A panel of bankruptcy judges at the recent "Views from the Bench" conference at Georgetown University Law Center say a 2009 case involving a high-end ski lodge has set off a "firestorm" of discussion in the credit world. But, while one frequent NACM contributor notes the appeals process is worthy of watching for developments, he doesn't believe there will be more than a tangential impact.
The panel, including U.S. Bankruptcy Court Judges Hon. Allan Gropper and Hon. Stuart Bernstein, both of Southern District of New York, noted the issue of "savings clauses" has some up in arms that the cost of borrowing could skyrocket following a Florida court's decision. The case in question is Yellowstone Mountain Club LLC and Official Committee of Unsecured Creditors of TOUSA v. Citicorp North America (known as the TOUSA case). The fraudulent transfer and lender liability claims-related case revolved about an ill-conceived joint venture into the high-end housing market near a ski destination right before the real estate crash. It was ruled that a typical savings clause ruled that a because a party (Conveying Subsidiaries) involved in a joint venture with primary owner (Yellowstone Mountain Club) was insolvent before a massive refinancing transaction and received no value from it - Hence, accompanying liabilities were not enforceable.
On top of that, the judge in the case found that the savings clauses weren't enforceable in general because, as noted in materials prepared for the panel for event host the American Bankruptcy Institute, "with multiple savings clauses for multiple obligors, ‘it is utterly impossible to determine the obligations that result from the operation of any particular savings clause...as a matter of contract law, ‘an inherently' indefinite contract term is unenforceable.
While the judges fretted of a likely increase in borrowing costs, Bruce Nathan Esq., of Lowenstien Sandler PC, tells NACM he believes it is much more of a bank issue than a trades issue and that its impact should not be too direct or significant for most small businesses. He characterizes the matter an argument over an onerous provision based on banks trying to make themselves fraudulent conveyance proof.
"There's always reason for concern if credit is more expensive, but I don't think it will have that much of a bearing on trade credit. Trades don't generally have those clauses in our guarantees," said Nathan. He added that, tangentially, marginal customers with bank lines based on guarantees from affiliate entities would be most likely to run the risk of a bank charge increase in the fallout of the decision. "It only affects us to the extent we take from a guaranteed entity. That's always a risk, but that's a risk we all already know about it."
Brian Shappell, NACM staff writer