In Citi-Wachovia Fracas, Bailout Bill Provision Takes Center Stage

[WSJ_law_blog]

So the fight over who will take home Wachovia went away on Friday, but the money issue remains.

The main question here is as follows: Does the exclusivity agreement reached between Citi and Wachovia enable Citi to collect damages against Wachovia for leaving it at the alter and hooking up with Wells Fargo?

The answer could turn on how the court — Manhattan federal judge Lewis A. Kaplan — interprets a new section of the Bailout Bill. The provision is section 126(c), which says, in essence, that there shall be no liability against a third party for having acquired a target that otherwise was in an exclusivity agreement with someone else.

But does 126(c) also apply to the target itself?

That’s what the lawyers — Boies Schiller for Wachovia; Gregory Joseph and Wilmer Cutler for Citi — are fighting over. Yesterday, David Boies and Robert Silver submitted a motion for leave to file a supplemental memo on the EESA. Conveniently for us, they attached their proposed memo, which argues:

Section 126(c) could hardly be more plain: It declares unenforceable and “contrary to public policy” any existing agreement that even “indirectly” affects the ability of any person to “offer to acquire or to acquire” an insured depositary institution, if that agreement is “in connection with” a transaction in which the FDIC exercises its authority under the Section 13 of the Federal Deposit Insurance Act . . . Section 126(c) plainly invalidates the Letter Agreement at issue here. The agreement undoubtedly “affects” the ability of any person other than Citigroup to “offer to acquire or to acquire” Wachovia during the exclusivity period.

Citi, on the other hand, argues in its motion that the EESA provision only applies to acquirers — i.e., it lets Wells Fargo, the so-called bid-jumper, off the hook, but not Wachovia.

On the law & policy front, the Boies Schiller lawyers also make the following point:

Perhaps the most widely publicized feature of EESA was its grant of authority to the Secretary of the Treasury to purchase on behalf of the United States up to $700 billion in troubled assets. Congress recognized, however, that, while the federal government’s entry into the marketplace would offer some relief, the private sector would also have to play a pivotal role in rescuing distressed financial institutions. That is why Section 126(c) expressly removes the obstacles to acquisitions that Citigroup seeks to impose here.

If Citi has its wish, some lucky jury will get to sort all this out. Today, Citi filed a jury demand.