Jkc Holding Co. v. Washington Sports Ventures, Inc.

264 F.3d 459 (4th Cir. 2001)

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Nature of the Case

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Facts

Jack Kent Cooke held 90% of the shares of P, which in turn owned the Washington Redskins. His son, John Cooke, Sr. owned the remaining 10% of the shares. When Jack Kent Cooke died, his will provided that his estate was to sell his stock in P and use the proceeds to fund a charitable foundation benefiting underprivileged youth. Sr was one of the executors of the Estate, as well as a director of P, which was formed for the purpose of selling the team and its related assets. A Special Committee was formed and eventually accepted an $800 million bid from D, a group of investors led by Howard P. Milstein, his brother Edward L. Milstein, and Daniel Snyder. Sr. and his group of investors had offered the second highest bid of $725 million. D understood that Sr. was potentially hostile to D's bid and that the transaction could fail as a result. The Special Committee gave D time to reconsider proceeding with the Agreement in light of this information. D decided to proceed, and the signature pages were signed and exchanged on January 10, 1999. The parties agreed to 'consult and use commercially reasonable efforts to make or obtain all Approvals as soon as is reasonably practicable after execution of this Agreement.' Art. VII. § 7.2. Each party was contractually obliged to use its best efforts to secure NFL approval for D. D was required to provide a $30 million irrevocable letter of credit, which P could exercise if a 'Deposit Forfeiture Event' occurred. Under the Agreement, the following three conditions must exist for a 'Deposit Forfeiture Event' to occur: (1) the Agreement was terminated prior to the closing date, in accordance with the termination provisions set forth in Section 9.1 of the Agreement; n1 (2) the Agreement was terminated prior to D obtaining NFL approval to own the Redskins; and (3) the NFL Commissioner did not advise P in writing that the reason D did not obtain NFL approval was solely due to problems with P's capital structure. The NFL owners scheduled a vote. Eight negative votes would prevent D from obtaining NFL approval, but it was aware of only three. Shortly before the NFL owners were to vote, however, D entered into a separate agreement with the NFL, negotiated by Commissioner Paul Tagliabue and Finance Committee Chairman Robert Kraft. According to this separate agreement, the NFL owners agreed to pay D the amount of any loss (up to $30 million) that it actually incurred with respect to the irrevocable letter of credit provided to P under the Agreement, if D would voluntarily withdraw its bid and agree not to sue the NFL over its application and subsequent withdrawal. The NFL owners then voted to accept D's voluntary withdrawal from the approval process and resolved to approve the agreement with D on condition that a satisfactory and enforceable final agreement be prepared encompassing such terms. Sr. renewed his bid for the Redskins, but the Special Committee again rejected it and, in July 1999, sold the team to a group headed by Snyder, the Milsteins' former minority partner, for $800 million. P demanded payment under the $30 million irrevocable letter of credit on January 5, 2000. It filed a declaratory judgment action against D. D counterclaimed against P, the Estate of Jack Kent Cooke, and three individuals who were executors of the Estate, managers of P and formerly directors of P. It did not sue Sr. in this action, although the record indicates that D has filed a separate action against him elsewhere. D alleged that Ds breached the Agreement by failing to use their best efforts to cause the Estate, and specifically Sr, to support its proposed deal to purchase the Redskins, and that they fraudulently induced D to enter into the Agreement by representing that D would not interfere in the approval process. P's motion for summary judgment on its declaratory judgment count and granted and the court dismissed D's remaining counterclaims. D appealed and contends that the $30 million irrevocable letter of credit agreed to by the parties is unenforceable as an illegal penalty under New York law, P caused D to withdraw its application before the NFL approval process was completed.