The Eleventh Circuit recently affirmed the decision of a supermajority of lenders to sell a loan back to a borrower at a substantial discount without a minority lender's consent. The case serves as a reminder that a minority lender's reliance on a "no amendment" clause in a participation agreement may not be sufficient to block a discounted loan sale as part of a workout. Before participating in a loan, lenders should carefully review the operative provisions in the participation agreement to determine what authority a majority or supermajority of lenders have in the event of a loan default.
In the case of Stonegate Bank, No. 13-14000 (11th Cir. Jan. 6, 2015), the borrower defaulted on a $27 million loan. After the default, a supermajority of the participating lenders voted to sell the loan back to the borrower for $9 million. A minority participating lender voted against the sale. The lead bank proceeded with the sale without the minority lender's consent. Thereafter, the minority lender brought an action against the lead bank in district court, alleging breach of contract and willful misconduct under the participation agreement.
In support of its position, the minority lender relied on the "no amendment" provision in the participation agreement, which required the minority lender's consent for any amendment, modification or termination of the agreement. The minority lender contended that the loan sale was a "termination" of the loan, and therefore such sale required its consent. The lead bank disagreed, asserting that under the "administration provisions" of the participation agreement, the sale was a "termination of [a] material term . . . of the [loan]," and not a termination of the loan. Therefore, the loan sale only required supermajority consent (i.e., 75% or more of participating lenders).
The Eleventh Circuit affirmed the district court's conclusion that the loan sale was properly authorized under the "administration provisions" of the participation agreement. While noting the agreement was ambiguous, the Eleventh Circuit reasoned that the "administration provisions" in the participation agreement governed because these provisions focused on how the participating lenders decided on a course of action (e.g., voting requirements for loan administration) while the "no amendment" provision merely addressed changes to the agreement between a participating bank and the lead bank. In sum, the specific provisions that addressed the issue took precedence over the general conflicting language.
This case serves as a reminder that lenders entering into participation agreements would be well served to review carefully the provisions dealing with collective action should the credit become impaired. Lenders should also be aware that a "no amendment" clause may not override specific language in a participation agreement and should, to the extent practicable, ensure the "administration provisions" are consistent with their expectations.
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