Can an Email or a Phone Call Create a Legal Obligation to Sell a Loan?



Loan trading is big business in New York. It’s also an informal business. Traders confirm huge trades by email or even by telephone. When a loan seller organizes an auction, bids come in through the same channels. The seller collects bids, chooses one—typically the highest—and the parties sometimes sign a standard loan sale agreement.

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In an auction sale for a loan, when does the seller lose the right to change its mind? Recent litigation on that question, Stonehill Capital Management v. Bank of the West, went all the way to the New York Court of Appeals, the state’s highest court.

In the Stonehill case, the seller identified and confirmed the highest bid. But the seller’s confirming email said the sale was “[s]ubject to mutual execution of an acceptable” loan sale agreement. The buyer and seller had some technical and trivial conversations about how that agreement should look. Before they concluded those discussions, the seller decided not to sell.

The buyer sued, arguing the seller became legally bound as soon as it confirmed the successful bid. A signed loan sale agreement was just a technicality. Its absence didn’t detract from the parties’ binding obligations. The seller, on the other hand, said lack of a signed loan sale agreement meant the seller could withdraw.

The Court of Appeals agreed with the buyer, in a long discussion that focused on industry practices and expectations. The court said the seller had the burden of showing its confirmation of the winning bid wasn’t intended to be binding. This particular seller hadn’t done that.

To the contrary, the court stated, the auction documents said the parties would become bound as soon as the seller confirmed the highest bid. Execution of an actual loan sales agreement was just part of what the parties agreed to do. It wasn’t a condition to their being obligated in the first place. Moreover, the seller had included a sample agreement in the information package for the auction. The parties never discussed any significant deviation from that template.

At first blush, the Stonehill decision sounds alarming. It means the parties became bound by an agreement without actually signing it—a scary and counterintuitive prospect. On the other hand, in a typical loan sale, like a typical real estate sale, at least 80 percent of the deal boils down to price. Most of the rest of the document deals with unlikely eventualities, mechanics (mostly obvious) and matters that a court can, if necessary, fill in based on “reasonableness” or “doing it the way everyone else does it.”

Nevertheless, we do expect to negotiate and sign verbose documents for any significant commercial transaction. In Stonehill, though, the court regarded this particular agreement as an afterthought. If the parties are bound without signing an agreement, why bother to sign one?

Maybe they shouldn’t bother, at least for a loan trade. The Loan Syndications and Trading Association sets standard terms for loan trading. If a bid confirmation incorporates those terms, an actual signed agreement adds little. And, although loan traders do sometimes sign loan sales agreements, the industry also expects confirmed auction bids alone to bind the parties.

The Stonehill decision reflects market expectations and practices. It is neither controversial nor surprising. It provides comfort for the loan-trading world, where traders often expect to be bound by oral agreements to buy and sell, not even evidenced by a confirmatory email. The binding nature of those oral trades represents a lynchpin of the secondary market for syndicated loans.

How does the Stonehill case apply to commercial real estate contracts as opposed to loan sales? A New York law invalidates any oral contract for the sale of real estate. That hasn’t changed. Real estate contracts are different from loan sale contracts. But that’s not the end of the discussion.

The Stonehill case does remind buyers and sellers of real estate to beware of “preliminary” signed agreements that, by their terms, sound binding. Even if a deal summary says it’s subject to the technicality of a formal contract, if it has signatures the courts might still decide to enforce it. The courts just might conclude, as they did here, that the parties, once bound by some form of preliminary agreement, also agreed they would sign an ordinary and typical purchase and sale agreement.

If parties to a real estate deal don’t want that—and they shouldn’t want it—they might need to do more than just say a signed deal summary is “subject to contract” or the like. They should go a step further, and say their deal summary doesn’t bind anyone in any way. Maybe they shouldn’t even sign it, except perhaps to confirm that it isn’t binding.

Joshua Stein is the sole principal of Joshua Stein PLLC.