The Bottom Line

In Shinhan Bank v. Lehman Brothers Holdings Inc. (In re Lehman Brothers Holdings Inc.), 17-2700 (2d Cir. July 17, 2018), the Second Circuit upheld the bankruptcy court's and district court's ruling that an email by defendant's counsel to the opposing side stating that the defendant will sign a settlement agreement creates a binding contract even if the defendant later chooses not to sign the settlement agreement. The Second Circuit affirmed the ruling that the parties intended to be bound by the settlement agreement despite not having an executed document because (i) the parties had not expressly reserved their right not to be bound absent a writing and (ii) there existed no disagreement on any material issue.

What Happened?

In this case, Lehman Brothers Holdings was mediating, as plan administrator, with Shinhan Bank in order to recover payments made after bankruptcy. The mediation was primarily focused on determining the settlement amount that Shinhan Bank would pay to Lehman. During the mediation, the mediator proposed a settlement amount. On April 20, 2016, Shinhan Bank's counsel emailed the mediator to inform him that Shinhan Bank had agreed to the proposed settlement amount. Lehman subsequently sent Shinhan Bank the draft of a written settlement agreement. In response, Shinhan Bank requested changes to the draft settlement agreement and Lehman complied. In March 2017, Shinhan Bank's counsel sent Lehman an email stating that Shinhan Bank would sign the revised settlement agreement. Subsequently, the bankruptcy court granted a motion to dismiss the adversary proceeding against Shinhan Bank and others. Several days later, Shinhan Bank said it would not sign the settlement agreement.

Lehman responded by filing a motion in the bankruptcy court to enforce the settlement agreement. In determining "whether the parties intended to be bound [to a settlement] in the absence of a document executed by both sides," the court applied the following four factors from Winston v. Mediafare Entertainment Corp., 777 F.2d 78 (2d Cir. 1985):

(1) whether there has been an express reservation of the right not to be bound in the absence of a writing; (2) whether there has been partial performance of the contract; (3) whether all of the terms of the alleged contract have been agreed upon; and (4) whether the agreement at issue is the type of contract that is usually committed to writing.

Id. at 80. The bankruptcy court, characterizing Shinhan Bank's refusal to sign the settlement agreement as a "change of heart" after the court granted the motion to dismiss the adversary proceeding, applied the four factors from Winston and concluded that the settlement agreement was enforceable. On appeal, the district court upheld the bankruptcy court's decision.

On further appeal, the Second Circuit, in a per curiam opinion, acknowledged that this was a "close case" but upheld the bankruptcy court's and district court's ruling. The Second Circuit applied the four Winston factors, concluding that two of the four factors weighed in favor of binding the parties to the settlement while two factors weighed against. Specifically, the court concluded that because (i) there was no partial performance by Lehman and (ii) Lehman had not effectuated a single settlement during its bankruptcy without a written agreement, these factors weighed against a finding that the parties intended to be bound by the settlement absent an executed document. However, given that (i) Shinhan Bank's counsel did not expressly reserve the right not to be bound in the absence of a writing when counsel emailed the mediator on April 20 stating that Shinhan Bank would accept the settlement amount and (ii) Shinhan Bank's counsel did not identify any outstanding issues when it consented to the proposed settlement amount on April 20, the Second Circuit concluded that "the balance [tipped] in favor of finding an intention to be bound."

Why This Case Is Interesting

Bankruptcy cases are typically rife with numerous contested matters and disputes that result in settlements to minimize litigation costs and maximize recoveries or outcomes for litigants. These settlements are customarily subject to back and forth, including emails to memorialize terms. It is also typical in complex Chapter 11 cases for advisers to materially advance settlement negotiations on behalf of clients. While the Second Circuit's opinion was nonprecedential, and its ability to be used to establish precedent is limited, the decision nonetheless provides a reminder of the importance of reserving rights pending final documentation and the risks of being bound despite the absence of definitive agreements in place.

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