OCEAN TRAILS CLO VII v. LP (2024)

Order, Supreme Court, New York County (Jennifer G. Schecter, J.), entered on or about December 7, 2023, which, insofar as appealed from, granted defendants’ motions to dismiss the seventh and eighth causes of action but denied their motions as to the first, second, third, fourth, fifth, and sixth causes of action, unanimously modified, on the law, to grant the motions to dismiss the first, second, third, fourth, fifth, and sixth causes of action, and to declare that the amended agreements are valid and enforceable contracts, and otherwise affirmed, without costs.  The Clerk is directed to enter judgment accordingly.

This case involves an “uptiering” transaction – i.e., one in which a borrower company buys back the existing loans of the majority of its lenders through issuance of new, more senior loans, thereby effectively subordinating the existing loans of minority lenders formerly in the same class as the majority lenders.  Plaintiffs are the now-subordinated minority lenders.

The declaratory judgment claim (first cause of action) is not viable.  Plaintiffs’ consent to the amended agreements was not required because § 9.08(b)(i) and (iv) of the original agreements were not implicated.

Section 9.08(b)(i) only requires the consent of “each Lender directly adversely affected” by a change in loan terms.  Here, the effect on plaintiffs’ loans was indirect (see Matter of Murray Energy Holdings Co., 616 B.R. 84, 99–100 [Bankr. S.D. Ohio 2020] [applying New York law];  see also LCM XXII Ltd. v. Serta Simmons Bedding, LLC, 2022 U.S. Dist. LEXIS 57976, *4–5 & n. 4, 2022 WL 953109, *2 & n. 4 [S.D.N.Y., Mar. 29, 2022, 21 Civ 3987(KPF)]).  There was also no “agreement” to “waive[ ], amend[ ], or modif[y]” the terms of any loans.  Rather, the participating lenders’ loans were assigned back to the borrower, cancelled, and then replaced with new loans with their own, new terms (see Matter of Chrysler LLC, 576 F.3d 108, 120 [2d Cir.2009], vacated as moot on other grounds by 558 U.S. 1087, 130 S.Ct. 1015, 175 L.Ed.2d 614 [2009];  Matter of Metaldyne Corp., 409 B.R. 671, 677–678 [Bankr. S.D.N.Y.2009], affd 421 B.R. 620 [S.D.N.Y.2009]).

For the same reasons, the subject transaction did not “amend the provisions of” § 7.02 within the meaning of § 9.08(b)(iv).  Had the parties wanted an effective or functional amendment to be covered, they could have used language to that effect, as they did elsewhere (see Quadrant Structured Prods. Co., Ltd. v. Vertin, 23 N.Y.3d 549, 560, 992 N.Y.S.2d 687, 16 N.E.3d 1165 [2014]).  Instead, they used terms suggesting an actual, textual amendment.  Contrary to plaintiffs’ claim, the amended agreements did not amend the definition of the term “Intercreditor Agreement” used in § 7.02, which was open-ended.

The breach of contract claims (second through sixth causes of action) should also be dismissed.  The subject transaction did not breach §§ 2.18(c) and 9.04(b)(ii)(D) because it complied with the express exception to these provisions located at § 9.04(i).  This provision authorizes the borrower to “purchase by way of assignment and become an Assignee with respect to Term Loans at any time.”  The parties dispute whether the subject transaction represented a “purchase” or simply a “refinancing” or “exchange” of the existing loans for new loans.  However, these concepts are not mutually exclusive.  There is no indication in the agreements that a refinancing or exchange cannot include a purchase, nor is there any indication that a purchase requires payment in full, upfront, in cash, or that debt cannot constitute payment.  Indeed, several provisions suggest otherwise.  A requirement of cash payment or prohibition on the use of debt as payment would also not be consistent with the common understanding of the word “purchase” (see Justinian Capital SPC v. WestLB AG, N.Y. Branch, 28 N.Y.3d 160, 169–170, 43 N.Y.S.3d 218, 65 N.E.3d 1253 [2016]).

The subject transaction also did not breach § 2.21 because any rights conferred under that provision were not sacred rights delineated under § 9.08(b) and thus could validly be waived with the consent of a majority of lenders, which was undisputedly obtained here.  The new loans incurred in connection with this transaction could also not, by definition, have been Incremental or Refinancing Term Loans insofar as they were incurred after the date of the amendments.  Section 2.21 does not contain any broader prohibition on incurring other types of new debt.  Although §§ 6.01 and 6.02 did, these were deleted from the amended agreements and are not at issue here.

The breach of the implied covenant of good faith and fair dealing claim was properly dismissed.  Although the implied covenant is part of every agreement, including the agreements at issue here, a reasonable person would not be justified in understanding that these agreements contained the particular implied promise claimed – i.e., that plaintiffs were to maintain their pro rata rights even in the face of the issuance of new debt (see generally Cordero v. Transamerica Annuity Serv. Corp., 39 N.Y.3d 399, 409–410, 190 N.Y.S.3d 274, 211 N.E.3d 663 [2023]).  The agreements, which were negotiated by sophisticated parties, contain specific, detailed provisions regarding when plaintiffs are entitled to pro rata treatment and when they are not.  Although the agreements contain limitations on the acquisition of new debt, they also allow the borrower to purchase loans “at any time” and permit amendments by majority consent with enumerated exceptions.  Had the parties wanted to prohibit amendments such as those at issue here, they could have done so, but they did not (see Audax Credit Opportunities Offshore Ltd. v. TMK Hawk Parent, Corp., 72 Misc.3d 1218[A], 2021 N.Y. Slip Op. 50794[U], *10, 2021 WL 3671541 [Sup. Ct., N.Y. County 2021] [hereinafter Trimark];  see also Intrepid Invs., LLC v. Selling Source, LLC, 213 A.D.3d 62, 66–67, 183 N.Y.S.3d 79 [1st Dept. 2023];  Women's Interart Ctr., Inc. v. NYC Economic Dev. Corp., 132 A.D.3d 442, 442–443, 17 N.Y.S.3d 405 [1st Dept. 2015], lv denied 29 N.Y.3d 907, 2017 WL 1731013 [2017]).

The tortious interference with contract claim was also properly dismissed.  For the reasons stated above, there was no underlying breach (see generally Lama Holding Co. v. Smith Barney, 88 N.Y.2d 413, 424, 646 N.Y.S.2d 76, 668 N.E.2d 1370 [1996]).  Any such claim was also barred by the economic interest defense (see generally White Plains Coat & Apron Co., Inc. v. Cintas Corp., 8 N.Y.3d 422, 426, 835 N.Y.S.2d 530, 867 N.E.2d 381 [2007]).

It is undisputed that Searchlight Capital Partners, LP is the controlling owner of the breaching entity and that Credit Suisse AG, Cayman Island Branch was its creditor.  Plaintiffs’ own allegations make clear that Searchlight sought to enhance the borrower's prospects by raising money to buy another company and pay down debt (see ICG Global Loan Fund 1 DAC v. Boardriders, Inc., 2022 N.Y. Slip Op. 33492[U], *25, 2022 WL 10085886 [Sup. Ct., N.Y. County 2022];  Trimark, 2021 N.Y. Slip Op. 50794[U], *11–12), and that Credit Suisse sought to protect its interest as a lender (see Wilmington Trust Co. v. Burger King Corp., 34 A.D.3d 401, 402, 826 N.Y.S.2d 205 [1st Dept. 2006], lv denied 8 N.Y.3d 806, 832 N.Y.S.2d 488, 864 N.E.2d 618 [2007];  Ultramar Energy v. Chase Manhattan Bank, 179 A.D.2d 592, 592–593, 579 N.Y.S.2d 353 [1st Dept. 1992];  U.S. Bank Natl. Assn. v. Triaxx Asset Mgt. LLC, 2019 U.S. Dist. LEXIS 159909, *27–28, 2019 WL 4744220, *9 [S.D.N.Y., Aug. 26, 2019, 18 Civ 4044(VM)]).  Plaintiffs’ conclusory allegations that the subject transaction was “contrary to [the borrower's] interests” are not supported by its factual allegations.  It does not matter whether the borrower could have secured an even more favorable deal had it sought financing from all lenders (see Trimark, 2021 N.Y. Slip Op. 50794[U], *11–12).

Plaintiffs do not claim that Searchlight or Credit Suisse employed fraudulent or illegal means in connection with the subject transaction.  They also failed to sufficiently allege malice.  That Searchlight wanted to help favored lenders while also boosting the borrower's business does not demonstrate a desire to harm plaintiffs.  Credit Suisse's alleged desire to secure early repayment of its loan cannot even arguably be characterized as malicious (or even in bad faith).

In view of our disposition of these issues, we need not reach the parties’ remaining arguments.