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Goodbye Ruby Tuesday: Sixth Circuit Upholds a Lender’s Right to Veto Ruby Tuesday’s Attempted Property SaleApril 4, 2023
We’ll Start (Me) Up this alert with a question we regularly get from our clients: how far can a lender go in enforcing loan agreements against defaulted borrowers (see, for example, our January 26, 2022 alert Bankruptcy Court Ruling Imposes Lender Liability). While lenders sometimes (Can’t Get No) Satisfaction, courts generally grant them very broad discretion to enforce remedies or exercise contractual rights, even where it may harm a borrower. On March 29, 2023, the Sixth Circuit continued that trend, upholding a district court’s dismissal of a lawsuit against Goldman Sachs, in which real estate developer BNA Associates alleged that the court should have no Sympathy for the Devil, because Goldman Sachs had improperly refused to consent to Ruby Tuesday’s attempted sale of a lease to BNA (no word on whether Goldman wanted to Paint It Black). The court was unfazed by Goldman Sachs’ seemingly hardball tactics to veto the sale despite being offered the full value of the lease, and emphasized the rights of lenders to rely upon the powers afforded to them under their contracts to engage in fair competition. The decision is a reminder that while You Can’t Always Get What You Want, courts give lenders wide latitude when enforcing their bargained-for contractual rights.
Facing financial strain, Ruby Tuesday determined to sell its interest in a mansion that it leased in Maryville, Tennessee, to real estate developer BNA Associates. Three years earlier, Ruby Tuesday had borrowed money from Goldman Sachs, and under its credit agreement, Ruby Tuesday needed consent from Goldman Sachs to sell its interest in the Maryvillle property. The condition was included in BNA’s purchase and sale agreement with Ruby Tuesday, which stated in capitalized letters and bold font, that Ruby Tuesday “MUST OBTAIN APPROVAL FROM [GOLDMAN SACHS] FOR THE TRANSACTION”. Goldman Sachs refused to approve the sale of the lease, and BNA filed suit against Goldman Sachs for intentional interference with business relations under Tennessee law.
BNA argued that Goldman Sachs had acted improperly by withholding consent, because it was not harmed by the proposed sale since the transaction would have paid off Goldman Sachs’ debt in full. But, BNA argued, Goldman Sachs knew that Ruby Tuesday would be filing for bankruptcy and wanted to take the benefit of the lease for itself. BNA reasoned that tort law should protect third parties’ reasonable expectations of how secured lenders should act, and that it was “not normal and unexpected” for secure lenders to “maneuver the situation to take an opportunity for themselves.”
The district court and the US Court of Appeals for the Sixth Circuit categorically disagreed, both emphasizing lenders’ rights to reasonably take advantage of bargained-for contractual provisions, even for their own benefit at their borrower’s expense. The district court explained that Goldman Sachs’ interest in either maintaining the status quo or obtaining the lease for itself was “well within Goldman’s rights as a secured lender” under the credit agreement, and contrasted Goldman Sachs’ behavior with other conduct that Tennessee courts have found to meet the standard of establishing interference with a business relationship, including a case where a third party defamed a competitor by telling others that the competitor “was in the mob, cheated his customers, slept with his employees, and was having financial difficulties.” The Sixth Circuit agreed and affirmed the dismissal of the case, reasoning that the tort “should not be interpreted in such a way as to prohibit or undermine the ability to contract freely and engage in competition,” noting that Goldman Sachs was “perhaps playing hardball,” but “[a]ny rational actor would likely have done the same, were it in their perceived best interest.”
While the courts’ emphasis on parties’ reasonable expectations under the plain language of their agreements is hardly treading new ground, the decision furthers a growing trend in pushing back on claims against lenders for availing themselves of their contractual rights even as a part of self-serving negotiating tactics. Courts seem uninclined to permit claims that would chill lenders’ reasonable right to use their bargained-for rights in lending agreements to their own benefit. Apparently, you can be a Street Fightin’ Man if you bargained for that right.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Daniel S. Shamah, an O’Melveny partner licensed to practice law in New York and Lauren M. Wagner, an O’Melveny Counsel licensed to practice law in New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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