I. Introduction
On February 20, 2013, the Court of Appeals for the Eleventh Circuit Court in Fontainebleau held that term lenders did not have standing to assert claims against revolving lenders under the same credit agreement for failure to fund, absent specific contractual provisions to the contrary.1 In the same decision, the Eleventh Circuit also held that summary judgment in favor of the borrower on their funding-related claims against the administrative agent and revolving lenders was improper because the terms governing the revolving lenders' funding obligation were ambiguous, thus requiring extrinsic evidence to establish the parties' intent.
While the second part the Eleventh Circuit's decision may have received much attention, it is the denial of standing that will be of particular significance to the lending industry. Revolving lenders in particular may be relieved to hear that a decision to decline a borrower's funding request does not expose them to the litigation risk that term lenders under the same credit agreement will come after them, unless the credit agreement specifically permits them to do so.
II. Background
In June 2007, Fontainebleau Las Vegas LLC and Fontainebleau Las Vegas II LLC, as borrowers, entered into a credit agreement (the "Credit Agreement") with Bank of America,2 as administrative agent, and certain lenders to fund the development of a casino-resort in Las Vegas, Nevada. The Credit Agreement provided for three facilities: (a) an initial term loan in the amount of $700 million, which was fully funded upon the execution of the Credit Agreement, (b) a delay draw term loan with a commitment of $350 million, and (c) a revolver with a commitment of $800 million. Importantly, section 2.1(c)(iii) of the Credit Agreement required that the revolving loans could not exceed $150 million unless the delay term loan commitments have been "fully drawn."
On March 2, 2009, Fontainebleau requested to draw the full amounts then available under the delay term loans and the revolver, i.e., $350 million and $670 million.3 The administrative agent rejected this borrowing request on the ground that section 2.1(c)(iii) of the Credit Agreement requires that the delay term loan must first been fully funded before revolving loans in excess of $150 million could be requested. A simultaneous borrowing request under both facilities would thus improper.
Fontainebleau countered that the Credit Agreement merely required that the delay term loan was fully requested—not fully funded—at the time that revolving loans in excess of $150 million are requested. Thereafter, on March 9, 2009, Fontainebleau submitted a revised request seeking to draw $350 million under the delay term loans, but not requesting any funds under the revolver. This request was approved by Bank of America and subsequently funded.
In light of the deteriorating financial condition of the casino project, on April 20, 2009, the revolving lenders notified Fontainebleau of certain events of defaults and terminated their commitments under the Credit Agreement. Subsequently, on June 9, 2009, Fontainebleau filed a petition for relief under chapter 11 case in the District for the Southern District of Florida.
III. The District Court's Rulings
On the petition date, Fontainebleau commenced an adversary proceeding against Bank of America and the revolving lenders asserting that the defendants breached their funding obligations under the Credit Agreement by refusing to honor the March 2 borrowing request. Fontainebleau also immediately moved for summary judgment on the breach of contract claim and sought an order for turnover of the revolver funds. On August 26, 2009, the District Court for the Southern District of Florida denied that motion. 4 The court held, in the alternative, that (a) the unambiguous meaning of the phrase "fully drawn" was "fully funded" and therefore the delay terms loans had to be first fully funded before the revolving funds in excess of $150 million could be funded and (b) even if that phrase was not unambiguous, it was reasonably susceptible to more than one interpretation, thereby opening the door for extrinsic evidence. In either case, summary judgment for Fontainebleau was improper. Fontainebleau appealed the decision to the Eleventh Circuit.
Separately from the Fontainebleau adversary proceeding, a number of term lenders also commenced lawsuits against Bank of America and the revolving lenders asserting, among other things, breach of the Credit Agreement. The defendants in the term lender lawsuits moved for dismissal. On May 28, 2010, the District Court for the Southern District of Florida dismissed with prejudice the term lenders' claims.5 The court held that the term lenders did not have standing to pursue claims against the defendants because, under applicable New York law, the term lenders were not an intended beneficiary of defendants' promise to fund the revolving loans under the Credit Agreement. The term lenders appealed the decision to the Eleventh Circuit.
IV. The Eleventh Circuit's Decision6
In the first part of its decision, the Eleventh Circuit affirmed the district court's dismissal of the term lender lawsuits for lack of standing. The Eleventh Circuit agreed with the district court that, under applicable New York law, the term lenders had failed to show that they were intended beneficiaries of the revolving lenders' promise to lend to the borrower Fontainebleau. Specifically, under New York law, the term lenders could only enforce a promise made in the Credit Agreement if either (a) the contract language clearly evidences an intent to permit enforcement by the term lenders or (b) if no other party may recover for the alleged breach of contract. The Eleventh Circuit concluded that the term lenders failed to satisfy this standard.
The Eleventh Circuit specifically rejected the term lenders' argument that the broad-sweeping language of a boilerplate beneficiary clause contained in the Credit Agreement sufficed to clearly show the parties' intent for the term lenders to enforce or benefit from the promise of the revolving lenders to fund Fontainebleau. That clause, which is widely-used in credit agreements, provided that "[t]he provisions of this Agreement shall be binding upon and inure to the benefit of the parties thereto and their respective successors and assigns."
Nor was the Eleventh Circuit satisfied that there was any other language in either the Credit Agreement or the related disbursement agreement that would clearly establish an intent to permit the term lenders to require performance of the revolving lenders. That the term lenders may indirectly benefit from the promise between the revolving lenders and Fontainebleau—e.g., the term lenders temporarily gained the benefit of a ratable security interest in the bank proceeds account when funded by the revolving lenders—only made them incidental beneficiaries, but did not make them intended beneficiaries. Further, the court noted that the term lenders are not the only party able to recover for breach of the Credit Agreement, as indicated by the adversary proceeding brought by Fontainebleau against the revolving lenders.
In the second part of its decision, the Eleventh Circuit also affirmed the denial of Fontainebleau's summary judgment motion on the ground that the relevant terms of the Credit Agreement are ambiguous, and therefore, the parties must be afforded an opportunity to establish the parties' intent.
The Eleventh Circuit concluded that the parties had set forth a reasonable basis for disagreement over the interpretation of the revolving lenders' funding obligation. On the one hand, as the revolving lenders asserted, the terms of the Credit Agreement could be read to establish a "sequential funding process" by which the revolving loans were the last loans to be funded to Fontainebleau. Under this interpretation, a simultaneous request for all of the funds from the delay term loans and all of the remaining funders under the revolver was not permitted. On the other hand, as Fontainebleau asserted, the funding arrangement could also be read to establish a continuous flow-of-funds structure pursuant to which delay term loans were only required to cover revolving loans that were outstanding at the time the borrower requested the loan. Under this interpretation, the March 2, 2009 request was proper because the delay term loans would have satisfied the then outstanding revolving loans. In light of these two reasonable interpretations of the Credit Agreement, judgment as a matter of law was not proper.7
V. Conclusion
The Eleventh Circuit's ruling will offer some comfort to revolving lenders who find themselves facing a funding request in the context of a borrower's deteriorating financial condition and/or an event of default. After Fontainebleau, it is clear that term lenders will not have standing to challenge the revolving lenders' decision not to fund under these circumstances, absent a specific contractual provision in their credit agreement giving them the right to do so.8
The Eleventh Circuit's decision in Fontainebleau establishes a clear default rule under New York law: unless a credit agreement provides clear and specific language to the contrary, lenders do not have standing to sue other lenders to enforce funding requirements under their credit agreement.
Footnotes
1 See Avenue CLO Fund, Ltd. et al. v. Bank of America, NA, et al., Case Nos. 11-10468 and 11-10740, 2013 WL 617060 (11th Cir. Feb. 20, 2013).
2 Bank of America was also one of the lenders under the revolver.
3 Fontainebleau submitted a revised notice on March 3, 2009 to correct a purported scrivener's error reducing the amount of revolving loans requested from $670 million to $656 million.
4 Fontainebleau Las Vegas, LLC v. Bank of America, N.A., et al. (In re Fontainebleau Las Vegas Holdings, LLC, et al.), 417 B.R. 651 (S.D.Fla. 2009). The matter was before the district court after having withdrawn the reference from the bankruptcy court on August 4, 2009.
5 In re Fontainebleau Las Vegas Contract Litigation, 716 F. Supp. 2d 1237 (S.D.Fla.. May 28, 2010). The matter was before the District Court for the Southern District of Florida after the lawsuits by the terms lenders (which were originally filed in the District of Nevada and the Southern District of New York) had been consolidated into a multi-district litigation action before that court.
6 The Eleventh Circuit consolidated the respective appeals in the Fontainebleau adversary proceeding and the term lender lawsuit.
7 The Eleventh Circuit did not reach the district court's alternative holding that the phrase "fully drawn" was unambiguous.
8 Of course, the borrower would still have standing to challenge a denial of a funding request.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.
