New Jersey Federal District Court Ruling Tests Provisions in Senior Lender's Subordination Agreement
In a January 2023 unpublished opinion of the New Jersey Federal District Court in the case of Bank Leumi v. Edward J. Kloss and Kloss Company LLC (d/b/a Crib & Teen City), the Court was asked to interpret the remedies available to a senior lender against a junior creditor under a debt subordination agreement in a commercial loan transaction as a consequence of a breach of agreement by the junior creditor. In denying the senior lender’s attempts to seek certain monetary recoveries against the junior creditor, the Court focused on the rights granted in the remedies section and concluded that the sole remedy available to the senior lender would be the acceleration of the underlying senior bank debt.
The Court was disinclined to go beyond the plain meaning of a narrowly drawn remedies provision in the subordination agreement. The subordination agreement in question limited the senior lender's remedies as a consequence of a breach by either the borrower or the junior creditor to the acceleration of the underlying senior debt. Applying the plain meaning standard, the Court concluded that acceleration was the only remedy available to the senior lender and denied the senior lender's attempts to pursue other remedies against the junior creditor that would otherwise be available at law or in equity.
As a result of this case, it would be prudent for a senior lender to review its standard subordination agreement and ensure that a robust set of remedial provisions are available to the senior lender against its borrower and the junior creditor.