Does the agent bank in a loan syndicate have the unilateral right to settle a claim against the agent and force the members of the syndicate to pay for the settlement? That issue was addressed in a recent arbitration decision.
The bank syndicate was formed to fund a credit facility for a large chain of camera stores. After the borrower was liquidated in bankruptcy, one of its other creditors sued the syndicate's agent bank, claiming that the agent and participant banks violated an inter-creditor agreement. After defending the litigation for several years, the agent suddenly decided to settle the creditor's claims. Rather than obtaining approval from the participating banks, the agent informed the syndicate members that it had the unilateral right to settle the case. Over objections from some participating banks, the agent entered into an eight-figure settlement. The agent demanded payment from the other syndicate banks pursuant to an indemnity provision in the syndicate's credit agreement.
Five of the banks refused to pay and retained Waller as counsel. After a lengthy evidentiary hearing in Atlanta, Georgia under the rules of the American Arbitration Association, the arbitration panel ruled in favor of the five banks that refused to pay. The panel held that the agent bank acted unreasonably in settling the case and that the five banks were not required to pay any portion of the agent's settlement.
Two main lessons came out of the arbitration result. First, agent banks act as representatives for members of a lending syndicate. They should always seek approval from the syndicate members before taking important actions, especially those that will obligate the syndicate members to spend their own funds. Second, before settling a claim that is covered by an indemnity agreement, the beneficiary of indemnity should always present the settlement offer to the indemnifying parties for their approval. As the agent bank discovered in this arbitration, it is better to be safe than sorry.
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