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Members of Real Estate Lender Syndicate Cannot Act Individually, Highest N.Y. Court Rules
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July 23, 2007
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(This article first appeared in the May 16, 2007, New York Law Journal.)
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Thelen LLP
Given the enormous size of modern loan transactions, the use of lender syndicates - a group of banks collectively funding a single loan - has become more prevalent. Syndicates generally authorize a specific bank or lender to act as an agent on behalf of the group, and the language used to grant this power can affect the rights of individual lenders in the syndicate. The recent New York Court of Appeals case Beal Savings Bank v. Sommer explores this issue and concludes that in lender syndicate agreements involving sophisticated members, the intent of parties to engage in collective action may preclude an individual lender's right to recover money owed under related loan agreements.
Member Rights
A lender syndicate typically works through a lead bank or agent that performs the ministerial and administrative tasks associated with the loan and then distributes collected loan payments to the member lenders. The primary benefit of entering into a lender syndicate is the diversification of risk. The risks associated with large loans may be reduced when a lender assumes only part responsibility on many loans instead of assuming total responsibility on fewer loans.
A lender holding a minority interest in a syndicated loan, however, faces the possibility that the majority in interest will act in a manner that the minority lender feels is against its own interest. This occurred in Beal Savings, when the majority of syndicate members settled a dispute with the borrower, and a minority member was precluded from enforcing the loan agreement on its own. Depending on the language of the loan documents, a minority lender in this situation may have little or no recourse against the borrower. Similarly, the syndicate may face action by the administrative agent with which the lenders disagree.
Before entering into a syndicate, a lender must fully understand the structure of the agreements. The rights an individual lender will retain and what rights will be granted to the syndicate as a collective must be clearly set forth, especially whether the right to pursue remedies at law against the borrower remains vested in the individual lender as well as the syndicate. A lender will have to look at the overall percentage of the loan interest it will possess and what collective percentage of the loan syndicate members must have to direct the administrative agent to act. Only when a prospective lender is comfortable with the answers to these questions should it enter the syndicate. If the lender is not clear on these issues, it may find itself without recourse to address them at law. Beal Savings presents a situation in which a minority member was prevented from pursuing rights against the borrower that the member believed it had when entering into the syndicate.
The Beal Case
Plaintiff Beal was an assignee member of a 37-member lender syndicate involved with a $400 million loan for a casino development project in Las Vegas. During the pendency of the loan, the borrower filed for bankruptcy and defaulted on the loan. After the default, 36 lenders representing 95.5 percent of the outstanding debt entered into a settlement agreement with the borrower. The syndicate originally included 13 lenders. The settlement agreement, entered into by 36 of the lenders, provided for distributing $6.5 million to the pre-bankruptcy petition lenders, of which Beal's assignor, BFC Capital, was not one. Beal Savings Bank v. Sommer, 10 Misc.3d 1062(A) at *9, 814 N.Y.S.2d 559 (Supreme Ct. 2005).
Although Beal (which represented the remaining 4.5 percent of the debt) received its pro rata share of the settlement, it chose to sue the obligors (the "Trust") under a "Keep-Well Agreement."
The Trust moved to dismiss Beal's action, arguing that it lacked standing to sue individually. The Trust contended that because the loan documents at issue promoted "collective lender action," an individual lender had no right to sue the borrower. Beal responded that the Keep-Well Agreement was "enforceable by the Administrative Agent and each Lender and their respective successors," and that the provision stating this authorized individual enforcement of the agreement.
The Supreme Court held that Beal lacked standing to sue, rejecting Beal's reading of the Keep-Well Agreement because of the "clear and unambiguous language" of the loan documents when read as a whole. The court stated that because the Credit Agreement controlled the events of default, its grant of power to act upon the direction and vote of the Required Lenders (constituting a two-thirds super-majority of the debt) would be rendered meaningless if the collective action of the Required Lenders could be thwarted by an individual lender suing on its own. This decision was affirmed by the Appellate Division. Beal Savings Bank v. Sommer, 29 A.D.3d 388, 815 N.Y.S.2d 63 (1st Dept. 2006).
The Court of Appeals also rejected Beal's position and affirmed the lower courts' decisions in an opinion written by Chief Judge Judith Kaye. Beal Savings Bank v. Sommer, 8 N.Y.3d 318 (2007).
The Court of Appeals cited to general principles of contract interpretation, stating that agreements should be construed "so as to give full meaning and effect to material provisions," that a contract should not be interpreted to "render any portion meaningless," and that a contract should be read as a whole "to give effect to its general purpose."
In reviewing the loan documents, the court noted that the Credit and Keep-Well Agreements did not contain any express clauses stating that a lender had the right to take action or refrain from doing so upon a default and indicated that it would have to "look to other specific clauses and the agreements as a whole to ascertain the parties' intent." The Credit Agreement was the only loan document that set out events of default. The Keep-Well Agreement was both executed pursuant to the Credit Agreement and expressly stated that unless otherwise indicated, it must be "construed, administered and applied" in accordance with the Credit Agreement. Because of this, the court reviewed both documents together and concluded that the agreements had "an unequivocal collective design."
The Court of Appeals agreed with the trial court that interpreting the agreements consistent with the plaintiff's position would render meaningless a key provision of the Credit Agreement because "there would be no reason to provide that the Required Lenders could enforce the agreements by a supermajority directing the Administrative Agent to act."
Regarding the section of the Keep-Well Agreement under which Beal sued, the court noted that the only entity mentioned in the section with the right to pursue a remedy upon default was the Administrative Agent, and as a result, "this section actually underscore[d] the collective enforcement scheme envisioned by the signatories of the Loan Documents." The court then pointed to myriad other language in the Loan Documents that showed the parties "contemplated unified action by the Administrative Agent." The title page of the Credit Agreement referred to the lenders in the collective as "Various Financial Institutions" instead of naming them individually. While Beal attempted to argue that an Administrative Agent typically held only ministerial powers, the court responded that the parties expressly provided the Agent in this instance "both discretionary power and power under the direction of the Required Lenders."
The court examined with approval a New York Supreme Court case, Credit Francais International, S.A. v. Sociedad Financiera de Comercio, C.A.. 128 Misc.2d 564, 490 N.Y.S.2d 670 (1985), in which a syndicate lent money to a Venezuelan financial institution that requested a temporary suspension of principal payments at the behest of the Venezuelan government. All but one of the lender banks in the consortium agreed to allow suspending the principal payment, but the remaining member sought to sue the borrower. The Credit Francais court held that the plaintiff did not have standing to sue the borrower because the loan transaction was between the syndicate and the borrower, not the borrower and individual banks. The title page did not list the lenders but simply called them "Depositors," which the court took as another indication that the agreement was collective. The court indicated that any agreement intending to permit individual depositors to proceed on their own should do so explicitly.
The Beal Savings Dissent
Judge Robert S. Smith dissented in Beal Savings, first stating that it was likely a bank would expect that if it were to lend money and not be repaid, it would be entitled to sue to recover that money. Judge Smith argued that if parties entering a syndicate choose to limit such a right, that limit must be written into the agreements expressly. Because no such language existed in the loan documents at issue, Judge Smith objected to the majority's interpretation of the agreements.
The dissent took issue with the majority's reading of the Credit Agreement and its contention that permitting individual action would render the authorization of power to the agent meaningless, stating that the section "means what it says - that certain powers may be exercised by the Administrative Agent at the direction of a supermajority, not that those powers are surrendered by the lenders." The dissent asserted that it is impossible to read the section as stating only that the Administrative Agent could act when subdivisions of the same paragraph authorized the Agent to "commence, appear in and/or defend any action... brought by or against the Borrower by the Lenders."
Judge Smith also disputed the applicability of Credit Francais because the language in that case was stronger than the language in the loan documents at issue. There, the agent was "irrevocably" authorized to act. The dissent also noted that in Credit Francais the agent was authorized to act upon the approval of a majority in interest while the loan documents at issue in Beal Savings required a two-thirds super-majority to authorize the agent to act. Judge Smith suggested that the fact that the majority in this instance controlled 95.5 percent of the debt made the decision "attractive" intuitively, but this "pragmatically appealing" result "essentially reads into the loan documents language that would compel results far less appealing" if the majority consisted of a smaller group. Fairness dictated a more narrow interpretation of the agreements.
Conclusion
Beal Savings serves as a reminder of the importance of carefully drafting multiple loan agreements that will be read in concert. Any individual lender entering into a syndicate that wishes to preserve its independent right to recover what is owed would be wise to ensure that this right is stated expressly in the controlling loan document. At the very least, the authority of the agent authorized to act on behalf of the syndicate should be explicitly described. Otherwise, the existence of a lender syndicate may be enough evidence for a court to promote the collective intent of the agreements and limit the individual rights of its members.
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(Reprinted and excerpted with permission from the May 16, 2007, edition of the New York Law Journal. ©2007 ALM Properties, Inc. All rights reserved.)
©2007 Thelen LLP
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