Avenue Clo IV, LTD. v. Bank of America, NA
2013 U.S. App. LEXIS 15311
| 11th Cir. | 2013Background
- Fontainebleau Las Vegas was a large hotel/casino development financed in part by a $1.85 billion Senior Credit Facility; Bank of America served as Administrative/Disbursement Agent for periodic advances.
- Under the Disbursement Agreement, Borrowers submitted Advance Requests with certifications; §9.3.2 allowed the Disbursement Agent to rely on those certifications and stated the agent was not required to conduct independent investigations.
- From Sept. 2008–Mar. 2009 Bank of America continued disbursing funds after receiving certifications; multiple adverse events occurred in that period (Lehman bankruptcy, FDIC repudiation of First National Bank of Nevada commitments, Construction Consultant reports of cost overruns, several lenders’ failures to fund).
- Term Lenders sued, alleging Bank of America breached the Disbursement Agreement by disbursing funds despite knowledge (or willful blindness) that various conditions precedent had failed, and that the bank was grossly negligent/bad faith.
- The district court granted summary judgment for Bank of America, holding the bank was entitled to rely on Borrower certifications and that Term Lenders failed to show actual knowledge or gross negligence.
- The Eleventh Circuit affirmed in part, reversed in part, and remanded: it held the Agreement permitted reliance on certifications absent actual knowledge to the contrary, but found genuine issues of material fact existed about whether Bank of America had actual knowledge of failures of several conditions precedent and whether its conduct could amount to gross negligence.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Scope of Disbursement Agent's duty to investigate conditions precedent | Bank (Disbursement Agent) had an affirmative duty to verify conditions precedent and inquire where information suggested problems | §9.3.2 expressly permits reliance on Borrower certifications and disclaims any duty to conduct independent investigation | Court: §9.3.2 permits reliance on certifications; no affirmative duty to investigate absent actual knowledge or absence of a certification |
| Whether Bank breached by disbursing despite actual knowledge of failed conditions | Term Lenders: circumstantial evidence (letters, meetings, consultant reports, lender failures) creates a triable issue that Bank had actual knowledge that several §3.3 conditions failed | Bank: no proof of actual knowledge; facts, even if concerning, were insufficient as a matter of law to show knowledge or breach | Court: reversed district court — genuine issues of material fact exist on whether Bank had actual knowledge as to multiple conditions (Lehman funding, lender repudiations/failures, cost overruns) |
| Materiality / whether adverse events could cause a Material Adverse Effect | Term Lenders: the interlocking financing meant lender failures and cost overruns could reasonably be expected to have a Material Adverse Effect | Bank: individual shortfalls were immaterial as a matter of law and did not show likely Material Adverse Effect | Court: materiality is a mixed question for the trier of fact; evidence raises triable issues when considered cumulatively |
| Gross negligence / bad faith standard and applicability | Term Lenders: cumulative disbursements despite knowledge (or reckless disregard) could constitute gross negligence | Bank: contractual limitation (§9.10) caps liability absent bad faith, fraud, gross negligence, or willful misconduct; no such evidence as matter of law | Court: gross negligence is generally for the finder of fact; genuine factual disputes prevent summary judgment on gross negligence |
Key Cases Cited
- Anderson v. Liberty Lobby, 466 U.S. 242 (summary judgment standard) (establishes genuine issue/jury standard for disputed facts)
- Alexander & Alexander Servs., Inc. v. These Certain Underwriters at Lloyd’s, London, 136 F.3d 82 (contract interpretation under New York law is a question for the court)
- Greenfield v. Phillies Records, Inc., 780 N.E.2d 166 (N.Y. 2002) (clear contract language must be enforced according to plain meaning)
- Colnaghi, U.S.A., Ltd. v. Jewelers Protection Servs., Ltd., 81 N.Y.2d 821 (N.Y. 1993) (definition and standard for gross negligence under New York law)
- Food Pageant, Inc. v. Consolidated Edison Co., Inc., 54 N.Y.2d 167 (N.Y. 1981) (gross negligence usually a question for the jury)
- Lucas v. Fla. Power & Light Co., 765 F.2d 1039 (materiality often a mixed question of law and fact for the trier of fact)
- Santos v. United States, 553 U.S. 507 (knowledge may be proved circumstantially)