Lipshaw on Cerberus: drafting for litigation options

Jeff Lipshaw takes issue with my analysis of Chancellor Chandler’s opinion in Cerberus. He comes to the same basic conclusion – that Chandler was right -- but for a different reason – that before condemning sloppy drafting you need to consider the context in which the contract was drafted.

Perhaps it is because I have actually been in the shoes of an M&A lawyer trying to craft a linguistic solution, or have been the client of M&A lawyers trying to craft linguistic solutions for me, that I chuckle at the charges of "sloppy drafting" as though lawyers have the absolute power (a reductive, rational, scientific, but unrealistic assumption) to control all outcomes through language. * * *

I agree, but I still like my explanation better – that Chandler needs to consider the message he’s sending to contract drafters: do the best you can, and don’t rely on the court to sort it out for you.

However, a particular aspect of Jeff’s analysis deserves further comment:

[W]e don't know what the lawyers were saying to their clients. We do know from the testimony that the seller's lawyers understood that the walk-away right essentially created a $100 million option. How do we know that the following conversation did not occur in the seller's executive suite or boardroom - "look, we aren't going to do much better than this - we will be able to make an argument there's an ambiguity on the walk-away right, but Cerberus is probably going to win it in the end. On the other hand, the worst thing that happened if we lose is that we get $100 million, and that should be a sufficient litigation war chest if we want to pursue an injunction."

In other words, the parties may have crafted the deal so that they were left with (1) what they explicitly bargained for; and (2) a litigation option.

Another possible example of this is one of my favorite LLC cases, Judge Easterbrook’s opinion in Valinote v. Ballis, 295 F.3d 666 (7th Cir. 2002), which I previously discussed here and which is included in my Unincorporated Business Entities book.

In a nutshell, a member negotiated a buyout from an LLC with a zero payout though he could have taken a positive payout under another paragraph of the LLC agreement. The departing member claimed that he was entitled to indemnity from the other member on a guaranty, arguing in part that this indemnity explains why he chose the zero-payout route.

The problem is that the plain language of the agreement didn’t support the member’s argument. Easterbrook applied this plain language, but only after struggling to provide a rationale for the member’s seemingly silly decision to forego the higher price even though this gave him no more protection on the guaranty.

Of course, the rationale for the member’s decision probably doesn’t matter: the agreement is the agreement. But Jeff's analysis of Cerberus gives some insight into what might have been going on in the member’s head: he really wanted a clean break from the firm. The agreement didn’t seem to give him one, but leaving as he did at least gave him an argument he could try out with the court. Same with URI and specific performance. Too bad the LLC member ended up with Easterbrook, and URI ended up with Chandler.

I wonder if this might be relevant to any possible malpractice claim that URI might try to bring against its lawyer.  The Chancellor says that URI got no more than it bargained for.  But URI claims it was entitled to specific performance, and conceivably could sue the lawyer for not making this clearer. But the claim doesn't work if ambiguity was exactly what URI wanted.  This illustrates the lawyer's dilemma when drafting in the swirl of exigencies that Jeff discusses.