Arlington LF, LLC v. Arlington Hospitality, Inc.

Summarized by Allen Guon , Cozen O'Connor
14 years 12 months ago

Citation:

No. 09-3560 (7th Cir. March 3, 2011)

Tag(s):

7th Circuit

Ruling:

Lender’s stated unwillingness to continue lending under a DIP loan agreement constituted a repudiation of the agreement and relieved the debtor of any obligation to pay additional fees and default interest.

Procedural context:

Appeal from the district court's reversal of the bankruptcy court's decision granting judgment in favor of the lender on the lender's motion for payment of fees, along with default interest, pursuant to 11 U.S.C. §§ 364(c)(1) and 503(b).

Facts:

The bankruptcy court approved a DIP loan agreement with a lender that also had an interest in purchasing the debtor’s assets. The DIP loan provided for the immediate payment of commitment and funding fees to the lender. The DIP loan also required that the lender give the debtor notice of any default and opportunity to cure. The debtor promptly borrowed on DIP loan, but did not pay the commitment fee or the funding fee. The lender’s and the debtor’s relationship soured after the parties were unable to negotiate the terms of an asset purchase agreement. The lender then indicated its unwillingness to advance any more funds under the DIP loan. Shortly thereafter, the lender declared the debtor to be in default for failing to pay the fees plus other amounts due. The debtor’s assets were later sold to a third party and the debtor paid the principal and interest due under DIP loan. The lender then sought payment of the additional fees and default interest. The Seventh Circuit held that under Illinois law the lender repudiated the DIP loan by stating an unwillingness to further lend under the agreement. While acknowledging that a repudiation can be retracted, the court rejected the lender’s argument that it subsequently made a sufficiently clear statement of a continued willingness to lend that effectively retracted the repudiation. The court also rejected the lender’s argument that the debtor could not assert an anticipatory repudiation because the debtor incurred no detriment or changed its position as a result of any breach. At the moment the lender repudiated, court held that the debtor was entitled to treat the agreement as having ended and was no longer obligated to perform. Therefore, the debtor was discharged from all of its remaining duties under the DIP loan and the lender was not entitled to any additional fees or default interest. Affirmed.

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