Highland Crusader v. Lifecare Holdings Sends Warning about Amending Credit Agreements

Case Summary

Highland Crusader Offshore Partners, L.P. v. Lifecare Holdings, Inc.,
No. CIV.A.3:08-CV-0102-B, 2008 U.S. Dist. LEXIS 20837
(N.D. Tex. August 27, 2008)

This case offers a warning to agents and borrowers that should guide them in the process of amending credit agreements. First, when originally drafting credit agreements, agents and borrowers should be careful not to extend the terms of the credit agreement to amendments of the credit agreement and not to require any notice of offers of amendment fees. Second, agents and borrowers should be cautious when making selective offers of amendment fees to only a portion of lenders.

Facts

The plaintiffs, and several other lenders, loaned money to the defendants under a credit agreement. The defendants sought to amend the credit agreement and offered an enhanced amendment fee to some of the lenders but did not include the plaintiffs. The amendment received the required threshold of lender approval, and the consenting lenders received the enhanced amendment fee. The plaintiffs brought breach of contract and tort claims against the borrower and the agents seeking damages based on the defendants' failure to disclose the enhanced amendment fee. On the defendants' motion to dismiss, the court dismissed the contract claims but not the tort claims.

Breach of Contract Claims

The breach of contract action against the defendants consisted of three claims. The court dismissed all three of the breach of contract claims, based on the provisions of the credit agreement.

First, the plaintiffs claimed the defendants breached the credit agreement by failing to give the plaintiffs notice of the enhanced amendment fee as required by section 9.01¹ of the credit agreement. The court found that section 9.01 only applies to notices provided for by the credit agreement. The credit agreement, however, did not require notice of offers of amendment fees or of negotiations of amendments. Therefore, the defendants did not fail to give any required notice and did not breach this provision. As a result, the court dismissed the plaintiffs' claim for breach of section 9.01.

Second, the plaintiffs claimed the defendants breached the credit agreement by furnishing misleading information to the plaintiffs in connection with the negotiation of the amendment in violation of section 3.12² of the credit agreement. The court found that section 3.12 only applies to information in connection with the negotiation of the credit agreement or any other loan document but not to information in connection with the negotiation of amendments to the credit agreement. Therefore, even if the defendants furnished misleading information, the information was furnished in connection with the negotiation of the amendment of the credit agreement and not the agreement itself. As a result, the defendants did not breach this provision, and the court dismissed the plaintiffs' claim for breach of section 3.12.

Third, the plaintiffs claimed the defendants breached the credit agreement by violating the implied covenant of good faith and fair dealing when the defendants injured the plaintiffs' right to receive the amendment fee. Following precedent, the court found that the implied covenant of good faith and fair dealing cannot create an obligation that is new or inconsistent with other terms in the contract. The credit agreement allows the defendants to deal with less than all of the lenders when amending the credit agreement by requiring only a certain percentage of lender consent. As a result, the addition of an obligation on the defendants' part to negotiate with or notify all lenders of offers of amendment fees would be adding a new and inconsistent term to the credit agreement. Therefore, the court dismissed the plaintiffs' claim for breach of the express and implied covenants of good faith and fair dealing.

Tort Claims

The plaintiffs also brought tort action claims of fraud and negligent misrepresentation against the defendants. The court did not dismiss these tort claims.

First, the plaintiffs claimed the defendants committed fraud by failing to disclose the enhanced amendment fee.  The court found that there are four situations under Texas law, which is similar to the law in other states, in which a duty to disclose may arise: (1) when a fiduciary or confidential relationship exists; (2) when a voluntary disclosure is made; (3) when new information makes an earlier disclosure untrue or misleading; and (4) when a partial disclosure conveys a false impression. Since the plaintiffs offered arguments based on the later three situations, the court found that the plaintiffs sufficiently alleged the existence of defendants' duty to disclose. As a result, the court did not dismiss the plaintiffs' fraud claim.

Second, the plaintiffs claimed the defendants committed negligent misrepresentation by failing to disclose the enhanced amendment fee. The court again found that a duty to disclose can arise without a fiduciary or confidential relationship. In addition, the court found that a negligent misrepresentation claim must include an injury independent of damages for a breach of contract claim. Since the defendants did not breach the credit agreement and the credit agreement does not provide for a right to an amendment fee, the court found that the plaintiffs' injury for the negligent misrepresentation claim did not arise from the credit agreement and was independent of the dismissed breach of contract claim. Therefore, the court did not dismiss the plaintiffs' negligent misrepresentation claim.

²Section 3.12 provides: "Neither the Information Memorandum nor any of the other written reports, . . . in connection with the negotiation of this Agreement or any other Loan Document . . . contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading . . . ."