The following is a case update prepared by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, analyzing a recent decision of interest:
A district court in Illinois has held that although the interest rate in a commercial note was tied to the original lender’s internal index, an assignee of that note acquired the failed lender’s power to set the index. [Knezovic vs. Urban Partnership Bank, 2018 Westlaw 3022680 (N.D. Ill.).]
FACTS: A commercial borrower executed a promissory note. The variable interest rate was keyed to an index based on the lender’s “internal commercial lending rate” for similar transactions, which was to be set by the lender in its sole discretion. The note provided that “[i]f the Index becomes unavailable . . . , Lender may designate a substitute index . . . .”
After the lender failed, the FDIC assigned the loan to an assignee. Several years later, the borrower filed a Chapter 11 petition. He filed an adversary proceeding against the assignee, claiming that when the original lender failed, its interest-rate index became “unavailable.” Thus, the assignee should have charged interest rates in line with the prevailing national rates. The bankruptcy court granted summary judgment in favor of the assignee, and the district court affirmed.
REASONING: The court held that the index in question never became “unavailable” because the assignee acquired all of the original lender’s rights and powers:
The idea that the Index could not be transferred along with the Note belies common sense and the plain terms of the agreement itself; if merely naming the original lender in a note meant that the parties could not assign the powers and interests enshrined in that instrument, basic commercial transactions would collapse.
AUTHOR’S COMMENT: This is the right result, but it appears that better drafting might have prevented the borrower from raising this argument at all. The court did not discuss the scope of the note’s definition of the word “Lender.” This odd silence leads me to believe that the documents did not expressly deal with the issue of a potential assignee’s rights. The drafting lesson is clear: make sure that the documents (1) define “Lender” to include all assignees and (2) provide that all assignees will succeed to all rights of the original lender.
These materials were written by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, for his Commercial Finance Newsletter, published weekly on Westlaw. Westlaw holds the copyright on these materials and has permitted the Insolvency Law Committee to reprint them