Citigroup, Morgan Stanley, Deutsche Bank, Credit Suisse, RBS and Wachovia had an uncomfortable time in Texas on Thursday. Or rather they would have done, had they actually been in the court of Judge John D Gabriel.
Judge Gabriel, presiding judge of Bexar County, Texas, has issued a restraining order against the banks intended to force them all, for now, to uphold their commitment to financing the $22bn debt for the LBO of Clear Channel Communications.
It’s just the kind of capital that banks really can’t afford to fork out right now.
The banks have naturally pledged to fight the order. The problem for them is that Texas really isn’t the best place to do it. They’d far rather be litigating in New York.
There is indeed, already a case underway in NYC. There, private equity groups Bain Capital and THL Partners are suing the banks to enforce their debt commitment letters. The complaint is available here (HT NYT DealBook).
In Texas, the banks are being sued for tortious interference with contract. Which might not, on first hearing, sound like such a big deal as the NYC case. Only it is.
Does anyone remember Pennzoil v. Texaco? Joe Jamail does (‘America’s King of Torts’, ‘Texas Super Lawyer’, ‘Lawyer of the Century’). Jamail has been hired by Bain and THL to fight Clear Channel’s corner.
In Pennzoil v. Texaco, Jamail won from Texas courts damages of $10.5bn for Pennzoil after Texaco encroached on an informal but still binding contract Pennzoil had to buy another company; Getty Oil. The case was the largest civil verdict in US history and pushed Texaco to bankrupcty, declared in 1987. (Tangent: Jamail was paid $335m for the Pennzoil victory). So when it comes to merger agreements, fighting “tortious interference with contract” cases in Texas has history to it.
Here, for those interested (with thanks again to Dealbook) is the case the banks will be fighting anyway:
(1) the existence of a contract subject to interference; (2) a willful and intentional act of interference; (3) the act was the proximate cause of the plaintiff’s damage; and (4) actual damage or loss occurred.
A possible defence?
…the interfering party is justified in interfering if the actions are done in a bona fide exercise of the party’s own rights or if the party has an equal or superior right in the subject matter. … Justification may include the right to file a lawsuit provided this is done in good faith with the belief that there is a colorable claim. … An interfering party is privileged to protect its own legitimate financial interest. (Hill v. Heritage Resources, Inc., 964 S.W.2d 89 (Tex.App. 1997))