Arlington LF, LLC v. Arlington Hospitality, Inc.

637 F.3d 706, 2011 U.S. App. LEXIS 4042, 54 Bankr. Ct. Dec. (CRR) 101, 2011 WL 727981
CourtCourt of Appeals for the Seventh Circuit
DecidedMarch 3, 2011
Docket09-3560
StatusPublished
Cited by8 cases

This text of 637 F.3d 706 (Arlington LF, LLC v. Arlington Hospitality, Inc.) is published on Counsel Stack Legal Research, covering Court of Appeals for the Seventh Circuit primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Arlington LF, LLC v. Arlington Hospitality, Inc., 637 F.3d 706, 2011 U.S. App. LEXIS 4042, 54 Bankr. Ct. Dec. (CRR) 101, 2011 WL 727981 (7th Cir. 2011).

Opinion

WILLIAMS, Circuit Judge.

This is a bankruptcy case with a complicated factual and procedural background, but one that boils down to a simple question: who breached the parties’ post-petition financing agreement? Arlington Hospitality, Inc. and its subsidiaries (“Arlington”), operators of the AmeriHost hotel chain, filed for Chapter 11 bankruptcy in August .2005. Arlington needed funds in order to meet its obligations during the pendency of the bankruptcy proceeding, and to that end entered into a post-petition financing agreement on the eve of the bankruptcy filing with Arlington LF, LLC (“LF”), a single-purpose entity that had been created for that purpose. LF lent Arlington $3.53 million under the agreement, but shortly thereafter, relations between the parties soured. LF began to have misgivings about its role as a post-petition lender and signaled that it did not wish to make further loans, while Arlington did not pay certain fees associated with the loan. Shortly thereafter, Arlington’s assets were successfully sold in the bankruptcy proceeding, and Arlington repaid LF the full $3.53 million it had borrowed, with interest. LF, believing it was still owed the additional fees Arlington had not paid, filed a motion in the bankruptcy court to recover them, along with additional default interest. Arlington, believing it had met all of its obligations and owed nothing more to LF, opposed the request. The bankruptcy court held a trial on the matter and ruled in Arlington’s favor, concluding that LF had breached the agreement. The district court reversed and remanded, and the bankruptcy court ruled for LF on the second go-round. The district court again reversed, this time on a different basis, with instructions to the bankruptcy court to rule in Arlington’s favor. LF appeals to us. We conclude that LF repudiated the parties’ agreement, and is not entitled to any additional fees or costs. We affirm.

I. BACKGROUND

Arlington owned or leased thirty-six AmeriHost hotels located primarily throughout the midwestern United States. In order to meet its operating costs during off-seasons, it had for a number of years utilized a revolving line of credit with LaSalle Bank (“LaSalle”), secured by Arlington’s assets. In 2005, Arlington began experiencing some financial difficulties and by that summer it owed approximately $3.5 million to LaSalle on the revolving credit loan and was having difficulty repaying it. That, coupled with litigation it was facing in Texas that had forced a subsidiary into bankruptcy, placed Arlington at serious financial risk. On the advice of an investment banking firm it had retained, Arlington decided that the best plan of action was to file for Chapter 11 bankruptcy and to begin soliciting potential purchasers of its assets and potential lenders to provide financing after a bankruptcy petition had been filed. One interested party was an entity called DH2, Inc. (“DH2”). Arlington and DH2 engaged in discussions about a potential purchase of Arlington’s assets, along with debtor-in-possession (“DIP”) financing during the pendency of the bankruptcy. DH2 had some concerns about the financing, because it had never engaged in DIP lending before, but decided to go forward because it wanted to preserve its ability to poten *709 tially purchase Arlington’s assets. DH2 created a special-purpose entity to transact business with Arlington — Arlington LF, LLC (“LF”) — and hours before Arlington filed its Chapter 11 petition, LF and Arlington signed an agreement called the “Outline of Terms and Conditions for Total DIP Financing Facility” (the “Term Sheet”).

A. The Term Sheet and Interim Order

Pursuant to the Term Sheet, LF agreed to lend Arlington a total of $11 million. The parties referred to this overall amount as the “Total DIP Facility.” The $11 million was divided into three separate parts: a $6 million revolving loan (the “Revolver” or the “Interim DIP Facility”), a $1 million “Term Loan A” that would be available after December 31, 2005, and a $4 million “Term Loan B” intended to fund certain real estate purchases by Arlington. 1 The Term Sheet set forth interest rates for the three loans and provided for a higher rate of default interest in the event that Arlington defaulted. The agreement also set forth various fees associated with the loan that Aldington agreed to pay. Two of these fees were a $100,000 “Total DIP Facility Commitment Fee” (the “Commitment Fee”) and a $210,000 “Total DIP Facility Funding Fee” (the “Funding Fee”). The Term Sheet provided that these two fees were “payable immediately” to LF. The Term Sheet also provided that LF would be entitled to legal fees and other various expenses it incurred in connection with post-petition financing.

The parties submitted the Term Sheet to the Bankruptcy Court for approval on the first day of the bankruptcy proceedings pursuant to 11 U.S.C. §§ 364(c) and (d). The bankruptcy court entered an Interim Order approving the agreement on September 2, 2005, finding that the terms of the DIP financing had been negotiated in good faith and were fair and reasonable. The Interim Order largely adopted the terms of the parties’ Term Sheet, but the two documents were not identical. Notably, while the Term Sheet had provided that Arlington could use the proceeds of the Revolver loan itself to pay the fees it would owe LF, the Interim Order stated that those fees had to be paid with separate funds, not drawn from the Revolver. Like the Term Sheet, the Interim Order provided that the $100,000 Commitment Fee and the $210,000 Funding Fee were “payable immediately” to LF. Other fees, in contrast, were payable “upon invoice” from LF.

Critically, the Interim Order also contained a paragraph requiring that LF give Arlington notice of any default and three business days to cure it (the “Notice Provision”). As the district court put it, the Notice Provision “created a condition precedent which must have occurred before LF stopped dealing with [Arlington].” Due to the Notice Provision, Arlington could not, conceptually, be in breach of the Interim Order until after it had been given notice and opportunity to cure it.

B. LF Indicates It No Longer Wishes to Lend to Arlington

On September 7, five days after entry of the Interim Order, Arlington drew $3.53 million on the Revolver and used it to pay off its obligations to LaSalle. It did not, however, pay either the Commitment Fee or the Funding Fee that were due immediately pursuant to the terms of the Interim Order. Arlington mistakenly believed that those fees were going to be paid through *710 the Revolver draw itself — an assumption likely based on the fact that the parties’ Term Sheet had provided for such an arrangement. LF, for its part, did nothing to seek payment of the two fees. It did not remind Arlington of its obligation to do so, nor did it utilize the Notice Provision procedure set forth in the Interim Order to inform Arlington of the potential default.

In the weeks that followed, the relationship between the parties began to take a downward turn, for reasons having nothing to do with the unpaid fees (it is not clear from the record that the fees were even on LF’s radar screen in September).

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Bluebook (online)
637 F.3d 706, 2011 U.S. App. LEXIS 4042, 54 Bankr. Ct. Dec. (CRR) 101, 2011 WL 727981, Counsel Stack Legal Research, https://law.counselstack.com/opinion/arlington-lf-llc-v-arlington-hospitality-inc-ca7-2011.