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THE PROCEEDS OF THE SALE OF COLLATERAL TO THE MAJORITY LENDERS WERE NOT DISTRIBUTED TO THE MINORITY LENDERS IN THE MANNER REQUIRED BY THE CREDIT AND SECURITY AGREEMENTS IN THIS PRIVATE FORECLOSURE; THE MINORITY LENDERS’ BREACH OF CONTRACT CAUSES OF ACTION SHOULD NOT HAVE BEEN DISMISSED (FIRST DEPT).

The First Department, reversing Supreme Court, in a full-fledged opinion by Justice Renwick, determined the breach of contract claims by the minority lenders against the majority lenders and a collateral agent should not have been dismissed. Collateral was sold to the majority lenders but the proceeds were not distributed to the minority lenders in the manner required by the credit and security agreements. The opinion is fact-specific and far too complex to fairly summarize here:

… [T]he pro rata sharing provisions required that all minority lenders receive pro rata treatment of their debt obligations, which meant that the proceeds of the sale of the collateral (notes and equity) should have been distributed to all secured lenders pro rata in accordance with the terms of the credit agreement. … While the Collateral Agent, as directed by the majority lenders, was authorized to define the terms, conditions, and limitations of how the restructuring sale should be carried out, the reorganization had to be for the pro rata benefit of all those holders of secured debt, including minority lenders. Thus, the minority lenders have the right to object to the restructure sale conducted through credit bidding based upon the failure to provide them adequate protection of their pro rata interest on the foreclosed collateral. AEA Middle Mkt. Debt Funding LLC v Marblegate Asset Mgt., LLC, 2023 NY Slip Op 01157, First Dept 3-7-23

Practice Point: This comprehensive opinion concerns a private foreclosure of collateral and the distribution of the proceeds to the majority and minority lenders pursuant to complex credit and security agreements.

 

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