There's been a lot of litigation over private equity deals that have gone bust since the credit crunch began, last summer. But the banks themselves have thus far avoided an adverse ruling that could haunt them in the future.

Until now. On Thursday, New York State Supreme Court Justice Helen Freedman will hold a hearing on motions for summary judgment by the private equity firms Thomas H. Lee Partners and Bain Capital against six banks who have been accused of failing to honor their commitments to finance the $19.4 billion buyout of radio-station giant Clear Channel Communications. The banks, meanwhile, are also potentially on the hook to Clear Channel itself on claims that their repudiation of the financing deal amounts to a tortuous interference with contract.

This morning, counsel for the banks made public a letter to the private equity firms, suggesting that the fight over the commitment letter be resolved through binding arbitration before a single, neutral arbitrator.

"The banks are repeat players in this game," says Elizabeth Nowicki, a professor at Tulane University Law School and a participant in a private equity session at the recent Tulane Corporate Law Institute. "I can see how these banks are beginning to sweat. The stakes are pretty darned high," she said.

Nowicki sees the offer to arbitrate as "a sign that nobody, including the banks' counsel, knows how this is going to play out." An adverse ruling could impact the banks' potential liability in other deals that are teetering on the brink of failure. That said, Nowicki observed, "this is not a superconciliatory letter," with the offer putting the dispute before just one arbitrator rather than the classic three-person panel.

The private equity firms, however, responded with lightening speed. "This proposal is yet another disingenuous attempt by the banks to avoid living up to their commitments. The banks want to move this case into the back room because they fear that a public trial will clearly expose their misconduct," said a spokeswoman for the firms. "We are ready to complete the deal to buy Clear Channel on terms consistent with the binding commitments the banks made nearly a year ago and provided all the documentation needed to execute the funding, but the banks refused to sign. The New York court hearing on April 24 offers a further opportunity for these critical issues to be revealed in the bright light of day."

But what about Clear Channel itself? Corporate litigators say that the company should have been pressing for arbitration—because all it wants is to close the deal. It doesn't necessarily care about the precedent of a court ruling. In a counterclaim in the New York case, the banks have argued that their liability should be limited to the $500 million breakup fee.

A Clear Channel spokesman said, "The company isn't commenting on the banks' letter. You have to ask the sponsors." The company is also not commenting on ongoing litigation, he said.

The parties are expecting a sellout crowd at the hearing on Thursday.

The New York State Supreme Court is heating up as a venue for failed deals. Alliance Data Systems filed a suit late last Friday against Blackstone Group's Blackstone Capital Partners, a day after their deal terminated, seeking to collect the $170 million breakup fee specified by the agreement, alleging that Blackstone failed to use "reasonable best efforts" to secure regulatory approval for the deal.

Blackstone walked away when the Office of Comptroller of the Currency demanded that A.D.S. maintain a $400 million fund to supply additional capital to a bank subsidiary. A.D.S. agreed to drop the purchase price by $400 million, but that may not matter in court, says Nowicki. "When push comes to shove, $400 million is such a high regulatory concession that it doesn't fall within reasonable best efforts," she says.

When tough regulatory problems are known, there is often much more specific language in the contract about what would be required to meet the regulatory approvals. This contract did not go beyond the general "reasonable best efforts language."