Teachers Insurance And Annuity Association Of America v. Tribune Co.

670 F.Supp. 491 (1987)

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Nature of the Case

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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 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.