American Consolidated Transportation Companies, Inc v RBS Citizens NA (In re American Consolidated Transportation Companies, Inc), Adversary No 10-00154, Bankruptcy No 09-26062 (Bankr ND Ill July 13, 2010)


A chapter 11 debtor sued its principal secured lender over whether the lender had engaged in overreaching behavior with the debtor before the bankruptcy filing. The suit essentially alleged that the lender had induced the debtor to enter into a loan containing provisions the lender knew the debtor could not meet, and then used a default by the debtor to take control of and attempt to sell the debtor’s business in order to recoup its loan. The Bankruptcy Court dismissed all but two of the debtor’s counts, primarily on the basis that the debtor failed to plausibly plead a claim. The court ultimately concluded that the lender had done nothing more than take hard steps to protect its interests.


American Consolidated Transportation Companies provided bus and travel services. Though aware of problems with American’s business, RBS Citizens entered into a banking relationship with American and its subsidiaries, expecting that it would be able to collect substantial fees and other revenue from American by providing ancillary services, such as commercial depository account services, letters of credit services, and merchant business services.

RBS and one of the American subsidiaries executed a variable rate term note in the principal amount of $4 million. Shortly thereafter, RBS and the American subsidiary executed an interest rate swap agreement, whereby the subsidiary would pay a fixed rate of interest, rather than a variable rate. RBS and other American subsidiaries entered into a loan and security agreement, involving a $1 million term note and a $1 million revolving line of credit. These transactions closed in September and October 2006.

The transaction documents contained a number of covenants regarding default, two of which are most relevant to this case. The first covenant required American to maintain a combined tangible net worth of at least $100,000 as of December 31, 2006, with specific annual increases. The second covenant required American to maintain a minimum cash flow so that the ratio of earnings to payments on the loans was always at least 1.20 to 1.00.

In June 2008, RBS sent American a default and acceleration letter, stating that American was in default of the net worth and cash flow covenants. At the time of this letter, American was current on its loan payments and not in default of any other loan provision.

RBS and American then entered into a forbearance agreement that, among other things, required American to pledge additional assets as collateral, retain a restructuring consultant of RBS’ choosing, and take an active role in selling its own business. After the forbearance period ended, American filed a petition for chapter 11 bankruptcy, and RBS filed a proof of claim for more than $6 million.


American alleged, and RBS internal documents showed, that RBS knew of material business problems within American even before the loan transactions closed. American had lost a major account, reducing its annual revenues by 25 percent, and RBS internal reports called into question several assumptions RBS had made about American’s ability to increase sales, reduce costs, and increase prices in order to offset the revenue loss. RBS considered American’s profitability to be “consistently below average” and its liquidity “weak.” Because of the lost account, American was actually in default of the cash flow covenant at the time the loan documents were executed.

The forbearance agreement required American to hire a chief restructuring consultant. The consultant was given extensive managerial responsibility in connection with American’s operations and businesses, and the primary responsibility of selling those businesses. Although American wished to remain in business, the forbearance agreement required American to use its best efforts to enter into a sale or refinancing transaction that would repay RBS in full, and to deliver at least one bona fide letter of intent or similar document no later than May 29, 2009. RBS itself was actively seeking proposals to liquidate American, and would have engaged a liquidation company had American not filed its bankruptcy petition.

American argued that these facts supported claims for equitable subordination of the RBS loan claim (Count I), damages for violations of the Illinois Consumer Fraud and Deceptive Business Practices Act (Count II), breach of fiduciary duty (Count III), breach of duty of good faith and fair dealing (Count IV), duress (Count V), subordination of the RBS swap claim (Count VI), and the undoing of the perfection of certain of RBS’ security interests (Count VII and Count VIII).

In its motion to dismiss seven of American’s claims, RBS made arguments falling into three categories: challenges to the plausibility of American’s pleadings; assertions that some counts represent affirmative defenses and not causes of action under state law; and RBS’ assertions of its own affirmative defenses.

Plausibility of Claims/Inadequacy of Pleadings

RBS argued that American did not adequately plead four of its claims. In examining the plausibility of American’s allegations, the court noted that a complaint must contain “sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” A complaint is plausible when “the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Claims set forth in a complaint must be more than “conceivable,” but not necessarily “probable.”  

The first count in American’s complaint pleaded equitable subordination. Under section 510(c) of the Bankruptcy Code, a claim may be subordinated to another claim, and any lien securing a subordinated claim may be transferred to the debtor’s estate. To subordinate a claim, American must show: (1) RBS engaged in some type of inequitable conduct; (2) the misconduct either resulted in injury to other creditors or conferred an unfair advantage on RBS; and (3) subordination is consistent with other provisions of the Bankruptcy Code. Under the holdings of other bankruptcy cases, types of inequitable conduct generally include fraud, illegality, or breach of fiduciary duties.

The legal relationship between the parties is a key component in determining whether conduct was truly inequitable. If RBS was a fiduciary with respect to American, then equitable subordination would be appropriate, unless RBS could show that the contested transaction was conducted at arm’s-length. If RBS was not a fiduciary, then American would have to show that RBS’ conduct was egregious, “gross misconduct tantamount to fraud or overreaching.”

The court cited several cases in noting that a debtor-creditor relationship does not, in and of itself, cause the creditor to be a fiduciary. The creditor must exert operating control of the debtor’s business in order to establish a fiduciary relationship. “Control must be so overwhelming that there is a merger of identity or a domination of the borrower’s will.” The court found that RBS never exerted that high level of control over American. Even the extensive responsibilities given to the restructuring consultant did not rise to the requisite level of control, since the consultant was not empowered to make unilateral operational decisions. Since American did not plausibly plead that RBS was a fiduciary, the court examined whether American had pleaded facts showing egregious conduct. American cited six instances of supposed egregious conduct, none of which the court accepted as tantamount to fraud. In each assertion, the court found either that American’s reasoning was simply not plausible or not sufficiently pleaded in the complaint so as to permit the court to draw inferences that RBS had engaged in such misconduct.

Here, the court concluded, “the Complaint shows little more than [RBS] taking hard steps to protect itself during years when the real estate market generally was in collapse.”

Illinois Consumer Fraud and Deceptive Business Practices Act

To establish violation of this Act, American must show that: RBS engaged in a deceptive act; RBS intended that American rely on its deception; the deception occurred in the course of commerce; actual damage to American occurred; and the damage was caused by RBS’ deception.

American alleged that RBS used its 2008 default letter as a pretext to liquidate American and regain the bank’s capital, even though RBS knew that American was in default of those covenants before the loan transactions were closed in 2006. The court stated that, “it is not plausible on the face of these sparse and conclusory pleadings that the Bank used American’s default as a pretext to control American and recoup its capital.”

In each instance that American offered as proof of RBS’ deceptive actions, the court replied that American’s pleadings were either sparse, or not plausible. The court dismissed four counts of the complaint for American’s failure to sufficiently plead a cause of action.

Dismissal of Other Claims

The court also dismissed two counts, breach of the covenant of good faith and fair dealing, and duress, on the grounds that neither constitutes an independent claim under Illinois law. The court did note, however, that they may stand as defenses to any claim RBS may make against American.

Broad Economic Context Counts

More than once in its opinion, the Bankruptcy Court mentions broader economic woes. In discussing American’s allegations of deceptive acts, the court states, “[t]he United States economy and real estate market suffered from a historic deep recession while the events complained of here were unfolding. Adequate pleading would have to show more than a creditor protecting itself during that period.” Though the court referenced RBS’ superior negotiating position with respect to the forbearance agreement and its imposition of the restructuring consultant on American, it also stated that “American seems rather to have been facing a ‘Hobson’s choice’ between financial collapse and forbearance on the Bank’s terms, a choice not unusual in the present economy.” As noted above, the court found that, rather than engaging in fraudulent or overreaching conduct, RBS was simply “taking hard steps to protect itself during years when the real estate market generally was in collapse.”


Overreaching and resulting lender liability are real concerns of any lender, and careful consideration should be given to all actions taken during the lender’s relationship with a borrower; in particular, when the loan enters workout. This case gives lenders some assurance that liability won’t be imposed on a lender for taking steps that are commonplace in the current economic climate. Nevertheless, the line between protecting interests and overreaching is one that must be carefully treaded.