RBC Capital Markets, LLC v. Highland Capital Management, L.P.
Dallas Court of Appeals, No. 05-13-00948-CV (December 4, 2015)
Justices Brown (Opinion), Evans, and Schenck

The Dallas Court of Appeals has reversed a $21.5 million judgment awarded to Highland Capital Management, L.P. against RBC Capital Markets, LLC in the trial court, and rendered a take-nothing judgment.

The case stemmed from events in 2000, when RBC marketed a set of subordinated promissory notes offered for sale by the note holders. Highland Capital offered to buy some of the notes for roughly half their face value, subject to “docs and reps,” including a customized written trade confirmation and representations by both the note holders and the payor. The note holders later refused to sell, but Highland claimed RBC was contractually bound to deliver the notes, even though the conditions were not satisfied. Arguing its stated conditions were not material to the deal, Highland sued RBC for breach of contract, and the jury awarded Highland $21.5 million plus pre-judgment interest. RBC appealed.

The appeal turned on whether oral communications between RBC and Highland created an enforceable agreement. Under New York law, as in Texas, contract formation requires a meeting of the minds on the essential terms. Here, Highland’s bid was subject to numerous conditions, including a written trade confirmation and certain representations from the note holders. The Court held RBC did not, and could not, accept those conditions because they required agreement by the note holders. And because material terms remained to be negotiated, the Court found no contract was formed.

The Court rejected Highland’s position, supported by expert testimony, that according to industry custom a securities trade occurs whenever parties agree to price and principal and that “docs and reps” were just a formality. The Court stressed that industry custom cannot alone create an intent to be bound or vary the parties’ express agreement. Nor can an expert witness “usurp the court’s function by giving an opinion as to the legal effect of an industry custom” or by opining “on the ultimate legal issue in the case.” From its own examination of the record, the court found the parties had not reached an agreement, reversed the jury’s verdict, and rendered a take-nothing judgment.