A s a result of the fjnancial crisis of the past commercial real - PDF document

44฀Canal฀Center฀Plaza,฀Suite฀400฀฀•฀฀Alexandria,฀VA฀22314฀฀•฀฀(703)฀739-0800฀฀•฀฀Fax฀(703)฀739-1060฀฀•฀฀www.abiworld.org (ABI,฀2012).฀ an฀associate฀in฀ Lowenstein฀Sandler฀ PC’s฀Bankruptcy,฀ Financial฀ Reorganization฀and฀ Creditors’฀Rights฀ Department฀and฀ Specialty฀Finance฀ Department’s฀ Private฀Equity฀ Richard฀Corbi฀is฀ He฀also฀serves฀ as฀a฀coordinating฀ editor฀for฀the฀ Group฀in฀New฀York.฀ The Essential Resource for Today’s Busy Insolvency Professional Lien on Me II B Y R ICHARD J. C ORBI 1 New York State Court Enforces “Bad Boy” Guaranty Provisions A s a result of the fjnancial crisis of the past commercial real estate developer, and Lightstone four years, the enforceability of many types Holdings LLC, of which Lichtenstein was the sole of loan and contract provisions have been managing member. 5 litigated. In particular, “bad boy” provisions, or guaranty agreements in loan agreements, have been Facts hotly litigated. A bad boy guaranty provision in loan In June 2007, the defendants purchased the agreements provides for personal liability against Extended Stay Hotels (ESH) hotel chain for approx - the borrower and principals of the borrower upon imately $8 billion, 6 of which, $1.9 billion was raised the occurrence of certain enumerated bad acts com - through fjve mezzanine loans to various companies mitted by the borrower or its principals, including that indirectly owned ESH. 7 As security, the defen - commencing bankruptcy proceedings. 2 This article dants guaranteed the mezzanine loans. 8 Specifjcally, examines a recent case by the New York State section 1.1 of each guaranty agreement provided Supreme Court that addressed enforceability of a that the “Guarantor hereby irrevocably and uncon - bankruptcy trigger of a bad boy provision. Although ditionally covenants and agrees that it is liable for this decision is not a bankruptcy decision, it illus - the Guaranteed Obligations as a primary obligor.” 9 trates how a bankruptcy fjling will affect other par - Section 1.2 of the guaranty agreement defined ties to a loan agreement that are not involved in the “Guaranteed Obligations” to include “the obliga - related bankruptcy case. tions or liabilities of Borrower to Lender under Recently, the New York State Supreme Court, Section 9.4 of the Loan Agreement.” 10 Section in Bank of America NA v. Lightstone Holdings LLC 9.4(b) of each of the mezzanine loan agreements (Lightstone) , 3 granted Bank of America’s summary- stated that if the “Mortgage Borrower, an Operating ABI Journal and฀ judgment motion pursuant to N.Y. CPLR 3213 with Lessee, a Mortgage Principal, the Borrower, a co-authored฀ Debtor- respect to a guaranty agreement in the amount of Senior Mezzanine Borrower or the Property Owner in-Possession $100 million. In Lightstone , the plaintiffs consist - (as the terms are defined in the mezzanine loan Financing: Funding ed of Bank of America NA, Wachovia Bank NC, agreements) files a voluntary petition under the a Chapter 11 Case Merrill Lynch Mortgage Lending Inc., U.S. Bank Bankruptcy Code, the debt due under the mezza - National Association as trustee for Maiden Lane nine loans becomes fully recourse to the Borrower Commercial Mortgage Backed Securities Trust as well as immediately due and payable.” 11 2008-1, Debt II ESH LP, Debt-U ESH LP and Subsequently, on June 15, 2009, the borrower, Key Bank National Association. 4 The defendants mortgage borrower and property owner fjled vol - consisted of David Lichtenstein, a residential and untary bankruptcy petitions. 12 The indebtedness under the mezzanine loans became fully recourse 1 The views expressed in this article are those of the author do not reflect the views of the firm or any of its clients. 5 Id . at *1. 2 See,฀e.g. , Kevin Baum, “Whatcha Gonna Do: After Credit฀Suisse฀v.฀Boespfmug Enforces 6 Id . at *1. a ‘Bad Boy’ Guaranty, It May Be What the Bank Wants You to Do,” 8 Amer.฀Bank.฀Inst.฀ Young฀&฀New฀Members฀Comm.฀Newsletter 1 (March 2010), available at www.abiworld. 7 Id . at *1. org/committees/newsletters/Young/vol8num1/bad_boys.html (discussing definition of 8 Id . at *1. 9 Id . at *1. “bad boy” provisions in case analysis). 10 Id . at *1. 3 32 Misc.3d 1244(A), 938 N.Y.S.2d 225 (Table), 2011 WL 4357491 (Sup. Ct. N.Y. Cty., 11 Id . at *1. July 14, 2011). 4 Lightstone฀Holdings , 2011 WL 4357491 at *1. 12 Id . at *1.