Presenting a live 90 ‐ minute webinar with interactive Q&A Structuring Default Provisions g in Commercial Loans Maximizing Borrower Protection and Lender Remedies Through Effective Event of Default Clauses TUES DAY, JUNE 7, 2011 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific T d Today’s faculty features: ’ f l f Zachary G. Newman, Partner, Hahn & Hessen , New Y ork Aric T . S tienessen, Attorney, Hinshaw & Culbertson , Minneapolis The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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5 Structuring Default Provisions in Commercial Loans in Commercial Loans
ZACHAR Y G. NEWMAN LITIGATION & DIS PUTE RES OLUTION P ARTNER HAHN & HES S EN LLP , NEW YORK CITY , 212.478.7435 znewman@ hahnhessen.com ARIC T . S TIENES S EN CORPORATE LAWYER HINS HAW & CULBERTS ON, LLP , MINNEAPOLIS 612.334.2504 astienessen@ hinshawlaw.com 6
D f Default Provisions Are The Keystone To Prosecuting lt P i i A Th K t T P ti And Defending Lender-Borrower Claims One of the consequences of a depressed economic climate is a rise in borrower-lender disputes. Disputes over the lending relationship, and, especially, the existence of defaults become the centerpiece of litigation. Whether or not a default will be upheld will largely depend Wh th t d f lt ill b h ld ill l l d d on the very specific language of the credit facility Care must be given when drafting amending and enforcing Care must be given when drafting, amending, and enforcing these provisions as they are the key to a successful litigation. 7
NEGOTIATING DEF AULT PROVIS IONS TERMINATION OF FUNDING PROVIS TERMINATION OF FUNDING PROVIS IONS IONS ADDRES S ING FORES EEABLE EVENTS AND CONDITIONS CROS S -DEF AULT PROVIS IONS INS S OL O VENCY-RELATED EVENTS C S AND MAC CLAUS C C US S ES CHANGE OF CONTROL PROVIS IONS OTHER DEF OTHER DEF AULT PROVIS AULT PROVIS IONS IONS AND RELATED IS AND RELATED IS S S UES UES 8
Termination of Funding Termination of Funding We have seen an influx of cases surrounding the issue of whether the lender is obligated to continue funding proj ects, or whether the lender is permitted to terminate funding. t i t f di The right to terminate funding will depend on the terms of the credit facility, as well as whether the borrower is of the credit facility, as well as whether the borrower is alleged to have defaulted under the terms thereof. Courts have seen a rise in these types of cases as lenders have lost confidence in their borrowers, or because borrowers claim the lender had no right to terminate or reduce funding. 9
Destiny US A Holdings, LLC v. Citigroup Global Markets Realty Corp (N Y App Div 4 th Dep’ t 2009) . App. Div., 4 th Dep t 2009) Realty Corp. (N.Y Citigroup agreed to lend Destiny US A Holdings, LLC (“ Destiny” ) $155 million in construction financing for the addition of a “ green” mall. Citigroup also acted as agent for all of the proj ect’s lenders and was responsible for approving all advances from the various other sources of funding. The loan documents contained a standard “ balancing” provision that required the borrower to deposit any deficiency with the lender if pending advances were insufficient to complete improvements or pay related costs. Allegedly, Citigroup honored disbursement requests despite deficiencies on a number of occasions and deducted interest payments from these advances. When construction was close to finished in June 2009, there existed a $15 million deficiency in part due to tenant improvement costs included in the ll d f d l d d h deficiency and Citigroup declared a default and refused to continue its scheduled disbursements. D Destiny sued for specific performance or an inj unction enj oining Citigroup from ti d f ifi f i j ti j i i g Citig f refusing to continue disbursing funds. 10
The Destiny-Citigroup Court Battle In July 2009, Destiny was granted a preliminary inj unction and Citigroup was required to continue funding the proj ect. The trial court found that the not ices of deficiency and default were erroneous since tenant improvement costs should not have contributed to the deficiency under the balancing provision. The court concluded that Citigroup breached the loan agreement and its fiduciary duty as Destiny’s agent. In November 2009, the appeals court upheld the order granting the preliminary inj unction, finding that Destiny was likely to succeed on the merits since the source of the deficiency should not have been included in the calculation of the deficiency under the clear terms of the agreement. the deficiency under the clear terms of the agreement The court found The court found irreparable inj ury if the inj unction was lifted since the proj ect was near completion, and, due to the economic climate, alternative financing was unavailable. However, the appeals court vacated the trial court’s determination of the ultimate rights of the parties and held that these issues should be determined at a full hearing on the merits. The final outcome is yet to be determined. 11
T k Takeaways If counseling the lender: If li h l d Draft specific provisions that provide escape clauses, default provisions, and funding limitations. Avoid provisions that obligate the lender, without the lender explicitly agreeing to a firm lending commitment. If counseling the borrower: If li h b Ensure provisions that will permit the borrower access to the funds necessary to accomplish its business obj ectives Ensure that the reporting provisions and financial covenants are achievable, and, most importantly, understood by the borrower. 12
ADDRES ADDRES S S ING FORES ING FORES EEABLE EEABLE EVENTS AND CONDITIONS : When Default s Are Met Wit h The Defense of Commercial Impract icabilit y Defense of Commercial Impract icabilit y 13
Bank of America, N.A. v. S helbourne Development Group Inc (N D Ill March 3 2011) Group, Inc. (N.D. Ill. March 3, 2011) Bank of America (BOA) and S helbourne entered into a loan agreement on December 11, 2006 in which BOA provided defendants with a $3 million revolving line of credit to assist in the development of a Chicago illi l i li f dit t i t i th d l t f Chi property. On June 5, 2008, the parties agreed to an amendment to accommodate d f defendant’s request d ’ for an extension of f i f time to obtain a binding i b i bi di irrevocable construction loan commitment. This amendment contained a non-monetary covenant that required S helbourne to provide additional collateral in the event they were unable to obtain the construction loan. Due to the credit crunch resulting from the financial crisis, S helbourne was unable to obtain the construction loan and BOA informed them they were required to provide additional collateral. S helbourne did not meet this demand and BOA declared the loans to be in default and accelerated the outstanding balance. 14
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