Otterbourg Prevails in Action on Capital Call Agreement
July 22, 2011
In a recent decision by the New York Supreme Court, Commercial Division, Otterbourg, representing the plaintiff, a commercial lender, won complete summary judgment in favor of its client in an action brought against the principal of a defaulting borrower for failing to fulfill his obligations under a capital call agreement in which the principal agreed to be personally liable for a portion of his company’s debt to the plaintiff.
In awarding the lender the full amount sought in the summary judgment motion, the Court rejected the defendant’s primary defense that two contributions he made to the defaulting borrower prior to a formal written demand by the lender pursuant to the terms of the capital call agreement entitled him to a reduction of his maximum liability under the agreement.
The Court ruled that the defendant’s other defenses failed as well. These defenses included (i) an alleged failure by the lender to dispose of other collateral in a commercially reasonable manner prior to imposing liability on the defendant, (ii) an alleged failure by the lender to issue a demand as required by the capital call agreement that accurately reflected the amount of the outstanding debt under the loan agreement and liability under the capital call agreement, and (iii) breaches by the lender of the underlying loan agreement by failing to adequately fund the borrower.
According to the Court’s decision, such defenses were untenable because they were either expressly barred by the capital call agreement and/or because the defendant lacked standing to assert defenses that belonged to the primary obligor (the borrower).
Finally, the Court awarded Otterbourg’s client its attorneys’ fees incurred in connection with the action. The defendant had argued against such an award because the capital call agreement itself did not contain an attorneys’ fees provision, and the defendant had previously refused to sign a form of personal guarantee that did contain an attorneys’ fee provision. However, the Court ruled that Otterbourg’s client was entitled to recover its attorneys’ fees because the loan agreement underlying the capital call agreement provided that attorneys’ fees incurred by the plaintiff in relation to the loan were part of the debt for which the defendant had agreed to be liable.
The Court's decision can be found here.