Beal Savings Bank is suing a group of guarantors for breach of a keep-well agreement in an unusual case that could have serious repercussions in the loan market. Beal is fighting over a piece of Aladdin Resort & Casino bank debt that it acquired in the secondary market. Its basic argument is that guarantees in the original credit supersede what Aladdin's bank group agreed to after the company filed for bankruptcy. Elliot Ganz, general counsel of the Loan Syndications and Trading Association, said if Beal wins the case, which is being heard in the U.S. Court of Appeals, it could set a bad precedent for other firms to sue under terms that are not normally accepted as part of conventional loan agreements.
Scott Musoff, a lawyer at Skadden, Arps, Slate, Meagher & Flom, which represents the defendants, agreed that a positive outcome for the plaintiff could create havoc. "It could have a dramatic impact on syndicated lending," Musoff said. "It could encourage rogue lenders to disrupt the lending syndicate to get gains they are not entitled to. There would be a shift in balance from the collective judgment of the syndicate to individual banks." Musoff added that it may encourage more vulture funds, in particular, to try and disrupt distressed-debt cases. "You would see more distressed-debt investors come in to find situations where they can create disruption for their own gain."
Beal acquired 4.5% of Aladdin's debt in the secondary market after the casino operator filed for bankruptcy on Sept. 28, 2001. The original loan financed the construction of the Las Vegas casino. When the company filed for bankruptcy, the agent of the syndicate, Scotia Capital, settled the loan for an undisclosed amount. The majority of the lenders--holding 95.5% of the credit--agreed to settle. Beal Savings was the sole lender that voted against the plan. Under the credit agreement, however, it was still paid its pro-rata share of the settlement.
Beal, unhappy with the settlement, decided to sue the guarantors of the credit agreement for breach of the keep-well agreement. This agreement, which was made at the time of the original credit, provided that sponsors of the borrower would make equity contributions to the borrower if its financial ratio fell below a certain minimum. Beal is suing these sponsors for failing to pay Beal, as a lender, the accelerated payment amount they are required to pay under the agreement, which Beal says is at least $90 million. Ganz said Beal has no right to sue because it is bound by the terms of the credit agreement, the settlement of which the majority of lenders agreed to.
"They are alleging the guarantee is separate from the credit agreement. We have never seen this before. It would set a bad precedent. I am surprised the court took the case," said Ganz. Ganz said the LSTA may file an amicus brief in support of defendants. He said he was waiting to review the plaintiff's papers, which are due at the end of October. The defendants have to file a response by the end of December. A Beal representative could not be reached for comment.
