North Carolina-based bank's assets.
In New York Supreme Court, Citigroup sued for bad faith breach of contract and tortious interference with contract claiming that Wells Fargo blew up its government-backed deal to buy Wachovia's banking assets for about $2.1 billion.
Justice Charles Ramos was assigned the case late Monday.
It was Justice Ramos who ruled from his Cornwall, Conn., weekend home on Saturday in Citigroup's favor, granting the financial services giant an extension on its "exclusivity agreement" with Wachovia.
Ramos was overruled on Sunday by Justice James M. McGuire of the Appellate Division, 1st Department, who issued a brief order saying "substantial questions have been raised regarding the authority of Judge Ramos to have issued the order while physically located outside the State of New York."
Meanwhile in the Southern District of New York, Judge Lewis Kaplan drew the assignment Monday on Wachovia's federal suit seeking a declaratory judgment that would allow it to proceed with a deal for Wells Fargo to purchase the entire bank for approximately $15 billion.
Kaplan initially scheduled a hearing for 2 p.m. today on Wachovia's motion for a temporary restraining order.
Monday afternoon, Sheila Blair, the chair of the Federal Deposit Insurance Corp., expressed optimism that a deal could be struck as early as Monday night.
Published reports have speculated that any agreement would split Wachovia's branches between Citigroup and Wells Fargo.
Wachovia's lawsuit, filed by David Boies of Boies, Schiller & Flexner, claims the agreement-in-principle that the FDIC, Citigroup and Wachovia signed on Sept. 29, did not prevent Wachovia from seeking a better deal.
And by comparison with the Citigroup proposal, in which the FDIC committed billions of taxpayer dollars to limit losses on Wachovia's loan portfolio, the federal complaint filed by Wachovia states the Wells Fargo transaction is "far superior to Wachovia, and the American taxpayer, than anything Citigroup is prepared to offer."
The Wells Fargo proposal would not require participation by the FDIC.
In state court, Citigroup claimed that the exclusivity agreement signed by Wachovia on Sept. 29 barred it until Monday from other merger talks or large stock sales that would interfere with Citigroup's pending deal.
In the complaint on behalf of Citigroup, attorney Gregory P. Joseph, said, "Among the differences, the illegitimate Wells Fargo Deal -- unlike the Citigroup agreement to acquire Wachovia's commercial banking subsidiaries and other businesses -- triggered the golden parachutes of Wachovia Chief Executive Officer Robert Steel and its other senior executives, which would enable these executives to bestow upon themselves a $225 million windfall."
But in federal court, Wachovia, which sought to remove Citigroup's state action Monday, said the exclusivity or "letter" agreement was unenforceable under §126(c) of the Emergency Economic Stabilization Act of 2008, the so-called bailout package approved by Congress and signed Friday by President Bush.
That section provides that agreements that restrict the ability to acquire "any insured depository institution" in a transaction in which the FDIC exercises its authority to confront "systemic risk" under the Federal Deposit Insurance Act, are unenforceable as "contrary to public policy."
Wachovia's federal suit, which also seeks damages and attorney fees, claimed that Citigroup's argument would restrict the ability of Wachovia directors to meet their fiduciary obligations to their shareholders.
Citigroup is seeking in its state litigation $20 billion in compensatory damages and $40 billion in punitive damages, an injunction preventing Wachovia from negotiating a merger and specific performance of the exclusivity agreement.
Its initial verified complaint also asked for a judgment that the proposed agreement between Wachovia and Wells Fargo is contrary to §126(c), but a second complaint dropped that language.
A hearing has been scheduled in state suit for 9:30 a.m. Friday.
In addition to Joseph, Citigroup is represented by his partners Pamela Jarvis, Douglas Pepe and Paul Bschorr of the Gregory P. Joseph Law Offices.
Wachovia is relying on Boies and George Frampton of Boies Schiller. Wells Fargo is relying on Eric Seiler of Friedman Kaplan Seiler & Adelman.
