Highland Capital Management LP v. Schneider

Leonard Schneider and his children (Schneiders) (defendants) sold two businesses to McNaughton Apparel Group, Inc. (McNaughton) in exchange for promissory notes worth $69 million. The Schneiders later engaged Glen Rauch of Glen Rauch Securities (GRS) as their agent to sell the notes. Rauch contacted RBC Dominion Securities Corp. (RBC) as a potential purchaser. The value of the notes was discounted because of concerns about McNaughton’s solvency. RBC planned to minimize its risk by reselling the notes at a markup and received a bid from Highland Capital Management LP (Highland) (plaintiff). A letter agreement between RBC and GRS governing the negotiations stipulated that the consummation of any transaction would be in the Schneiders’ sole discretion. GRS and RBC conducted most of the negotiations via telephone calls that were recorded in the routine course of RBC’s business. Rauch repeatedly reminded RBC on those calls that he could not finalize terms without the Schneiders’ approval. Several offers were made and rejected by both parties. After some haggling, Rauch told RBC he believed the deal could be done “tomorrow morning” at 51 percent of the notes’ value. However, unbeknownst to Rauch, the Schneiders had learned about a possible acquisition of McNaughton that would result in full payment of the notes. In a recorded call the following day, RBC pressured Rauch to conclude the deal, while Rauch maintained that he could not finalize terms without the Schneiders’ approval, and he was waiting to hear from their attorney, which probably would not happen before the end of the day. According to RBC, during an unrecorded call 10 minutes later, Rauch agreed to sell the notes at 51 percent and said he would get the lawyers to confirm and move on to a written contract. Rauch did not have the Schneiders’ authorization, and he denied having agreed to the terms. The Schneiders decided not to sell and received full payment for the notes when McNaughton was acquired. Highland filed suit, arguing along with RBC that the Schneiders breached a contract to sell the notes. Following a jury trial, the district court entered judgment against the Schneiders, and they appealed.