Roy L. Reardon and William T. Russell Jr.
Roy L. Reardon and William T. Russell Jr. ()

Late last month, in a unanimous decision written by Judge Jenny Rivera, the Court of Appeals clarified the circumstances in which New York courts will find that parties have a binding and enforceable agreement in the absence of a final written contract.


In Stonehill Capital Management v. Bank of the West, the Court of Appeals found that defendant Bank of the West (BOTW) had entered into a binding agreement and was liable for breach despite the fact that its acceptance of a bid was expressly subject to the execution of a final agreement and despite the fact that BOTW expressly reserved the right, in its sole and absolute discretion, to withdraw from sale any or all of the assets it had offered to sell.

BOTW was the lender on certain non-performing loans and retained co-defendant Mission Capital Advisors to manage an auction of a number of these loans, including an $8,787,141 loan referred to by the parties as the “Goett Loan.” Mission prepared offering materials including an Offering Memorandum stating that Mission, in conjunction with BOTW, would select final bids that would require immediate execution of a pre-negotiated asset sale agreement and submission of a non-refundable 10 percent deposit. The Offering Memorandum also provided that BOTW “reserves the right, at their sole and absolute discretion, to withdraw any or all of the assets from the loan sale, at any time” and “[o]nly those representations and warranties that are made by [BOTW] to a prospective bidder in a definitive, executed loan sale agreement shall have any legal effect.”

Stonehill Capital Management, Stonehill Institutional Partners and Stonehill Master Fund (collectively, Stonehill) expressed an interest in the Goett Loan, and Mission forwarded to them a proposed Loan Sale Agreement (LSA). Two days later, on April 18, 2012, Stonehill submitted a $2,363,142 final bid on the Goett Loan. Stonehill also informed Mission that the LSA was not the proper documentation to effect the transfer of a syndicated loan like the Goett Loan. Stonehill offered to either modify the LSA or use a standard industry form. On April 20, Mission notified Stonehill that it had submitted the winning bid and three days later Stonehill sent Mission a revised version of the LSA. The parties exchanged some correspondence regarding the proper form for documenting the sale and BOTW’s lawyer informed Stonehill that he had been unaware that the Goett Loan was a syndicated loan and that he now preferred to use the industry form that Stonehill had suggested. Stonehill then sent BOTW an industry form agreement that included the terms of the Goett Loan sale that had been set forth in the offering documents and Stonehill’s winning bid.

In the meantime, on April 27, Mission emailed Stonehill written confirmation that its bid had been accepted “[s]ubject to mutual execution of an acceptable” agreement. Shortly thereafter, BOTW learned that Stonehill had provided financing to Goett, which substantially increased the value of the loan. On May 18, BOTW informed Mission, which forwarded the communication to Stonehill, that BOTW “will not proceed with this trade because it has no obligation to do so. There are no agreements (oral or written) between [BOTW] and Stonehill Capital. The Offering Memorandum specifically permits [BOTW] to withdraw any loan from the auction at any time. Specifically, it states ‘The Seller reserve[s] the right, at their sole and absolute discretion, to withdraw any or all of the assets from the loan sale, at any time.’ In addition, Mission Capital’s bid response email to Stonehill conditioned [BOTW's] response to the execution of a definitive loan sale agreement.”

On June 21, as result of the financing Goett had received from Stonehill, BOTW received $4,197,441 in repayment on the loan from Goett, which is approximately $1.8 million more than BOTW would have received from Stonehill had it proceeded with the loan sale.

Stonehill commenced an action in Supreme Court, New York County asserting claims for breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment and indemnification. Stonehill moved for summary judgment and BOTW cross-moved for summary judgment dismissing the complaint. The trial court granted Stonehill’s motion for summary judgment on the breach of contract claim and denied the cross-motion. The Appellate Division, First Department reversed, finding that Stonehill had failed to establish a valid acceptance needed to make the parties’ agreement enforceable.


The Court of Appeals granted leave to appeal, reversed the First Department’s decision and reinstated the trial court’s judgment in favor of Stonehill on its breach of contract claim.

The court was clearly troubled by the evidence suggesting that BOTW terminated the transaction because it learned that Stonehill was refinancing the loan and that BOTW accordingly realized that it would make more money by not selling. Rather than rely on one of Stonehill’s equitable causes of action, however, the Court of Appeals found that BOTW had breached an actual agreement with Stonehill. The court concluded, based on the totality of the circumstances, that BOTW’s acceptance of Stonehill’s bid constituted a binding contract to sell the Goett Loan. The court pointed to the fact that BOTW’s April 27 acceptance of Stonehill’s bid confirmed the material terms such as the price, the specific loan to be sold, the timing of the closing and the method of payment and the fact that BOTW failed to identify any problems with the industry standard form or Stonehill’s terms before it announced that it was withdrawing from the sale.

The court rejected BOTW’s argument that the fact that the transaction was subject to a final sales agreement meant that the parties did not yet have a binding contract. The court noted that this “subject to” language was not a clear expression that BOTW was not bound by its acceptance of Stonehill’s auction bid and could withdraw at any time. The court also rejected, in a footnote, BOTW’s argument that it had expressly reserved the right, at its sole discretion, to withdraw any or all assets from sale at any time. The court found that, read in context, this only allowed BOTW to withdraw loans from sale but not to withdraw acceptance of an offer to sell.

The Takeaway

The lesson for practitioners here is that if a client wants to preserve its ability to withdraw from a transaction before a final agreement is executed, it needs to make that intent clear using language more explicit than simply providing that the deal is “subject to” a final, executed agreement. The client should explicitly state that any accepted offer will not be binding unless and until the parties have entered into a final, written agreement. Anything less runs the risk that the client will be bound by its acceptance of a bid that includes the material terms of a transaction.