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Violation of Intercreditor Agreement Costs Senior Lender its Priority

Violation of Intercreditor Agreement Costs Senior Lender its Priority

An Illinois Appellate Court recently held that a senior lender that violated the terms of an intercreditor agreement partially relinquished its priority in collateral securing its loan. In Bowling Green Sports Center, Inc. v. G.A.G. LLC, 2017 IL App (2d) 160656, G.A.G. LLC financed the purchase of a bowling alley with loans from Gold Coast Bank and Bowling Green Sports Center, Inc. Gold Coast lent GAG $3.4 million and Bowling Green lent $405,000. Gold Coast and Bowling Green entered into an intercreditor agreement pursuant to which Gold Coast agreed not to amend or modify its loan to GAG without the consent of Bowling Green. In exchange, Bowling Green agreed not to pursue collection of its debt until Gold Coast was paid in full. Despite the agreement, Gold Coast subsequently increased its loan to GAG by $51,000 without notifying Bowling Green. Later, Bowling Green sued GAG to collect its debt and Gold Coast intervened, asserting that the complaint should be dismissed because the intercreditor agreement prohibited Bowling Green from pursuing its claims against GAG until the Gold Coast debt was paid in full.

The trial court agreed and held that Bowling Green’s complaint was premature and could not be brought until Gold Coast’s debt was repaid. On appeal, the appellate court affirmed the lower court’s ruling, but with the modification that the complaint was premature only until the amount of Gold Coast’s debt equaled $51,000. In support of its holding, the court cited numerous cases and the Restatement (Third) of Property for the proposition that a senior lender’s failure to obtain a junior lender’s consent results in a modification of the underlying loan documents being ineffective as to the junior lender and the senior lender relinquishing to the junior lender its priority with respect to the modified terms. The court did not, however, agree with Bowling Green’s assertion that Gold Coast should entirely forfeit its lien priority, as the additional $51,000 loan by Gold Coast "did not substantially impair Bowling Green’s security interest and rights as a junior lienholder."

The case is a reminder of the importance of carefully drafting intercreditor agreements and, more importantly, adhering to their terms.

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