A legal dispute is underway between Mission Peak Capital, an affiliate of Stabilis Capital Management, and American Capital (“ACAS”) regarding the sale, or rather non-sale, of a commercial mortgage-backed securities bond portfolio. Mission Peak bid on ACAS’ $52 million CMBS portfolio but the near-deal fell through the day before closing, and the assets were sold to a different party.
Sources are watching to see what will unfold at the next hearing, on June 10, and told CO that this case may very well set a legal precedent because it explores a critical question: What constitutes “a deal?” More specifically, by which means of communication should a deal be legally finalized? Is email verbiage legally binding? Or is a formal, printed purchase and sale agreement the only document that ties two parties together? Further, if capital is drawn in preparation for closing, does this step seal the deal?
“This case is very interesting because it shows that ‘a deal’ to one party is simply ‘negotiations’ to another. Therefore, when is a deal a deal?” a CMBS litigation attorney told Commercial Observer.
MPSF, an affiliate of Summit, N.J.- based Mission Peak and Stabilis, filed a New York Supreme Court lawsuit on March 8 against ACAS and subsidiaries ACAS CRE Services and American Capital Asset Management for the “sudden and baseless refusal” of ACAS and its subsidiaries to abide by its agreement to sell the portfolio assets to MPSF. The suit followed a $52 million bid that Mission Peak made on Feb. 29 on a CMBS bond portfolio, which eventually ended up in the hands of another buyer despite Mission Peak Capital believing it was the winning bidder.
The bidding process began in February when ACAS CRE Services launched a sealed-bid process to sell certain of its commercial real estate holdings. In mid-February, ACAS contacted Mission Peak to solicit an offer for the purchase of the assets. The same day, ACAS sent Mission Peak its confidentiality agreement and provided access to due diligence materials, according to court records.
What then ensued between Feb. 18 and Feb. 28 was an exchange of numerous emails and telephone calls between Nicholas Skibo, the vice president in the equity capital markets group at ACAS, and Scott Fishkind, the head of business development at Mission Peak, in which they discussed various aspects of the assets for sale, as shown in public court records.
On Feb. 29, Mission Peak submitted its $52 million bid to ACAS for the CMBS bond portfolio, the equity in American Capital CRE Management and the fee-sharing agreements for the purchase price of $52 million, along with a draft contract for the assets’ purchase and sale. Mission Peak proposed to close on the acquisition of the portfolio assets within six days of its bid price being accepted.
This is when it got tricky.
ACAS informed MPSF that it was the winning bidder and that it had accepted MPSF’s bid to purchase the portfolio assets on March 1, according to the affidavit of Joseph Tuso, the general counsel and the managing director of Stabilis Capital Management, filed March 14. Mr. Skibo refutes this allegation in his affidavit.
Per Exhibit E of Mr. Skibo’s March 22 affidavit, Mr. Fishkind emailed Mr. Skibo one day later, asking if Mission Peak Capital should prepare to fund so that MPSF would be “ready to roll [fund] when docs are finalized.”
Mr. Skibo responded via email, also shown in Exhibit E in his affidavit, telling Mr. Fishkind to, “Please call capital, and let me know when you do.”
Later that day, Mr. Skibo emailed Mr. Fishkind, shown in Exhibit H in Mr. Skibo’s affidavit, telling him, “Subject to final agreement on terms and conditions, we intend to move forward with your offer to purchase select CMBS bonds, related fee agreements and collateral [administration] agreements.”
ACAS however never actually reached “final agreement on terms and conditions” on the transaction with Mission Peak Capital, Mr. Skibo claimed, having never agreed to the terms of a revised draft purchase agreement. Mr. Skibo went on to state that the terms of the purchase agreement had been changed by MPSF, including which CMBS bonds would be part of the sale.
In Mr. Skibo’s affidavit he argued that the terms of the agreement still had to be worked out, in spite of the capital call. MPSF had proposed to add bonds with $0.00 principal balance to the sale in a revision to the draft purchase agreement. Per Exhibits to Mr. Skibo’s affidavit, he emailed Mr. Fishkind to tell him that ACAS’s analytical team was working through the zero-value bond analysis, to which Mr. Fishkind queried whether ACAS was “good with comments besides that.” Mr. Skibo stated in his affidavit that this indicated to him that MPSF understood that final terms had yet to be agreed upon.
In court records, Mr. Skibo stated ACAS did not agree to sell to MPSF all of the CMBS bonds requested, and he expressly told Mr. Fishkind he would not sell the nominal consideration bonds.
On the morning of March 7, MPSF attempted to confirm the closing process with ACAS, before being told around 6 p.m. that ACAS would be selling the CMBS-related assets to another bidder, not named in the suit, and that it had entered into a definitive written agreement with said bidder. MPSF filed its suit one day later—the same day that the closing was set to occur, March 8.
“From a bond trading perspective, normally when you say you’re done, you’re done. These are normally recorded lines. An amount is confirmed over the phone, and you’re done,” a CMBS bondholder opined. “In a sealed bid situation however, when you’re ‘done’ is harder to define.”
The bondholder went on to differentiate what is expected in bid-wanted-in-competition versus sealed-bid sales. “When you have a portfolio of bonds in a BWIC format, these bonds have a reserve associated with them and a time when bids are due, if a bid is accepted you are typically notified with a verbal ‘you’re done,’ and settle the trade in two or three days. With the sealed bid process, however, it’s an award. If you are the winning bidder you are notified by the seller that you were awarded the bid and the settlement date is predetermined in the ‘terms of sale’ provided at the beginning of the process. But if the purchaser adds other assets to the asset schedule while negotiating the purchase and sale, that were not previously included in the award, that would change things,” he said.
This case demonstrates how diligent one needs to be with regard to the language used in emails where a potential deal is being discussed, another CMBS attorney told CO. “I advise my clients to include a disclaimer in every email that this communication is for discussion purposes only.”
The attorney went on to say that while many of her clients do indeed “close” deals verbally or via email correspondence, nothing is final, in her eyes, until contracts are signed. “Everything can fall apart at the contract stage. Everything.” The CMBS attorney went on to say that when her clients are negotiating portfolio sales, deciding the winner comes down to who has the best economics, the pricing and is able to get the deal done, but a winning bidder isn’t always the winning bidder.
A second CMBS lawyer chimed in, “You never have a deal until you have an executed sale and purchase agreement.”
MPSF sent a signed purchase and sale agreement to ACAS but “more than an hour after” filing the lawsuit on March 8, said Mr. Skibo in his affidavit. The agreement was included as Exhibit P to Mr. Skibo’s affidavit.
As part of the lawsuit, MPSF filed a motion to block ACAS from selling the assets to the third-party winner until the matter was resolved, claiming that any sale would result in “irreparable damage” to the firm. Specifically, MPSF argued that the value of the assets was speculative and they contained covenants that allowed for the purchase of some of the underlying assets, according to court filings.
A three-day temporary restraining order was initially granted on March 9 by Judge Jeffrey K. Oing, who was acting as a placeholder for Judge Charles E. Ramos. Things appeared to get heated in the March 9 hearing that Mr. Oing presided over, as seen in the hearing transcript, with the judge telling the bickering counsels, “You know what? Hey, fellas, it’s not a reality show. Okay? Relax.”
ACAS suffered harm from Mr. Oing’s temporary restraining order, Mr. Skibo stated in his affidavit, because the different party to whom ACAS was now contractually obligated to on March 11 sent a letter to ACAS stating that the financial ramifications of the closing not occurring on the scheduled date would now need to be discussed.
When Mr. Ramos stepped in on March 14, however, he refused to extend the preliminary injunction blocking the assets’ sale. Mr. Ramos disagreed with MPSF’s claim of “irreparable harm,” saying in the hearing transcript, “Let’s say you’re going to buy something worth $60 million. You have $60 million of damages. Where’s the irreparable harm?” Mr. Ramos said. “You’re not buying the Empire State Building.”
In the meantime, a CMBS litigator pointed to the language contained within the confidentiality agreement sent to MPSF on Feb. 29—and filed in court records—to show why MPSF has a fight on its hands. The agreement states, “[MPSF] shall not have any claim whatsoever against ACAS, its affiliates or ACAS’ representatives, arising out of or relating to the transaction.” As with everything else, he said, the devil is in the details.
The majority of the underlying assets are serviced by Fortress affiliate CWCapital, according to data provided by Trepp.
Vivian Arias, the counsel for MPSF, and representatives for Mission Peak did not respond to requests for comment. Daniel Bernstein, the counsel for ACAS, declined to comment. Officials at ACAS and general counsel for Stabilis did not respond to requests for comment, an official at Stabilis declined to comment.