United States: Enforcing A Breakup Fee In A Financing Term Sheet

A case this past year, White Winston Select Asset Funds, LLC v. Intercloud System, Inc. (D.N.J. Oct. 3, 2017), addressed the enforceability of a breakup fee provision in a term sheet for second lien financing. The case is notable because the court was prepared to enforce the breakup fee on summary judgment, even though it was not at all clear that the financing could have ultimately closed. The main driver of the court's decision appeared to be the action taken by the defendant borrower that frustrated any possibility of performance by the lender. The court awarded the breakup fee notwithstanding that the lender had not completed its diligence and there remained certain unresolved issues. While the plaintiff prevailed, the case offers some lessons for the careful drafting of a breakup fee provision in a financing term sheet.


Intercloud Systems, the defendant, was a publicly traded corporation providing telecommunications and cloud computing services. To say the least, it was not in a financially robust condition. In 2012, it had entered into a loan and security agreement with MidMarket Capital Partners, LLC. that prohibited it from incurring certain additional debt without MidMarket's approval. In the spring of 2013, the plaintiff, White Winston Select Asset Funds, LLC, entered into negotiations with the defendant to provide up to $5 million in additional secured financing. The parties executed a term sheet memorializing the principle terms and conditions of the proposed new financing. The term sheet contained a breakup fee provision. Insofar as relevant, the provision stated that if the defendant closed on a financing with any other lender within 45 days of the termination date of the term sheet, Intercloud would pay $500,000 to White Winston.

In September 2013, Intercloud closed on a $10 million revolving credit and security agreement with PNC Bank. At the same time, Intercloud and MidMarket amended the MidMarket loan to allow PNC Bank to obtain a first-priority security interest in Intercloud's assets. Thereafter, in October 2013, Intercloud told the plaintiff that, at best, it could get a third position in the collateral behind PNC Bank and MidMarket.

Intercloud did not, at the time, pay the breakup fee to White Winston, and instead the parties continued to negotiate about a proposed financing. However, after it became clear that MidMarket would not accede to a second lien position for White Winston, in November 2013, the plaintiff delivered a demand for its breakup fee, which the defendant refused.

White Winston filed its complaint in December 2013, asserting claims of breach of contract, breach of the duty of good faith and fair dealing, and promissory estoppel. It sought payment of its $500,000 breakup fee and reimbursement of expenses and attorneys' fees to which it was entitled under the parties' term sheet. The district court (by a different judge) granted defendants' motion to dismiss in August 2014, but in August 2015 the Third Circuit reversed.1 Upon remand, in April 2017, both parties filed motions for summary judgment.

Issues and Holding

The court distilled the parties' conflicting positions as follows. Defendant Intercloud argued that the plaintiff was not entitled to the breakup fee because (1) it had not satisfied the conditions to the proposed financing, one of which was that it enter into an intercreditor agreement with MidMarket, and (2) that it was not "prepared to close" on the financing, as it had not completed its due diligence. Plaintiff White Winston countered that it was indeed prepared to close on the basis of the terms set forth in the term sheet, and that it had either satisfied all the conditions precedent to receiving the breakup fee, or if it did not, the conditions were excused because Intercloud prevented their performance. 

Apparently, the failure of condition on which the defendant relied was limited to the intercreditor agreement. The plaintiff had served up an intercreditor agreement to MidMarket providing for a second lien in favor of White Winston. The draft was presented to MidMarket in June 2013, before PNC came on the scene, and as alleged by the defendant, MidMarket at the time objected to some of its terms. White Winston again presented its draft to MidMarket in October 2013, after Intercloud had entered into its financing with PNC. This time, MidMarket rejected the document without proposing any modifications, stating only that the second lien was a nonstarter given the PNC agreement. 

The court, in siding with the plaintiff, invoked the prevention doctrine. The court quoted from the New York Court of Appeals in Kooleraire Serv. & Installation Corp. v. Bd. of Ed. of City of N.Y.,  28 N.Y.2d 101 (1971), reciting the principle that "a party to a contract cannot rely on the failure of another to perform a condition precedent where he has frustrated or prevented the occurrence of the condition."

From MidMarket's October response to White Winston, the court inferred that MidMarket and White Winston may have been able to work out an agreement had Intercloud not entered into the PNC financing. By executing the agreement with PNC, Intercloud had prevented White Winston from even engaging in further discussions with MidMarket, so that under the prevention doctrine, the condition precedent was excused.

The court also rejected the defendant's contention that the plaintiff's "being prepared to close under the same terms and conditions as set forth" in the term sheet meant that White Winston was required to have completed its due diligence in order to collect the breakup fee. The court reasoned that the plaintiff's interpretation of the "prepared to close" language would eliminate the purpose behind the breakup fee, which was to protect White Winston against Intercloud's entering into a more favorable transaction after White Winston had expended resources on the financing.

Finally, the court said that there would have been no purpose in the plaintiff's completing its diligence once the defendant had rendered impossible performance under the term sheet.

            Liquidated Damages or Penalty?

Trying another tack, the defendant argued that the breakup fee was an unenforceable penalty. Had the financing gone through, defendant maintained, the plaintiff would have realized a return of $600,000. The $500,000 breakup fee was 83% of that amount, and therefore "grossly disproportionate" to the damages suffered by the plaintiff.

Relying again on New York case law, the court said that Intercloud had the burden of proving either that damages were readily ascertainable at the time the parties entered into the term sheet, or that the breakup fee was "conspicuously disproportionate to foreseeable losses." Without extensive analysis, the court held that the defendant failed to sustain its burden. Animating the court's decision, appeared to be an unwillingness to interfere in the parties' agreement on the breakup fee, absent any showing of what the cited New York case law termed "exploitive overreaching or unconscionable conduct" (quoting a citation to Fifty States Mgmt. Corp. v. Pioneer Auto Parks, Inc., 46 N.Y.2d 573 (1979)).2


With the defendant having engineered the precise situation toward which the protections of the breakup fee were directed — the defendant entered into an alternative financing that precluded the plaintiff from concluding its own financing proposal — it is perhaps not surprising that the court was pulling for the plaintiff.

Nonetheless, there are some more general lessons to be learned. The plaintiff's quest to recover its breakup fee took some four years, no doubt involving expenditure of substantial legal fees, and perhaps is still not at its end. In hindsight for White Winston, but with foresight for other lenders seeking to protect their efforts and expenditures in the negotiation phase of their relationship with prospective borrowers, it would have been advisable to specify the terms of the breakup fee with greater precision.

  • Instead of forcing the plaintiff to rely on the prevention doctrine, the term sheet could have expressly provided that the breakup fee would be triggered if the borrower took action reasonably likely to preclude consummation of the financing, irrespective of the stage of discussion or diligence.

  • The term sheet could have been clearer on the concept of the lender's being "prepared to close." A lender's willingness to proceed should not mean that all conditions to closing have been fully satisfied, but rather that the lender is prepared to take all action within its control in order to proceed to a closing on the terms contemplated by the parties' term sheet.

  • The term sheet could have been explicit on the parties' agreement that the breakup fee was a liquidated damages provision, with a recitation of the basis for that proposition.

It may not be often that breakup fee provisions are found in financing term sheets. Perhaps, White Winston inserted the provision in its term sheet with Intercloud because it had a premonition that Intercloud was using White Winston as a fallback, when its real intention was to negotiate more favorable terms with another lender. In similar circumstances where a breakup may be desirable, it is good to have a case that serves as a data point for enforcement. But the case is also a reminder of the attention that should be paid to these provisions to facilitate collection, should that become necessary.


1   Explaining its decision,  the Third Circuit remarked, "[A] plausible reading of the breakup fee clause ... 'was to protect [plaintiff] from the risk that [defendant] would secure a more favorable deal after [plaintiff] had already expended resources on the Financing. Thus, given the language of the Term Sheet, we decline to read the Term Sheet in a manner that would operate to leave [a] provision of the contract ... without force and effect.'"  White Winston Select Asset Funds, LLC v. Intercloud Sys., Inc., 619 F. App'x 157 (3d Cir. 2015). 

2   The court also addressed an interesting textual argument advanced by the defendant. The term sheet provided that White Winston would be entitled to the breakup fee if Intercloud closed with another financing source "within" 45 days of the termination date of the term sheet. The termination date of the term sheet was November 15, 2013. Since the PNC financing was consummated in September 2013, it did not close within the period of 45 days following the termination date. The court, however, credited the plaintiff's reading of the term sheet that "within" meant "before the end of." The court based its reading on another provision of the term sheet providing that the breakup fee "shall survive the Termination Date," implying that the requirement to pay the breakup fee could exist before the termination date. The court also held that its reading — which it termed unambiguous — was consistent with the purpose of the breakup fee. White Winston, however, could have avoided this line of defense entirely had it taken greater care with the wording of the breakup fee provision.

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