Highland Capital Mgmt. L.P. v. UBS Securities, LLC (In re Lyondell Chemical Co.), 505 B.R. 409 (S.D.N.Y. 2014) –

A hedge fund sued an investment bank for tortious interference based on its exclusion from participation in exit financing for a debtor. The bankruptcy court granted the investment banker’s motion to dismiss for failure to state a claim, and the hedge fund appealed.

The debtor (Lyondell) was described as the world’s third largest chemical company with yearly revenues approaching $31 billion. To complete its reorganization, the debtor sought syndication of a $1 billion senior term loan facility as part of its exit financing.

The engagement letter between Lyondell and an investment bank (UBS) as one of the Joint Lead Arrangers and Joint Bookrunners provided that “the Joint Lead Arrangers, in consultation and cooperation with [Lyondell], will manage all aspects of any syndication, including decisions as to… which institutions will participate.” Further, UBS was authorized to accept commitments and allocate the term loan among selected lenders.

A “Confidential Information Memorandum For Public Investors” (CIM) that offered participations in the term loan was circulated “solely for informational purposes.” It specifically stated that there was no legal obligation with respect to the term loan until a definitive agreement was executed. The CIM included a form commitment letter that included the statement: “Subject only to satisfactory documentation, we are pleased to commit: $____  millions to the $1.0 billion Senior Secured Term Loan Facility.”

A hedge fund (Highland) had a long history of lending to Lyondell, including a prior investment of over $200 million in the debtor’s capital structure. It wanted to participate in the term loan. So, Highland provided a letter in the required form committing to $150 million. Lyondell sent an acknowledging email with a comment that it looked forward to successfully closing the financing, and then a second email announcing changes with a request that Highland recommit. Highland agreed to the revised terms. A few days later Highland learned that the term loan had been allocated and it had not been invited to participate.

During this time frame UBS and Highland were involved in several lawsuits, including a UBS lawsuit against Highland alleging that it committed fraud in connection with restructuring a loan facility. Highland contended that UBS did not include Highland in the Lyondell term loan facility to “maliciously punish” Highland for litigating against UBS. It asserted that UBS intended that blocking its participation “would embarrass Highland and diminish its standing in the financial community, would harm Highland’s own fund-raising efforts and ultimately deprive Highland of the profit to be made from the extremely successful Lyondell offering.”

Procedurally Highland initiated litigation in state court against the debtor for breach of contract and against UBS for tortious interference with contract and tortious interference with prospective economic relations. After the bankruptcy court exercised jurisdiction, Highland filed an adversary proceeding against UBS based on tortious interference. The court granted UBS’ motion to dismiss for failure to state a claim.

On appeal, the district court outlined the elements of a state law claim of tortious interference with contracts as follows:

[1] the existence of a valid contract between the plaintiff and a third-party, [2] the defendant’s knowledge of the contract, [3] the defendant’s intentional procurement of the third-party breach without justification, [4] actual breach of contract and [5] damages.

In this case the court held that the claim failed because Highland did not provide adequate proof that a contract existed. Highland argued that the CIM was an offer and its commitment letter was an acceptance. However, the court determined that the statement that the CIM was solely for informational purposes and created no obligation evidenced that there was no intent to be bound.

The court contrasted the Lyondell facts with another case involving a letter of intent with language that “Upon receipt by [lenders] of an accepted counterpart of this letter, our agreement to purchase from you and your agreement to issue, sell and deliver to us… the captioned securities, shall become a binding agreement between us.” Although closing was subject to satisfactory documentation, the court found a basic difference in the intent to be bound.

Turning to tortious interference with prospective economic relations, the court identified the elements of the state law claim as follows:

(1) the plaintiff and third party share a business relationship; (2) the defendant knew about the relationship and intentionally interfered with it; (3) the defendant’s act was solely out of malice or through dishonest, unfair, or improper means; and (4) the defendant’s interference injured the relationship.

As a defense, UBS asserted an absolute privilege to decide who it wanted to deal with. The court agreed, noting that state law “states that the privilege with whom to deal ‘exists regardless of the actor’s motive for refusing to enter business relations with the other and even though the sole motive was a desire to harm the other.’” The “refusal to maintain trade relations with any individual is an inherent right which every person may exercise lawfully, for reasons he deems sufficient and for no reason whatever, and it is immaterial whether such refusal is based on reason or is the result of mere caprice, prejudice or malice.” Thus, UBS had a right to refuse to deal with Highland.

Accordingly, the district court affirmed the bankruptcy court decision.

It is not entirely clear how an absolute privilege of refusing to deal with someone can be reconciled with the concept that a tortious interference claim can be based on an action taken solely out of malice. It also should be noted that simply stating that an agreement is subject to definitive documentation may not be sufficient to prevent the argument that a contract has been formed. So, when negotiating keep in mind that while it may be difficult to establish a tortious interference claim, there is always a risk that a disgruntled party could make the claim stick.