Litigation Update

A copy of Litigation Update can be found HERE.

 

Litigation Update

On behalf of FisherBroyles’ litigation partners, I’m pleased to introduce our new Litigation Update. We plan to release Updates several times each year containing substantive legal developments we hope you will find beneficial to your business. You may learn more about our broad and diverse litigation practice here: https:// fisherbroyles.com/areas-of-practice/. If you have questions, please feel contact your relationship partner or me.

Thank you. Tom Lundin, Managing Partner – Litigation.

When Best Efforts Are Not Good Enough

Sometimes, the best way to win a lawsuit is to avoid it altogether by anticipating common causes of litigation.

Even though best efforts clauses have been used in innumerable forms of contracts for centuries, that phrase and its kin seem to generate an undue amount of litigation. In the first three months of 2025, federal and state courts have already issued over 150 decisions regarding disputes about “best efforts” clauses in commercial contracts. Clients and lawyers alike are well-advised to take stock of the law on best efforts clauses and assess whether including a best efforts clause in a contract is simply an invitation to attend a subsequent lawsuit. As one court noted, “Although deceptively simple and ostensibly clear, the usual contractual term, best efforts, has little common meaning among lawyers[.]” First National Bank of Lake Park v Gay, 694 S2d 784, 790 (Fla App 1997). And if such clauses are subject to problematic vagaries of interpretation, are there effective means to limit the potential for mischief?

Best Efforts: An Attempted Gap Filler

Best efforts clauses are common in commercial agreements where, for whatever reason, the parties may not wish to, or simply cannot, define a mutually acceptable objective standard to govern certain future conduct. The phrase is part of a constellation of clauses that all circle around defining the indefinite, with variants ranging from “commercially reasonable best efforts,” to “good faith efforts,” to “reasonable efforts” and a host of other iterations.

Unfortunately, many negotiators assume they know what these phrases mean, assuming (for example) that “reasonable efforts” must imply less demanding standard of conduct and achievement than “best efforts.” That assumption, however, may be incorrect, with some decisions suggesting the two provisions impose similar standards of duty and performance. Decisions in a single jurisdiction may be at odds on this very point, however. Compare In re Chateaugay Corp., 198 B.R. 848, 854 (S.D.N.Y.1996). (holding that the “standard imposed by a ‘reasonable efforts’ clause . . . is indisputably less stringent than that imposed by the ‘best efforts’ clauses”) and Holland Loader Co. v. FLSmidth A/S, 313 F. Supp. 3d 447, 470 n.5 (S.D.N.Y. 2018), aff’d, 769 F. App’x 40 (2d Cir. 2019) (declaring it is “unclear that, as a general rule, a ‘reasonable efforts’ clause imposes a less stringent obligation than a ‘best efforts’ clause…….  Rather, the New York courts tend to treat the two terms interchangeably, suggesting that they each impose a similar performance obligation.”). Throw in other states’ jurisprudence, and the complications multiply. See Fortis Advisors LLC v. Dialog Semiconductor PLC, C.A. No. 9522-CB, 2015 WL 401371, at *5 n.22 (Del. Ch. Jan. 30, 2015) (there is a difference between “best efforts” and “commercially reasonable best efforts”).

Choice of Law May Dictate Enforceability

Two cases within the past year illustrate states’ divergent approaches to enforcing “best efforts” clauses. In some states such as Texas, a best-efforts clause may be deemed unenforceable vague unless it is supported by “some kind of goal or guideline against which best efforts may be measured.” Spain v. Phoenix Elec., No. 01-22-00656-CV, 2024 Tex. App. LEXIS 1714, at *23 (Tex. App. Mar. 7, 2024). In Spain, sellers and purchasers of an electrical contracting business entered into an agreement requiring purchasers to use “best efforts” in operating the business to procure qualifying new contracts, thereby maximizing the payments made to the sellers pursuant to a contractual formula. Plaintiff sellers sued claiming that defendant purchasers failed to satisfy the “best efforts” standard. The trial court granted summary judgment in favor of defendants, finding the provision vague and unenforceable. The appellate court affirmed, acknowledging that “some cases hold that an agreement to use best efforts can be enforceable,” citing Maranatha Temple, Inc. v. Enter. Prods. Co., 893 S.W.2d 92, 103 (Tex. App.—Houston [1st Dist.] 1994, writ denied), but finding that the contract at issue “ lack[ed] a clear set of guidelines against which [defendant’s] best efforts can be measured.” Spain, 2024 Tex. App. LEXIS 1714, at *20-21, 25-26 (“The Purchase Agreement does not specify how [defendant] is to maximize Earn-Out Payments . . . , for example, by requiring [defendant] to bid on as many new contracts as possible or by requiring [defendant] to prioritize more lucrative new contracts that would yield a higher amount of retainage.”).

In contrast to Texas, other states uphold “best efforts” clauses if the context of the contract, taken as a whole, or other “external standards or circumstances impart a reasonable degree of certainty to the meaning of the phrase ‘best efforts[.]’” Greenland Asset Mgmt. Corp. v. MicroCloud Hologram, Inc., 2024 NY Slip Op 51120(U), ¶ 2, 83 Misc. 3d 1277(A), 216 N.Y.S.3d 871 (Sup. Ct. July 22, 2024). The claims in Greenland arose out of a SPAC transaction involving a Registration Rights Agreement (RRA), which provided that defendant MicroCloud “‘shall use its best efforts, as expeditiously as possible’ to register shares upon receipt” of a demand from plaintiff Greenland, the SPAC sponsor. Id. at 2024 NY Slip Op 51120(U), ¶ 2. Defendant argued that the “best efforts” clause was unenforceable because it contained no objective criteria against which its efforts could be measured. The court disagreed, finding that, reading the contract as a whole, other clauses – identifying language setting forth specific timelines for notifications and permitting defendant to defer a registration demand for a defined period – provided “sufficient guidelines or objective criteria against which to compare MicroCloud’s behavior[.]” Id.

Accordingly, when faced with a dispute concerning a commercial contract, particular attention must be paid to the governing law. In a hypothetical contract between companies based in New York and Texas, for example, the choice of what state’s law governs a “bare bones” best efforts clause may result in the clause being enforceable (under New York law) or void (under Texas law).

To avoid issues that can generate years of needless litigation, corporate lawyers would be well-advised to consult with their litigation partners before accepting a best efforts clause or any of its variants.

 

Bill Dolan (Chicago)

[email protected]

D: +1.312.399.4362

 

 

The Enduring Power of the Butner Principle in Bankruptcy Litigation

After nearly a half century, the Butner principle continues to serve as a critical tool for creditors navigating complex commercial bankruptcy cases. Rooted in the U.S. Supreme Court’s landmark decision in Butner v. United States, 440 U.S. 48 (1979), the principle dictates that property rights in bankruptcy proceedings are governed by state law unless a compelling federal interest overrides. This foundational concept empowers practitioners to leverage state law to achieve favorable outcomes for clients.

What Is the Butner Principle?

In Butner, the Supreme Court rejected a federal common-law approach to determining property rights in bankruptcy, emphasizing the primacy of state law. The Court reasoned that unless a federal interest requires otherwise, bankruptcy courts should avoid altering the substantive property rights created by state law. This principle has since become a cornerstone of modern bankruptcy jurisprudence, ensuring that parties’ pre-bankruptcy property rights remain largely intact during the process.

Applying Butner: Insights from Miranda v. Banco Popular (In re Cancel, 7 F.4th 23 (1st Cir. 2021)

The First Circuit’s decision in Miranda v. Banco Popular underscores the ongoing vitality of the Butner principle. In that case, the trustee sought to avoid an unrecorded mortgage under Puerto Rican law. The court emphasized that state or territorial law governs property rights unless a specific federal interest requires otherwise. The decision illustrates the importance of understanding the nuances of local jurisprudence and how state or territorial law can decisively shape bankruptcy outcomes.

The Challenge of Recharacterizing Debt as Equity

One of the most challenging and contentious issues in bankruptcy litigation is the recharacterization of purported debt instruments as equity investments. Federal courts, including the Seventh Circuit, generally presume against recharacterization, emphasizing the need to uphold the contractual designations of the parties absent compelling evidence to the contrary. Matter of Chicago, Milwaukee, St. Paul & Pac. R.R. Co., 791 F.2d 524, 528 (7th Cir. 1986) (“The fact that a proceeding is equitable does not give the judge a free-floating discretion to redistribute rights in accordance with his personal views of justice and fairness, however enlightened those views may be.”). Judge Posner stressed that the court should not lightly disturb the parties’ chosen terms.

This presumption creates a formidable barrier for creditors’ committees and other parties seeking to prove that a financial instrument labeled as debt was in fact an equity contribution based on the economic substance of the transaction.

Leveraging State Law to Achieve a Favorable Outcome

In a recent complex Chapter 11 reorganization case, FisherBroyles represented a creditors’ committee in a dispute over whether a substantial financial arrangement should be treated as debt or recharacterized as an equity investment. The secured creditor relied on federal precedent emphasizing the presumption against recharacterization. However, we turned to the Butner principle to shift the analysis to state law, where we found more favorable precedents.

Drawing on state supreme court decisions from the 1970s, we highlighted key factors under state law that supported the argument for recharacterization. These cases provided a more favorable framework for examining the substance of the transaction, including the absence of conventional debt characteristics. By grounding our arguments in state law, we were able to present a more compelling case that led to a court- approved settlement resolving the claim in a manner beneficial to our client. The settlement significantly enhanced recovery prospects for unsecured creditors.

A Strategic Approach to Complex Bankruptcy Cases

These cases show how the Butner principle can be a powerful tool in complex bankruptcy litigation. By carefully integrating federal precedent with state law analysis, FisherBroyles was able to overcome significant legal hurdles and achieve a favorable outcome for its client. The result underscores our ability to navigate the interplay between state and federal law to protect creditors’ interests in high-stakes bankruptcy proceedings.

 

Matthew Wawrzyn (Chicago)

[email protected]

D: +1.224.777.1787 M: +1.847.274.9844