United States: Fifth Circuit Addresses Issue Of When Oral LSTA Loan Trades Become Binding

The maxim that a "trade is a trade" is the bedrock for the hundreds of billions of dollars1traded annually in the secondary loan market. Once the material terms of a trade are agreed to orally, a binding contract is formed. The enforceability of oral loan trades was codified in New York in 2002 when such trades, subject to certain requirements being met, became exempt from the statute of frauds.2Thus, when traders agree to the material terms of a secondary bank loan trade on the telephone (i.e., identity and amount of bank debt and price), the parties become bound to consummate the transaction.3

Without this now basic tenet, that an oral trade is a trade, parties would be free to ignore or refute oral trades until the parties execute a corresponding written trade confirmation. The "tricky" part for traders, financial institutions, hedge funds and other market participants is the method by which one party provides "sufficient evidence" of a binding oral agreement. Without such evidence, an alleged oral agreement to a trade may be left to the court in a cumbersome "he said, she said" litigation process. 

Highland v. Bank of America4

On October 2, 2012, the United States Court of Appeals for the Fifth Circuit held that Highland Capital Management, L.P. ("Highland") made a viable breach of contract claim against Bank of America, N.A. ("BofA") in connection with an oral trade agreement. Highland alleged that BofA orally agreed to sell to Highland $15,500,000 of Regency Hospitals, LLC bank debt (the "Regency Debt") at a purchase rate of 93.5% (the "Purchase Rate"). According to Highland, on December 3, 2009, Highland and BofA agreed via telephone that Highland would purchase the Regency Debt from BofA at the Purchase Rate and no additional terms of trade were communicated between the parties. Later that day, Highland confirmed the trade by e-mail to BofA, stating the parties were "now done on this trade subject to agent and borrower consents." BofA responded by e-mail to Highland the same day, stating that the transaction was "subject to appropriate consents and documentation."

Subsequent to these e-mails, Highland alleged that BofA requested off-market terms from Highland, which were not included within the LSTA Standard Terms and Conditions for Par/Near Par Trade Confirmations (the "LSTA Standard Terms"), including agreement to (a) indemnify BofA against any failure by the borrower or agent to consent to the transaction, (b) pay all of BofA's legal fees associated with the transaction, and (c) waive all legal claims against BofA. Highland contended that such requests were not customary. In order for the parties to be bound by a variation from LSTA Standard Terms, Highland argued that such alterations needed to be addressed at the time of the parties' phone call, when the material terms of the oral trade were agreed. However, BofA refused to close the trade, arguing that its e-mail stating that the transaction was "subject to appropriate consents and documentation" precluded the formation of a binding oral contract. The Regency Debt was ultimately paid off at par. Had the alleged trade closed, Highland would have profited from such par payout. 

The United States District Court dismissed Highland's breach of contract claim, ruling that although the LSTA Standard Terms allow for trades to be agreed upon orally, because the parties indicated in subsequent e-mails that the trade was "subject to" further consents and documentation, no binding contract was created. Thus, Highland failed to plead facts sufficient to establish a breach of contract claim under New York law.5

The United States Court of Appeals for the Fifth Circuit reversed the District Court, holding that the lower court's interpretation of the "subject to" language in the parties' e-mails ignored other facts which, when accepted as true (as required in the context of a motion to dismiss) preserved Highland's claim. Specifically, the Fifth Circuit focused on Highland's assertion that the consents and documentation referenced in BofA's e-mail were constrained by the LSTA Standard Terms, and any deviation from such terms needed to be reserved at the time of trade.6As to "documentation," the Fifth Circuit noted that, although bank debt trades typically include execution of a written trade confirmation, it is not required following an oral agreement on material terms.7In reaching its conclusion, the Court noted that BofA "may argue that the parties never agreed on all the material terms, but that is an issue of fact, and it should not be a basis for dismissing the claim." The Fifth Circuit went on to say that the "subject to" e-mails following the oral agreement did not "unambiguously" disavow the parties' intention to be bound. The Court concluded that, "without further evidence regarding the parties' interactions and industry custom and practice, it is not possible to definitively determine whether the parties intended to be bound by their oral agreement." Thus, the Fifth Circuit found that Highland had stated a viable claim for breach of an oral contract.

"Sufficient Evidence" Under NY Statute of Frauds Exemption

Given the Courts' struggle with determining the parties' intent as to the material terms of the trade, loan market participants must consider best practices to avoid disputes. As noted above, parties are able to enforce oral agreements for loan trades, provided sufficient evidence exists. Thus, the issue becomes whether evidence is "sufficient" under New York law.8

New York General Obligations Law ("NY GOL") § 5-701(b) (which exempts loan trades from the statute of frauds) provides that "sufficient evidence" exists if:

a. there is evidence of electronic communication (including, without limitation, recorded telephone calls9or e-mails) sufficient to indicate that in such communication a contract was made between the parties (§ 5-701(b)(3)(a));

b. a written confirmation sufficient to indicate a contract has been made between the parties and sufficient against the sender is received by the party against whom enforcement is sought no later than the fifth business day after such contract is made (i.e., trade date), and the sender does not receive, on or before the third business day after such receipt, written objection to a material term of the confirmation10(§ 5-701(b)(3)(b)); or

c. there is other writing sufficient to indicate that a contract has been made, signed by the party against whom enforcement is sought or its agent (§ 5-701(b)(3)(d)).

Additionally, the statute provides that an electronic communication or written confirmation may constitute "sufficient evidence" even if it omits or incorrectly states one or more agreed material terms, as long as such evidence provides a reasonable basis for concluding that a contract was made.

Practical Takeaways

One lesson for market participants from the Fifth Circuit's decision is that an e-mail confirmation of an oral trade stating that it is "subject to" further conditions may create ambiguity as to whether the parties intended to enter into a binding oral contract. If secondary loan market participants endeavor to deviate from LSTA Standard Terms, such deviation should be stated specifically, clearly and unambiguously at the time of trade. The more specific one is with a counterparty with respect to deviations from LSTA Standard Terms, the better position one will be in later to prove whether certain conditions were required to be met in connection with having an enforceable, binding agreement. For example, to the extent BofA was aware that it would require certain terms not included within the LSTA Standard Terms, best practices would have been to state clearly and specifically such terms orally at the time of trade.

To the extent a party has agreed to a "vanilla" oral loan trade and wants confirmation, a simple and unambiguous e-mail to its counterparty which (A) specifies that the trade shall settle pursuant to LSTA Standard Terms (or "distressed" LSTA standard terms, as the case may be), and (B) memorializes the material terms, including (i) trade date, (ii) counterparty name, (iii) identity and amount of debt being purchased or sold and (iv) purchase rate, should constitute "sufficient evidence." To the extent the "safe harbor" provision set forth in NY GOL § 5-701(b)(3)(b) is utilized, the e-mail message (or, alternatively, delivery of an LSTA standard trade confirmation without any "other terms of trade" inserted) would be delivered to a counterparty against whom enforcement is (or could be) sought within five business days of the trade date. If a written objection from a counterparty is not received within three business days of receipt of such e-mail (or receipt of such LSTA trade confirmation), a very strong case exists that you have a binding contractual agreement.

Another practice employed by many loan market participants is to have recorded phone lines, which can be admissible evidence supporting a party's contention that the material terms of a trade were (or were not) agreed. Traders should be aware that counterparties often record phone lines and exercise appropriate caution when entering into an oral trade agreement to ensure clear expressions of intent. Also, to be better positioned to prove oral trade terms, loan market participants should standardize procedures for creating sufficient evidence of such terms.11Electronic communications, Bloomberg messages and traders' notes are all sources of evidence supporting contract formation. Loan market participants should create and regularly monitor systems to record and preserve such evidence.

As a final takeaway, parties should recognize that, although orally agreed LSTA loan trades are binding under New York law, without good systems and practices in place to evidence a binding contractual agreement, parties leave themselves open to unnecessary risk and uncertainty. To alleviate such risk, use of clear and specific language that sets forth the material terms of the trade, coupled with the safe harbor provisions under NY GOL § 5-701(b)(3)(b), will greatly assist parties when a dispute arises.   


1 Trading volumes equaled approximately $98 billion in the second quarter of 2012, based upon the Loan Syndications and Trading Association Inc.'s (the "LSTA") market settlement data published on July 25, 2012.

2See N.Y. Gen. Oblig. Law § 5-701(b) (McKinney 2012).

3 Unlike bonds, bank loans do not settle in a T+3 environment and delays in settlement may arise for various reasons including obtaining agent or borrower consents, agency freezes due to pending amendments under the credit agreement, etc. The median settlement time for par bank loans (generally performing loans) in the second quarter of 2012 was T+12 (trade date plus 12 business days) and for distressed bank loans (generally loans that are in default or where borrower having material difficulties) was T+34 (trade date plus 34 business days).  

4Highland Capital Management, L.P. v. Bank of America, Nat. Ass'n., No 11-11139, 2012 WL 4498518 (5th Cir. 2012).

5Highland Capital Management, L.P. v. Bank of America, Nat. Ass'n., No. 3:10-CV-1632-L, 2011 WL 5428779 (N.D. Texas 2011). The District Court's decision only considered whether viable claims existed under New York law. The Court noted that in determining whether a contract had been formed, the contracting parties' intentions and reasonable expectations and industry practice may be considered in determining whether a binding contract existed.

6 As to BofA's position that the trade was subject to "consents" the Fifth Circuit noted that although all bank debt trades typically require consent of the agent and/or borrower, if consents could not be obtained the LSTA standard terms require the parties to close the transaction as a participation in lieu of an assignment. Thus, according to Highland's complaint, consents of the borrower and/or agent are not a condition precedent to the formation of a binding oral trade.

7 One interesting point omitted in Highland's complaint was the fact that the "documentation" required to settle LSTA par bank debt trades generally is perfunctory in nature and only requires the execution of a form assignment and acceptance agreement which is rarely subject to negotiation and often executed by the parties on electronic platforms such as ClearPar. Typically, the only modifications to the form of assignment and acceptance agreement are the name of the assignor, the name of the assignee and the amount and identification of the debt being purchased.

8 LSTA trading documents are governed by New York law.

9 Under New York law, taped phone conversations are generally admissible evidence. SeeN.V. Simons' Metaalhandel v. Hyman-Michaels Co., 7 A.D. 2d 840 (1st Dept. 1959); 57 N.Y. Jur. 2D Evidence § 190 (2012) ("[N]o statutory provisions place any restriction upon the right of one participating in a conversation by telephone to have it recorded or upon the admissibility of such recording in evidence").

10 If a counterparty does respond within such three business day period with modifications, the issue then becomes whether the changes pertain to material or non-material terms.

11 The LSTA Standard Terms provides that "[e]ach of Buyer and Seller shall record on the trade date of each transaction between the parties and retain in its files a written or electronically recorded trade ticket or similar internal record containing or reflecting evidence of agreement to such transaction, including (a) the date of the agreement, (b) a description of the type of debt including obligor(s) and purchase amount, (c) the identity of the other party to the transaction and (d) the purchase price or purchase rate."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions