No Standing Room: How Lender Collective Action Subverts Basic Principles of Contract Interpretation


NO STANDING ROOM: HOW LENDER
COLLECTIVE ACTION SUBVERTS BASIC

PRINCIPLES OF CONTRACT
INTERPRETATION

Michael R. Miller*

Large, predominately asset-backed financings are seldom
undertaken by a single lender. Most commonly, a lead lender
will distribute the risk associated with such ventures by
selling interests in the loan to other lenders. If the loan is
"syndicated," an administrative agent will usually be elected
to manage the loan on behalf of the lenders. In the wake of
the 2008 financial crisis, and in particular, with the rise of
commercial mortgage defaults, bank syndicates have faced
increasing opposition from member lenders seeking to
challenge the decisions of the administrative agent.

In response to these challenges, the doctrine of Lender
Collective Action has arisen. In New York, Lender Collective
Action has been asserted to compel unified action and quash
minority dissent. In essence, the doctrine has stripped
member lenders of their standing to assert rights or remedies
under the credit documents. Unfortunately, in applying the
doctrine, courts have abandoned traditional principles of
contract interpretation.

This Note argues that the doctrine, although appealing,
should not be asserted in order to undermine a member
lender's traditional rights and remedies at law. To the extent
that New York courts have used the doctrine to reason that
lenders may impliedly waive such rights, this Note will take
the position that Beal Savings Bank v. Sommer should be
overturned.

* J.D. Candidate 2012, Columbia University School of Law; B.A.
Political Science 2009, Boston College. The author would like to thank
Professor Edward R. Morrison for his insightful comments and the staff of
the Columbia Business Law Review for their invaluable assistance in
preparing this Note for publication.



I. Introduction ................................ 332
A. The Rules of the Game ........... ............ 332
B. Summary of Argument .................. 336

II. The Financial Framework of Syndicated Loans....... 337
A. The Credit Documents ................... 337
B. Choosing the Right Remedy ............... 341

III. Origins of the Collective Action Theory .... ..... 343
A. All for One, One for All .................. 344
B. Dream of Revenge .................. 346

IV. Beal Savings Bank: A Case Study....... ...... 349
A. The Facts ...................... ...... 349
B. The Court's Reasoning ........... ........ 351

V. Beal Savings Bank: Redux........... ............ 359
A. Individual Right of Action ........... ..... 359
B. Forbearance .................... ...... 360
C. Credit Bidding ............................ 362

VI. Moving Forward .................... ...... 364
A. Justifications.. ......................... 365
B. Criticism .................................. 366

1. Say What You Mean.. ................ 367
2. And Mean What You Say...... .............. 371

C. Duty Before Everything: Beyond
Interpretation .................... ..... 375

VII. Conclusion ........................ ...... 384

331No. 1:330] NO STANDING ROOM



In fact, four men such as they were-four men
devoted to one another, from their purses to their
lives; four men always supporting one another, never
yielding, executing singly or together the resolutions
formed in common; four arms threatening the four
cardinal points, or turning toward a single point-
must inevitably, either subterraneously, in open day,
by mining, in the trench, by cunning, or by force,
open themselves a way toward the object they wished
to attain, however well it might be defended, or
however distant it may seem. The only thing that
astonished D'Artagnan was that his friends had
never yet thought of this.'

I. INTRODUCTION

A. The Rules of the Game

In the world of secured credit, the players know the rules
of the game, even if they do not always play by them.
Imagine that a hypothetical lender provides a hypothetical
borrower with a term loan2 for the purchase of a new
manufacturing facility. The lender expects that the loan will
be repaid, with interest, by the maturity date,3 in accordance
with the terms of the governing credit documents.' The

1 ALEXANDRE DuMAS, THE THREE MUSKETEERS 127 (Barnes & Noble
Books 2004) (1884) (emphasis added).

2 A "term loan" is an "installment loan, such as a loan one would use
to buy a car. The borrower may draw on the loan during a short
commitment period and repays it based on either a scheduled series of
repayments or a one-time lump-sum payment at maturity (a bullet
payment)." Steven Miller, A Syndicated Loan Primer, in STANDARD &
POOR'S: A GUIDE TO THE LOAN MARKET 16 (Sept. 2011).

' The "date of maturity" is the date when a debt falls due, or the date
by which the entire balance of the outstanding debt must be paid. BLACK'S

LAw DICTIONARY 452 (9th ed. 2009).
" Under the "perfect-tender-in-time" rule, borrowers must repay the

loan in exact conformity with the terms of the loan agreement. See Ellis v.
Craig, 7 Johns. Ch. 7, 7 (N.Y. Ch. 1823) (holding that the time of payment
is part of the contract, for the mutual benefit and convenience of both

[Vol. 2012332 COL UMIA B USINESS LA W RE VIE W



lender also expects it will be entitled to enforce the terms of
the contract as provided therein and will have redress to the
courts in the event that the borrower defaults.'

In the interest of efficiency, the lender might elect an
agent to manage the account on its behalf.' To protect its
interests, the lender might place limitations on what the
agent may or may not do without its express consent.7 It
might also spread the risk associated with any particular
investment by seeking other lenders to join in the financial
venture-by either syndicating the loan or selling
"participations."8

parties, and that borrowers may not therefore ordinarily alleviate
themselves of the interest obligation by prepaying the loan); see also 5
STUART M. SAFT, COMMERCIAL REAL ESTATE FORMS 3d § 16:22 (2011)
(describing common events of default, including non-conforming payment
of obligations owed under the terms of the loan agreement).

" See 5 COMMERCIAL REAL ESTATE FORMS 3d, supra note 4, § 16:33
("The rights and remedies section of the mortgage is a continuation of the
default provisions because it establishes the mortgagee's options in the
event the borrower and, possibly, the guarantor default in satisfying the
terms of the mortgage . . . [and o]ne must remember that all of the rights
and remedies of the lender are subject to whatever law is in effect in the
jurisdiction where the property is located."); see also U.C.C. § 9-601(a)
(2003) ("After default, a secured party . . . (1) may reduce a claim to
judgment . . ."); RESTATEMENT (THIRD) OF PROP.: MORTGS. § 8.2 (1997)
("When an obligation secured by a mortgage becomes due, the mortgagee
may . .. (a) obtain a judgment against any person who is personally liable
on the obligation . . .").

6 See 6 COMMERCIAL REAL ESTATE FORMS 3d, supra note 4, § 18:33
("Loan documents in large loans frequently have provisions dealing with
administrative agents and provide for the appointment, power, rights and
immunities of the agent, reliance by other parties, events of defaults,
sharing of costs, resignation and removal, and actions they must take with
regard to the funds, documents, and loan delinquencies.").

Id. See also infra Part III (providing select provisions from the
credit documents at issue in Beal Say. Bank v. Sommer, 865 N.E.2d 1210
(N.Y. 2007) as illustrative of how lenders attempt to limit the power of an
agent without unduly inhibiting the agent's ability to manage the account
on behalf of the principal).

" See 6 COMMERCIAL REAL ESTATE FORMS 3d, supra note 4, § 18:2
("Unbeknownst to most borrowers, lenders frequently take in partners in
loans that they make in an attempt to share the risk and to avoid
compromising their regulatory lending limitations."). See also infra Part

NO STANDING ROOM 333No. 1:330]1



COLUMBIA BUSINESS LAW REVIEW

These basic principles of finance do not change to any
significant degree in the context of a "syndicated loan"--a
loan that is provided by a group of lenders and is structured,
arranged, and administered by one or several commercial or
investment banks, known as the "agent" or the "arranger."'
Borrowers know that they are required to repay their loans
and lenders expect to be repaid.10 If either party believes the
loan agreement has not been honored, the courts must step
in to settle the score." Yet for syndicated loans, the New
York courts have added another factor into the equation: the
doctrine of Lender Collective Action.

Lender Collective Action is a judicially created technique
of contract interpretation that resolves ambiguities in the
credit documents in favor of unitary action-thereby
permitting the agent of a bank syndicate to take action, or
forbear from taking action, at the direction of majority
lenders over the objection of minority lenders.12  Lender
Collective Action is, by definition, only used when a single
lender or a small group of lenders seeks to block action
supported by a majority of the syndicate."

II (discussing the framework of syndicated loans and the efficiencies that
result from collective action in the context of large, complex financial
transactions); 6 COMMERCIAL REAL ESTATE FORMS 3d, supra note 4, § 18:5
(providing a sample "participation agreement").

* Miller, supra note 2, at 7.
1o See supra note 4.

Typically, parties will specify, in writing, the particular jurisdiction
in which any and all claims arising out of the agreement will be brought,
as well as the applicable law under which the terms of the agreement will
be governed. See, e.g., 6 COMMERCIAL REAL ESTATE FORMS 3d, supra note
4, § 18:19 (Sections 7.08 and 7.09).

12 See Marc Abrams, Rachel C. Strickland & Keith H. Wofford, Acting
on a Syndicate's Behalf Over an Objecting Minority, in Lender 'Collective
Action' Doctrine Provokes Controversy, N.Y. L.J., Dec. 14, 2009, at 2
("Collective action can now be considered a judicial trend towards
interpreting credit documents to permit administrative or collateral
agents acting on behalf of a majority of lenders to exercise exclusive control
over credit decisions whether or not all lenders agree.") (emphasis added).

1o Id.

334 [Vol. 2012



The theory behind Lender Collective Action is simple:
when lenders decide to join a bank syndicate, 14 they must
envision a sort of "collective design" to the entity, and
accordingly, must be willing to cede to the whole certain
rights and remedies by subordinating their own rights as
individual lenders." By construing contractual terms
liberally, New York courts have employed Lender Collective
Action to resolve disputes arising from alleged ambiguities in
the lender's credit documents.16

One would think that virtually all lenders, like the
musketeer D'Artagnan, would see the strategic value of
joining forces against a common object-a delinquent
borrower or its guarantor." And yet, in many instances,
they do not." Or worse, they do not realize that their credit
documents are deficient in material respects-that they are

" A "bank syndicate" is simply a term used to refer to the lenders and
agent, collectively. They may also be referred to as a "syndicated credit
facility," a "credit facility," a "lending syndicate," or "syndication."

" See, e.g., Credit Francais Int'l, S.A. v. Sociedad Financiera de
Comercio, C.A., 490 N.Y.S.2d 670, 683 (N.Y. Sup. Ct. 1985) (concluding
that syndicated lenders should be treated as a single entity).

16 In contract law, interpretation of a promise or agreement or a term
thereof is the ascertainment of its meaning. RESTATEMENT (SECOND) OF

CONTRACTS § 200 (1981). A term or provision is ambiguous if it is capable
of capturing more than one meaning. Ambiguity may arise from imprecise
drafting, clumsy sentence structure, the use of obtuse or unclear
vocabulary, or from the coalescence of multiple contractual provisions on
the same subject matter.

1 See, e.g., HSH Nordbank AG N.Y. Branch v. Swerdlow, 259 F.R.D.
64, 72 (S.D.N.Y. 2009) ("[Ljenders are co-lenders of the Loan and thus
share a common interest in enforcing defendants' obligations under the
Guaranties.") (emphasis added).

" See, e.g., Marc Abrams et al., Intercreditor Issues and Subordinate
Financing: "Tranche Warfare", 100110 ABI-CLE 33 ("In distressed debt
situations, one generally considers the debtor as being the party seeking
supervised protection. However, given the current credit market and the
general sophistication of lending parties, the past few years have seen a
marked rise in intercreditor disputes and judicial intervention to resolve
them.").

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COLUMBIA BUSINESS LAW REVIEW

ambiguous on which parties may exercise remedies against
the borrower-until it is too late. 9 So what are courts to do?

B. Summary of Argument

This Note will analyze the current state of Lender
Collective Action and will argue that, in many instances, the
doctrine unjustifiably perverts basic principles of contract
interpretation and the lender-borrower relationship-
notably, the lender's right to obtain a judgment against a
borrower for any outstanding balance of the loan that has
become due. This Note will argue that courts should adopt a
"clear statement" rule when determining which rights have
been reserved to the agent of syndicated loans and which
have been preserved by the individual lenders. As a result,
this Note will take the position that courts should no longer
use Beal Savings Bank v. Sommers20 when interpreting
contracts governed by New York State law. Certain
equitable limitations will also be proposed.

Part II will outline the financial framework of the
syndicated loan market. Part III describes the origins of
Lender Collective Action while Part IV uses Beal Savings
Bank as a case study on how Lender Collective Action is
applied in party-specific litigation. Part V summarizes the
post-Beal landscape of Lender Collective Action, with a
primary focus on how courts have responded to (1) lenders
asserting an individual right of action; (2) agent forbearance;
and (3) agent credit bidding. Part VI sets forth certain
proposals for adjusting how courts use Lender Collective
Action, including the assumption that lenders do not eschew
traditional characteristics of the lender-borrower relation-
ship in vague or ambiguous manners. Certain equitable
limitations will also be proposed.

1 See id. (describing the problems associated with resolving
intercreditor disputes once bankruptcy proceedings have begun).

20 Beal Say. Bank v. Sommer, 865 N.E.2d 1210 (N.Y. 2007).

336 [Vol. 2012



NO STANDING ROOM

II. THE FINANCIAL FRAMEWORK OF
SYNDICATED LOANS

Syndicated loans are the preferred method of financing
transactions for which traditional, individual lines of credit
prove inefficient or insufficient.2 1 Starting with the
leveraged buyout ("LBO") boom during the mid-1980s, the
market for syndicated loans has increased dramatically over
recent decades.2 2 Unfortunately, considering the high-risk
behavior of borrowers turning to bank syndicates for
resources and assistance, the financial instability of the
syndicated loan market has increased drastically as well. As
of November 2009, there was over $438 billion in "distressed
debt" nationwide-much of which was provided by
syndicated lenders.2 3

A. The Credit Documents

The syndicated loan process often involves the drafting of
a variety of contracts: the participation or syndication
agreement, intercreditor agreement, credit agreement,
guaranty agreement, and security agreement(s), to name a
few (collectively, the "credit documents"). Intercreditor
agreements are used in a variety of financial transactions
and are governed primarily by the basic rules of contract
law. In the context of the bank syndicate, the intercreditor

21 Miller, supra note 2, at 7.
22 Id. Alternatively, the loan could be structured as "mezzanine" level

debt, though this structure has also come under increasing scrutiny in
recent years. See 5 COMMERCIAL REAL ESTATE FORMS 3d, supra note 4, §
16:51 ("Not surprisingly, as a result of this increased risk, mezzanine
loans usually had a higher interest rate but, it turns out, did not earn a
return that was nearly high enough to offset the enormous risks the
mezzanine lender took in the highly leveraged deals that mezzanine debt
made possible.").

2 Abrams et al., supra note 12, at 2 (citing DEBTWIRE NORTH AMERICA,
http://www.debtwire.com).

24 See Highland Park CDO I Grantor Trust, Series A v. Wells Fargo
Bank, N.A., No. 08 CIV. 5723 (NRB), 2009 WL 1834596, at *4 (S.D.N.Y.
June 16, 2009) (rejecting an interpretation that would render certain
portions of an intercreditor agreement superfluous on the ground that it

No. 1:330] 337



agreement is used to define the rights and remedies of the
creditors or member lenders.2 5 By their very nature,
intercreditor agreements are tailored to the needs of the
member lenders and the borrower. As a result, intercreditor
agreements are not highly standardized.2 6

At the heart of every credit agreement is an allocation of
risk.27 For banks and other institutional lenders, the
principal credit risk factors are "default"" and "loss-given-
default."29 When assessing these risk factors, lenders will
examine existing covenants and attempt to protect
themselves contractually." To mitigate these risks, a lender
might require sponsorship on the loan, take a security
interest in the borrower's collateral, provide for the exercise

would run afoul of the basic principles of contract interpretation); see also
Shultz v. Mfrs. & Traders Trust Co., 291 N.Y.S. 117, 120-21 (N.Y. App.
Div. 1936) ("It is fundamental that it is the things upon which the minds
of the parties were at one as demonstrated by the language used and the
circumstances surrounding its use that govern in the interpretation of
written agreements.").

2 Comm. on Commercial Fin., ABA Section of Bus. Law, Report of the
Model First Lien/Second Lien Intercreditor Agreement Task Force, 65 BUS.
LAW. 809, 809 (May 2010).

26 Id. Note that there may be commonalities across intercreditor
agreements generally, in terms of specific contractual provisions. The
wording of a "required lenders" or "unanimous consent" clause, for
example, may be relatively similar from one transaction to the next. See
infra notes 50-52 and accompanying text.

2 See generally Anthony B. Kuklin, Project Financing and the Real
Estate Lawyer, C974 ALI-ABA 143, 157 (1995) (describing the role of real
estate counsel in using the credit documents to allocate the business risks
associated with construction projects and other real estate acquisition
transactions).

28 "Default risk is simply the likelihood of a borrower's being unable to
pay interest or principal on time," as per the terms of the credit
agreement. Miller, supra note 2, at 13.

" "Loss-given-default risk" measures, in the event of default by the
borrower, the severity of the loss to the lender. Investors assess this risk
based on the collateral (if any) backing the loan and the amount of other
debt and equity subordinated to the loan. Id.

30 Id. at 23.

338 COL UMIA B USINESS LA W RE VIE W [Vol. 2012



remedies in the event of default, and subordinate the rights
of other creditors.

Lenders prefer borrowers with strong sponsorship. 2 A
lender may require the borrower's sponsor to become a
"surety" or "secondary obligor" on the loan through the
authentication of a guaranty agreement. The secondary
obligor is a backup source of payment from whom the lender
may immediately demand payment if the borrower defaults
and the loan becomes due." The surety's obligations are
dependant and recursive. The surety owes only when the
borrower owes and only to the extent defined in some
secondary set of documents (such as the guaranty
agreement).5

A borrower could also enhance its credit by granting the
lender a security interest in its collateral, including its real36

or personal37 property. A security interest is a lien, or legally

3 See generally id. at 16-30.
32 Id. at 13 ("To the extent that the sponsor group has a strong

following among loan investors, a loan will be easier to syndicate and,
therefore, can be priced lower.").

3 RESTATEMENT (THIRD) OF SURETYSHIP & GUARANTY § 1.1 (1996) ("[A]
secondary obligor has suretyship status whenever: (a) pursuant to contract
(the "secondary obligation"), an obligee has recourse against a person (the
"secondary obligor") or that person's property with respect to the
obligation (the "underlying obligation") of another person (the "principal
obligor") to that obligee; and (b) to the extent that the underlying
obligation or the secondary obligation is performed the obligee is not
entitled to performance of the other obligation; and (c) as between the
principal obligor and the secondary obligor, it is the principal obligor who
ought to perform the underlying obligation or bear the cost of
performance.").

" Miller, supra note 2, at 14 ("Among institutional investors, weight is
given to an individual deal sponsor's track record in fixing its own
impaired deals by stepping up with additional equity or replacing a
management team that is failing.").

35 See RESTATEMENT (THIRD) OF SURETYSHIP & GUARANTY §§ 17, 19.
36 RESTATEMENT (THIRD) OF PROP.: MORTGS. § 1.1 (1997) ("A mortgage

is a conveyance or retention of an interest in real property as security for
performance of an obligation.").

3 U.C.C. § 9-109(1) (2003) ("[This article applies to] a transaction,
regardless of its form, that creates a security interest in personal property
or fixtures by contract . . .- ").

No. 1:3301 NO STANDING ROOM 339



enforceable right, against collateral." The "security
agreement"" or "mortgage"4 0 creates the security interest
and defines the specific rights and remedies of the parties.
The Uniform Commercial Code ("UCC") and Restatement
(Third) of Property (Mortgages) govern secured transactions
and create a default set of remedies that the lender may
exercise against the borrower in the event of default. These
remedies include the right to foreclose on the collateral4 1 and
obtain a judgment for any deficiency,4 2 or in the alternative,
to sue the borrower and any secondary obligors for the
balance of outstanding debt.

What constitutes an "event of default" depends on the
exact wording of the relevant credit documents, but almost
invariably includes late-payment or non-payment.44 Still, the
lender may not exercise remedies against the borrower until
the loan becomes due. The borrower may cure the default by
paying the lender the amount that is then-owing on the
obligation or by performing any other duty required under
the terms of the credit documents.4 5 Lenders may avoid the
borrower's ability to cure by including an "acceleration
clause" in the credit agreement, thereby empowering the
lender to declare the full obligation immediately due and
payable.4 6

BLACK'S LAw DICTIONARY 1478 (9th ed. 2009).
U.C.C. § 9-102(a)(73).

40 RESTATEMENT (THIRD) OF PROP.: MORTGS. § 4.1.
4 U.C.C. § 9-601(a); RESTATEMENT (THIRD) OF PROP. MORTGS. § 8.2(b).
42 U.C.C. § 9-608(a)(4); RESTATEMENT (THIRD) OF PROP.: MORTGS. §

8.2(b).
' U.C.C. § 9-601(a); RESTATEMENT (THIRD) OF PROP.: MORTGS. § 8.2(a).

4 See supra note 4. For a sample "Events of Default" provision, see 6
COMMERCIAL REAL ESTATE FORMs 3d, supra note 4, § 18:19 (including as
an event of default: "[If tihe Borrower shall fail to pay any amount of
principal of, or interest on, any Note or any stand-by fee hereunder when
due and payable and, in the case of any failure to pay such interest, such
failure shall remain unremedied for five Business Days .....

4 RESTATEMENT (THIRD) OF PROP.: MORTGS. § 8.1(b).
* Acceleration refers to the process of advancing a loan agreement's

maturity date so that payment of the entire debt is due immediately.
BLAcK'S LAw DICTIONARY 12 (9th ed. 2009). An acceleration clause (or

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NO STANDING ROOM

Finally, lenders might protect their interests by
subordinating the rights, remedies, and interests of other
creditors-for example, by distinguishing between first-lien
and second-lien lenders.4 1 Second-lien structures provided
much needed liquidity not otherwise provided for on an
unsecured basis."8 Falling default rates and the relatively
narrow interest rate spreads available in the second-lien
market (at least before the financial crisis) also helped spur
a resurgence of the second-lien facility.49

B. Choosing the Right Remedy

When a borrower defaults on a loan, the lender must
choose how to respond. The lender could (1) ignore the
default; (2) give the borrower an opportunity to cure; (3)
work with the borrower to negotiate a settlement (e.g.,
engage in a "workout"); or (4) exercise remedies against the
borrower by accelerating the loan and either foreclosing on
the collateral or seeking a judgment at law. But in a bank
syndicate, who decides: the agent or the individual member
lenders?

The terms of the credit documents is a good place to start.
The intercreditor agreement,-principally, the "required

demand clause) is a loan agreement provision that defines the specified
events ("triggering events") that permit the creditor or agent to declare
acceleration, such as failing to make payment or maintain insurance. See
also RESTATEMENT (THIRD) OF PROP.: MORTGs. § 8.1(a).

" A "first-lien" and "second-lien" loan is a structured transaction in
which the same collateral secures the interests of two separate, classified
lender groups, but priority is given to one group over the other. The "first-
lien" loan is secured by a "first priority lien," often on all or substantially
all of the assets of the borrower. The "second-lien" loan is secured by a
"second priority lien" on the same assets. The second-lien lenders can be
thought of, then, as residual claimants; the second-lien lenders can recover
on any remaining assets if and only if the interests of all first-lien lenders
are fully satisfied. Comm. on Commercial Fin., supra note 25, at 809.

4 See 5 WILLIAM L. NORTON, JR., NORTON BANKR. L. & PRAc. § 94:37
(3d ed. 2008) (arguing that second-lien structures provide liquidity,
particularly to bankruptcy-prone entities, that senior lenders are unable
or unwilling to provide).

41 Comm. on Commercial Fin., supra note 25, at 809.

No. 1:330] 341



lenders" and "unanimous consent" clauses-will determine
when the agent (or the members) can exercise remedies."o A
"required lenders" clause sets the minimum percent of
lenders (usually 51% or 66%) required to approve or overturn
the actions of the agent.' By contrast, the "unanimous
consent" clause prohibits the agent from taking specific,
enumerated actions (such as amending, modifying, or
waiving terms of the agreement) without the consent of all of
the lenders.5 2

In most cases, disputes among lenders can be resolved
without turning to the courts for assistance. The agent will
propose a course of action, the lenders will vote on the
matter, and the majority faction will prevail." However,
when the borrower becomes insolvent, the pool of assets

'0 Mark C. Simon, Loan Sales And Syndications: Key Issues In A
Troubled Time, 563 PLI/Real 315, 324 (2009) ("At least from a document
point of view, the decision as to whether to exercise remedies is one that
can be made based on the requisite consent or vote. In a simple
participation agreement where the lead lender retains the right to make
that decision, the lead lender can make that decision. On a syndicated
loan, either a majority or supermajority [e.g., the 'Required Lenders'] has
to vote in favor of exercising remedies and then can exercise them.").
Other actions require unanimous consent. See infra note 52.

5' Simon, supra note 50. For example, in Beal Savings Bank v.
Sommer, 865 N.E.2d 1210 (N.Y. 2007), under Section 9.1 of the Credit
Agreement, the lenders authorized the administrative agent to act on their
behalf in enforcing the provisions of the Agreement and, "in the absence of
other written instructions from the Required Lenders . . . to exercise such
powers . . . as are specifically delegated to or required of the
Administrative Agent by the terms [of the Loan Documents], together with
such powers as may be reasonably incidental thereto." Id. at 1211.
Section 1.1 of the Credit Agreement defined the term "Required Lenders,"
in pertinent part, as those lenders holding at least 66-2/3% of the
outstanding principal. Id. at 1211-12. The result was to require the agent
to seek approval from a supermajority of the Lenders before exercising
powers not specifically enumerated or reasonably incidental thereto.

52 In Beal Savings Bank, Section 9.1 was subject to one important
limitation: Section 10.1(f) of the Credit Agreement (the "Unanimous
Consent" clause) provided that no amendment, modification, or waiver of
the Loan Documents could be made by the agent "without the consent of
all Lenders." Id. at 1217.

* Simon, supra note 50, at 324.

342 COL UMBIA B USINESS LA W RE VIE W [Vol. 2012



available to the lenders is limited and disagreements
regarding the proper course of action may not be so readily
resolved."4 Lenders may be less inclined to work with the
borrower, or may have an on-going relationship with the
borrower that favors forbearance over foreclosure, and may
argue that a proposed course of action is subject to the
unanimous consent clause rather than the required lenders
clause.5 In response, the doctrine of Lender Collective
Action has emerged.

III. ORIGINS OF THE COLLECTIVE ACTION
THEORY

As early as 1985, credit documents governed by New York
law have been interpreted to allow the agent to force its
decisions upon a dissident minority faction." At issue in
each case is whether the member lender, or group of lenders,
has standing to enforce the terms of the credit documents."

' Id. at 323 ("Lawyers have done everything they can think of in loan
agreements, co-lending agreements and participation agreements to set up
a co-lending process for functional and fair decision-making. However,
when loans go into default, no document provisions are sufficient to assure
that decision-making between multiple lenders will go smoothly. Even
lenders who are in quite similar positions on a loan transaction may
simply have differences of opinion, which are often exacerbated under
stress.").

5 Id. at 323-24 ("Of course, more often than not in the real world, the
interests of the lenders are never quite as aligned as one would think.
One lender might have a strong on-going relationship with the borrower,
whereas for another, this is a one-shot transaction. A lender might itself
be under financial stress and might be reluctant to put a transaction into
default. One lender might be represented in the transaction by a loan
officer who made the loan in the first place and has a vested interest in its
success, whereas another lender may have turned the transaction over to a
work-out group, which is considerably less enamored of the transaction
and ready to foreclose.. .. Unfortunately, in reality, it may prove difficult
to work out a loan without unanimous consent of the lenders.").

56 See Credit Francais Int'l, S.A. v. Sociedad Financiera de Comercio,
C.A., 490 N.Y.S.2d 670, 672-73 (N.Y. Sup. Ct. 1985); see also Abrams et
al., supra note 12, at 2.

1 Originally, the dispute focused on whether a member lender can act
when the agent refuses to take action (with the support of the majority).

No. 1:330]1 NO STANDING ROOM 343



A. All for One, One for All

The origins of Lender Collective Action in New York date
back to Credit Francais." In Credit Francais, the borrower
defaulted on a loan by failing to make payments according to
the terms of the credit documents, and the plaintiff, a single
member of an international syndicate of nine banks, sought
a judgment for its pro rata share of the principal balance
owing ($2 million or 12% to the remaining total outstanding
debt). 9  The New York Supreme Court dismissed the
plaintiffs suit for lack of standing: "[wlhen parties have
agreed to operate through an agent or as a collective entity,
whether it be a corporation, a partnership, a syndicate or a
consortium, a unitary body is created, and only unitary
action can be permitted."" Thus, the court concluded that
only the syndicate could enforce the terms of the credit
documents."

The principle of unitary action was reasserted when
Enron filed for bankruptcy in December 2001.62 JP Morgan
Chase Bank ("Chase"), the bank syndicate's agent,
accelerated Enron's loan (at the time, $360 million remained
outstanding).6 3 The plaintiffs, certain members of the bank

See, e.g., Beal Say. Bank, 865 N.E.2d 1210; Commercial Bank of Kuwait v.
Rafidain Bank, 15 F.3d 238 (2d Cir. 1994); New Bank of New England v.
Toronto-Dominion Bank, 768 F. Supp. 1017 (S.D.N.Y. 1991); In re Enron
Corp., 302 B.R. 463 (Bankr. S.D.N.Y. 2003); Credit Francais, 490 N.Y.S.2d
670. More recently, cases involving Lender Collective Action have focused
on whether the decision of the agent should be ratified according to the
"required lenders" or "unanimous consent" provision. See, e.g., In re
Chrysler, Inc., 405 B.R. 84 (Bankr. S.D.N.Y. 2009); In re GWLS Holdings,
Inc., No. 08-12430, 2009 WL 453110 (Bankr. D. Del. Feb. 23, 2009); In re
Metaldyne Corp., 409 B.R. 671 (Bankr. S.D.N.Y. 2009); In re Delphi Corp.,
No. 05-44481, 2009 WL 2482146 (Bankr. S.D.N.Y. July 30, 2009).

5 See Credit Francais, 490 N.Y.S.2d at 672-73.
5 Id. at 683.
60 Id. at 682.
61 Id.

62 In re Enron Corp., 302 B.R. 463.
6 Id. at 467.

[Vol. 2012344 COLUAMIA B USINESS LA W RE VIE W



group,' however, were unhappy with the fact that Chase
refused to foreclose on the collateral-namely, a "Make
Whole" guaranty in the amount of approximately $360
million." As a result, the bank group sought to lift the
automatic stay, granted pursuant to Section 362 of the
Bankruptcy Code,66 and recover on the collateral.6  Enron
and the creditors' committee objected."

Since the laws of New York governed the credit
documents," the Bankruptcy Court for the Southern District
of New York turned to New York case law for guidance. The
court cited Credit Francais for the proposition that unified
action was required in the face of default and that only the
agent could pursue remedies against the borrower.70 As the
court reasoned, "[tihe purpose of contracting in advance to
restrict enforcement to a single agent is to prevent the chaos
that would ensue if multiple lawsuits were initiated by each
lending bank with, possibly, divergent interests."" If the
lenders wish to preserve their right to foreclose on the
collateral or pursue a judgment against the lender, the court
concluded, they must do so explicitly in the credit
documents.72

64 The plaintiffs were members of a lending syndicate that had
provided Enron with $375 million in refinancing for the acquisition of a
manufacturing facility at one of its fully owned subsidiaries. Id.

65 Id.

6 11 U.S.C. § 362 (2010) (preventing the enforcement, against the
debtor or against property of the estate, of certain liens perfected before
the commencement of bankruptcy proceedings).

67 In re Enron Corp., 302 B.R. at 465-67.
61 Id. at 469. The "Creditors' Committee" was the Official Committee

of Unsecured Creditors appointed by the U.S. Trustee pursuant to Section
1102 of the Bankruptcy Code. Id. at 465.

" Id. at 472 n.8.
7o Id. at 472-75.
71 Id. at 472-73.

" Id. at 477 ("[The parties] could have negotiated to allow the
individual members of the Bank Group to sue individually if all members
joined in the lawsuit or even if a majority joined in any such suit. Instead,
pursuant to the terms of [the agreements], the desire of a majority of the
members of the Bank Group . . . to enforce compliance with the
agreements could only be implemented by Chase, as Collateral Agent,

No. 1:330] NO STANDING ROOM 345



COLUMBIA BUSINESS LAW REVIEW

B. Dream of Revenge

Of course, a dissatisfied member lender could, with the
support of the required lenders, direct the agent to take the
desired course of action-such as to exercise remedies
against the borrower and foreclose on the collateral."
However, as a practical matter, this may not be feasible; it
can be difficult for a non-agent bank to marshal enough votes
to do so, particularly when the agent itself owns a
substantial portion of the loan." Indeed, where the credit
documents impose a supermajority requirement for joint
action, it may be impossible for an individual member lender
to garner the votes needed without the support of the
agent.5

Thus, as suggested by In re Enron Corp., one solution for
the lone lender bent on confronting the borrower is to make
it clear in the governing credit documents that the rights
granted to the agent are not exclusive of any rights
traditionally retained by individual member lenders. For
example, in New Bank, the borrower entered into a
syndicated loan with four institutional lenders. 6 When the
borrower defaulted in making payments due under the credit
agreement, the agent and a majority of the lenders refrained
from accelerating the loan. The plaintiff, a member lender

after written demand was made upon Chase, as Collateral Agent, by the
Required Lenders.").

7 Simon, supra note 50, at 325.
7 Id.
" Id. It would be impossible for a lender to garner the necessary votes

if, for example, the agent owns more than a 33% interest in the loan.
" New Bank of New England v. Toronto-Dominion Bank, 768 F. Supp.

1017, 1019 (S.D.N.Y. 1991).
1 Id. at 1020. The agent, and two of the three other lenders, sent the

plaintiff a letter stating that "as Majority Lenders, [they had agreed] to
refrain from declaring an acceleration under Section 11.1 of the Senior
Credit Agreement as a result of the currently existing payment default
thereunder." The letter also stated that the agreement to refrain from
accelerating was given in order to negotiate for a restructuring of the
borrower's capital structure. Id.

346 [ Vol. 2012



of the syndicate, did not consent to the waiver." Instead, the
plaintiff bank brought suit against the agent, demanding
that the loan be accelerated." Under the express language of
the credit agreement, the court found that the plaintiff could
not compel the syndicate to accelerate.80  Also, since
acceleration is a remedy of contractual creation, the plaintiff
itself had no right to accelerate the loan, or any portion
thereof.8'

Ultimately, lenders are stuck with the documents they
draft.8 2 Nevertheless, as the court reasoned, the doctrine of
Lender Collective Action did not apply in this instance
because the contract specifically preserved the rights,
powers, or privileges of the member lenders." Thus, the
plaintiff was free to pursue its own remedies at law when
such remedies arose-namely, suing the borrower to collect
on the debt when it became due.'" Therefore, while the
individual lender retained some ability to personally enforce
its interest, that ability was sharply limited by the credit
agreement's provision requiring collective action for
acceleration."

78 Id.
7 Id.

80 Section 11.1 only permitted the "Majority Lenders" (e.g., those
lenders holding at least 50% of the aggregate unpaid principal amount of
the notes) to accelerate the loan. Id. at 1019.

81 Id. at 1023.
82 Id. at 1021 (holding that courts have generally refused to rewrite

agreements to provide lenders with any rights which are not expressly set
forth in the credit documents).

' Here, the intercreditor agreement provided: "The rights, remedies,
power and privileges herein provided are cumulative and not exclusive of
any rights, powers and privileges provided by law or in equity." Id. at
1023.

* Id. Here, the loan had not been accelerated so the lender had to
wait until the loan became due before seeking a judgment against the
borrower.

85 Although the date of maturity for the notes at issue in New Bank
was never stated, if they bore a common ten-year term, the lender would
have had to have waited until August 25, 1998-another seven years-in
order to collect the full balance of the outstanding debt. See id. at 1019.

NO STANDING ROOM 347No. I:3301



Indeed, the right of the lender to sue the borrower for
repayment of the outstanding principal on or after the date
of maturity is a traditional remedy in common-law
countries.8 6 In Commercial Bank, for instance, a syndicate of
banks provided the Republic of Iraq, acting through several
government-owned banks (the "Iraq Banks"), with roughly
$1.1 billion in financing, $33 million of which was provided
by the Commercial Bank of Kuwait ("Commercial")." After
the Gulf War broke out in 1991, the Iraq Banks stopped
making payments, thereby violating the credit agreement
with the syndicate." Commercial sued the Iraq Banks to
recover its pro rata share of the principal, which had come
due by the time litigation commenced.89

According to the Second Circuit, since the syndicate had
included both a cumulative remedies clause and a pro rata
sharing clause, Commercial was entitled to sue the Iraq
Banks for any sums owed once they became due:

While the participation agreement at issue . . .
authorizes the [agent] to sue 'only if requested to do
so by the Majority Banks,' this provision does not
abrogate the rights of participating banks to sue on
their own. Indeed, the agreement points the other
way, providing that the rights of the parties 'under
the general law' are expressly reserved. We believe
that this includes the right to sue as an undisclosed
principal as allowed under the governing English
law.9o

Alternatively, it could sue the borrower for each installment payment that
came due, yet this would undoubtedly be a prohibitively costly endeavor.

' See Commercial Bank of Kuwait v. Rafidain Bank, 15 F.3d 238, 243
(2d Cir. 1994) ("It is a well-established rule of English law that an
undisclosed principal can sue and be sued on a contract ... save in those
cases when the terms of the contract expressly or impliedly confine it to
the parties to it.") (quoting Teheran-Europe Co. v. S T Belton (Tractors)
Ltd., [19681 2 Q.B. 545 (Eng.)). The Restatement Second of Agency has
adopted a similar standard. See infra note 127 and accompanying text.

7 Commercial Bank of Kuwait, 15 F.3d at 239.
8 Id.
89 Id. at 241.
90 Id. at 243.

COL UMBIA B USINESS LA W RE VIE W [Vol. 2012348



Accordingly, the Second Circuit affirmed the district court's
order entering a default judgment in favor of Commercial.9'

IV. BEAL SAVINGS BANK: A CASE STUDY

For the better part of two decades, Credit Francais
remained a non-binding but persuasive source of authority
for unitary action. It was not until 2007, when the New York
Court of Appeals took up the issue in Beal Savings Bank v.
Sommer,9 2 that the doctrine of Lender Collective Action
became solidified in New York law, emerging as a model for
how to defeat minority opposition to agent action.

A. The Facts

The Aladdin Resort and Casino in Las Vegas, Nevada
(the "Aladdin") was in financial trouble from the day it
opened its doors on August 18, 2000."1 Two years earlier, in
February of 1998, Aladdin Gaming, LLC (the "Borrower")
entered into a Credit Agreement with a lending syndicate of
thirteen individual institutions (the "Lenders")." The
Lenders provided the Borrower with $410 million for capital
improvements at the Aladdin' and appointed an agent-the
Bank of Nova Scotia, and later its successor, BNY Asset
Solutions, LLC-to administer the syndicate.96

Less than one month before the Aladdin was to reopen,
the Borrower requested and obtained an additional $50
million for last-minute renovations.97  To secure the
supplemental funds, the Borrower's parent company, the
Sommer Trust (the "Trust"), agreed to become a sponsor, or

a Id. at 244.
9 See Beal Say. Bank v. Sommer, 865 N.E.2d 1210 (N.Y. 2007).

Charleston Commc'ns, History of the Aladdin, http://www.a2z
lasvegas.com/hotels/history/h-aladdin.html (last visited Mar. 5, 2012).

9 Beal Say. Bank, 865 N.E.2d at 1211.
9 Id.
96 Id.
9 Id. at 1212.

NO STANDING ROOM 349No. 1:330]1



COLUMBIA BUSINESS LAW REVIEW

guarantor, under a Keep-Well Agreement." One year later,
the Aladdin was still struggling to break even, and in the
wake of September 11, 2001, the Borrower filed for
bankruptcy." At the time the Borrower sought bankruptcy
protection, thirty-seven pre-petition lenders were members
of the lending syndicate.' 0

Immediately thereafter, one of the thirty-seven original
lenders assigned its 4.5% participation interest in the
outstanding principal to BFC Capital, Inc ("BFC").'0' Two
weeks later, on September 30, 2002, the Agent entered into a
Settlement Agreement with the Trust, under which the
Agent agreed to perpetually forbear from enforcing any
obligations that the Trust owed under the Keep-Well in
exchange for certain consideration on the part of the Trust.'0 2

Thirty-six of the Lenders, holding 95.5% of the outstanding
principal amount, agreed that recovery under the Keep-Well
would be less profitable than under the Settlement
Agreement; BFC was the only lender who refused to release
the Sponsor from its obligations under the Keep-Well."o' The
Settlement Agreement was entered into over BFC's
objection.'04

On April 6, 2005, BFC's assignee, Beal Savings Bank,
filed a lawsuit against the Trust under Section 4 of the Keep-

" The Keep-Well was a sponsorship agreement, separate from but
dependant upon the original Credit Agreement, between the Agent, the
Lenders, and certain Sponsors of the Borrower. Under Section 2 of the
Keep-Well, the Sponsors agreed to make equity contributions to the
Borrower in the event that the Borrower became financially unstable, as
defined therein. Additionally, Section 4 stated that in the event of
acceleration under Section 8.2 and Section 8.3 of the Credit Agreement,
the Sponsors guaranteed payment of the accelerated amount to the
Administrative Agent for the benefit of the Lenders. Id. at 1211.

99 Id. at 1212.
00 Id. at 1213.
'0' Id. at 1212.
102 Id. at 1213.
1o3 Id.
104 Id.

350 [Vol. 2012



Well," seeking either (1) $90 million, to be split pro rata
among the Lenders, or (2) in the alternative, its pro rata
share thereof.06 The Trust filed a motion to dismiss on the
ground that "no individual member of the consortium was
empowered to enforce the agreements in the event of default,
and only the Administrative Agent, at the behest of a
supermajority of Lenders, could do so."1ov

After extensively analyzing the credit documents, as well
as the history of Lender Collective Action in the region, the
Court of Appeals concluded that "the parties intended for
collective action in the event that the obligations of the
Borrower could be accelerated."'o

B. The Court's Reasoning

The question that the court faced, simply stated, was
whether the plaintiff, Beal Savings Bank, a member of the
lending syndicate, could sue the Trust in order to enforce the
Trust's guaranty under the Keep-Well. As suggested at the
outset of this Note, the court supported its assertion with
both contractual'o and equitable"0 considerations.

105 Section 4 of the Keep-Well provided: "In the event that the
Obligations of the Borrower under the Credit Agreement shall be
accelerated pursuant to the provisions of Section 8.2 or 8.3 thereof, the
Sponsors guarantee and agree to pay the Accelerated Payment Amount to
the Administrative Agent for the benefit of the Lenders not later than
forty (40) days following the date of such acceleration." Id. at 1216.

10 Id. at 1213. The Credit Agreement included a pro rata sharing
clause declaring that if a Lender receives any payment, such as by setoff,
it must share any excess of its pro rata share of payments with the other
Lenders. Id. at 1216-17 (discussing Section 4.8 of the Credit Agreement).

'o' Id. at 1213.
1os Id. at 1219.
. Naturally, in a case based on contract interpretation, the majority's

argument focused on the credit documents themselves, as well as the ex
ante intent of the parties: "The specific, unambiguous language of several
provisions, read in the context of the agreements as a whole, convinces us
that, in this instance, the lenders intended to act collectively in the event of
the borrower's default and to preclude an individual lender from
disrupting the scheme of the agreements at issue." Id. at 1211 (emphasis
added).

NO STANDING ROOM 351No. 1:3301



COLUMBIA BUSINESS LAW REVIEW

The court began its analysis by announcing selected
"governing principles" of contract interpretation, including
the four corners rule,' the full effect rule,112 and the cannon
of noscitur a sociis."' The court also outlined the application
of certain lender remedies at common-law, including when a
lender may or may not sue as an undisclosed principal" 4 or
accelerate the loan. 5

When applying these principles and common-law rules
to the credit documents, the court clearly-and
correctly-found that there was no express provision
authorizing any lender to take individual action against the

n0 Throughout the opinion there is a constant tone of reassurance-
that Lender Collective Action is appropriate in this case because of the
great inequities that would flow were the court to allow a single lender,
holding only a fraction of the outstanding debt, to prevent the syndicate
from collecting as much from the borrower as possible given the
circumstances. "Thus," the court reaffirmed, "the provisions concerning
amendment, modification and waiver of the agreements do not preclude
the Administrative Agent and 95.5% of the Lenders from attempting to
recover on as much of the Trust's obligations as they could." Id. at 1218.
The problem is that they do prevent the agent from taking action if such
action constitutes an amendment, modification, or waiver. As In re Enron
demonstrated, the fact that a majority of the lenders have acceded to the
action does not override the plain language of the contract. Id.

" Id. at 1213 ("Construction of an unambiguous contract is a matter
of law, and the intention of the parties may be gathered from the four
corners of the instrument and should be enforced according to its terms.").

112 Id. ("The court should construe the agreements so as to give full
meaning and effect to the material provisions [and] . . . [a] reading of the
contract should not render any portion meaningless.").

n13 Id. at 1213-14 ("Further, a contract should be read as a whole, and
every part will be interpreted with reference to the whole; and if possible it
will be so interpreted as to give effect to its general purpose.") (citation
omitted). Literally, noscitur a sociis is a canon of construction holding that
the meaning of an unclear word or phrase should be determined by the
words immediately surrounding it. BLACK's LAW DICTIONARY 1160-61 (9th
ed. 2009). For the purposes of this Note, the cannon is persuasive when
interpreting credit documents and is routinely employed by courts
advancing Lender Collective Action.

n14 Beal Say. Bank, 865 N.E.2d at 1218 ("[A]n undisclosed principal
can sue on a contract except when the terms of the contract expressly or
impliedly confine it to the parties to it.") (citation omitted).

n1 Id. at 1216.

352 [Vol. 2012



NO STANDING ROOM

Borrower (or the Trust) in the event of default."' Indeed,
such authorization rarely appears in either the intercreditor
agreement or guaranty agreement."'

On the contrary, with respect to the Keep-Well (and
Section 8.3 of the Credit Agreement, as referred to therein),
"[t]he only entity section 4 mentions as having the right to
pursue default remedies is the Administrative Agent."118 In

6 Id. at 1215.
"' Given the common-law rule that a principal (even an undisclosed

one) can sue on a contract, whether or not such an authorization is
provided for contractually, it may not be altogether surprising that
syndicates do not include a residual rights clause in their intercreditor
agreements, nor should it be surprising that there is little pressure from
individual lenders to include such clauses. See supra note 86. But see A.I.
Credit Corp. v. Gov't of Jam., 666 F. Supp. 629 (S.D.N.Y. 1987) (discussed
in Beal Savings Bank).

n1 Beal Say. Bank, 865 N.E.2d at 1216 (concluding that Section 4 of
the Keep-Well underscores the collective enforcement scheme envisioned
by the member lenders). Section 8.3 provided:

If any Event of Default . . . shall occur for any reason,
whether voluntary or involuntary, and be continuing, the
Administrative Agent, upon the direction of the Required
Lenders, shall by notice to the Borrower declare all or any
portion of the outstanding principal amount of the Loans
and other Obligations . . . to be due and payable or the
Commitments . . . to be terminated, whereupon . . . the
Borrower shall automatically and immediately be obligated
to deposit with the Administrative Agent cash collateral in
an amount equal to all Letter of Credit Outstandings ....
In addition to the foregoing, the Administrative Agent
upon direction of the Required Lenders may, without
further notice of default, presentment or demand for
payment, protest or notice of non-payment or dishonor, or
other notices or demands of any kind . . . exercise any or all
rights and remedies at law or in equity (in any combination
or order that the Lenders may elect, subject to the
foregoing), including, without prejudice to the Lenders'
other rights and remedies, the following: . . . (h) recover
judgment on the Completion Guaranty or the Keep-Well
Agreement either before, during or after any proceedings
for the enforcement of the Lenders' rights and remedies
hereunder or under the other Loan Documents.

Id. at 1215.

No. 1:330] 353



this sense, the Agent's functions were not merely mechanical
or ministerial;"' the Agent was empowered to exercise
remedies against the Borrower in the event of default (but
only upon the direction of the Required Lenders).12 0

But what about the individual lenders? Could they
enforce the terms of the credit documents? Remember New
Bank: a member lender cannot compel the syndicate to
accelerate the loan on default.121 Moreover, the Trust's
obligations were dependent and recursive-the Trust only
owed when the Borrower owed, and only to the extent
defined in the Keep-Well.122

But Beal Savings Bank was not trying to compel the
syndicate to accelerate. When the Borrower filed for
bankruptcy protection, the filing itself constituted an event
of default under the Credit Agreement that resulted in the
automatic acceleration of all of the Borrower's obligations
thereunder.123  As a result, the Trust became immediately
liable for the "Accelerated Payment Amount" under the
Keep-Well Agreement.'2 4 In the words of the New York
Court of Appeals, "neither the Credit Agreement nor the

' The Beal Savings Bank court recognized that, when granted only
limited functions, an agent would not be afforded much deference in
decision-making. See id. at 1216. However, the court held that the setting
of interest rates and the concurrent ability to review the borrower's
financial documents, along with the fact that only the name of the agent
was included on the cover of the Credit Agreement, was sufficient to
support a finding that the agent was not a mere technocrat. Id. Here, the
words of Justice Moody seem particularly appropriate: "It is difficult to
deal with a proposition of this kind except by saying that it is not true."
Hunter v. City of Pittsburgh, 207 U.S. 161, 177 (1907). If those are the
indicia of the agent's actual authority to bind, it is indeed difficult to
imagine any circumstances in which only ministerial powers might be
found. Cf. A.I. Credit Corp., 666 F. Supp. at 631 (where the credit
documents specifically limited the agent to "perform[ing] the mechanical
and clerical functions" of the syndicate).

120 Beal Say. Bank, 865 N.E.2d at 1216
121 See supra note 81 and accompanying text.
122 See supra notes 35, 98.
12 See Complaint at 2-3, Beal Say. Bank v. Sommer, 865 N.E.2d 1210

(N.Y. 2007) (No. 05601222).
124 Id.

354 COL UMBIA B USINESS LA W RE VIE W [Vol. 2012



Keep-Well contains an explicit provision stating that a
Lender may-or may not--take individual action in the
event of default."12 5 Yet Section 10.20 of the Credit
Agreement explicitly granted "the Administrative Agent or
the Lenders remedies at law and in equity in addition to
every other right or remedy" contained in all Loan
Documents. 26

New Bank and Commercial Bank both indicate that
cumulative rights clauses preserve the lenders' common law
right to seek a judgment against the borrower when the loan
becomes due. Here, the issue was twofold: whether
individual lenders have a remedy at law to enforce a
guaranty that has come due, and second, whether such right
was waived by the lenders when they authorized the lender
to take action on their behalf in Section 4 of the Keep-Well.

The fact that the lenders authorized the Agent to act on
their behalf and at their direction does not speak to the
ability of the lenders to act on their own behalf. Under the
Restatement of Agency, as under English law, a third party
(the borrower or guarantor) who has dealt with an agent for
an undisclosed principal (the lender) is, upon knowledge of
the principal's existence, in the same position as a third
party who has dealt with an agent of a disclosed principal.12 7

This approach does not permit the third party to delay
rendering performance to the newly disclosed principal.'2 8

The Trust, upon learning of the plaintiffs existence, owed
the Bank the same duties as it owed the Administrative
Agent-specifically, to pay the Accelerated Payment Amount
not later than forty days following the date of acceleration.'29

125 Beal Say. Bank, 865 N.E.2d at 1215
126 Id. at 1217 (emphasis added).
127 RESTATEMENT (THIRD) OF AGENCY § 6.07 cmt. a (2006) (stating the

basic principle "that, when an agent enters into a contract on behalf of an
undisclosed principal, the third party, the principal, and the agent become
parties to the contract" and that such parties shall have "the same rights,
liabilities, and defenses against each other as if the principal made the
contract personally").

128 Id.
129 Beal Say. Bank, 865 N.E.2d at 1216.

No. 1:330]1 NO STANDING ROOM 355



This self-executing provision required neither the lenders
nor the Administrative Agent to take any action for the
payment to become due; it was due the moment the default
(i.e., the filing for bankruptcy protection) occurred. Thus,
when the Trust failed to make the payment, the plaintiff
exercised its "remedies at law" to collect, on behalf of the
bank syndicate, the debt that was owed thereto.o1 3

To the extent that the credit documents seem to preserve
each lender's individual ability to exercise rights and
remedies at law, the court was unconvinced.' 3 ' To avoid a
majority hold-up, the court reasoned that the consent of the
required lenders was all that was required to approve the
Agent's forbearance1 32  and prevent the initiation of
successive lawsuits by individual lenders. 33 In the process,
the court summarily distinguished A.I. Credit Corp.1' and

130 See supra notes 105, 106 and accompanying text; see also

Kirschbaum v. Merchs. Bank of N.Y., 71 N.Y.S.2d 79, 80 (N.Y. App. Div.
1947) ("A member of a partnership seeking to recover from a third party a
debt due the partnership must bring the action on behalf of and for the

benefit of the partnership and may not recover upon such an obligation
individually. The cause of action resides in the partnership and not in one
of its members.") (emphasis added); supra note 86 (describing the
principal's right to sue on the contract).

131 See, e.g., Beal Say. Bank, 865 N.E.2d at 1217 ("The purpose of
section 18 (e) is to assure that the Agent's or a Lender's failure or delay in

enforcing rights is not a waiver of those rights. Both these provisions-
intended to preserve alternate remedies-do not provide to each Lender
express grants of enforcement in the event of default.") (emphasis added).
Nevermind the fact that, as the court quoted, the "lender's failure or delay
in enforcing rights" was explicitly not a waiver of such rights, which
necessarily assumes that the lender has rights and remedies under the
credit documents. Id.

132 Id. at 1219 ("Here, the supermajority vote is meant to protect all
Lenders in the consortium from a disaffected Lender seeking financial
benefit perhaps at the expense of other debtholders.").

133 Id.

134 In A.L Credit Corp. v. Government of Jamaica, 666 F. Supp. 629,
631 (S.D.N.Y. 1987), the parties explicitly provided: "The amounts payable
at any time hereunder to each Bank shall be a separate and independent
debt and each Bank shall be entitled to protect and enforce its rights
arising out of this Agreement, and it shall not be necessary for any other
Bank to be joined as an additional party in any proceedings for such

[Vol. 2012356 COL UMBIA B USINESS LA WRE VIE W



Commercial Bank,3 5 while following Credit Francaisl36

unwaveringly.
However, the court's treatment of New Bank was

particularly problematic. As the court in Beal Savings Bank
stated, the issue in New Bank was one of a lender
attempting to compel the syndicate to accelerate .13  The
credit documents were unambiguous on this issue; the New
Bank plaintiff clearly lacked standing to assert such claims.
Yet the New Bank court explicitly stated that a lender who
had included a cumulative remedies clause in the credit
documents could pursue such remedies at law once the debt
became due.' As a result, the majority in Beal Savings
Bank cites New Bank with approval, even though New Bank
fails to resolve the issue, and in fact, likely favors the
position of the plaintiff.13 1

Recognizing the inconsistencies in the majority's
argument, the dissent stressed that a lender's expectation
interests should not be so readily dismissed:

purpose." The Beal Savings Bank court reasoned that, when combined
with an Agent Authorization clause that limited the Agent's function to
merely ministerial tasks, Lender Collective Action was properly rejected in
A.I. Credit Corp. Beal Say. Bank, 865 N.E.2d at 1218. Here, however, the
parties had not included a specific clause authorizing individual
enforcement of rights in the event of default, and the New York Court of
Appeals was not willing to read one into the agreement. Id. at 1218-19.

1 The Beal Savings Bank court reasoned that Commercial Bank was
unpersuasive merely because it was "based on English law." Id. at 1218.
But see infra note 196.

" Beal Say. Bank, 865 N.E.2d at 1214.
. Id. at 1214-15.
" See id. at 1220 (Smith, J., dissenting).
a See id. ("The majority mistakenly cites New Bank as supporting its

position . . . . A right of acceleration, unlike the basic right to sue for
money that is already due, does not exist except to the extent that a
contract provides for it. The New Bank court itself pointed out this
distinction: 'although acceleration and foreclosure are contractual
remedies which may not be exercised without a majority vote of the
Lenders, NBNE is free to pursue its own remedies at law by suing Noble
to collect on its debt to NBNE.' Beal should be no less free to pursue its
own collection remedy here.") (citations omitted).

No. I:330] NO STANDING ROOM 357



A bank that lends money to a borrower and is not
repaid is entitled to sue to get its money back. That
is, at least, the assumption that most banks surely
make when they enter into loan agreements. A bank
that is part of a lending group can, of course, agree
that no suit will be brought unless a majority or
supermajority of the lenders agree to take action, but
if that agreement is made, it should be stated in
plain language in the document. It is not hard to
say: "No suit shall be brought except by the
Administrative Agent, acting upon the written
instructions of the Required Lenders." No such
language, or anything that can fairly be read as its
equivalent, appears in this Credit Agreement or
Keep-Well Agreement, and I dissent from the
majority's decision to read it in.'40

In the end, the issue in Beal Savings Bank may seem
remarkably unremarkable. By authenticating the
Settlement Agreement with the Borrower and the
Guarantor, the Agent agreed to forbear from exercising its
lawful remedies. The minority argued that the forbearance
constituted a waiver. Under the express terms of the credit
documents, it did not.14 ' Yet the court went a step further,
concluding that a lender could impliedly waive its rights to
enforce the terms of the credit documents, including its right
to seek a judgment against the Guarantor. Thus, Lender
Collective Action was born-if a lender did not expressly
provide for a right or remedy in the credit documents, even
ones traditionally held under the common law, it risked
having a court find that such rights were waived, and that
they were to be exercised only by the agent, exclusive of the
individual lenders.

140 Id. at 1219.
"' Id. at 1217. Under Section 18(e) of the Keep-Well: "No failure on

the part of the Administrative Agent or any Lender to exercise, and no
delay in exercising, any right" would be deemed a waiver. As the court
concluded, "[T]he Settlement did not release the Trust of its obligations by
amending, modifying or waiving any provision in the agreements . . . ." Id.

[Vol. 2012358 COL UMBIA B USINESS LA W RE VIE W



NO STANDING ROOM

V. BEAL SAVINGS BANK: REDUX

In the wake of Beal Savings Bank, lower courts
attempted to synthesize the Court of Appeal's
groundbreaking ruling with existing precedent. Generally,
these cases have involved one or more of the following
scenarios (1) lenders seeking a judgment against a defaulting
borrower; (2) agent forbearance; or (3) agent credit bidding.

A. Individual Right of Action

The one question that Beal Savings Bank clearly resolved
is whether a member lender of a bank syndicate can
impliedly waive its rights to seek a judgment against the
borrower when there is no express authorization to do so in
the credit documents. 14 2 When the parties to a contract have
not agreed with respect to a term that is essential to a
determination of their rights and duties, the court must
supply a term that is reasonable in the circumstances.14 3

Pursuant to Beal Savings Bank, if the required lenders make
an election by directing the agent not to pursue legal action,
it is reasonable for a court interpreting credit documents
governed by New York law (as most are) to conclude that a
dissenting lender does not have standing to seek a judgment
against the debtor on the ground that such lender has
implicitly waived such right of recourse. 4 4

142 In Beal Savings Bank, there was no clause that provided the
members with a right to sue. "Had the parties intended that an individual
have a right to proceed independently," the court concluded, "the Credit
Agreement or the Keep-Well should have expressly so provided." Id. at
1218 (citing A.I. Credit Corp. for an appropriate example of an "individual
remedies clause"). See also Simon, supra note 50, at 324-25. ("For
example, it occasionally happens that the agent bank refuses to enforce
loan agreement provisions against the borrower and seems to have an
inappropriate bias (i.e., the agent bank is a leading lender to such
borrower and does not want to jeopardize its business relationship with
the borrower, even at the cost of tolerating some defaults on the specific
loan).").

143 RESTATEMENT (SECOND) OF CONTRACTS § 204 (1981).
'" Beal Say. Bank, 865 N.E.2d at 1216; see also id. at 1211 (reasoning

that lenders intended to act collectively in the event of the borrower's

No. I:330] 359



COLUMBIA BUSINESS LAW REVIEW

B. Forbearance

The next issue that courts interpreting New York law
have faced is whether the agent of a bank syndicate may
take actions that seem to violate the spirit of the credit
documents, yet are not expressly prohibited by the terms
thereof. Take In re Delphi,"' for example. When the Delphi
Corporation filed for bankruptcy protection in 2005, the
agent of Delphi's syndicated debtor-in-possession ("DIP")
creditors forbore from collecting on the borrower's debt at the
direction of a majority of the lenders."' Considering the
"collective design" of the syndicate, as well as the policy
concerns surrounding the potential insolvency of the
borrower, the Bankruptcy Court held that the agent had the
right to not only exercise remedies afforded it, but also to
forbear from exercising the same, unless contrary intentions
are explicitly provided.' Since nothing in the credit
documents explicitly prohibited the agent from forbearing,
the court reasoned that the agent had the authority to
forbear at the direction of a majority of the lenders.'

But what happened when the maturity date arrived? The
purpose of the forbearance was to buy time so that the
parties could execute an "accommodation agreement,""

default and to preclude an individual lender from disrupting the scheme of
the agreements at issue).

14 In re Delphi Corp., No. 05-44481, 2009 WL 2482146 (Bankr.
S.D.N.Y. July 30, 2009).

146 See Transcript of Hearing Held on December 1, 2008 at 10:56 a.m.
at 152-53, In re Delphi Corp., No. 05-44481 (Bankr. S.D.N.Y. Dec. 1,
2008), available at http://www.dphholdingsdocket.com/Docket/Search
Results.asp?SH=1 (Court Docket #14582, filed 12/11/2008) [hereinafter
Transcript of Hearing].

147 Id. at 45 (stating that the court would not look beyond the four
corners of the contract when determining whether or not the Agent is
permitted to act at the discretion of a mere majority of lenders).

14 See id. at 156.

* For the full Accommodation Agreement, see Order (I)
Supplementing January 5, 2007 DIP Refinancing Order (Docket No. 6461)
and Authorizing Debtors to Enter Into and Implement Accommodation
Agreement with Agent and Participating Lenders and (II) Authorizing
Debtors to (A) Enter Into Related Documents and (B) Pay Fees in

360 [Vol. 2012



NO STANDING ROOM

under which the borrower and lenders would renegotiate the
terms of the credit agreement and provide for a restructuring
plan under Chapter 11 of the Bankruptcy Code.'5 o Under the
terms of the credit documents, the agent would need
unanimous consent of the lenders if it wished to extend or
otherwise modify the maturity date.' The essence of the
accommodation agreement was to do just that: according to
the GM-Delphi Agreement, dated May 9, 2008, among the
borrower, the guarantors, the DIP Lenders, and their agent,
JP Morgan Chase, the DIP lenders would have to agree to a
forbearance with respect to the Maturity Date.'5 2

It would seem, then, that the consent of all DIP
lenders would be required. Not so, ordered the court. 53 In
sanctioning the agent's effective modification of the loan, the
Bankruptcy Court stated that its forbearance decision was
"directly supported by" Beal Savings Bank.'54 The court even
cited the language of Beal Savings Bank: "the fact that
forbearance has a similar effect to extension is insufficient to
override the parties' agreements with regard to collective
action to enforce their respective rights under the DIP credit
agreement."'5 5

Connection Therewith ("Dip Accommodation Order"), In re Delphi Corp.,
No. 05-44481 (Bankr. S.D.N.Y. Dec. 3, 2008) (No. 14515), available at
http://www.dphholdingsdocket.com/Docket/SearchResults.asp?SH=1 [here-
inafter DIP Accommodation Order].

150 See Transcript of Hearing, supra note 146, at 152-53.
" See id. at 109 (referring to Section 10.09 of the Credit Agreement).
152 See Order Authorizing Debtors to Enter (I) Second Amendment to

Arrangement with General Motors Corporation Approved Pursuant to
Second Dip Extension Order (Docket No. 13489) and (II) Partial
Temporary Accelerated Payment Agreement ("GM Arrangement Second
Amendment Agreement Approval Order"), In re Delphi Corp., No. 05-
44481 (Bankr. S.D.N.Y. Dec. 3, 2008) (No. 14514), available at
http://www.dphholdingsdocket.com/Docket/SearchResults.asp?SH=1.

's See DIP Accommodation Order, supra note 149, at 1-10.
See Transcript of Hearing, supra note 146, at 155 (referring to

Section 2.25 of the Credit Agreement).
... Id. at 157 (emphasis added).

No. 1:330] 361



C. Credit Bidding

Generally, after a secured creditor forecloses on the
debtor's property, it must hold a foreclosure sale.15 6

Alternatively, the creditor may agree to take the collateral in
complete satisfaction of the debt ("strict foreclosure").15 7 If a
sale is held, the creditor may bid on and purchase the
collateral, crediting the sale price against the outstanding
debt.' 8 If the borrower is in bankruptcy, a Section 363 sale
may be held, whereby a secured creditor may bid at an
auction some or all of its collateral and "offset such claim
against the purchase price of such property.""'

Since the financial crisis of 2008-2009, agents have been
under increasing pressures to collect on troubled assets.'60

As the capital markets for debtors-in-possession'' and exit
financing 62 continue to struggle, agents have had to rely

1 U.C.C. § 9-610(a) (2003); RESTATEMENT (THIRD) OF PROPERTY
(MORTGAGES) § 8.2 (1997).

m See generally U.C.C. § 9-620 (2003); RESTATEMENT (THIRD) OF PROP.:
MORTGS. § 3.1, cmt. f (1997) (permitting creditor to take a deed in lieu of
foreclosure).

158 U.C.C. §§ 9-610(c), 9-615(a)(2); RESTATEMENT (THIRD) OF PROP.:
MORTGS. § 8.4.

159 11 U.S.C. § 363(k) (2010).
1 Abrams et al., supra note 12, at 2.

A debtor-in-possession ("DIP") is a Chapter 11 or Chapter 12 debtor
that continues to operate its business as a fiduciary to the bankruptcy
estate. With certain exceptions, the debtor-in-possession has all the
rights, powers, and duties of a Chapter 11 trustee. BLACK'S LAW
DICTIONARY 464 (9th ed. 2009). DIP lending is the process by which
debtors-in-possession obtain financing to cover ongoing business
operations or short-term capital improvement projects.

16 When debtors emerge from restructuring, they will typically need
to find sources of capital to finance ongoing operations and business plans.
This process is referred to as "exit financing." See generally Penny G.
Friedman, Proper Exit Financing Is Key to Chapter 11
Emergence Challenges Abound for Debtors, Lenders Alike, TURNAROUND
MGMT. ASS'N, (July 1, 2004), http://www.turnaround.org/Publications/
Articles.aspx?objectlD=3431.

362 COL UMIA B USINESS LA W RE VIE W [Vol. 2012



increasingly on alternatives to the traditional Chapter 11
plan of reorganization,' including credit bidding.

Such experimentation has not been without criticism,
particularly where the syndicate itself is classified into first-
and second-lien classes.'" While the market for second-lien
loans has grown, so has the pressure on agents to protect the
interests of the first-lien lenders, potentially to the detriment
of the second-lien lenders.'6  Agents of bank syndicates have
turned to Lender Collective Action to justify credit bidding in
face of lender opposition. 166

Unsurprisingly, whether an agent can credit bid on behalf
of the syndicate depends entirely upon the language of the
credit documents. If, for example, the credit documents
empower the agent to exercise all rights and remedies
provided in the credit documents, "together with such powers
as may be reasonably incidental thereto,"' then few courts
would say that the right to credit bid is per se beyond the
scope of the agency.1' Indeed, because of the fundamental

'" At a very basic level, Chapter 11 allows an insolvent business, or
one that is threatened with insolvency, to reorganize its capital structure
under court supervision (and subject to creditor approval) while continuing
its normal operations. BLACK's LAw DICTIONARY 264 (9th ed. 2009). See
generally 11 U.S.C. §§ 1101-1174.

" See infra Part VI.B.
165 See infra notes 239, 241 (describing the mechanisms for creating a

"silent second," a class of second-lien lenders that has no say over the
administration of the loan).

16 Abrams et al., supra note 12, at 2.
16 Beal Say. Bank v. Sommer, 865 N.E.2d 1210, 1211 (N.Y. 2007).
16 See, e.g., In re Chrysler, 405 B.R. 84 (Bankr. S.D.N.Y. 2009), affd,

576 F.3d 108 (2d Cir. 2009) (approving a credit bid by the agent, free and
clear of any liens, for only a fraction of the principal amount of the loan,
over the objection of minority lenders holding a 7.5% interest in the
principal); In re GWLS Holdings, Inc., No. 08-12430, 2009 WL 453110,
(Bankr. D. Del. Feb. 23, 2009) (rejecting the argument that the
amendment provision in the Credit Agreement precludes the agent from
credit bidding all of the debt and concluding that the exercise of remedies
under the Collateral Agreement is not a waiver, amendment, supplement
or modification of the Credit Agreement); In re Metaldyne, 409 B.R. 671
(Bankr. S.D.N.Y. 2009) (approving a credit bid of 100% of the prepetition
term debt over the objection of a lender holding less than 1% of the same

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COLUMBIA BUSINESS LAW REVIEW

nature of the right,169 most courts would allow an agent to
credit bid unless there is an express contractual provision in
the credit documents stating otherwise."o There is genuine
controversy, however, as to the extent of the right and the
scope of its exercise, particularly where the agent attempts
to credit bid the full amount of the debt over the objection of
a substantial minority of lenders."'

VI. MOVING FORWARD

It is unclear if there is any bright-line test for when, or
how, courts will apply Lender Collective Action.17 2 While
parties are free to define rights and remedies as they see fit,
it is still the courts that give meaning to the text of private
agreements."' Unless constrained by the legislature, the
courts will have the final word on the issue of Lender
Collective Action. With these considerations in mind, this
Note will attempt to provide a justification for the theory's
existence, while also proposing certain limitations to account
for the theory's shortcoming, including the adoption of (1) a

despite a provision in the credit documents that "prohibits amendments
that . . . release all or substantially all of the Collateral from the Liens of
the Security Documents, without the written consent of each Lender").

169 See Keith A. Simon, Credit Bidding by a Syndicated Lending
Group: Understanding the Complexities of § 363(k) of the Bankruptcy Code,
18 J. BANKR. L. & PRAC. 6 Art. 5, 9 (Nov. 2009) (placing special emphasis
on credit bidding in the context of syndicated loans and analyzing recent
case law on the matter).

170 It is possible that a court might also prevent an agent from credit
bidding where the action would result in inequity for the lenders or the
syndicate. Alternatively, a court might permit the credit bid, but with
certain restrictions, such as an aggregate limit or a member approval
procedure. At this point, however, it is too early to say whether any
limitations will be placed on the option, equitable or otherwise.

.. For more on credit bidding, see infra Part VI.C (proposing stronger
equitable limitations on the ability of the agent to credit bid over the
objection of junior lenders when doing so would unfairly extract value from
the borrower at the expense of the junior faction).

.72 Abrams et al., supra note 12, at 2.
173 Id.

364 [Vol. 2012



"clear statement" rule; and (2) equitable or fairness
limitations.

A. Justifications

The classic justification for Lender Collective Action is
that the theory is a proper interpretive tool that furthers
institutional goals without impeding the syndication process
or frustrating individual expectation interests."' Delegation
is the sine qua non of syndication."' To decentralize is to
destabilize: Lender Collective Action binds the various actors
and prevents unnecessary or counterproductive dissention.' 6

Moreover, through democratization (e.g., voting structures),
the delegation function is responsive to the needs and wishes
of the various constituent lenders."

By the same token, syndicated lenders are highly
sophisticated (as are the lawyers who represent them), and
collective action is anticipatable.17 The agent can only
override the wishes of a dissenting minority to the extent
that the minority has contractually subordinated its own
interests to those of the collective whole.1 7 ' A lender that
wishes to have a veto may provide for one through careful

174 Marc Abrams & Rachel C. Strickland, For: A Consensual Solution

For the Greater Good, in Lender 'Collective Action' Doctrine Provokes

Controversy, N.Y. L.J., Dec. 14, 2009, at 3.
175 Id.
176 Id.

1' Id.
178 Id.

"' See Michael T. Madison et al., Participant Relations In a Troubled
Loan-Fraud and Misrepresentation, 2 L. REAL EsT. FINANCING § 11:18
(2011) ("Banks are sophisticated institutions. In negotiating a
participation agreement, the bargaining positions of the parties are
roughly equal and, therefore, the area of loan participation is not an area
of commerce in which the courts need to intervene to protect the
uninformed or the weak."). But see Citadel Equity Fund Ltd. v. Aquila,
Inc., 371 F. Supp. 2d 510, 512 (S.D.N.Y. 2005), affd, 168 F. App'x 474 (2d
Cir. 2006) ("The parties are sophisticated and well advised[, yet t]his
dispute demonstrates that the disposition of substantial sums of money
can result in surprisingly different views of the most carefully
contemplated contract.").

NO STANDING ROOM 365No. I:330]



attention to and precise drafting of the credit documents."'o
Accordingly, minority lenders can hardly complain when
they find themselves in a predicament that they could have
reasonably foreseen and around which they could have
contractually negotiated."' Thus, some have argued that a
minority lender's expectation interests are not frustrated
when it is held to the terms of the agreement for which it has
negotiated.'82 Where the lenders have envisioned a uniform
response to borrower default, they claim, Lender Collective
Action is appropriate, even if the language of the credit
documents is unclear or ambiguous on the issue.

B. Criticism

But not so fast! Maybe some lenders do envision unified
action when joining a syndicate,' or at the very least,
should."' But, what about our judicial system's adherence to
traditional methods of contract interpretation? Some, like
New York bankruptcy attorney, Keith Wofford, have argued
that the theory is ignorant of basic principles of contract law
and needlessly restructures the common-law landscape.'8 6

According to Wofford, Lender Collective Action is actually a
tool of elite institutional lenders: the theory allows large,
liquid creditors to use their positions to entrench themselves

180 Abrams & Strickland, supra note 174, at 3.
181 Id.
182 Id.

183 See supra note 15 and accompanying text.
'" See Paul J. Epstein, Beal v. Sommer: Did Decision on Collective

Action in Exercise of Lenders' Remedies Reflect Contracting Parties'
Intent?, 125 BANKING L.J. 240, 246 (2008) (concluding that the result
reached by the majority in Beal Savings Bank may have accurately
reflected the intent of the lenders, and market practice generally, even if
such a result was not clearly supported by the text of the credit
documents).

185 See supra notes 174-177.
18 Keith H. Wofford, Against: A Violation of New York Law and Good

Policy, in Lender 'Collective Action' Doctrine Provokes Controversy, N.Y.
L.J., Dec. 14, 2009, at 4.

366 COL UMIA B USINESS LA W RE VIE W [Vol. 2012



by enhancing majority power at the expense of the
minority.187

1. Say What You Mean

The most fundamental flaw of Lender Collective Action
stems from a misunderstanding of agency and contract law.
According to Wofford:

The entitlements traditionally reserved as the
exclusive domain of individual lenders, namely, the
right to obtain repayment of principal at maturity,
the right to receive payment of interest at the agreed
rate and at agreed intervals, and the right to bar
releases of all or substantially all loan collateral and
guarantees, legally cannot and should not be denied
by means of "collective action" doctrine.18'

In many instances, courts have relied upon affirmative
delegations to the agent as adequate grounds for implying a
negative, reciprocal discharge of a right or remedy on the
part of the member lender.'" Yet a delegation of power to an
agent does not equate to an abdication of power by the
principal.9 0 A lender can authorize the agent to sue on its

187 Id.

188 Id.
189 See, e.g., Beal Say. Bank v. Sommer, 865 N.E.2d 1210, 1213 (N.Y.

2007) (holding that no individual member of the consortium was
empowered to enforce the agreement in the event of default where the
credit documents only mentioned the Administrative Agent in relation to
such tasks); see also Credit Francais Int'l, S.A. v. Sociedad Financiera de
Comercio, C.A., 490 N.Y.S.2d 670, 684 (N.Y. Sup. Ct. 1985) ("It is
axiomatic in partnership law that 'a member of a partnership seeking to
recover from a third party a debt due the partnership must bring the
action on behalf of and for the benefit of the partnership and may not
recover upon such an obligation individually. The cause of action resides
in the partnership and not in one of its members.'"); In re Enron Corp., 302
B.R. 463, 477 (Bankr. S.D.N.Y. 2003) (using similar language to dismiss a
suit brought by an individual lender rather than the collective syndicate,
even though almost all of the lenders had joined the suit by the time
litigation ensued).

190 RESTATEMENT (THIRD) OF AGENCY § 1.03, cmt. c (2006).

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COLUMBIA BUSINESS LAW REVIEW

behalf without necessarily giving up its own right to sue on
its own behalf, or on behalf of the entity.9 1

As such, the Credit Francais court's analogy of the bank
syndicate to a partnership,1 9 2 though apt, is misplaced. The
fact that the partner can seek a judgment on behalf of the
partnership acknowledges the fact that the individual
partner has standing to seek the judgment. 19 3 Thus, where a
lender participates in syndication, the only thing that
changes is the form of the remedy, not the right to exercise
the remedy itself.'94 Though there may be practical reasons
why a syndicate would choose not to permit its members to
individually seek a judgment in the event of default,"' as a
matter of contract interpretation, the reasoning of Beal
Savings Bank is unpersuasive. '"

So what are courts to do? As previously indicated, Lender
Collective Action case law focuses largely on the specific
terms of the governing credit documents. Generally,

191 See supra note 134.

192 See Credit Francais, 490 N.Y.S.2d at 684.
1' See supra note 127 and accompanying text.
' The remedy may be fashioned as either a recovery on behalf of the

entire entity or the member's pro rata share of the collective remedy. See
Beal Say. Bank, 865 N.E.2d at 1213 (where the plaintiff sought $90
million to share with the other Lenders or, in the alternative, its pro rata
share thereof). But in either instance, the principal is still permitted to
bring the action.

"9 To be sure, lenders can contract around Beal Savings Bank if they
so choose or they can refuse to participate in syndications altogether if
they fear the risk of being unable to pursue remedies on their own.
Alternatively, lenders could increase the rate of interest that they charge
to account for this risk.

" For example, the Beal Savings Bank court distinguished
Commercial Bank on the mere ground that it was "based on English law."
Beal Say. Bank, 865 N.E.2d at 1218. Yet much of American common law
is based on English traditions and customs. Contract law itself is largely a
relic of Continental doctrine. Such an argument could hardly stand
scrutiny in other areas of law, such as torts, property, or criminal law.
Moreover, the Restatement explicitly adopts a similar standard. See supra
notes 127-28. If the Restatement rule is the same as the English rule, it
makes little sense to disregard Commercial Bank simply because the
governing law is not identical.

368 [Vol. 20 12



NO STANDING ROOM

unambiguous terms should be given their "plain meaning,"97

yet credit documents are often subject to "differing yet
rational interpretations."' The standard cure for ambiguity
is to place the term or provision "in context" using either
intrinsic 9  or extrinsic2 evidence. Accordingly, credit
documents must be read "as a whole," and industry customs
or terms-of-art may be imported to ascertain the true intent
of the parties.20 ' As a practical matter, credit agreements
rarely foreclose the right of a lender to sue for payment upon
breach.202 Does silence in the credit documents manifest an
intention on the part of the lender to preserve its right of
private action or to abandon it in favor of collective action?
According to Beal Savings Bank, a broad delegation of
authority to the agent implies that the parties intended for
collective action in the event of default.20 3

197 RESTATEMENT (SECOND) OF CONTRACTS § 202.3 (1981) ("Unless a
different intention is manifested, (a) where language has a generally
prevailing meaning, it is interpreted in accordance with that meaning . . .

198 Abrams et al., supra note 12, at 2.
"9 Generally, a court will place a term in context by examining the

contract as a whole, or other related documents. RESTATEMENT (SECOND)
OF CONTRACTS § 202.2 ("A writing is interpreted as a whole, and all
writings that are part of the same transaction are interpreted together.").

200 An appropriate context might include a course of dealing, industry
usage, or other terms and provisions within the same or accompanying
documents. Id. § 202.5 ("Wherever reasonable, the manifestations of
intention of the parties to a promise or agreement are interpreted as
consistent with each other and with any relevant course of performance,
course of dealing, or usage of trade.").

201 See, e.g., R/S Assocs. v. N. Y. Job Dev. Auth., 771 N.E.2d 240, 242
(N.Y. 2002) ("Unless the court finds ambiguity, the rules governing the
interpretation of ambiguous contracts do not come into play. Thus, when
interpreting an unambiguous contract term evidence outside the four
corners of the document is generally inadmissible to add to or vary the
writing.") (citations omitted). This "four corners" approach emphasizes the
use of competing provisions within the same or accompanying documents,
as well as industry custom; though extrinsic evidence would generally be
inadmissible unless ambiguity is found.

202 Wofford, supra note 186, at 4.
203 Beal Say. Bank v. Sommer, 865 N.E.2d 1210, 1218 (N.Y. 2007)

("[Aln undisclosed principal can sue on a contract except when the terms of

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COLUMBIA BUSINESS LAW REVIEW

This Note disagrees, proposing instead that courts should
adopt a contract version of the "clear statement rule" for the
abrogation of remedies traditionally provided at law. The
"clear statement" rule is a canon of statutory construction
that provides that, when a statute may or may not be
interpreted to override long-standing rights, or make a large
policy change, courts should not interpret the statute to
make the change unless the intention of the legislature is
clearly stated in the statute.20 4

The rule is based on the assumption that parties do not
make major, fundamental changes to pre-existing or default
rules in a vague or unclear manner.2 05 It could be argued
that applying the "four corners" and "plain meaning" rules
would lead to the same result as a "clear statement" rule-
by giving terms their traditional, common meaning and by
limiting the terms of the contract to those expressly made
within the four corners of the document. Insofar as this is a
true statement of the rules, they have been insufficient to
reach the results advocated herein.20 6 Thus, a stronger
version-namely, the contract equivalent of a "clear
statement" rule-is necessary.

Courts interpreting contracts governed by New York law
should refrain from turning to Lender Collective Action
when doing so would abrogate a lender's traditional remedies

the contract expressly or impliedly confine it to the parties to it.") (citation
omitted). Because nothing in the credit documents expressly confined the
right to sue on the contract to the parties-i.e., the agent and the
borrower-the court must have concluded that the contract did so
implicitly.

204 For a modern application of the Rule, see Morrison v. National
Australian Bank Ltd., 130 S. Ct. 2869, 2883 (2010) (finding that the
'presumption against extraterritoriality" is a long-standing principle of
statutory construction and that if the legislature wishes to apply a specific
statute extraterritorially, a clear statement in the text of the statute to do
so is required).

20' See, e.g., United States v. Bass, 404 U.S. 336, 349 (1971).
206 For example, see the court's treatment of the "four corners" and

"plain meaning" rules in Beal Savings Bank. See supra Part IV.B.

370 [Vol. 2012



at law.207 A clear statement limitation would serve as a sort
of gap-filling device by resolving ambiguities in favor of
default remedies at law, including the right to enforce the
terms of the credit documents and seek a judgment for any
outstanding obligations once they become due.2 08 Insofar as a
clear statement rule could be applied in practice, its effect
would be to severely limit the extent to which Beal Savings
Bank would retain any precedential value-either as a model
of contract interpretation or for its holding that lenders may
impliedly waive their right to seek a judgment.

2. And Mean What You Say

"Thou shalt not modify, amend, or waive the terms of the
agreement without the express, unanimous consent of the
lenders." A simple imperative, yet it is one that has confused
and overwhelmed New York courts. When lenders include a
unanimous consent clause in the credit documents, they
intend to preserve their veto power over the decisions of the
agent, at least with respect to enumerated categories of
action.209 Yet, in the wake of Beal Savings Bank, lower
courts have permitted agents to act or forbear even though

20' Principally, this Note argues that a court should not apply Lender
Collective Action in order to prevent individual member lenders from
obtaining a judgment against the borrower (or the guarantor) when such
sums become due. See Wofford, supra note 186, at 4 (discussing the
fundamental nature of the individual right of action in terms of lender
expectation interests). This Note does not address the full range of
remedies available at law.

20' In this context, the "default rules" would be those rights and
remedies available at common law, provided by statute, or otherwise.
Note that such language is often provided in credit documents already and
is often overlooked by courts applying Lender Collective Action. See, e.g.,
Beal Say. Bank v. Sommer, 865 N.E.2d 1210, 1217 (N.Y. 2007) ("Section
10.20 of the Credit Agreement grants the Administrative Agent or the
Lenders remedies at law and in equity 'in addition to every other right or
remedy' contained in all Loan Documents.") (emphasis added).

209 See supra note 96.

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COLUMBIA BUSINESS LAW REVIEW

the action is functionally the same as one of the "prohibited"
actions.210

In a workout scenario, the most precious commodity is
time; often, the more time that passes, the deeper the
borrower's hole grows.211 If done correctly, a forbearance of
legal remedies can give the borrower much needed breathing
room, while still allowing the lender to save both time and
money. In some cases, the lender can end up obtaining title
to the collateral faster under a workout than - under
traditional foreclosure proceedings.2 12 However, when an
agent forbears from exercising the remedies provided in the
credit documents, minority lenders argue that it must first
seek the unanimous consent of the lenders.213 This is
particularly true when the agent seeks to enter into a
"forbearance agreement" with the borrower, under which the
agent agrees to forbear from exercising remedies, even after
the date of maturity. According to the minority lenders,
forbearing from exercising remedies is the same as a waiver
or modification, which would clearly require the unanimous
consent of the lenders.'

However, the New York courts say that to forbear2 15 is not
to waive.21 ' Even if a forbearance agreement has a "similar

21 Relying on Beal Savings Bank's "similar effect" language, see Beal
Savings Bank, 865 N.E.2d at 1217, lower courts and bankruptcy courts
have permitted agents to take actions not explicitly barred by the credit
documents despite similar results, see supra note 146.

21 Stephen Benko, A Mortgage Lender's Guide to Workouts, REAL EST.
FIN. J., Spring 1991, at 12.

212 Id. at 13.
213 See In re Delphi Corp., No. 05-44481, 2009 WL 2482146 (Bankr.

S.D.N.Y. July 30, 2009).
214 See generally Transcript of Hearing, supra note 146.
215 To "forbear" is to refrain from enforcing a right, obligation, or debt.

Strictly speaking, forbearance denotes an intentional negative act, as
opposed to an omission. BLAcK's LAW DICTIONARY 717 (9th ed. 2009). To
perpetually forbear, then, is to intentionally refrain from ever enforcing
the rights and remedies provided in the credit documents.

216 To "waive" is to voluntary relinquish, forfeit, or abandon-by
express or implied means-a legal right or advantage. Id. at 1717. It is,
in a more contrived manner of speaking, "one of those words of indefinite
connotation in which our legal literature abounds; like a cloak, it covers a

372 [Vol. 2012



NO STANDING ROOM

effect" as a waiver agreement, credit documents rarely
require the agent to seek the unanimous consent of the
lenders to forbear from exercising remedies against the
borrower. As courts interpreting New York law have
reasoned, if lenders desired such a limitation, then they
should have provided for it in the credit agreements.21 7

Perhaps this is a reasonable response for short-term,
temporary forbearances, but for long-term or perpetual
forbearances (which resemble a waiver or modification), the
lenders have made a concerted effort to provide for a veto
and courts should not so lightly draw a line between actions
that are functionally equivalent.

The Second Circuit has implicitly acknowledged the
reasonableness of such an approach in Citadel Equity
Fund.21

8 In Citadel Equity Fund, the borrower had entered
into a credit agreement with a syndicated credit facility for
approximately $430 million in financing.2 19 When the
borrower failed to comply with certain refinancing
conditions, the plaintiff, a private equity fund, demanded
that the borrower pay a mandatory prepayment, as required
by Section 2.7(d) of the credit agreement.2 2 0 Unfortunately,
the required lenders had other things in mind. On
September 14, 2004, the required lenders, holding two-thirds
of the outstanding debt under the credit facility, informed
the borrower that it would not enforce the mandatory

multitude of sins." WILLIAM R. ANSON, PRINCIPLES OF THE LAW OF
CONTRACT 419 (Arthur L. Corbin ed., 3d Am. ed. 1919).

" See supra notes 153-55.
218 Citadel Equity Fund Ltd. v. Aquila, Inc., 371 F. Supp. 2d 510, 521-

22 (S.D.N.Y. 2005), affd, 168 F. App'x 474 (2d Cir. 2006).
219 Id. at 513.
220 Id. ("According to Citadel, the purpose of Section 2.7(d) was to

protect the lenders against the risk that Aquila would fail to pay,
refinance, retire, or otherwise defease the Senior Notes in a timely
manner. Citadel and the other lenders had an interest in seeing that
Aquila met its obligations under the Senior Notes in order to protect the
lenders from a cross-default that could interfere with their economic
interest in the outstanding loans under the Credit Agreement.").

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COLUMBIA BUSINESS LAW REVIEW

repayment (and premium) due under Section 2.7.221 But was
the lenders' notice effective?

The court noted that in most cases of default, the loans
would only become due and payable if the required lenders
so elected.22 2 By contrast, the mandatory prepayment
provisions under Section 2.7(d) occurred automatically upon
the occurrence of the preconditions set forth therein, much
like the Trust's obligations under the Keep-Well Agreement
in Beal Savings Bank, where when the conditions were not
met, the Loans became "due and payable" without any action
on the part of the lenders.22 3 The court went on to conclude
that, even if the required lenders had the authority to waive
the mandatory prepayment requirement (meaning, even if it
was not mandatory), "the waiver at issue here was invalid
because it was not based on the unanimous consent of all the
lenders."224

To be fair, in Citadel Equity Fund, the letter that the
required lenders sent to the borrower explicitly stated that
the lenders were "waiving" the requirements of Section
2.7(d).225 But what if they had instead stated that they were
"forbearing" from collecting on the debt due under Section
2.7? Does such a difference in form alter the underlying
substance of the transaction? Should it? On the one hand,
there are meaningful short-term economic differences
between a waiver agreement and a forbearance agreement.22 6

221 Id. at 515.
222 Id. at 519.
223 Id.
224 Id. at 520 (citing the unanimous consent clause).
225 Id. at 515.
226 There is at least one significant legal difference between

forbearance and waiver: "A forbearance agreement will not eliminate the
default. To the contrary, a forbearance agreement expressly preserves the
default, and the lender only agrees to refrain from exercising its remedies
during the forbearance period. A waiver agreement, on the other hand,
waives the default and restores the parties to their pre-default positions."
Scott G. Night & Craig S. Unterberg, Waiver, Forbearance Agreements
After Default, HAYNEs & BOONE, LLP, http://www.haynesboone.com/
waiver_forbearanceagreements-afterdefault/ (last visited Mar. 5, 2012).

374 [Vol. 2012



NO STANDING ROOM

Yet, to the extent that it is consistent with both the above
mentioned "clear statement" rule and the general canon of
expressio unius,m preventing agents from taking actions that
are functionally equivalent to a modification or a waiver
would more accurately reflect basic principles of contract
interpretation by avoiding rendering portions of the credit
documents functionally meaningless.22 8 At the very least,
agents should not be entitled to extend the maturity date
(i.e., modify the agreement) under the guise of forbearance.
To the extent that they have allowed such action, New York
courts have vastly overextended the "similar effect" language
of Beal Savings Bank.

C. Duty Before Everything: Beyond Interpretation

Most intercreditor agreements recognize the importance
of allowing the agent to exercise remedies, even without the
unanimous consent of the lenders-to execute singly, or
together with the required lenders, the resolutions formed in
common under the credit agreement. What limitations,
then, should be applied to an agent exercising such remedies
on behalf of the syndicate?

Consider, for example, a typical foreclosure proceeding, in
which the syndicate obtains a judicial foreclosure on the

Thus, under a forbearance agreement, the borrower will still be liable for
the default interest rate, while under a waiver agreement, it will not.

227 Under the maxim expressio unius est exclusio alterius, the
expression in a contract of things of a class implies the exclusion of all not
expressed, even though all would have been implied had none been
expressed. However, the rule should not be used to contradict a clear
expression of intent. 17A C.J.S. Contracts § 327 (2010). In the context of
statutory interpretation, New York courts have made it clear that the
cannon should not be applied when doing so would frustrate the purpose of
the statutory provision. See In re Bath & Hammondsport R.R. v. N.Y.
State Dep't of Envtl. Conservation, 539 N.E.2d 560, 560 (N.Y. 1989).

2" Wofford, supra note 186, at 4. For example, forbearing from
exercising remedies after the date of maturity would effectively constitute
an extension of the maturity date (e.g., a modification). Likewise,
perpetually forbearing from collecting on mandatory payments due under
the contract would constitute an effective waiver of those provisions. The
unanimous consent clause should be triggered in both of these situations.

No. 1:330] 375



borrower's property (e.g., the manufacturing facility) and
holds a foreclosure sale.2 29 The borrower and guarantor are
entitled to an offset of the purchase price of such collateral at
the foreclosure sale against the outstanding debt owed.230 If
there is a secondary class of lenders, then the proceeds from
the foreclosure sale are applied first to the senior debt
obligation and then, if any proceeds are remaining, to the
junior debt obligation.2 3 ' Alternatively, the creditors may
obtain a "strict foreclosure" on the collateral in satisfaction of
all or part of both the first- and second-lien obligations.23 2

In either case, the purchase price of the collateral is offset
against the outstanding debt and the lender may obtain a
judgment for any deficiency.2 33 Note that, if it is determined
that the fair market value of the collateral is greater than
the foreclosure sale price, then the borrower is entitled to an
offset against the deficiency in the amount by which the fair
market value, less the amount of any liens on the real estate
that were not extinguished by the foreclosure, exceeds the
sale price.234 Similar rules apply in the context of a
bankruptcy proceeding where the debtor is in possession of
the collateral and the creditors bid on the assets at a sale
pursuant to Section 363 of the Bankruptcy Code in complete
or partial satisfaction of the debtor's outstanding obligations.

229 See generally supra notes 41-43.
230 U.C.C. § 9-615(a) (2003); RESTATEMENT (THIRD) OF PROP.: MORTGS. §

8.2(b) (1997).
231 Id.
232 U.C.C. § 9-620; RESTATEMENT (THIRD) OF PROP.: MORTGs. § 8.2(b).
233 U.C.C. § 9-608(a)(4); RESTATEMENT (THIRD) OF PROP.: MORTGS. §

3.1(c), cmt. f (permitting "deed in lieu" of foreclosure agreements); 11
U.S.C. § 363 (2010) (permitting credit bidding if full or partial satisfaction
of the outstanding debt).

234 RESTATEMENT (THIRD) OF PROP.: MORTGS. § 8.4(d); see generally
U.C.C. § 9-610(b) (requiring foreclosure sales to be performed in a
"commercially reasonable manner"). For example, if the outstanding debt
is $1.5 million, the collateral has a fair market value of $1 million, and the
secured creditor, acting in bad faith, purchases the collateral for $250
thousand, then the debtor and guarantor are entitled to an offset against
the deficiency in the amount of $750 thousand, thereby leaving an
outstanding obligation of $500 thousand.

COL UMIA B USINESS LA W RE VIE W [Vol. 2012376



In certain instances, accepting collateral in satisfaction of
the outstanding debt (through credit bidding or otherwise)
may be inconsistent with notions of "fairness" towards
minority lenders. For example, if the agent credit bids the
entire face value of the outstanding debt, then there is no
deficiency; the entire debt is extinguished and the
obligations of the borrower are discharged. To the extent
that there is a class of second-lien lenders, the "cram down"
implications of credit bidding can be troubling. In such
instances, the second-lien lenders, as members of the
syndicate, have the entire face value of their debts
extinguished as well. Thus, such lenders are not entitled to
a deficiency judgment against the borrower, even if the fair
market value of the manufacturing facility is only enough to
pay off the outstanding balance of the first-lien lenders.235

In other bankruptcy proceedings, it is much harder for
the first-lien lenders to "cram down" second-lien lenders
because the bankruptcy code requires that a plan of
reorganization be "fair and equitable" to all classes of
lenders.23 6 For example, if the syndicate decides that
foreclosure would be less profitable than continued operation
of the manufacturing facility, it might engage in a workout
to restructure the borrower's debt under Chapter 11 of the
Bankruptcy Code. Under Chapter 11, the borrower's
creditors must vote on any plan of restructuring.237 If the
creditors are classified, each class usually has a right to vote
on any proposed plan.238 In some cases, a plan may be

235 See PowerPoint Presentation by Donald S. Bernstein, Karin S.
Day, Jason Kyrwood & Brian Resnick, Attorneys, Davis Polk & Wardwell
LLP, to Loan Syndications & Trading Ass'n (Sept. 24, 2009), at 17,
available at www.1sta.org/WorkArealdownloadasset.aspx?id=7582 (down-
load only) [hereinafter Davis Polk Presentation].

236 See 11 U.S.C. § 1129(a)(8), (b)(1) (voiding a plan of reorganization
where it is not accepted as an injured class of claimants). See also Latham
& Watkins LLP, Client Alert: Second Lien Financings-Answers to the
Most Frequently Asked Questions (Apr. 15, 2004), at 5, available at
http://www.1w.com/Resources.aspx?page=FirmPublicationDetail&attno=02
065&publication=967 [hereinafter Latham Client Alert].

237 See 11 U.S.C. § 1129(a)(8)(A).
238 See id. § 1129(a)(7)(A)(i).

NO STANDING ROOM 377No. 1:3301



approved over the objections of a class of creditors if such a
plan is fair and equitable to all classes.23 9 The standard for
what is "fair and equitable" is higher for secured lenders
than it would be for unsecured lenders, thus giving second-
lien lenders greater leverage during restructuring
negotiations.240

Unfortunately, when the second-lien lenders are members
of the same lending syndicate as first-lien lenders, the agent
may be able to by-pass these statutory safeguards by
asserting Lender Collective Action and arguing that the
second-lien lenders have constructively "accepted" the terms
of the reorganization plan (or in liquidation proceedings, the
foreclosure sale) by permitting first-lien lenders to vote on
their behalf. In syndicated transactions, for example,
counsel to first-lien lenders have created a so-called "silent
second" by incorporating second-lien structures into the
intercreditor agreements themselves, subordinating virtually
all of the rights of the second-lien lenders, and redefining the
dispute-resolution clauses in a way that requires only the
approval of the first-lien lenders for agent actions.2 4' When
the interests of creditors are prioritized in such a manner,
the agent may be able to "cram down" a restructuring plan
over the objection of the entire class of second-lien lenders.
Nevertheless, the Bankruptcy Code's focus on fairness is
instructive.

Although Wofford has argued that credit bidding should
only be permitted where explicitly authorized by the
applicable credit documents,2 42 a credit bid is not a waiver,
amendment, or modification of the credit documents, and
therefore should not be construed to fall within the ambit of

.. A class of creditors that is forced to accept the terms of a plan that
it voted against is said to be "crammed down." Latham Client Alert, supra
note 236, at 5.

240 Compare 11 U.S.C. § 1129(b)(2)(A) with 11 U.S.C. § 1129(b)(2)(B).
24 Comm. on Commercial Fin., supra note 25, at 810. For example,

the "Required Lenders" clause might state that only the approval of a
majority of the first-lien lenders is required for the agent to take action on
behalf of the syndicate.

242 Wofford, supra note 186, at 5.

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NO STANDING ROOM

most "unanimous consent" provisions.2 43 Instead, credit
bidding is an independent statutory remedy at law.2" Like
the right to pursue a judgment at law, the credit bid should
be considered a non-exclusive remedy exercisable by either
the lenders or the agent.

However, there is still the problem of first-lien lenders
appropriating value at the expense of the second-lien lenders
if the "required lenders" clause is defined as a majority of
only the first-lien lenders.24 5 The real concern, it seems, is
whether the foreclosure price is reflective of the fair market
value of the collateral. Under the Restatement (Third) of
Property (Mortgages), when real property is sold below its
fair market value, the sale is valid but the amount that a
creditor can obtain from the obligated parties is
diminished.24 6 This restriction does not apply to junior
lienholders, however, when the junior lienholder does not
acquire the property:

The junior lienholder in this setting does not acquire
the real estate, it is not in a position to achieve a
recovery that exceeds the mortgage obligation and
thus no unjust enrichment will occur . . .. [Tihe
junior lienholder arguably is able to protect itself by
bidding at the senior sale and, in so doing, either
obtain real estate that is worth enough to cover its

243 But cf. id. (arguing that credit bidding has the effect of a waiver,
modification, or amendment).

24 11 U.S.C. § 363.
245 Imagine, for example, a bank syndicate divided into first- and

second-lien lenders and administered by a common agent. What happens
if lenders holding $51 million of a $100 million first-lien credit facility
direct the agent to credit bid all of the first-lien debt and the entire $1
billion second-lien credit facility (over the objection of holders of $49
million of the first-lien credit facility and all of the second-lien lenders)? If
the required lenders are defined as only a majority of the first-lien
creditors, the agent would be able to credit bid the entire $1.1 billion, even
if the collateral was only worth, for example, $51 million. See Davis Polk
Presentation, supra note 235, at 17 ex. D; see also supra note 55
(discussing reasons why one lender might want to take action that is
detrimental to the syndicate, such as an ongoing relationship with the
borrower or the prospect of providing future financing to the borrower).

246 RESTATEMENT (THIRD) OF PROP.: MORTGS. § 8.4(d) (1997).

No. 1:330] 379



obligation or, if another person is the ultimate
purchaser, insure that the sale yields enough surplus
to satisfy its lien out of the sale proceeds. However,
unlike the foreclosing mortgagee who is able to bid
up to the mortgage obligation without advancing new
funds, each dollar the junior lienholder bids at the
senior sale will represent an additional investment in
the real estate. Thus, it seems unfair to compel the
junior lienholder to take such a course of action in
order to preserve its right to recover on the junior
obligation. 4 7

The risk of appropriating value at the expense of minority
lenders is greatest when the bank syndicate is classified and
the rights and remedies of the second lienholders are
completely subordinated to those of the first lienholders.2 4

8

Under the Restatement approach, the exemption from the
deficiency offset would not apply to the second-lien lenders
who are out of the money because, as a member of the
syndicate, the second-lien lender would be acquiring the
property, even if it had no say in the matter.

One solution is for Bankruptcy Courts to be as critical as
possible of the language in intercreditor agreements and, as
suggested above, to deprive second-lien lenders of standing
to object to the syndicate's proposed course of action only
when such a waiver is made explicit and clear.2 4 9 In In re
Boston Generating, for example, the Bankruptcy Court for
the Southern District of New York entered an order
upholding the right of the second-lien lenders to object to
bidding procedures proposed for a Section 363 sale on the
ground that the intercreditor agreement did not specifically
deprive the second-lien lenders of standing to assert such
claims.2 50 Although the intercreditor agreement provided
first-lien lenders with the "exclusive right to . . . make

247 RESTATEMENT (THIRD) OF PROP.: MORTGS. § 8.4, cmt. d.
248 See supra note 245 (discussing Davis Polk Presentation, Example

D).
249 See supra Part VI.B.1.

250 In re Bos. Generating, LLC, 440 B.R. 302, 320 (Bankr. S.D.N.Y.
2010).

380 COL UMBIA B USINESS LA W RE VIE W [Vol. 20 12



determinations regarding the . . . sale" of collateral, the
Bankruptcy Court concluded that such language was not
specific enough to extend to the second-lien lenders' right to
object to the bidding procedures at a Section 363 sale-a
right traditionally granted to lenders under the Bankruptcy
Code.25 1  Unfortunately, Boston Generating may be easily
distinguished in the future; a court wanting to overcome the
objection and permit a Section 363 sale to proceed will
emphasize the general language to reign in the arguments
advanced by a minority of lenders.252

However, there is another option. In part, courts can
limit the risks outlined above by turning back to the
language of Credit Francais. The analogy of the bank
syndicate to the corporation or partnership carries with it
certain vestiges of the corporate form.253 It would be a non
sequitur to merely suggest that agents of syndications owe a
duty of loyalty to the member lenders.254 More precisely, by
analogizing the syndicate to a "close corporation," four
reasonable fiduciary duties could be found to be owed
between lenders and the agent and among member lenders:
(1) to act with reasonable diligence, care and skill; (2) to act
with good faith in furtherance of each other's interests; (3) to

251 Id. at 316, 319-20 (stating that a secured lender may only waive its
rights to object to a Section 363 sale in a manner that is "clear beyond
peradventure that it has done so," concluding that nothing in the
intercreditor agreement clearly waived such rights on the part of the
second-lien lenders, and citing Section 6.2 of the ABA Model Intercreditor
as exemplary of an express waiver of such rights).

.52 Mark N. Berman & Jo Ann J. Brighton, An Update on Second-Lien
Financings and Intercreditor Agreements: Part II, 30-MAR AM. BANKR.

INST. J. 28, 63 (2011). See also In re Chrysler LLC, 405 B.R. 84 (Bankr.
S.D.N.Y. 2009) (permitting the agent to credit bid over the objection of the
minority faction on the ground that the minority had no standing to
object); In re Gen. Motors Corp., 407 B.R. 463, 496, (Bankr. S.D.N.Y.
2009), cert. denied, 409 B.R. 24, 51, and affd, 430 B.R. 65 (S.D.N.Y. 2010)
(same).

253 This Note does not address in any great detail the adequacy of the
analogy, though it does seem persuasive and courts have used it in the
past. See, e.g., Credit Francais Int'l, S.A. v. Sociedad Financiera de
Comercio, C.A., 490 N.Y.S.2d 670, 682 (N.Y. Sup. Ct. 1985).

254 RESTATEMENT (THIRD) OF AGENCY § 8.1 (2006).

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COLUMBIA BUSINESS LAW REVIEW

disclose fully all relevant business information to one
another; and, perhaps most importantly (4) to refrain from
using their position to gain special advantage over another.25 5

These fiduciary duties would place serious limits on the
ability of a majority faction2 56 to "cram down" a workout plan
that would sell off substantially all of the borrower's assets
at a price that is unresponsive to their fair market values.
Moreover, when the credit-bidding agent is also a first-lien
lender, the agent's actions would constitute a sort of "self-
dealing."257 In syndicated transactions, a fairness standard
could be implemented for "self-interested" transactions and
would require a fair price, benefits for the entire syndicate,
and the "earmarks of an arms length transaction."2 58

Although the agent would not be barred from accepting
collateral in complete or partial satisfaction of the debt, the
transaction would need to pass this stricter "overall fairness"
standard in order to be approved. Finally, this limitation
would be consistent with the Bankruptcy Code, which in
many instances forces the courts to consider what is fair to
all parties involved.259

The next question might be whether bank syndicates
could "opt out" of, or contract around, these fiduciary duties.
In many instances, intercreditor agreements already do; for

25 See Rosenthal v. Rosenthal, 543 A.2d 348, 352 (Me. 1988)
(announcing these four duties in the context of the close corporation); see
also Mary Siegel, Fiduciary Duty Myths in Close Corporate Law, 29 DEL. J.
CoRP. L. 377, 380 (2004) ("Since there are a wide variety of reasons why
statutory or contractual remedies may be ineffective, the extent and
availability of fiduciary obligations provide another source of protection.").

256 This includes the agent as well as the individual lenders within the
majority faction.

257 In most states, actions that constitute corporate "self-dealing" are
subject to even greater scrutiny than normal transactions. See, e.g., Lewis
v. S.L. & E., Inc., 629 F.2d 764, 768 (2d Cir. 1980) (applying an overall
fairness test); Kahn v. Lynch Commc'n Sys. Inc., 638 A.2d 1115 (Del. 1994)
(same).

... See Lewis, 629 F.2d at 772-73 (holding that a transaction is not
fair and reasonable when shareholders use their majority power to pay
unreasonably low rent for the use of a facility at the expense of
shareholders).

251 See supra notes 239-42.

382 [Vol. 2012



example, by explicitly sheltering lenders from any liability
other than that which is expressly provided for therein.26 0

Likewise, although agents clearly owe certain duties to the
syndicate and the member lenders, as outlined above, agent
liability for its actions or omissions is often qualified by gross
negligence or willful misconduct.2 6 '

On the one hand, those who believe in the power of
contract over government mandate (so-called
"contractarians"), view most business enterprises simply as a
nexus of contracts and have, as a result, argued that
corporations and partnerships should be entitled to "opt out"
of the fiduciary duties owed by the entities' agents to the
principals, if such principals so choose.262 By contrast, others
have recognized that business organizations are not simply a
nexus of contracts; they are organizational forms with a set
of state-given benefits that have a dramatic impact on the
everyday lives of citizens of the state.2 63

260 See, e.g., New Bank of New England, N.A. v. Toronto-Dominion
Bank, 768 F. Supp. 1017, 1023 (S.D.N.Y. 1999) (rejecting plaintiffs
negligence and breach of fiduciary duty claims against co-lenders on the
ground that the intercreditor agreement provided that "no creditor 'shall
have any liability ... except as expressly provided herein.'").

261 Id. at 1023 ("As for TD Trust .. . Section 7(a) of the Intercreditor
Agreement provides that the agent 'shall be liable for its own gross
negligence or willful misconduct.'"). In New Bank, because the agent owed
no duty to the plaintiff to declare a default, and owed only a duty to follow
the declarations of the required lenders (which had determined that they
did not want to declare a default), the failure to make such a declaration
did not constitute negligence. We may query, however, whether a similar
result should be reached if the agent's assent is required in order to
achieve the minimum percent ownership threshold under the required
lenders clause.

262 See generally Henry N. Butler & Larry E. Ribstein, Opting Out of
Fiduciary Duties: A Response to the Anti-Contractarians, 65 WASH. L. REV.
1, 71 (1990) (responding to proposals for stronger, mandated fiduciary
duties and concluding that, "[elven where liability rules are appropriate,
they should be regarded as standard form contractual provisions that can
be drafted around").

268 See, e.g., Grant M. Hayden & Matthew T. Bodie, The
Uncorporation and the Unraveling of "Nexus of Contracts" Theory, 109
MICH. L. REV. 1127, 1139 (2011).

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Admittedly, the bank syndicate would not exist but for a
series of contracts (e.g., a complex set of credit documents),"
and sophisticated lenders are arguably in less need of
protection from wayward agents than are corporate
shareholders. Yet, if the recent financial crisis has taught us
anything, it is that the "private ordering" of institutional
lenders and corporate borrowers can have devastating
consequences on the state's citizens.

Although this Note does not attempt to settle the ongoing
debate between these two camps, it does find the
justifications for stronger default fiduciary duties persuasive.
Whether such duties should be mandatory or optional is
beyond the scope of this Note. When determining the
standards by which such agents' action should be judged, the
Restatement of Agency is a nice place to start.2 65 To the
extent that courts have been hesitant to scrutinize the
actions of the lending syndicates' agents, perhaps it is time
to go a step further by imposing duties that resemble those
found in a close corporation and, equally important, actually
holding agents to such standards.

VII. CONCLUSION

The bank syndicate-a group of member lenders devoted
to one another, from their purses to their remedies,
executing singly or together the resolutions formed in
common-must inevitably open themselves a way toward the
object they wish to attain-namely, the assets of the
borrower-however distant or unlikely default may seem at
the outset of the venture. What is truly is astonishing is the
extent to which disagreement arises among member lenders

2 See supra Part II.A (discussing the financial and legal framework
of syndicated credit facilities).

2' See Charles L. Menges, An Agent's Liability to Co-Lenders in
Syndicated Loan Transactions, PROB. & PROP., Feb. 2003, at 45, 46
(adopting the Restatement of Agency approach and finding that as a
fiduciary, an agent is bound to the exercise of the utmost good faith,
loyalty, and honesty toward its principals, the member lenders, to an
extent that is comparable to that of a trustee).

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concerning the proper course of action and the pervasiveness
of litigation surrounding the matter.

And yet, perhaps our duty-bound hero's sense of unity
with his faithful companions is a bit much. 266 After all, it is
only through disagreement, through open confrontation, that
the three Musketeers see the value in joining D'Artagnan
against a common enemy.267 Going it alone, it seems, can be
productive, at least until the others wise up. As a threshold
matter, members of bank syndicates can avoid Lender
Collective Action by anticipating problems early and by
clearly providing solutions for them in the credit documents.
Unfortunately, to err is human. As long as imperfections in
credit documents exist, the courts will be asked to resolve
indefinite language and seemingly contradictory contractual
provisions.

While this Note has not focused on the issue, one might
question why creditors have not reacted in any significant
way to this novel development in New York law.268 Whatever
the reasoning may be for the survival of Lender Collective
Action, it is sufficient for present purposes that the anomaly
presents itself. To the extent that ambiguity truly exists,
Lender Collective Action may be an effective tool for
discerning the a priori intent of the parties and for settling
disputes between the litigants. Indeed, there may be
compelling reasons why the members of a bank syndicate

2" See supra note 1 and accompanying text.
267 See DuMAS, supra note 1, at 91-101.
266 As an illustrative example, consider the credit documents from In

re Metaldyne Corp., 409 B.R. 671 (Bankr. S.D.N.Y. Aug. 12, 2009), which
permitted the agent to credit bid on behalf of the syndicate over the
objection of minority lenders. The applicable language in Metaldyne was
almost identical to that found in the credit documents from In re GWLS
Holdings, Inc., No. 08-12430 (PJW), 2009 WL 453110 (Bankr. D. Del. Feb.
23, 2009). Yet in the nearly seven months between the two cases, none of
the seemingly problematic language in Metaldyne's credit documents was
removed, nor were any express limitations on the agent's ability to credit
bid added. Had either of these occurred, the minority lender in Metaldyne
would not have found itself is such a predicament. As we speak, credit
documents continue to be produced containing language that is
unresponsive to GWLS's holding.

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would prefer limiting the ability each member lender to
wreak havoc upon the borrower by independently exercising
remedies against it.269

But plain language trumps unspoken preference. Courts
must respect the terms of credit documents, even if they do
not agree with the specific outcomes. As a matter of contract
interpretation, courts must preserve traditional remedies at
law.270 When exercising their equitable powers, Bankruptcy
Courts must not abandon the interests of second-lien
creditors by "blindly follow [ing] the hue and cry of the most
vocal special interest groups."271 In a capital market
characterized by volatility, reasonable limitations must be
placed on Lender Collective Action, a doctrine that is often
unsound as a method of contract interpretation.

269 See supra notes 71, 181-83.
270 See Wofford, supra note 186.
271 Comm. of Equity Sec. Holders v. Lionel Corp., 722 F.2d 1063, 1071

(2d Cir. 1983) (reversing the order of the Bankruptcy Court for the
Southern District of New York authorizing the sale of debtor's primary
asset under Section 363 of the Bankruptcy Code on the grounds that the
order failed to adequately consider the diverse interests of the debtor,
creditors, and equity holders, and that the proposed sale was not
sufficiently grounded in an articulated sound business justification).

386 [Vol. 2012