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CARES Act Loans and SPE Borrowers Locke Lord LLP

By on March 23, 2021 0

SPE borrowers should carefully review their existing loan documents when considering loans under the CARES Act in order to relieve liquidity pressures. Existing loans may contain SPE covenants or other provisions that limit additional indebtedness, trigger recourse, or create defaults if additional indebtedness is incurred or if statements are made that a party is unable to pay its debts to. their deadline. A PPP loan or an economic disaster loan can violate these SPE commitments and / or potentially trigger unexpected partial or total recourse liability from unwary guarantors.

Most SPE covenants limit additional indebtedness to commercial debt not exceeding about 3% of the original loan amount, prohibit this debt from being evidenced by a note, and require that it be repaid within 60 to 90 days. The organizational documents of an SPE borrower usually contain similar restrictions and SPE covenants generally require strict adherence to organizational documents. In addition, non-recourse exclusions often make guarantors personally liable for violations of the SPE’s covenants and, in the case of subordinate financing, the full amount of senior debt.

Many loan agreements treat written statements that a borrower is unable to pay debts as they come due as a trigger for default and / or recourse. Guarantees with recourse often treat these statements as full recourse which makes the guarantor personally liable for the full amount of the loan.

A written request for loan modification or forbearance indicating that such relief is necessary because the income is not sufficient to pay the existing principal or interest could constitute such admission. A recent case in New York suggests that such a statement could become a source of guarantor liability.

In DB Zwirn Special Opportunities Fund, LP c. SCC Acquistions, Inc., 74 AD 3d 530, 902 NYS 2d 93 (NY – 1st Dept. 2010) a lender claimed that financial reports showing that a borrower’s liabilities far exceeded its assets were in fact a written admission that the borrower was unable to pay his debts as they became due and triggered a personal remedy for the guarantor. The borrower provided the financial information to the lender along with a request to restructure the loan. The Court concluded that the mere fact of sending financial information to a lender showing financial difficulty, without an express declaration of the borrower’s inability to pay his debts, was not an admission which satisfied the provision. on elastic recourse. However, if the borrower had made such a statement in a cover letter, the court essentially said that would have triggered the full remedy provisions and resulted in the personal liability of the guarantor.

Most courts strictly interpret non-recourse exclusions. In the case of additional debt, the recourse guarantors were held personally liable for the full amount of the senior debt, even when the junior debt was repaid and the associated lien waived before the senior lender had even had it. awareness. (See CSFB 2001-CP-4 Princeton Park Corporate Center, LLC v. SB Rental 1, LLC, 980 A. 2d 1 (NJ Super. Ct. App. Div. 2009)).

When considering a loan under the CARES Act, borrowers subject to SPE requirements and non-recourse exclusions should consider not only the applicable SPE clauses, but all related non-recourse exclusions as well. The definitions of “authorized indebtedness” should also be reviewed. We can help you review your current loan documents.

Ideally, any principal lender agreement to a CARES Act loan would state that this debt, and any claim or documentation submitted in this regard, will not be considered a default or violation of an SPE commitment or organizational document from the Lender. borrower, or will by itself trigger any personal recourse liability on the part of a guarantor.