When the London Stock Exchange received its coat of arms in 1923, inscribed on it was a Latin saying, Dictum Meum Pactum. It translates as, “My word is my bond.”
The adage, which dates back centuries, is well known and often cited as it underscores the importance that integrity plays in life and in business. Perhaps that’s why the London Exchange displays its motto nearly a century later. It’s an important reminder that our words and our bonds really do matter.
All across the world, in markets, banks and on trading floors, people understand that principle all too well. So too do industry professionals who operate by another common principle, “A trade is a trade,” which effectively means buyers and sellers abide by rules by which they verbally agree to terms and then confirm their deal in writing. In ever-changing markets where billions can be won or lost in moments, such commonly accepted practices have been in place to prevent the markets from spiraling into chaos. Such rules are necessary.
New York’s highest court, the state Court of Appeals, recently firmly established this as a part of the law, likely saving trading markets from the potential of serious disruptions and disorder brought on by institutions or rogue players that don’t necessarily respect an adage that was more or less an unwritten rule until the court made its decision in late December.
In simple terms, the landmark decision regarding the case Stonehill Capital Management, LLC (Stonehill) vs. Bank of the West (BOTW) overruled a surprise New York Appellate Court ruling. The higher court essentially concluded that a sale, purchase or trade is executable as long as the material terms and conditions are spelled out and mutually accepted – such as through emails and conversations – even if a contemplated formal agreement has not been signed. A trade is a trade, that is. The decision also raised the bar on often-used escape clauses that were aimed to give one party an ability to back out for any reason they deem fit. That’s not how our markets function best and the court understands that.
The decision sided with Stonehill, which I represented, and stemmed from the auction sale of an $8.7 million distressed mortgage loan; the case made its way through three New York courts dating back to 2014.
Our argument was that Bank of the West had accepted Stonehill’s offer to purchase the loan by accepting its bid and agreeing to use a standard industry form as the loan sale agreement. But BOTW pulled out of the deal when the market changed in its favor – earning it millions – saying they were not bound to sell the loan to Stonehill because they didn’t have a signed agreement. The bank also maintained that it was not bound to sell the loan to Stonehill because under the auction terms, BOTW had the sole discretion to withdraw the loan from the sale at any time.
The Court of Appeals disagreed. Its unanimous decision was forward-looking, practical and based on common sense and practice. Because it is not subject to appeal, it puts an end to any doubt as to when a deal is actually a deal. The decision will reverberate across the country and around the world, as New York is considered the gold standard of governing laws in commerce and finance.
Some trade groups, such as the Loan Syndications & Trading Association, which works to increase transparency, education, fairness and order in the loan markets, are calling this a “watershed” moment. Why? Because oral agreements – as in a person’s word — ensure the order of the financial markets.
Had the lower court decision prevailed, the integrity of the U.S. debt and equity markets would have been in serious jeopardy going forward, with parties having carte blanche to back out of agreed-upon trades arbitrarily or because of changing market conditions. That not only could have affected institutional markets, but could have trickled down to unsettle trading markets that comprise investments in 401Ks, mutual funds and any number of other financial accounts where investors large and small save for college, retirement, homes and the like.
Markets demand a platform of absolute confidence. This decision not only restores that platform, it permanently defines and protects it going forward. “A trade is a trade” or “Your word is your bond” are concepts to live by and trust — in business and in life.
Martin Eisenberg is principal of Law Offices of Martin Eisenberg in White Plains and New York City, representing hedge funds, private equity and mutual funds, financial institutions, investment banking firms, business entities and individuals in bankruptcy and business litigation, distressed debt and bankruptcy claim trading, creditors’ rights and general civil litigation. He can be reached at email@example.com and at 914-682-2044 or 212-351-5020.