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Note: Under Investor Participation Agreements, German and others (Prospective Applicants) were to arrange LCs in favor of Dyer Investment LLC (Prospective Beneficiary) in support of Prospective Applicants' participation in assuring minimum ticket sales in financing the Lennox Lewis/ Mike Tyson prizefight in Memphis, Tennessee. Prospective Beneficiary sought financing after its bank, First Tennessee, declined to issue a letter of credit on its behalf backing the financing obligation. Prospective Beneficiary was the primary investor in financing the prizefight, and involved Prospective Applicants as sub-investors, to limit its losses. The Investor Participation Agreements provided that losses or profits would be based on ticket sales. If ticket sales were below US$12,500,000, Prospective Applicants would pay pro rata portions of the losses via the posted LCs. If ticket sales exceeded this figure, Prospective Beneficiary would receive US$12,500,000, plus a portion of proceeds in excess of this amount, and would distribute portions of the gains to Prospective Applicants.

The Agreements provided that the letter of credit "terms and expiry [dates must] be acceptable to [Prospective Beneficiary] in its sole discretion." Furthermore, the opinion stated that the Independent Participation Agreements provided "that [Prospective Beneficiary] was authorized to draw on [each] letter of credit, once the anticipated fight occurred and [Prospective Beneficiary] presented to the issuing bank a letter stating that the ticket sales had ended up totaling less than the guaranteed site fee, and specified the amount to be drawn against [each] letter of credit. The [Agreement] did not set forth deadlines for the parties' obligations, but stated, 'Time is of the essence in this Agreement.'"

There was evidence that Prospective Applicants made arrangements with their banks, all of which requested additional information, including "'the form letter of credit, where and when these were to be sent, who the letters were to be payable to, and things of that nature'", in order to issue the letters of credit. Prospective Beneficiary did not provide such information. After ticket sales reached a level sufficient to guarantee a profit, Prospective Beneficiary advised Prospective Applicants that subinvestors were no longer needed. Prospective Beneficiary made approximately US$3,000,000 from the prizefight, and it did not distribute any of the profits to Prospective Applicants.

Prospective Applicants sued for breach of contract and the covenant of good faith and fair dealing, seeking their portions of the profits. All except one settled out of court. The remaining Prospective Applicant sought US$200,000 of the profits. The Chancery Court of Dyer County, Butler, C., entered summary judgment in favor of Prospective Beneficiary. On appeal the Court of Appeals of Tennessee, at Jackson, Kirby, J., reversed, with the exception of the dismissal of the punitive damages claim.

The chancery court found that the Investor Participation Agreement did not form an enforceable contract, reasoning that posting a letter of credit was the means by which a Prospective Applicant could accept the Prospective Beneficiary's offer. Considering that the required LC was never posted, the Chancellor reasoned that the offer was never accepted, and thus no enforceable contract was formed. The chancellery court also ruled that there was no breach of the duty of good faith and fair dealing, as the issue was in the execution of the contract, rather than performance under it, and that punitive damages were not available for a breach of contract case in Tennessee.

Reversing, the appellate court ruled that that the Investor Participation Agreement contained "an implied duty to cooperate in the [Prospective Applicant's] performance of its contractual promise." In this way, it found that an enforceable contract did exist. It stated "from the language in the [Agreement] and the surrounding circumstances, [Prospective Applicant] had a binding obligation to provide [Prospective Beneficiary] with a letter of credit in the agreed-upon amount very soon after the parties signed the document. Consistent with this obligation, the evidence in the record shows that [Prospective Applicant] quickly made arrangements to obtain the necessary financing, asked [the deal organizer] repeatedly to obtain from [Prospective Beneficiary] the information needed to have the letters of credit issued, and gave [the deal organizer] commitment letters from his bank showing that the bank was in a position to issue the letters credit in the required amounts."

The appellate court noted that "the trial court emphasized that, under the [Investor Participation Agreement], [Prospective Beneficiary] had 'final approval in its sole discretion' regarding the terms of [each] letter of credit. In order to obtain a percentage interest in any profits from the fight, [Prospective Applicant] was required to give [Prospective Beneficiary] a letter of credit from a financial institution that was acceptable to [Prospective Beneficiary] and 'on terms and expiry acceptable to [Prospective Beneficiary] in its sole discretion.'"

The appellate court concluded that this discretion had to be "exercised with reasonableness or good faith," "because the subject matter of the approval provision would not involve matters of personal taste, such as a work of art, the preferred interpretation of the [Agreement] would require [Prospective Beneficiary] to exercise its discretion not only in good faith, but also in an objectively reasonable manner, that is, the court would have to determine whether a reasonable person in the position of [Prospective Beneficiary] would have approved the letter of credit." "The letter of credit could not be issued without active cooperation by [Prospective Beneficiary], by supplying foundational information. If the principle outlined above is applied in this case, the duty of good faith and fair dealing imposed on [Prospective Beneficiary] would require [Prospective Beneficiary] to take affirmative steps to cooperate in the issuance of the letter of credit, namely by providing the terms of the letter of credit to [Prospective Applicant]. Its failure to do so would constitute passive non-cooperation, a breach of its duty to cooperate in [Prospective Applicant's] performance of his duty to have the letter of credit issued. [Prospective Beneficiary's] breach of this implied duty to cooperate would have the effect of excusing [Prospective Applicant's] failure to post the letter of credit, thereby entitling [Prospective Applicant] to his participation interest even in the absence of a letter of credit."

The Investor Participation Agreement "included an implied or constructive condition requiring [Prospective Beneficiary] to furnish [Prospective Applicant] the information necessary for [Prospective Applicant] to post the letter of credit as set out in the [Agreement]. Such an implied condition is clearly necessary". In this regard, it also found that Prospective Beneficiary breached the covenant of good faith and fair dealing.

[JEB/mcb]

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