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Bank Legally Bound to Pay Despite Unsigned Settlement Agreement in a Clawback Suit

New York, August 3, 2017 – The U.S. District Judge Denise Cote recently affirmed a decision of the bankruptcy court, holding that the Bankruptcy Judge Shelley Chapman committed no error in its finding that the parties intended to be bound by the settlement in the case regardless of whether the agreement was yet to be signed.

The dispute arose from a bankruptcy proceeding in which Lehman Brothers Holdings Inc. (“LBHI”), the Chapter 11 bankruptcy plan administrator for Lehman Brothers Special Financing Inc. (“LBSF”) (collectively, “Lehman”), sought to clawback certain transfers from Shinhan Bank (“Shinhan”). On April 20, while a motion to dismiss was fully submitted and pending before the bankruptcy court, Lehman and Shinhan agreed to a settlement of a certain sum of money in exchange for mutual releases. Shinhan asked for some small changes to Lehman’s standard settlement package, which Lehman accepted and circulated the execution copy of the agreement. While Shinhan was yet to sign the execution copy of the agreement, the judge ruled on the pending motions and dismissed Lehman’s claims. However, Shinhan subsequently advised Lehman that it did not believe an enforceable settlement agreement had been entered into and that it would not pay the settlement amount. Lehman’s attempts to resolve the issue with Shinhan through the mediator were unsuccessful. The bankruptcy court held that the settlement agreement was enforceable. Shinhan appealed the bankruptcy court’s finding.

The District Court relied upon to the four factors as laid out in Winston v. Mediafare Entertainment Corp., 777 F.2d 78 (2d Cir. 1985) and Powell v. Omnicom, 497 F.3d 124, 129 (2d Cir. 2007). “Parties are free to enter into a binding contract without memorializing their agreement in a fully executed document.” Winston, 777 F.2d at 80. “Parties may enter into a binding contract orally, and the intention to commit an agreement to writing, standing alone, will not prevent contract formation.” Powell v. Omnicom, 497 F.3d 124, 129 (2d Cir. 2007)

The Court held that the parties drafted a written agreement that was unsigned by Shinhan only because of its delay and the court’s issuance of the dismissal order. The Court determined that allowing Shinhan to back out of the April 20 agreement because the parties took steps to record their agreement in writing would frustrate the important goal of committing to writing already-agreed-to settlements. The District Court affirmed the bankruptcy court’s finding and held that Shinhan Bank is legally bound by a clawback settlement with Lehman Brothers that Shinhan hadn’t yet physically signed before receiving a favorable court ruling.