- WHEN IS A DEAL A “DONE DEAL” UNDER KENTUCKY’S “ALL OR NOTHING” APPROACH TO CONTRACT FORMATION?
- May 12, 2015 | Author: Michael J. Gartland
- Law Firm: DelCotto Law Group PLLC - Lexington Office
On October 9, 2014, the Litigation Department (consisting of the author and J. Wesley Harned, Esq.) of DelCotto Law Group PLLC knocked out JPMorgan Chase Bank, N.A. (“Chase”) with respect to its $5.1 million counterclaim asserted against First Technology Capital, Inc. (“FTC”) and James L. Bates (“Bates,” and together with FTC, the “FTC Parties”) in a civil action styled First Technology Capital, Inc. v. JPMorgan Chase Bank, N.A. v. James L. Bates, 5:12-cv-00289-REW (the “Action”). In the Action commenced by FTC, FTC sought a declaratory judgment that it had not entered into an enforceable contract with Chase as to FTC’s proposed sale of a $22,886,139 allowed general unsecured claim (the “Claim”) against American Airlines, Inc. (“AA”) for approximately $8.1 million. Chase asserted counterclaims for breach of contract, fraud, negligent misrepresentation and unjust enrichment, and sought an award of compensatory and punitive damages.
After the close of discovery, the FTC Parties and Chase filed cross motions for summary judgment on all counterclaims asserted by Chase. The FTC Parties and Chase each filed approximately 100 pages of summary judgment briefs. In a 52-page Memorandum Opinion and Order, the Court entered summary judgment for the FTC Parties and against Chase as to all of Chase’s counterclaims. First Technology Capital, Inc. v. JPMorgan Chase Bank, N.A., __ F. Supp. 3d. __, 2014 WL 5093395 (E.D. Ky. Oct. 9, 2014) (hereinafter, the “Opinion”). This article discusses why the summary judgment ax severed Chase’s contract claim.
The facts of the case were straight forward and not in dispute. On September 30, 2010, FTC acquired one hundred percent of the beneficial interests in the Dougherty Air XVIII Investment Trust (the “Trust”), of which Dougherty Air Trustee, LLC (“Dougherty”) was the trustee. Opinion at *1. In order to acquire one hundred percent of the beneficial interests in the Trust, FTC executed and delivered to Tennessee Commerce Bank (the “Bank”) a Term Promissory Note dated September 30, 2010 in the original principal amount of $10,473,142 (the “Note”). Id. In order to secure the Note, FTC granted the Bank a security interest in all of FTC’s assets, including its beneficial interests in the Trust and the Trust’s assets, together with any ensuing proceeds. Id. The Note and nine related documents are hereinafter referred to as the “Loan Documents.”
FTC infused all or substantially all of the funds lent by the Bank to FTC under the Note into the Trust. On September 30, 2010, Dougherty, as trustee of the Trust, acquired a certain 1999 McDonnell Douglas DC-9-83 (the “Aircraft”), which was leased to AA under a certain lease (the “Lease”). Opinion at *1. Things ran smoothly until AA filed for Chapter 11 bankruptcy protection on November 29, 2011 and ceased making payments to the Trust under the Lease, a substantial portion of which flowed through to the Bank to reduce FTC’s indebtedness under the Note. Id. at *2. As if the AA bankruptcy was not bad enough, the Bank was closed by the Tennessee Department of Financial Institutions and the FDIC was appointed as Receiver of the Bank on January 27, 2012. Id. at *2. FTC thus became indebted to the FDIC under the Note and the FDIC held a lien on all of FTC’s assets, including its one hundred percent beneficial interest in the Trust and Trust’s assets, which included the Aircraft and Lease. Id. Because FTC had no experience in dealing with the FDIC, a proverbial 800-pound gorilla, FTC engaged Intuitive Processes and Controls (“iPAC”) to assist it in reaching an agreement with the FDIC to pay off all of FTC’s indebtedness under the Note at a discount. Id.
After AA threatened to reject the Lease in its Chapter 11 case, FTC and AA entered into negotiations to restructure the Lease, which resulted in an executed term sheet (the “Term Sheet”). On June 20, 2012, the Term Sheet was approved by the bankruptcy court presiding over AA’s Chapter 11 case. Opinion at *2. Under § 5.1 of the Term Sheet, the “Lessor” of the Aircraft under the Lease, Dougherty (not FTC) was granted the Claim, which was to be listed by AA on the claims register in its Chapter 11 case (the “Claims Register”). Id. About this time, FTC had reason to believe that an offer in compromise to the FDIC would be accepted and needed to sell the Claim in order to raise money to settle with the FDIC and satisfy all of its obligations under the Note. Id. The only problem was that FTC did own the Claim, Dougherty did under § 5.1 of the Term Sheet.
On June 22, 2012, W. Thomas Bunch (“Bunch”), a long-time attorney for the FTC Parties, approached Chase to see if it was interested in purchasing the Claim. Opinion at *2. Bunch’s initial email communication with Chase referred to FTC’s “beneficial interest” in the Aircraft leased to AA under the Lease. Id. Bunch also represented that FTC has been granted the Claim under § 5.1 of the Lease, which was incorrect. Id. Later on June 22, Chase offered to purchase the Claim for 33% of $22,886,139, or $7,552,425.87, which was not accepted by FTC. Id. Chase and Bunch exchanged emails over the course of the next six days concerning a possible transaction with regard to the Claim. Things came to a head on June 28, 2012, when Chase extended its highest and best offer to purchase the Claim:
First, thank you again for giving JPMorgan the opportunity to bid on your claim, this is an important transaction for us. I understand that you are on a conference call and can’t speak, so I spoke with our desk and JPMorgan is please [sic] provide you with a best and final bid at 35.75% on your $22mm allowed American Airlines, Inc. claim. This bid is good until 5pm EST today, June 28, 2012 and is subject to review of your due diligence and execution of a Transfer of Claim agreement. We [sic] very interested in working with you on this opportunity and hope this is reflected in our bid. Please confirm via email if we are done and you would like to lock in this price.
Opinion at *3 (bold and italicized words in original) (bold and underlined words with emphasis added). Chase’s 35.75% bid (the “Bid”) was accepted by FTC through emails transmitted by Bunch, with FTC’s authorization, and Bates, as the President of FTC. Id. The Bid and FTC’s acceptance are hereinafter referred to as the “Conditional Agreement.”
Early on June 29, a representative of Chase emailed Bunch with a Process Outline for closing the Conditional Agreement. Opinion at *4. By the email, Chase requested copies of an unredacted copy of the Term Sheet, the Loan Documents and any proof of claim filed with respect to the Claim. Id. Chase also informed Bunch that Chase would run a UCC lien search on FTC and would “need to understand and resolve any liens that may appear.” Id. The Chase email concluded: “Once we review the basic documents, we will forward a draft Transfer of Claim Agreement.” Id.
Between June 29 and July 16, 2012, Chase engaged in due diligence with respect to the Claim, obtained a UCC lien search on FTC (the morning after the parties entered into the Conditional Agreement), reviewed and was satisfied with the Term Sheet and Loan Documents, and saw the Claim listed on the Claims Register in Dougherty’s name. Opinion at *4-6. Only after doing its due diligence and seeing the Claim listed on the Claims Register did Chase email Bunch a draft Transfer of Claim Agreement (the “Draft TCA”) on July 16, 2012. Opinion at *6. Prior to July 16, nobody with Chase discussed what provisions would be contained in this agreement, which was more than five, single-spaced pages. Id. at *13-14. One of the provisions of the Draft TCA was a representation and warranty by FTC that there were no liens, claims or encumbrances of any kind whatsoever on the Claim.
On July 20, 2012, Bunch informed Chase that Dougherty, the owner of the Claim, did not agree to the proposed sale of the Claim to Chase. Opinion at *6. This created a huge problem for Chase because it claimed that it sold the Claim to two hedge funds on July 9, 2012 and needed to close the Conditional Agreement with FTC in order to convey the Claim to the hedge funds. Id. at *5. On July 11, 2012, the FDIC rejected FTC’s offer in compromise, which meant that marketable title to the Claim could not be conveyed to Chase even if FTC and Dougherty wanted to close the Conditional Agreement. On August 1, 2012, Bunch emailed Chase and informed it that he could not advise FTC to execute the Draft TCA because of the FDIC’s lien on the Claim. Id. at *7. After Chase threatened to sue FTC if it did not execute and deliver the Draft TCA, FTC filed a complaint for declaratory judgment that the Conditional Agreement was unenforceable. Id. Chase counterclaimed against FTC for breach of contract, and asserted counterclaims against the FTC Parties for fraud, negligent misrepresentation and unjust enrichment, and requested an award of punitive damages. Id.
As to Chase’s breach of contract claim, the issue for the Court was whether the Conditional Agreement was a valid and enforceable agreement under Kentucky law, or rather an unenforceable agreement to agree. Under Kentucky law, a valid and enforceable contract “must” include the parties’ obligations in sufficiently “definite and certain terms.” Opinion at *9 (citing Kovacs v. Freeman, 957 S.W.2d 251, 254 (Ky. 1997)). Whether an agreement is oral or written, all “material” or “essential” terms must be agreed to or the agreement is unenforceable. Opinion at *9. As it relates to the key issue of open material terms and prospective negotiation, Kentucky takes an all or nothing approach to contracting. Id. “Thus, while the modern contracting trend would enforce a preliminary agreement that essentially binds the parties to good faith negotiations on open terms, Kentucky treats a preliminary agreement-even one evincing intent to be bound-as unenforceable if material terms remain subject to future or further negotiation.” Id. (citing Cinelli v. Ward, 997 S.W.2d 474, 478 (Ky. Ct. App. 1998) (“Either the agreement is enforceable as a binding contract to consummate the transaction or it is unenforceable as something less.”); Giverny Gardens, Ltd. P’ship v. Columbia Hous. Partners Ltd. P’ship, 147 F. App’x 443, 446 (6th Cir. 2005) (unpublished) (contrasting modern trend and Kentucky rule)).
In light of Kentucky’s all or nothing approach to contracting, the Court held that the Conditional Agreement was an unenforceable agreement to agree and fell prey to the Bid. Opinion at *8-15. After all, the Bid was “subject to” Chase’s due diligence and execution of a Transfer of Claim Agreement, which obviously included the negotiation of the terms of such agreement. Id. at *8. The Court noted that the term “subject to” means “being under control, being under dominion,” “being dependent or conditional upon.” Id. at 10. Critical to the Court’s reasoning was the fact that none of the terms of the Draft TCA were discussed prior to the time that FTC and Chase entered into the Conditional Agreement, and Chase needed to conclude its due diligence concerning the proposed $8.1 million transaction before it could even prepare the Draft TCA for FTC’s review and comments. Id. at * 10-12. The Draft TCA was chock full of material terms, none of which had been agreed to when FTC and Chase entered into the Conditional Agreement, making said agreement nothing more than an unenforceable agreement to agree under Kentucky law. Id.
Kentucky rejects the modern contracting trend, which enforces a preliminary agreement that essentially binds the parties to good faith negotiations on open terms. When drafting a contract, the drafter must be sure that all “material” or “essential” terms of the agreement between the parties are contained within the document, or can be determined by a “definite method of ascertaining” such terms. Walker v. Keith, 382 S.W.2d 198, 203 (Ky. 1964). Otherwise, the contracting parties run the risk of having a court declare what they thought was a valid and binding agreement to be nothing more than an unenforceable agreement to agree.
 The Action is pending in the United States District Court for the Eastern District of Kentucky (the “Court”).