The borrower and related guarantors (the “borrowing parties”) brought claims against several secured parties, alleging the secured parties had failed to dispose of the collateral in a commercially reasonable manner, which would have paid off the debtor’s outstanding debts. The secured parties on the loan consisted of the lender, an administrative agent, and an investment advisor to the loan. Each side also sought damages for breach of contract. The borrower had obtained two loans from the lender for a new business project. The maturity date on both loans had been extended to May 2020. The loans had been secured by the following collateral: (1) 25 million shares of the borrower’s stock in his company (the “borrower’s shares”) (which the borrower did not want to be sold for the sake of the company’s success); (2) a ranch located outside Aspen, Colorado owned by the borrower; and (3) various equity interests held by the borrowing parties. At the time of the second loan, the borrower and the lender executed an account control agreement, which provided that if a notice of control were issued, the investment advisor could take control of the account holding the borrower’s shares.
The borrowing parties defaulted on both loans and proceeded to enter into two bridge agreements (one for each loan) with the secured parties that provided the secured parties would forbear from exercising their rights in the collateral until either a termination event or until March 30, 2021. The bridge agreements provided, among other things, that the borrower would complete the sale of the ranch by December 2020, the proceeds of which would go to repay the loans. At the time of the bridge agreements, the investment advisor delivered a notice of control as required under the control agreement. The loans had still not been paid by March 2021, nor had the borrower fulfilled his obligation to sell the ranch; however, the secured parties agreed to continue working with the borrower and focused on selling the ranch rather than exercising their rights in other collateral. After a long period of negotiations, the ranch remained unsold, and the secured parties continued to refrain from selling the borrower’s shares (as requested by the borrower). After this period, the secured parties informed the borrower that it planned to pursue repayment from other collateral and sell the shares because the secured parties believed the borrowing parties were attempting to avoid their obligations under the loans. Finally, at the beginning of 2023 (nearly two years after default), the secured parties sold the borrower’s shares and a yacht owned by a guarantor of the loan. The ranch ultimately was sold in a Chapter 11 bankruptcy. Because of the value of the shares at the time of sale, the secured parties were not able to recover enough funds to fully forgive the debt. However, if the secured parties had sold the shares earlier in this process, the value of the collateral would have been more than enough to repay the borrowing parties’ debts. Thus, the borrowing parties brought suit, alleging that the secured parties did not dispose of the collateral in a commercially reasonable way and also alleging that the lenders’ proof of claim in the bankruptcy case should not be allowed.
In AVR AH LLC v. Nineteen77 Capital Solutions A LP (In re Strudel Holdings LLC), 659 B.R. 659 (Bankr. S.D. Tex. 2024), the court found that the secured parties did dispose of the collateral in a commercially reasonable way and held that the borrowing parties owed the secured parties at least $100 million on the loans before taking into account any reduction for the sale of the ranch through the related chapter 11 cases. First, the court found that under applicable New York law, the secured lenders had disposed of the collateral in a commercially reasonable manner (i.e., did not act in bad faith). New York UCC Article 9-610(a), (b) provides that all aspects of the disposition of collateral by a secured party must be “commercially reasonable.” Commercial reasonableness is a factual inquiry based on the whole circumstances of the case, including whether a creditor made good faith efforts when dealing with the disposition of collateral. Under 9-610(b), “a disposition is commercially reasonable if it is made ‘(1) in the usual manner on any recognized market; (2) at the price current in any recognized market at the time of the disposition; or (3) otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.’” The fact that the secured parties may have achieved a better price if they had sold the collateral at a different time or in a different method did not show, without other evidence, that the sale was commercially unreasonable.
As to the disposition of the shares, the borrowing parties argued that by being in control of the shares under the control agreement and by not selling them until February 2023, the secured parties unreasonably delayed the disposition of the collateral in order to gain more interest on the loans. However, the court found no evidence of undue delay but rather concluded that had been an active effort (through bridge agreements, respecting the borrower’s own requests, focusing on the borrower’s ranch sale plan instead as a method for repayment, etc.) by the secured parties to work with the borrower in good faith to allow the borrower to repay the loan and avoid liquidating his personal assets. Therefore, based on the totality of the circumstances, the secured parties did not act commercially unreasonably for holding off on the sale of the borrower’s collateral because the secured parties were in good-faith discussions with the borrowing parties trying to recover the loan amount in the traditional way. The court also found that the method used for the disposition of the borrower’s shares – the New York Stock Exchange – was commercially reasonable because it is a recognized market under the UCC. Further, the court held that the disposition of the shares was still commercially reasonable regardless of any arguments that the secured parties could have conducted the actual sale differently. As to the disposition of the ranch, the court found no evidence that, as a result of the secured parties not following the borrowing parties’ plans for the sale, the sale was commercially unreasonable. As to the disposition of the yacht, the court also found that the sale was conducted in a commercially reasonable manner. The borrower also argued that the secured parties’ failure to communicate with him during the sale process made the sale commercially unreasonable. The court disagreed for several reasons – the secured parties had appointed a consultant to assist in the disposition of the vessel who had attempted to reach out to the borrower, but the borrower had failed to provide any meaningful response, and the actual sale and manner had been commercially reasonable based on the determined value of the yacht.
The court then denied both the borrowing parties’ and the secured parties’ claim for breach of an implied duty of good faith and fair dealing. The court reasoned that the secured parties did not breach this implied contractual duty simply because they rejected the borrower’s plans for repayments or sales; disagreements between the parties do not indicate a breach of the implied contractual duty because each party has a right to act in its own interest under the contract. Similarly, the court found that the borrowing parties did not violate the implied duty by filing the lawsuit; rather, they acted in their interest under the contract in the same way the secured parties had acted in their interest. Ultimately, the court found that because the secured parties did not breach any agreements with the borrowing parties, acted in good faith throughout negotiations with the borrowing parties, and used commercially reasonable efforts to dispose of collateral, there was no breach of contract or any claim in which the borrowing parties would not be found liable for the repayment of the loans.
By Kristin Meurer [email protected]
Edited By Maycee Redfearn [email protected]
Edited By Ashley Boyce [email protected]
Edited By Hayden Mariott: [email protected]