25 February 2010
A recent decision by the US District Court for the Southern District of New York regarding the terms of an engagement letter demonstrates the need to clearly articulate the intended purpose and scope of an engagement. As the case described below demonstrates, if there is any ambiguity with regard to whether or not a fee must be paid and/or when an engagement is terminated, the resolution of such ambiguity may depend upon the description of the engagement’s purpose.
In Peter J. Solomon Company, L.P. v. Oneida Ltd.,1 the court upheld a bankruptcy court’s denial of a claim for investment banking fees. In March 2004, Oneida Ltd. (Oneida) engaged Peter J. Solomon Company, L.P. (PJSC) as its non-exclusive financial adviser. The engagement letter stated that PJSC was engaged to act as an adviser in connection with “a transaction or series of transactions, whereby, directly or indirectly,” Oneida would restructure its debt or raise capital through financing or the sale of assets.
The engagement letter provided that it continued on a month to month basis and that, as compensation for services rendered, Oneida would pay PJSC both a monthly fee “during the term of [the] engagement” and a transaction fee upon completion of the contemplated transaction. The engagement letter stated that either party could terminate the engagement upon 30 days’ written notice, and contained a “tail provision” pursuant to which PJSC was entitled to a transaction fee if a transaction was consummated within one year of such termination.
In August 2004, Oneida completed an out-of-court restructuring with the assistance of PJSC. Following the restructuring, Oneida paid all invoices related to the transaction, and no further monthly fees were requested or paid.
The following year, a question arose over the possible application of the tail provision in the PJSC letter and, although it was Oneida’s position that the PJSC engagement had terminated upon completion of the August 2004 transaction, Oneida sent PJSC a written termination of the PJSC engagement in April 2005.
Oneida later retained Credit Suisse Financial Services as its exclusive financial adviser and, with the assistance of Credit Suisse Financial Services, entered into a restructuring transaction that included a Chapter 11 bankruptcy filing. PJSC then submitted a proof of claim for $6.17 million in unpaid fees, claiming that it was owed such fees because its engagement by Oneida did not terminate until 30 days after delivery of the termination notice and the tail provision therefore applied because the restructuring transaction occurred within one year of such termination. The bankruptcy court denied the claim, finding that PJSC’s engagement terminated upon the completion of the August 2004 restructuring. On appeal, the district court affirmed the decision of the bankruptcy court.
In reviewing the engagement letter, the court determined that PJSC had been hired for a limited purpose (rather than to provide general financial services or to provide services for a fixed period of time). Because of such limited engagement, the court determined that once the August 2004 restructuring was completed and Oneida had paid PJSC’s fees in connection with that transaction, the duties under the engagement letter were discharged and the contract was completed.
PJSC argued that the termination provisions provided that the engagement could not be terminated without written notice and that the tail provision would therefore apply in all cases. The court, however, emphasized that the engagement letter must be read in its entirety, including the month-to-month basis of the engagement, the purpose of the engagement, and the termination provisions.
The court determined that the entirety of the engagement letter made it clear that the parties intended that 30 days’ notice was only required if either side terminated the relationship before a transaction was completed, and that the tail provision was intended solely to prevent Oneida from reaping the benefits of PJSC’s efforts while avoiding paying PJSC’s fees by terminating the engagement before consummation of the contemplated transaction. Because the engagement was for a limited purpose, and the purpose of the engagement—a transaction—had been completed, neither the 30 days’ notice requirement nor the year-long tail provision applied.
The ruling by the court demonstrates that parties to an engagement letter should not only carefully consider the termination and fee provisions of the engagement letter in order to avoid disputes and uncertainties, but they should also carefully consider the language that is used to describe the purpose of the engagement. As the above case demonstrates, courts may review engagement letters in their entirety and, in doing so, may use the stated purpose of the engagement in order to determine whether or not a fee is payable.
For inquiries related to this Client Alert, please contact
Learn more about Mayer Brown’s Leveraged Finance practice.
1. Peter J. Solomon Company, L.P. v. Oneida Ltd., No. 09 Civ.2229 (S.D.N.Y. 2010).