## Facts

- Ormesa Geothermal (Ormesa) sought multiple large loans to finance construction of a new multimillion-dollar power plant.
- Because the project required very large sums and carried substantial risk even with government-related support, Ormesa negotiated with a small group of institutional lenders and investors able to fund the project.
- Ormesa began negotiations with Teachers Insurance & Annuity Association (TIAA) for a long-term loan of $25 million.
- During negotiations, the parties reached agreement on the deal’s key financial terms, including a relatively high interest rate.
- To lock in those financial terms, TIAA sent Ormesa a signed commitment letter that described itself as “binding” and set out the agreed financial terms and conditions.
- Consistent with the parties’ practice in these negotiations, the commitment letter did not attempt to resolve all nonfinancial provisions; those were left for later documentation once the financial terms were fixed.
- Ormesa indicated acceptance of the commitment letter’s stated terms by returning a countersigned copy to TIAA.
- After Ormesa countersigned, TIAA began taking steps to proceed toward funding the $25 million loan.
- Before the transaction closed, bond market conditions shifted and interest rates fell substantially.
- Ormesa decided not to proceed with the TIAA financing and sought to obtain cheaper financing at lower rates.
- TIAA filed suit in federal court alleging that Ormesa’s withdrawal breached the binding commitment reflected in the letter.

## Issues

1. Whether the parties’ signed, self-described “binding” commitment letter created an enforceable agreement obligating Ormesa to proceed with the loan on the agreed financial terms, even though additional nonfinancial terms and documents remained to be completed.
2. Whether Ormesa breached that agreement by abandoning the deal after market interest rates dropped in order to pursue lower-cost financing.
3. What contract remedy is appropriate if a binding commitment existed and Ormesa’s refusal to close caused TIAA to lose the benefit of the loan bargain.

## Decision

- The court held that the commitment letter was enforceable as a binding agreement on the deal’s agreed financial terms.
- The court rejected the argument that the letter was merely a nonbinding “agreement to agree” simply because additional documentation and nonfinancial terms were left for later.
- The court found Ormesa liable for breach based on its decision to withdraw from the transaction after interest rates fell and it became economically advantageous to seek different financing.
- The court determined that TIAA was entitled to contract damages aimed at compensating it for the loss of the benefit of the loan transaction, subject to ordinary limits such as mitigation.

## Legal Principles

- A commitment letter can form an enforceable contract when sophisticated parties manifest an intent to be bound and reach agreement on the principal economic terms, even if other provisions are reserved for later documentation.
- The label the parties give the document (including describing it as “binding”), together with the completeness of the financial terms and the parties’ conduct (such as countersigning and beginning performance steps), supports enforceability.
- A party may not escape a binding loan commitment simply because market conditions change and the deal later appears unfavorable.
- Contract remedies for breach of a binding financing commitment are designed to put the nonbreaching party in the position it would have occupied had the transaction closed, while accounting for mitigation where appropriate.

## Conclusion

In Teachers Insurance & Annuity Association v. Ormesa Geothermal, the court treated the parties’ countersigned, self-described “binding” loan commitment letter as an enforceable agreement on the loan’s main financial terms and held that Ormesa breached by backing out after interest rates fell, entitling TIAA to damages for the lost benefit of the bargain.


Teachers Insurance & Annuity Association v. Ormesa Geothermal, 791 F. Supp. 401 (1991)