TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA V. TRIBUNE CO.
670 F.Supp. 491 (1987)
NATURE OF THE CASE: This was a dispute that arose over a restructuring transaction. The
Court made findings of fact and conclusions of law in Teacher's (P) action against Tribune
(D) in which P alleged that the parties had made a binding agreement to borrow and to lend
on the agreed terms and that D had breached that agreement.
FACTS: Tribune (D) wanted to restructure its assets and decided on a complicated
transaction to sell its News Building. La Salle Partners was to buy the building and the
Teachers Insurance (P) and Annuity Association was to supply the financing. La Salle was to
pay for the building by giving Tribune a mortgage note secured by a mortgage. No immediate
cash would go to Tribune from this transaction. However, Tribune would then proceed to
borrow from a lender the amount equal to the mortgage note. The loan agreement with the
lender would provide that Tribune could pay off its own note to the lender by putting in
place its own note, the mortgage note that Tribune would receive from La Salle. To
compensate the lender for the risk inherent in the put, Tribune would pay the lender a
premium. Tribune could also hide the transaction off its balance sheets and merely describe
it as a footnote to its financial statements. By only showing the cash infusion, its balance
sheet would look much better. The transaction was dependent upon Tribune getting a firm
commitment letter from the lender in order to take advantage of tax advantages such a sale
would have in 1982. Tribune asked for that letter by September 15, 1982. The Finance
Committee for Teachers met on the 16th and told Smith of the Tribune that Teachers would
issue its commitment letter promptly. The letter was mailed on September 22nd. Neither the
term sheet nor its commitment letter made reference to the availability of offset
accounting. When the letter was received certain language regarding a 'binding commitment'
caused serious concerns but Smith signed the letter stating that the agreement was subject
to the approval of the Board of Directors. No mention of an important tax advantage or of
the offset accounting was made. On October 28, the Board approved that proper officers of
the Tribune were authorized to affect the borrowing of the monies with the actual terms and
conditions subject to prior approval by the resolution Finance Committee. In the interim,
interest rates had dropped rapidly and were now substantially below the rates that Teachers
and Tribune had entered into the commitment letter. Tribune was concerned that its
accountants would not approve the use of offset accounting. Price Waterhouse had serious
reservations about the offset accounting transaction and for it to be satisfied an
unconditional put option would make the offset accounting appropriate. The transaction began
to unravel and interests rates were in a downward spiral. The Tribune closed with LaSalle on
the sale of the building. Teachers was concerned the deal would not close at the higher
rates and dropped its demand on Tribune's exercise of the put. Tribune told Teachers that it
would meet to close a deal if the loan would be conditional on Tribune's ability to use
offset accounting. Teachers responded that Tribune's ability to use offset accounting was
not part of the deal. Teachers brought suit. The issue at trial was whether the commitment
letter was a binding contract such that there was an obligation to deal in good faith.
ISSUE:
RULE OF LAW:
HOLDING AND DECISION:
LEGAL ANALYSIS:
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