In a May 28, 2010 decision, Judge Alan Gold of the United States District Court for the Southern District of Florida granted a motion to dismiss claims filed against lenders on a revolving loan agreement to the Fontainebleau resort and casino project in Las Vegas. The claims were brought by two term loan lenders for the project, Avenue CLO Fund, which had provided term loan funding, and Aurelius Capital, which had acquired the interests of other term lenders following the project’s bankruptcy. The revolving loan lenders, which included JPMorgan Chase, N.A., Barclays Bank PLC, Deutsche Bank Trust Company Americas and The Royal Bank of Scotland plc, had refused to fund Fontainebleau’s initial request for funds under their credit agreement, and eventually terminated that facility. The court dismissed the claims on the grounds that the term loan lenders were not “intended beneficiaries” under revolver facility and, therefore, lacked standing to sue. In re Fontainebleau Las Vegas Contract Litigation, No. 09-CV-23835, No. 10-CV-20236 (ASG) (S.D. Fla. May 28, 2010).
The Credit Agreement
In June 2007, Fontainebleau Las Vegas LLC entered into a series of loan agreements to finance the construction and development of a resort and casino in Las Vegas: (1) a $700 million initial term loan facility; (2) a $350 million delay draw term loan facility; and (3) an $800 million revolving loan facility. After receiving the proceeds of the initial term loan, Fontainebleau’s access to the funds under the other facilities was subject to restrictions. Under the credit agreement, Fontainebleau could not access more than $150 million of the revolving loan unless and until both the initial and delay draw term loans were “fully drawn.” In addition, under a separate disbursement agreement, the administrative agent could issue a Stop Funding Notice terminating Fontainebleau’s access to the funds if a “Default or Event of Default has occurred and is occurring.”
In March 2009, Fontainebleau submitted a Notice of Borrowing and simultaneously sought access to both the delay draw term loan and the revolving loan. The administrative agent, Bank of America, denied this request pursuant to the credit agreement, on the grounds that the delay draw term loan was not yet “fully drawn.” In fact, prior to March 2009, Fontainebleau had not requested nor received any funding under the delay draw term loan. Fontainebleau insisted, however, that the “fully drawn” requirement under the credit agreement was satisfied when the delay draw term loan was “fully requested,” even though the funds were not released. Ultimately, Fontainebleau relented and amended its request, seeking access to only the delay draw term loan, which was then disbursed.
In April 2009, as the project began to face financial difficulties, Bank of America, acting as administrative agent, sent a letter to Fontainebleau providing notice that one or more “Default(s) or Event(s) of Default have occurred and are occurring,” and advised that, pursuant to the credit agreement, the revolving loan commitments were being terminated by the lenders. Fontainebleau immediately requested access to the revolving loan, but this request was refused. In June 2009, Fontainebleau filed a voluntary Chapter 11 petition in the United States Bankruptcy Court for the Southern District of Florida.
The Initial Litigation
After filing the Chapter 11 petition, Fontainebleau commenced an adversary proceeding against the revolving loan lenders seeking, among other relief, an order directing the lenders to release the revolving loan funds. On a motion for summary judgment, Fontainebleau repeated its interpretation that “fully drawn” under the credit agreement meant “fully requested,” and the revolving loan lenders were obligated to disburse the loan in March 2009, when both the delay draw term loan and the revolving loan were requested.
Judge Gold denied Fontainebleau’s motion and concluded, as a matter of law, that “fully drawn” unambiguously means “fully funded” and not “fully requested.” Therefore, the revolving loan lenders were never under any obligation to fund Fontainebleau’s request for the entire revolving loan in March 2009, as the request did not comport with the credit agreement’s terms.
The Current Litigation
As the Fontainebleau litigation was proceeding, Avenue CLO Fund and Aurelius Capital, as term loan lenders, filed separate lawsuits in Nevada and New York, respectively, against the revolving loan lenders. On defendants’ motion to the Panel on Multi District Litigation, these claims were centralized and consolidated in the Southern District of Florida before Judge Gold. The term lender plaintiffs argued that the revolving loan lenders’ failure to fulfill their obligations under the credit agreement caused the Fontainebleau casino and resort project to face financial difficulties, which harmed the term lenders’ investments.
The revolver lenders moved to dismiss the claims on the ground that the term lender plaintiffs lacked standing to pursue their claims against the revolving loan lenders. As Judge Gold explained, to pursue breach of contract claims, a plaintiff must have a “legally enforceable right.” This determination is made by reference to state law, and the court determined that under New York law, which applied pursuant to the credit agreement’s terms, a plaintiff must be an “intended beneficiary” of a contractual promise to sustain an action for breach of that contract. Unless the plaintiffs could demonstrate they were “intended beneficiaries” of the revolving loan lenders’ promises under the credit agreement, the court explained, they lack standing to sue the revolving loan banks.
The court’s analysis began with the intentions of the parties, as expressed in the plain language of the credit agreement. According to the court, the language was unambiguous as the credit agreement stated that the revolving loan lenders agreed to make loans to “borrowers.” Thus, the language imposed a contractual duty on the revolving loan banks only in favor of Fontainebleau, as borrower. Nothing in the credit agreement created a similar duty in favor of the term lender plaintiffs, nor suggested any intention of the parties to permit the term lenders to enforce the credit agreement. Although the term lender plaintiffs would have probably benefitted if the revolving loan banks did fund Fontainebleau’s request, the court found that, at most, this demonstrates that the term lenders were “incidental beneficiaries” under the credit agreement. As a result, the term lender plaintiffs have no “legally enforceable right” and lack standing to pursue claims against the revolving loan banks.
The court also noted that, even if the term lender plaintiffs had standing, they could not demonstrate that the revolving lenders breached the credit agreement. Echoing his previous opinion in the Fontainebleau litigation, Judge Gold reiterated that the plain meaning of “fully drawn” in the credit agreement means “fully funded” and not “fully requested.” Since Fontainebleau requested the revolving loan funds before the delay draw term loan was “fully drawn,” there was no breach of the credit agreement by the revolving lenders.
The court did refuse to dismiss a separate breach of contract claim against Bank of America, as administrative agent, for allegedly disbursing the delay draw term loan after allegedly receiving notice of a default by another Fontainebleau lender, as well as notice of other potential problems related to the financing of the casino and resort project.