Funding Commitment: “Inure to the Benefit of the Parties Hereto” May Not Mean What You Think It Means

Avenue CLO Fund Ltd. v. Bank of America, N.A., 709 F.3d 1072 (11th Cir. 2013) –

This case involves a failed Las Vegas casino-resort development that was to be funded by revolving loans and term loans, as documented in a series of agreements, including a credit agreement and a disbursement agreement.  The developers filed bankruptcy within a few months after the revolving lenders declined to fund a draw request.  Both the debtors and the term loan lenders sued the revolving loan lenders alleging a breach of contract.  The district court denied the debtors’ motion for partial summary judgment and dismissed the term loan lenders case on the basis that they lacked standing.  The 11th Circuit considered both cases on a consolidated basis.

The primary dispute centered on interpretation of section 2(c)(iii) in the credit agreement which provided:

“each Revolving Lender severally agree[d] to make Revolving Loans… to Borrowers… provided that… unless the Total Delay Draw Commitments [had] been fully drawn, the aggregate outstanding principal amount of all Revolving Loans and Swing Line Loans shall not exceed $150,000,000.”

The developers requested $350 million in Delayed Draw Term Loans (which was the full amount of the commitments).  On the same day they requested $670 million in Revolving Loans.  The revolving lenders rejected the draw request on the basis that asking for Delay Draw Term Loans and Revolving Loans at the same time did not comply with the credit agreement condition that the Total Delay Draw Commitments be fully drawn.  The debtors responded that “fully drawn” meant “fully requested,” not “fully funded,” so that the simultaneous request was in compliance.

The 11th Circuit first addressed the term lenders.  To establish standing, the term lenders were required to show a legally protected interest that was injured.  Looking to New York law, the 11th Circuit held that they could enforce the credit agreement “if either the contract language ‘fully evidences an intent to permit enforcement’ by the Term Lenders or if no other party may recover for the alleged breach of contract.”

The term lenders argued that they were intended beneficiaries of the revolving loan commitments.  Although the applicable section did not say anything to that effect, they pointed to other provisions of the agreements.

First, the credit agreement contained a standard boilerplate provision that:  “The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.”  Since the term lenders were parties to the credit agreement, they argued that they were intended beneficiaries of all of the provisions, including the revolving loan commitments.  However, the 11th Circuit did not agree.

They also argued that the disbursement procedures generally provided that loans were paid into a bank proceeds account until appropriate conditions were met.  Since the lenders all had a ratable security interest in deposited funds during the interim, the term lenders argued that they had the benefit of a security interest in the revolving loan proceeds.  Again, the 11th Circuit did not agree.

In particular, the court concluded that the term lenders were “incidental beneficiaries” as opposed to intended beneficiaries.  (An incidental beneficiary was described as someone who derives benefit even though it is not a promisee and performance is not rendered to that person.)  Since (1) the term lenders were only incidental beneficiaries, and thus not entitled to enforce section 2.1(c) of the credit agreement, and (2) they were not the only parties able to recover for a breach, the 11th Circuit agreed with the district court that the term lenders lacked standing.

In considering the debtors’ claims, the court concluded that the terms of the agreement were ambiguous, so the court could not find as a matter of law that the debtors should prevail on their summary judgment motion.

In particular, one of the sections in question provided that the proceeds of the Delay Draw Term Loans were to be disbursed first to repay Revolving Loans and then to the bank proceeds account.  The revolving lenders argued that this established a sequential funding process.  A simultaneous request was not consistent with using the Delay Draw Term Loans to repay the Revolving Loans.  The debtors provided an alternate interpretation that the intent was to provide a “continuous flow-of-funds structure.”  They also made an argument based on the use of the term “outstanding” in other places to mean “funded.”  Since “outstanding” meant “funded,” then “drawn” should mean “requested.”  Given the arguments, the court found that there was a reasonable basis for a difference of opinion, so it affirmed denial of the debtors’ motion for summary judgment.

It is interesting that the standard boilerplate language was not sufficient to give the term lenders the benefit of provisions in the credit agreement.  It would not be unusual to see an explicit statement about whether third parties are entitled to the benefit of provisions of a contract, but you would normally expect that a party would be entitled to bring an action for breach of the contract, particularly where it includes standard boilerplate to the effect that the agreement inures to the benefit of the parties.  There is the separate question of the appropriate remedies and/or the measure of damages.  However, it seems surprising that the term lenders were not even allowed to try to make a case.

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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