Lakeside Inn, Inc. v. the Bank of the West
3:14-cv-00473
D. Nev.Mar 25, 2015Background
- Lakeside Inn (the Casino) borrowed under a $6.5M Term Loan Agreement (TLA) and a $1M revolving credit (RELOC); both secured by real and personal property and guaranteed by third parties. The TLA used a LIBOR-based variable rate; the parties also executed a separate February 24, 2009 ISDA Master Agreement (Swap) that the Casino expected would fix economics at 6% via swap payments.
- The RELOC was later amended and extended; the parties dispute alleged breaches of financial covenants (non-monetary defaults) tied to collateral-value and financial ratios. Casino never missed payments and contends debt is fully secured.
- Bank issued written notices of default in May 2014 asserting non-monetary covenant breaches; negotiations followed, including discussions about payoff and default interest, and disputed statements that the Swap had been sold.
- Casino sued for declaratory relief (seeking rulings on foreclosure/sale rights, enforcement against personalty, enforceability of a default-interest clause, Swap effects, and validity/effect of any Swap transfer); Bank removed under diversity and moved for summary judgment.
- Court found the disputed questions are legal (contract interpretation under Nevada law), denied Casino’s request for further discovery, and granted summary judgment to Bank, entering multiple declaratory rulings while declining to decide factual questions about whether defaults actually occurred or whether the debt is currently fully secured.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| May bank foreclose/sell collateral based on non-monetary covenant breach even if debt is fully secured? | Manke requires that foreclosure is improper absent monetary default when debt is fully secured. | Parties contractually agreed events of default include non-monetary covenant breaches; remedies permit foreclosure/sale. | Bank may foreclose/sell on breach of monetary or non-monetary covenants regardless of whether debt remains fully secured. |
| May bank enforce security agreement against personal property absent monetary default? | Personalty enforcement should be limited when debt is fully secured (implicit Manke-based claim). | SA/TLA permit enforcement against personal property upon events of default; Nevada law and instruments allow agreed remedies. | Bank may enforce SA against personal property after a non-monetary default regardless of adequacy of security. |
| Is the TLA §2.3 default-interest provision an unenforceable penalty (liquidated-damages)? | The default-rate should be treated as an unenforceable penalty if unreasonable. | The 5% default-interest is a reasonable estimate of lender damages and not penal. | §2.3 is not an unenforceable penalty; default interest is reasonable under Nevada law. |
| Does the February 24, 2009 Swap Agreement fix the TLA/RELOC interest rates or obviate §2.3? | Swap imposes a fixed 6% rate on TLA, so default rate cannot apply. | ISDA Swap is a separate derivatives contract that does not govern the loan documents. | Swap Agreement does not directly affect or govern interest under the TLA/RELOC; it does not obviate §2.3. |
| Would an attempted transfer of Bank’s Swap interest without Casino’s consent be valid/breach? | Any sale/transfer of the Swap without consent would violate the Swap and be a breach. | Bank denies transfer; if transfer occurs without consent it is void under swap terms. | Any transfer of Bank’s Swap interest without Casino’s written consent (and not within specified exceptions) is void but is a nullity—not a contract breach under the Swap’s terms. |
Key Cases Cited
- Anderson v. Liberty Lobby, 477 U.S. 242 (summary-judgment standard on genuine dispute)
- Celotex Corp. v. Catrett, 477 U.S. 317 (summary-judgment burden-shifting principles)
- Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (nonmoving party must show a genuine factual dispute)
- T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass’n, 809 F.2d 626 (what factual showing avoids summary judgment)
- Taylor v. List, 880 F.2d 1040 (conclusory allegations insufficient to avoid summary judgment)
- C.A.R. Transp. Brokerage Co. v. Darden Rests., Inc., 213 F.3d 474 (movant-with-trial-burden summary-judgment proof standard)
- Manke v. Prautsch, 401 P.2d 680 (Nev. 1965) (mortgagee bore burden to prove covenant breach in injunction action—distinguishable)
- Mason v. Fakhimi, 865 P.2d 333 (Nev. 1993) (reasonableness of liquidated-damages estimates under Nevada law)
- Thrifty Oil Co. v. Bank of Am., 310 F.3d 1188 (characterization of interest-rate swaps and swap mechanics)