The District Court for the District of New Jersey has held in an unpublished opinion that a lender may protect itself against Racketeer Influenced Corrupt

Organization Act (“RICO”) claims through the careful drafting of its loan commitment documentation. In Kennedy Funding, Inc. v. Lion’s Gate Dev., LLC, Civ. No. 05-4741 (DRD) (D.N.J. April 17, 2006), Kennedy Funding, Inc. (“KFI”) filed a complaint against Lion’s Gate Development, LLC (“Lion’s Gate”), alleging claims for, among other things, breach of contract and fraud arising from a loan agreement in which KFI agreed to loan Lion’s Gate $18.2 million as part of a real estate transaction.

Lion’s Gate filed a counterclaim and third-party complaint against, among others, KFI and several of its officers (the “Officers”). In pertinent part, the counterclaim and third-party complaint later were amended to allege that KFI and the Officers violated New Jersey’s RICO Act. KFI moved for judgment on the RICO claims alleged by Lion’s Gate.

Through KFI, the Officers were engaged in commercial real estate lending. Per the court, the Officers made “extravagant” claims on their Web site related to KFI’s ability to quickly close multimillion dollar deals.

Lion’s Gate approached KFI for a loan to purchase real estate in Arizona, and on or around July 28, 2005, the parties began negotiating terms for the loan agreement. The final draft, dated Aug. 10, 2005, provided for a loan amount of $18.2 million and a closing date of Aug. 15, 2005, with “time being of the essence.” Pursuant to the commitment agreement, Lion’s Gate forwarded $536,000 by wire transfer to KFI’s attorneys to be held in escrow.

The Lion’s Gate counterclaim and third-party complaint alleged that KFI falsely issued the commitment letter, because KFI neither had the $18.2 million in its accounts nor had the funds available to make the loan. Lion’s Gate further alleged that to avoid closing on the loan, KFI falsely stated that Lion’s Gate had not met the conditions called for in the commitment agreement. Lion’s Gate further claimed that KFI imposed additional conditions that had to be met before closing but could not be timely satisfied—such as requesting that Lion’s Gate procure soil samples just prior to the closing date.

RICO Claims

In its review of the RICO claims, the court noted that Lion’s Gate failed to establish a pattern of racketeering on behalf of KFI or the Officers. The court further observed that the wording of the loan commitment letter provided KFI with “virtually unlimited discretion” in determining whether Lion’s Gate had satisfied the terms of the agreement.

The court observed that the loan commitment letter contained broad and protective language such as:

  • “Borrower must … produce such evidence as Lender may require to demonstrate current full compliance with all applicable zoning, health, environmental and safety laws, ordinances and regulations….”
  • “…[T]he form and substance of each and every document evidencing the Loan and the security thereof or incident thereto, must be satisfactory to and approved by Counsel to the Lender in its sole discretion.”
  • “…[T]he Loan Documents shall contain… terms and conditions consistent with the terms hereof as shall be satisfactory to KFI in its sole discretion….”

Given KFI’s broad discretion, the court concluded that Lion’s Gate could not successfully allege KFI misrepresented the terms and conditions that Lion’s Gate needed to satisfy before KFI would close the loan.