Comments by the bank requesting reconsideration
Our attorneys concentrated on the legal merits of the case and avoided the “flavor” arguments while the opposing counsel concentrated on mud slinging and “flavor”. Our attorney advised us that the court system would follow the law and that the mud slinging by the guarantor’s lawyers would not matter. Our attorneys focused on the law because they believed the law is clear and thought the rest was irrelevant.
Apparently the guarantor’s mud slinging and flavoring carried the day. We have advised our attorney to revise his tactics in litigation.
We were all surprised that not only does the flavor matter, but that even the minority opinion referred to the majority opinion as reaching “a pragmatically appealing” result.
How can this be? How can this court think that depriving a bank of its absolute right to pursue a guaranty and thus suffer a loss can be appealing in any way? The court must think that the other lenders made an informed decision to compromise and that this single bank didn’t want to play ball. This is not true. The fact is that this single bank made the correct decision and that the other lenders fell in like lemmings behind an offer that made no sense and where at least some of the other lenders now realize they made a mistake. We have talked to other lenders who signed on who have said that the only reason they signed on was because they lacked pertinent information which they had no right to demand and did not have the time or desire to investigate the issues. Some of the consenting lenders agree in hindsight that they made a mistake with their vote and now wish that they had joined us in pursuing the guarantee.
The vast majority of syndicated loan agreements contain language that requires unanimous consent for certain loan amendments . This court now holds that the unanimity provision in this vast majority of syndicated loan agreements may no longer enforceable in New York. Instead, apparently depending on the circumstances, there is a new indeterminable threshold which we suspect is somewhere in the 70 and 95% range, which probably varies depending on the circumstances. Perhaps this new rule may only apply if a lender acquired its loan after the borrower’s declaration of bankruptcy because that was cited in this case. Or actually, this lender DID acquire its loan prior to bankruptcy so perhaps the test is whether a lender challenges an irrelevant assertion that it acquired its loans after a bankruptcy filing. Or perhaps the new rule only applies where all lenders received some consideration of undeterminable value as was cited here where an interest in a mall that was over mortgaged and essentially bankrupt was conveyed. Talk about chaos – here it is. When, in New York, are various provisions enforceable as written?
Is it possible that the intent of the parties to this contract was not clear?.... No, they are crystal clear. Is it possible that while the parties intent was clear that perhaps they could not or did not contemplate this specific situation so that there was no real meeting of the minds for this unique situation? No, almost inconceivable. So why would this court rule as it did? Is it a plausible explanation that the Court finds the outcome so objectionable that they simply must rationalize what they perceive to be a fair conclusion. That must be what happened but that simply means that the court did not really understand the situation and perhaps we are at fault for not providing more of the flavor of the case and sitting by while opposing counsel called us a “rogue”, mischaracterized the nature of the lender decision making process, and virtually fraudulently misrepresented language construction.
This court cites that $6.5 million was to be provided to prepetition lenders and that we were not a prepetition lender. This is not true. We were a prepetition lender and we received nothing. We question whether any of the lenders received any of this $6.5 million.
This court states that we acquired our loan interests after the borrower declared bankruptcy. This is not true as all of our debt was acquired prior to the borrower’s bankruptcy. We never stressed this to the court because it should absolutely not matter when we acquired our loan interests. Our attorney advised us to stick with the material issues and not get lost in the weeds pointing out issues that are irrelevant.
The settlement offer was essentially to execute a new guarantee that would provide the lenders $6.5 million in minimum proceeds upon the sale of an interest in an adjacent mall in exchange for the release of a guaranty from a trust that purportedly had a net worth in excess of $20 million. Why should we exchange our existing unlimited guarantee for a new diminished and limited guarantee, particularly when the mall was over mortgaged and essentially bankrupt anyway? We have heard that this new $6.5 million guarantee was either not honored or subsequently renegotiated away and that the lenders actually received nothing. Perhaps our decision in hindsight was not so bad. We have heard these things but we do not know what really happened.
Why can’t we find out what really happened and where the money went? Because the administrator owes us no such answer. They owe us nothing. Is this court really telling us we should simply go along with the crowd and vote “yes” because we are being told everyone else is doing it? Why can’t we say “no”. Isn’t that our right. Isn’t that our obligation? How do we even know what other lenders are doing?? Perhaps if we hold out against a poor decision that will send a message to other lenders to reconsider and we will all benefit. What other mechanism do we have to let other lenders know we disagree?
Remember that, in general, the administrator is usually the same party who originated the loans and came telling us lenders how “everyone” wanted to buy the loans at a low interest rate so they could get their loans sold profitably. Routinely, these same administrators come back to us when we say no and subsequently offered a higher yield because they couldn’t get their loans sold. These are not parties acting in our best interests. These are used car salesman trying to get their cars sold. It may even be true that a majority of lenders initially voted against a particular settlement but that the used car salesman worked on everyone to change their vote and everyone went along for the ride. How can we ever know? How do we ever even know until the deal is signed what other lenders are doing? We have no right to know and we do not know. I guess we can ask the used car salesman but he has no obligation to tell us or to tell us the truth. He has already stretched reality repeatedly when he was trying to sell loans. Yet this court is telling us we should change our vote to “yes” because the used car salesman is telling us everyone else is doing it?
I know you’re thinking “wow, that sure sounds like a stretch of the truth…used car salesmen”. We don’t know exactly what happened in the Aladdin matter at issue here, and we’re not entitled to know, but we do remember vividly our experience on a $1 billion syndicated loan to another Las Vegas casino hotel. The administrator called and said they wanted our yes vote to a partial collateral release. When we subsequently indicated our displeasure with the release they told us we were the “only no” vote and asked what it would take to change it to a “yes”. We pointed out that “no” was not our final decision but an indication of our initial assessment. We were perplexed that everyone else would go along without compensation for a material collateral release and consequent increase in risk. In this syndicate we were one of the largest lenders with a $160 million loan and we just happened to know who some of the other major lenders were. So we called some of them and were surprised to have them tell us that they had not yet reached a decision on what they were going to do and they were angry that the administrator would misrepresent the situation. So much for administrator integrity and this involved a big wall street administrator and a billion dollar credit. The release was subsequently resolved to the satisfaction of all parties.
We never stressed these issues because they seemed irrelevant to the matter at hand.
Perhaps it should be pointed out that this Aladdin settlement was not to further a “reorganization” or a restructuring plan that preserved jobs or a business. The borrower was walking away from both the business and its obligations through bankruptcy and thus the settlement was simply an exchange of an existing broad and unlimited guarantee for a new severely diminished and limited guarantee.
If the highest court in the State of New York really is interested in the “flavor” of the majority settlement and the decision making process (or actually lack thereof) or why a holder of $21 million of debt voted “no” consistent with it’s rights and requirements to “…make its own credit decisions as to exercising or not exercising from time to time any rights and privileges available to it…” (language from the loan documents) we will grudgingly stray into that area for discussion.
We voted “no” with no knowledge that we would be the only dissenter because there was no communication among the lenders. When the administrator circulated a proposal that could be accepted by those lenders that wanted to accept it, we never even considered discussing our belief with other lenders that they should not accept the offer (notwithstanding that we had no right to do that or even to know the identity of the other lenders). Why did we care? We can accept it or we can pursue the guarantee. There was no group decision for us to participate in. This was a question asked of 36 mostly uninformed lenders. There was never a group vetting of the issues or the merits of the proposal. Never an investigation by the lenders of the alternatives or anything similar. Simply an offer that was circulated by the administrator that we could accept or reject.
We could accept the offer or we could reject the offer and pursue the guarantee. Simple choice. We did our homework and declined the offer. What in the world is wrong with that?? Why should we now be precluded from pursuing the guarantee to which we are a party and which expressly gives us enforcement rights and also effectively precluded from now receiving any payment from the settlement???
We strongly believe that if a vetting of the issues and merits had taken place among the lenders that many other lenders would have agreed with our analysis and declined the settlement. The characterization of this decision process as a group effort suggesting discussion and debate is totally inappropriate. It was a simple question: The borrower has made this offer and who wants to accept it? The loan administrator often has conflicting interests with the other lenders. We do not know whether conflicts existed here. We have not investigated and frankly don’t care. We are supposed to make our own credit decisions.
But it is worth pointing out that the administrator in this case was an originator of the loans. Generally speaking, originators that have sold their loans off to other lenders are often more interested in maintaining borrower relationships and subsequent loan opportunities than in attempting to maximize collections for third party lenders. Consequently it is not at all unusual for administrators to float poor settlement offers to syndicated lending groups and not at all unusual for many lenders to vote yes simply because they have no rights to force the administrator to answer their questions, obtain more information, or negotiate a better deal. It is also common practice for administrators to avoid group communications among the syndicate lenders simply because it increases the workload and increases the chances that a settlement desired by the administrator will be rejected by the syndicate if the lenders all get to talking about the offer. It happens routinely that when such group discussions do take place that the lenders who had previously been in favor of some proposal change their minds and vote against it. These lender group discussions did not take place in this transaction.
As crazy as it may seem, that is the process in today’s loan syndicates. Someone originates a big loan, sells it off as smaller loans to many other lenders who have very limited rights other than those granted in the loan documents, retains administration for a fee or selects parties to be administrator, and goes on to the next loan.
Would this court suppose that current financials on the trust guarantor might be some information that an informed lender might want to see before voting on whether to release the guarantee? We thought so. No such information was available and when we requested it from the administrator they indicated that they would not provide it or attempt to obtain it. The refusal to provide this information by and of itself is sufficient reason to object to a guarantor release.
The administrator has virtually no obligation to do anything except pass along payments to the lenders and fulfill some limited backoffice functions but may (or may not) undertake additional limited activities if a majority of the lenders request it. Administrator’s are under no obligation to negotiate settlements, compromise guarantees, or act in the best interests of the syndicate lenders. The lenders can replace the administrator (through a cumbersome ad hoc committee process) if they want to pursue a particular settlement or they can do nothing. Lenders often do nothing because they are often small lenders in a big lending syndicate and don’t even have the right to force the administrator to disclose the identities of other lenders.
This reality flies in the face of the guarantor’s absurd characterization in this case that suggests some process where group decisions are made. The fact is that there is simply no mechanism for a collective decision process. There is no party to “chair” such a process. The administrators are not compensated to foster group decisions. The lenders have virtually no ability to discuss or share their opinions with other lenders.
There simply is no process available for group decision making. No provisions are present in the loan documents and industry practice is such that no such process occurs except as follows. The administrator has little incentive to participate and in practice routinely avoid such a process although they routinely honor requests to forward some communications to other lenders. The practice is for some subset group of the lenders to form an ad hoc committee that the administrator may or may not co-operate with. But remember that there are compelling reasons to decline to participate on this ad hoc committee. The ad hoc committee often receives material non public information and therefore members of the committee are restricted and cannot buy or sell any related securities including the loan interest that is the subject of the committee. Thus many holders routinely decline to participate on the ad hoc committee. Thus the ad hoc committee is some subset of the lenders. Some proposed ad hoc committees never form because they cannot achieve sufficient lender interest and some do form with a small minority of lenders. This ad hoc committee then hires an attorney but has no authority to require the administrator to pay the attorney from the syndicate so the committee either gets the borrower to fund the costs or the participants of the committee fund the costs from other sources. Remember that this committee may have a small minority of lenders on it. This committee may then contact the borrower and discuss a deal that hardly reflects the interests of the lenders, but rather reflects the thoughts of this small subset of lenders.
The committee has no authority to negotiate anything binding but can float borrower proposals to the administrator who may (or may not) elect to forward those communications to other lenders for information purposes or for a vote or whatever. This process can be very cumbersome and hardly represents “a collective decision” process. We do not know whether such a committee was formed in the matter at hand, but we believe one was not formed because normally as a holder of a 4.5% loan we would be asked to join such a committee and no-one ever asked us to join or for our opinion. If such a committee were even formed, which we believe did not occur, it would routinely be comprised of less than 50% of the lenders. Let’s now assume for the sake of argument that this small ad hoc committee received a proposal from the borrower and the borrower requested a vote from the lenders. This small group of lenders might not even be in favor of a particular proposal but might feel obligated to put the offer to a vote of the lenders. Now let’s assume that 95% of the lenders accept the proposal. Has this been a group decision process that should deprive the 5% of its contractual rights??
This court needs to understand that this is how these multimillion dollar decisions are made. Little thought and little consensus on the proposal but perhaps a majority vote in favor. No opportunity to affect the proposal unless you’re willing to agree to stop any purchase or sales of related loans and securities. Yet this court is to hold that this truncated process is binding on all lenders notwithstanding contractual language to the contrary? The decision process can be remarkably ill informed which is why lenders will not subject their loans to the process and why lenders routinely require their own consent as a part of a unanimous decision on material aspects of the loan.
Loan agreements requiring unanimity on some loan terms are the absolute norm, not the exception. But now that language may not be enforceable in contracts governed by New York law. This court is circumventing this time honored process and subjecting minority holders to the whims of a very awkward decision process. Perhaps lenders of the future will be compelled to increase amounts of their loans against their wishes if enough other lenders agree to do so. What is the difference between releasing collateral without consent on the one hand, or increasing the loan amount without consent on the other hand?
In this case the guarantor offered to essentially repurchase various personal property interests in its guarantee. Those that wanted to accept the deal could sell their interest in the guarantee to the guarantor. What is wrong with that? What is wrong with the guarantor making such an offer? What is wrong with the administrator passing the offer to the lenders? What is wrong with some lenders electing to sell their property interests? What is wrong with some lenders electing not to sell their property interest? Obviously nothing.
Well, when does something become wrong? When 60% sell and 40% do not, is that ok? When 80% sell and 20% do not, is that still ok? We have just learned from this court that when 95% sell and 5% do not that something is wrong and the 5% should be deprived of their property rights as a consequence. What is the threshold in a contract that specifically says there is no such threshold? The contract says that no lenders interest in the guarantee can be released without their consent. Why is this provision of the contract so onerous that this court must rationalize otherwise?? Can’t the guarantor decide to accept or reject the offers from the 95% knowing that they still have an agreed contractual liability to another party? If this court is to rule that this was a group decision in spite of the fact that no such process exists and in spite of specific contract provisions to the contrary, shouldn’t we at a minimum be entitled to the same payment that other parties received for their interests?? This is not to suggest that we want such a payment because we have repeatedly said we want our contractual rights to pursue the guarantor for monies due. Rather it is another attempt to point out the irrational nature of a decision where we are not entitled to the payment because we voted “no” and that we are also not entitled to collect from the guarantor. Or is there a suggestion that we should be deprived of such a group decision payment as some form of punishment because we elected not to make a poor decision to sell our interest in the guarantee?
This court rightly wishes that people could agree on resolution in business controversies. But how can this court take this “feel good” concept of group compromise and impute it to a contract that simply has no provisions for such group activities. Perhaps syndicated loans should or could be structured with provisions for group decisions and moderators or arbitrators and mechanisms for debate etc., but they are not. Because they are not, lenders refuse to give up specific rights to object to collateral releases and other material compromises that materially affect the value of their loans. Whether this is good or bad or fair or not fair should be determined by the parties to the transaction and reflected in their written agreements. In this case they were determined by the parties and the contracts clearly and fairly written. The fact that the guarantor floated a low ball offer as a trial balloon that most lenders, with no benefit of communication with other lenders, appear to have accepted like lemmings, should not alter the clear language of the contract.
Where the drafters of the loan documents wanted the majority to prevail on decision votes, they included such terms. They could easily have written that the right to pursue the guarantee was such a decision. Instead they clearly wrote the opposite: the guarantee is enforceable by each lender and a lenders interest cannot be released without that lenders consent.
This court also cites that enforcing the contract as written would be potentially “chaotic”. Really?? Where is the chaos? These contracts have been around for many decades requiring unanimous consent among lenders to alter material loan terms and the courts have upheld them. The result has hardly been chaos and even if the results were chaotic isn’t it still the courts role to uphold the contracts and the law and let the lawyers develop new contract language that resolves the chaos? We suspect the chaos will begin now as defaulting borrowers use this courts decision to defeat contractual obligations.
Additionally, administrators will now not know what to do with settlement proceeds: should they distribute proceeds only to the terminating lenders as the contract requires? Or should they declare a “collective decision” contrary to the contract terms and distribute to all lenders? Unclear, better ask the court when “unanimous” really means “less than unanimous”. Let’s suppose lenders agree on a new syndicated loan contract form that replaces “unanimous” with 90% concurrence. Will that be OK with the court? Or is 87% so close to 90% that it will work. Clearly the contract now really did want some dissenting lenders forced into a collective decision and 87% is so close to 90%. That is actually more defendable than what happened here. So 87% should work, will 86% work? How about 83%.
What if 30 separate and totally individual multimillion-dollar loans that had not shared a common servicer had been originated with 30 separate guarantees and 29 of the loans accepted a borrower offer of payment to release the guarantee. Would this court rule that the 30th loan was unenforceable? Would that be considered chaotic?
Why is it different if those 30 individual lenders join together and appoint one servicer (administrator) to collect payments and undertake some backoffice functions. Why is it now chaotic if one lender disagrees with the other 29?
This court held that “the lenders intended to act collectively… and to preclude an individual lender from disrupting the scheme of the agreements at issue”. But disruption didn’t occur even with a single lender voting “no”. The fact is that one lender did vote “no”, but the balance of the settlement took place. The only issue now is whether the “no” lender who chose not to release its interest in the guarantee can pursue the guarantee. The guarantor made the decision to proceed with the settlement with the “yes” voters and chose to litigate with the “no” voter rather than honor their guarantee. How is this disruptive?
The reality of this court’s decision is profound: Lenders in syndicates have virtually no rights. They can’t identify other lenders in the syndicate, they can’t require the administrator to act on their behalf (except in very limited circumstances) and now they can’t even pursue their rights as clearly enunciated in the contract documents in a court of law. I guess we lenders had just better wait by the mailbox and hope that someone mails us a check, because if they don’t, we have no rights to pursue collection. We can’t demand that the administrator take action (remember that the administrator “may” act but is not compelled to act) and now we can’t collect by ourselves.
Why would this court want to penalize a bank that was diligent, conducted its own investigation, and reached the correct conclusion that the guarantee should be pursued? This was not a collective negotiation or collective decision or representative of the majorities wishes. It was at most an offer by the borrower that most lenders accepted.
This court agreed with and cited the lower courts findings that the loan agreements “explicitly …precluded Beal from recovering a judgment under the keep well”. Unbelievable. The loan documents say exactly the opposite: “enforceable by the administrative agent and each lender”. The minority opinion concurs and we believe that this court owes us all the specific location of the language that “explicitly” precludes Beal from recovering. Frankly it is hard to improve upon the arguments and reasoning of the minority opinion. This narrative attempts to add a little flavor.
This case is so simple. There is a loan and a loan guarantee. The loan guarantee is made in favor of and enforceable by each individual lender. The guarantee cannot be released without unanimous consent. It’s that simple.
The court holds that because a majority of the other lenders accepted a settlement for their loan guarantees that a separate lender cannot collect under the guarantee.
This involves a $21 million loan that is part of a $450 million lending syndicate.
Please reconsider your decision.