ContractsProf Blog

Another Private Equity Buyout Implodes

Alliance Data Systems is suing The Blackstone Group, seeking to force the latter, a private equity firm, to go through with a $6.4 billion buyout deal.  According to this story in the Dallas Morning News, The Blackstone Group has announced that it will not proceed with the deal because of "conditions imposed by a federal banking regulator," but others suggest that Blackstone is backing out because of a more generalized buyer's remorse.

According to The New York Times, the suit alleges that Blackstone failed to exercise its "reasonable best efforts" to obtain regulatory approval as required in the buyout agreement.  Blackstone now appears not to be interested even in a much smaller investment in Alliance.  It is early, but this might be a case to watch, as suits such as these, in which very-well financed parties have billions of dollars at stake, can go to trial and lead to enlightening opinions on the enforceability of best efforts clauses.

[Jeremy Telman]

Material Omission?

This story from today's NY Times:

EDDIE CROWE, a 38-year-old former bar manager from Galway, Ireland, thought he had hit the jackpot.

In June 2006, after more than a year of searching for a suitable place to open a bar and restaurant, Mr. Crowe found a prime location on Second Avenue near East 93rd Street: a 1,500-square-foot space previously occupied by Hooligan’s Tavern, a dingy bar whose lease was not renewed. The site was on a busy avenue with heavy foot traffic in Yorkville, where Mr. Crowe was sure that his Irish stouts and homemade shepherd’s pie would find a loyal clientele.

Mr. Crowe happily signed a 12-year lease and sank his life savings into a $350,000 renovation. But soon after installing a 22-foot-long mahogany bar, a kitchen and flat-screen televisions, Mr. Crowe began to fear that the location for the Crowe’s Nest Bar and Restaurant, which opened last January, was not a blessing but a curse.

Sounds fantastic. Why a curse? Turns out, the NYC MTA began building the second avenue subway line. The story continues:

“I don’t want to get into detail, but from May until now it’s been very bad,” he said one recent evening as he slumped in a chair inside his nearly empty bar. “After all these renovations, suddenly I was thrown a curveball — the Second Avenue subway until 2014. If I’d known, there’s no way in hell I would have signed that lease.”Although business was steady for the first few months, April brought groundbreaking for the subway line literally outside Mr. Crowe’s front door. Soon, Second Avenue from 91st to 95th Streets was transformed into a maze of chain-link fencing and concrete barriers around a gaping hole surrounded by backhoes and dump trucks.

Some of the dozens of business owners on Second Avenue in the 90s, who had been forewarned about the project, say their income has fallen up to 35 percent because of the construction.

The thing is, Crowe was unaware of the planned subway construction when he signed the 12-year lease. His landlord, however, was presumably aware:

According to Jeremy Soffin, a spokesman for the Metropolitan Transportation Authority, that information was communicated starting in 2004, in letters to property owners, public presentations and visits to individual residences and businesses.

“We’re very straightforward,” Mr. Soffin said. “This is a huge public works project that involves certain inconveniences, and we’re doing everything we can to mitigate the inconveniences.”

Assuming the landlord was aware of the planned subway construction, and omitted to mention this fact when negotiating the lease wtih Crowe, does this constitute a material omission?

[Meredith R. Miller]

Executive Pay at Delphi

When it comes to executive compensation, scholars tend to fall into two camps.  Some defend current levels of executive compensation as the product of a market.  Simply put, highly skilled executives negotiate for very rich compensation packages because of the value they bring to the companies that they lead and because they would not agree to take on the risk and responsibility of such leadership  if they were not appropriately compensated.  Others (and I am in this camp) point out that executive compensation packages are not really the product of arms-length transactions since executives negotiate their salaries with boards of directors that consist largely of other executives who want to hire good people but also want executive compensation to be generous. 

My reading of reports on the Delphi case suggests what would happen if executive pay were indeed the product of a negotiation involving an entity committed to protecting the interests of corporate constituencies other than management.  Last week, in approving Delphi's reorganization plan, Bankruptcy Judge Robert D. Drain trimmed Delphi's proposed executive incentive pay from $87 million to $16.5 million, as reported here and here. Judge Drain questioned the compensation schemes because they were challenged by representatives from two unions that in turn represented Delphi workers who had accepted cuts in their own compensation packages in order to pave the way for reorganization.  Under questioning from Judge Drain, Delphi's executive compensation consultant conceded that the approach he recommended was "novel," "rare," and "not the norm," according to Gretchen Morgenson's report in The New York Times.

I merely suggest that when parties reach an agreement for $87 million in compensation but then agree to $16.5 million in compensation under pressure from a judge, the original agreement is not the product of an arms-length negotiation.  Would you be willing to do your job for less than 20% of your current salary?  Perhaps Delphi has entered into some side agreement to provide additional compensation to executives in years to come, but if that is not the case, the Delphi reorganization plan seems like strong evidence of extraordinary elasticity in the market for executive services.

[Jeremy Telman]

Bridezillas Revisited

To the left is Profossor Rich Bodek of the College of Charleston's History Department.  He took my wedding photos.  He also served as best man, witness and host of the wedding reception.  I was very pleased with his work -- and with his price.  I recommend him highly to anyone in need of a wedding photographer. 

Why do I mention this?  Well, there has been a string of wedding-related litigation.  This blog did not stoop to comment when the blogosphere lit up (e.g., here, here, here, here, and here) with news of a New York litigation associate who sued a florist that delivered the wrong-colored flowers to her wedding reception.  The florist was to provide floral arrangements valued at $27,000, but to the delight and outrage of the blogarazzi, plaintiff sued to recover the full cost of her wedding, $400,000. 

Next, our own Meredith Miller reported that a groom (groomzilla, I suppose) successfully sued a wedding photographer who took lousy pictures at the groom's wedding.  The total contract price was $5400 for pictures and a wedding video, and since there was no problem with the video, the court awarded damages in the amount of $2700.

Well, the post-nup litigation continues.  Yesterday's New York Times reported on the impending bankruptcy of Celebration Studios.  Apparently, many newlyweds who paid thousands of dollars for Celebrations Studios' services have never seen the wedding photos and videos that they paid for.  The Times reports that a class action is in the works.  As one potential plaintiff put it, "I feel rabid about it." 

Well, for those of you whose wedding is still in the planning stages, don't get rabid, call Rich.  Tell him I sent you. 

[Jeremy Telman]

Allocating Contract Liability after the Bubble Bursts

The New York Times had an article yesterday about a woman who is suing her real estate agent for persuading her and her husband to pay perhaps 10-15% too much for their $1.2 million house in San Diego.  The case is pretty ordinary, which leads one to think there's plenty more where this one came from.  Marty Ummel claims that she and her husband trusted their real estate agent, who assured them that they were getting a good price.  Soon after moving in, the Ummels learned that similar houses in their neighborhood had sold for as much as $175,000 less.

According to the Times, the defendant, Mike Little did not respond to the Ummels' requests to see the appraisal that he ordered.  Mr. Little has expert witnesses who will argue that they were thus harmed, if at all, by their own inadequate due diligence.  The Ummels have already settled for modest amounts with the appraiser and the mortgage broker, but Mr. Little is unrepentant.  "The lady's a nut job.  I didn't do anything wrong," Mr. Little is quoted as saying.  He should expect a call shortly from central casting. 

The Times reports that Ms. Ummel has already spent $75,000 on attorneys fees.  Her own appraiser contends that the property was worth $1,050,000 at the time she purchased it, so it's hard to see how damages could possibly exceed $150,000.  Ms. Ummel denies being obsessive-compulsive, but she did picket Mr. Little's ReMax offices on weekends for a year and describes herself as "114 pounds of absolute perseverance." 

[Jeremy Telman]

Evaluations, Contracts and Ethics

I have written many an angry letter to Randy Cohen, author of a column called "The Ethicist" which appers in The New York Times' Sunday Magazine.  My letters are always about how law and ethics are not the same thing and how he fudges his analysis when he consults attorneys (as he frequently does) and, upon learning that the conduct in question is lawful, concludes that it is also ethical -- or at least not unethical.  Mr. Cohen has always been very patient with me, explaining that while legality is not proof of ethics, there is considerable overlap and so if conduct is lawful, that counts as some evidence that it is also ethical.  But we both know what is really going on here.  I'm really just pissed off that he never asks my advice.

But this time, I'm going to criticize Mr. Cohen for not considering a legal angle.  In his most recent column, which you can listen to here and read here, a reader reports that a university had employed a handwriting expert in order to determine which student was responsible for breaking the university's code of conduct by making derogatory comments about an instructor's sexual orientation in the student's supposedly anonymous evaluation of the instructor's course.  Mr. Cohen answered that the university's response would do far more harm than the student had caused with his or her homophobic slurs.  He recommends that the university clarify that it will only protect the anonymity of students who comment on what he called a professor's "work," by which I assume he means classroom teaching.  Seems like a tough line to draw. 

My question though goes to the most basic of all contracts issues.  When the university says that it has a policy of protecting the anonymity of evaluators, is that an enforceable promise?  I think it ought to be, and my reasons for thinking so are basically ethical.  The breach gives rise to no cognizable damages as far as I can tell, but I think a court could enjoin the university from disciplining a student whose anonymity it has promised to protect.

[Jeremy Telman]