In Meridian Sunrise Village, LLC v. NB Distressed Debt Investment Fund Ltd., et al., No. 13-5503(W.D. Wash. Mar. 7, 2014), the court held that hedge funds acquiring distressed debt did not constitute “financial institutions” for purposes of a loan agreement’s assignment limitation. Prior to bankruptcy, the debtor had borrowed money to construct a shopping center pursuant to a loan agreement. The debtor had negotiated specifically for a provision limiting the lender’s ability to assign the loan to a “commercial bank, insurance company, financial institution or institutional lender.” Following a nonmonetary default, the initial lender requested that the debtor waive the assignment limitation, and the debtor declined. The lender then began charging the default interest rate, which led the debtor to file for bankruptcy.
After the debtor filed for bankruptcy, one of the lenders assigned its interest in the loan, over the debtor’s objection, to funds specializing in the acquisition of distressed debt. The funds argued that the assignment was permissible under the loan agreement because the dictionary definition of “financial institution” included any institution handling and investing funds. Affirming the bankruptcy court, the district court rejected the use of common and legal dictionaries in this context, holding that the parties had intended a narrower meaning of “financial institution” that excluded distressed debt funds. The court explained that the funds’ definition of “financial institution” was unacceptably broad because it encompassed “virtually any entity that has some remote connection to the management of money––up to and including a pawnbroker.” The court also noted that the funds’ broad definition of “financial institution” would render meaningless the provision’s other terms (i.e., “commercial bank,” “insurance company,” and “institutional lender”). The court also highlighted extrinsic evidence supporting its interpretation, namely the lender’s attempts to convince the debtor to permit assignment of the loan to the funds––requests that would have been unnecessary under the funds’ construction. Meridian Sunrise Village is therefore a reminder to both borrowers and lenders not to overlook eligible assignee provisions and to ensure such provisions are drafted clearly to reflect the parties’ intent.