Judge Explains EMI Decision

A U.S. District Judge has explained why he didn’t toss the lawsuit Terra Firma is bringing against American bankers Citigroup over the purchase of EMI and set a date for the case to proceed in New York.

Jed Rakoff denied Citigroup’s request to dismiss the case March 24 and said he would explain his reasoning at a later date.

In a written opinion handed down July 26, he said he blocked the bankers’ bid to move the case to London because none of the deal documents forced Terra Firma to sue in England.

It says he rejected the bank’s argument that the dispute belongs in a UK court and allowed the case to proceed in New York because “there is a legitimate U.S. interest in learning whether Citi, a major American bank, may be liable for fraudulent inducement, and thus subject to substantial damages.”

Citigroup, with headquarters in New York, had argued that the city’s court wasn’t the appropriate forum.

Terra Firma is accusing Citigroup of misleading it into believing that rival private-equity firm Cerberus Capital Management LP was still in the 2007 auction to buy EMI, when in fact it had pulled out. It also claims Citigroup told Terra Firma it would miss out on buying EMI unless it raised its offer.

Terra Firma says Citigroup’s misrepresentation caused it to pay an inflated price for EMI, and that it would also have pulled out of the auction if it had known it was the only remaining bidder. Terra Firma ended up paying £4.2 billion for the UK’s only remaining major music company.

Judge Rakoff says one document called the Project Mulberry Agreement, which Terra Firma signed when it first entered the bidding, required Citigroup to sue Terra Firma or EMI in England if it needed to enforce its terms.

“The document did not require Terra Firma to sue there,” he said.

Terra Firma originally sued in a New York state court Dec. 11, although the case was later moved to federal court in Manhattan. The trial is now set for Oct. 18.

Buyout firms such as Terra Firma usually raise loans secured on the targets they acquire to finance about two-thirds of the purchase price. The rest comes from its own funds.

They also tend not to invest more than 20 percent of their own capital in any one company, although continually covering its bank covenants with Citigroup has pushed Terra Firma far above that mark.