Pillsbury Winthrop Shaw Pittman

US District Court reaffirms distressed debt funds not eligible assignees under loan agreement

By Douglas J Schneller, Bart Pisella and Timothy P Kober

A recent decision by the US District Court for the Western District of Washington found that certain distressed debt funds were not ‘financial institutions’ under the definition of ‘eligible assignee’ in the applicable loan agreement and thus were not entitled to vote on the debtor’s chapter 11 plan of reorganisation. The District Court decision affirmed a bankruptcy court decision enjoining loan assignments to the funds and recently denied the funds’ motion to vacate the decision.

Although the decisions in Meridian may have been driven by the particular facts, the case nevertheless serves as a cautionary tale for distressed debt investors and more generally as a reminder for parties drafting and negotiating loan documents.

In April 2008, Meridian Sunrise Village borrowed $75m (£45m) from US Bank National Association, acting as initial lender and administrative agent, for construction of a shopping centre. The loan agreement permitted the lenders to assign a portion of the loan, but only to an ‘eligible assignee’ — defined in relevant part as ‘any commercial bank, insurance company, financial institution or institutional lender approved by the agent in writing and, so long as there exists no event of default, approved by the borrower in writing, which approval shall not be unreasonably withheld’. US Bank subsequently assigned portions of the loan to Bank of America NA and two other banks…

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