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Suit Between Soccer Club Creditors Advances

(CN) - A state appellate court in New York refused to dismiss a suit between two lenders that helped bankroll the controversial purchase of a professional soccer team in England by two Americans who later defaulted on the loans.

A unanimous five-judge panel of the New York Appellate Division's First Department ruled that Mill Financial LLC, one of three financial institutions that financed the acquisition of the Liverpool Football Club of the English Premier League, has a viable breach of contract claim against another of the creditors, the Royal Bank of Scotland.

The suit alleges RBS violated an agreement among the three lenders' by making repayment arrangements with the debtors on terms that favored the bank without giving notice to Mill Financial.

RBS, Mill Financial and Wells Fargo extended more than $400 million in loans to the individuals and business entities that purchased the soccer club in 2007. The purchasers included Kop Football Holdings Ltd. and several of its subsidiaries, as well as George Gillett and Tom Hicks, who have had ownership interests in a wide array of other businesses including the Texas Rangers baseball team and the Vail ski resort.

Gillett and Hicks were reviled by fans of the Liverpool team, who accused the businessmen of draining assets from the club and failing to make promised investments in players and a new stadium. Their interests were sold by the team's creditors, against their will, in 2010, at a reported loss to them of more than $150 million. A tangle of litigation among multiple parties has ensued.

Soon after extending loans in separate deals, the three creditors that funded the club's acquisition entered into a Tri-Party Agreement to memorialize and protect their rights with security interests in the club. That agreement required each lender to give notice to the others whenever they made any demands on the borrowers or commenced any actions to enforce their loans.

The borrowers soon began having trouble making payments on the loans, and in August of 2010, Gillett Football LLC, the entity formed by Gillett and Hicks to manage their interest in the soccer club, defaulted on its loan from Mill Financial.

The company initially filed suit against its guarantors, namely Gillett Football, but later added RBS as a defendant. RBS had repeatedly agreed to extend repayment dates for its loans, and in return, negotiated side agreements that gave it the right to approve the chairman of one of the club's parent companies. At the behest of RBS, the club ultimately agreed to sell all of its shares in a company that constituted Mill Financial's collateral for its loan.

According to Justice Dianne T. Renwick, who wrote the decision, the suit against RBS alleges that the bank "breached the Tri-Party Agreement by taking control of the Club's board of directors via the side letters, without first providing written notice to Mill Financial."

After taking control of the club's board, RBS is also accused of pushing for the sale of the club to New England Sports Ventures for a low price that was sufficient to cover only RBS's share of the total debt. Mill Financial alleges that RBS failed to give notice to the other creditors when it entered into the side agreements, in clear violation of the agreement among the three creditors.

The appellate panel agreed, finding Mill Financial had stated a cause of action for breach of contract.

"The motion court correctly concluded that the plain language of the Tri-Party Agreement required defendant RBS to give notice to Mill Financial of its demand that Mill Financial's collateral be sold, in exchange for forbearance from immediate default under the RBS Credit Agreement," Renwick wrote.

RBS asserted that those steps did not constitute formal enforcement actions and thus, no notice was required. But Renwick declared, "RBS, a sophisticated party making a loan of approximately a half billion dollars, failed to limit the notice language to only 'formal' enforcement actions."

During the course of litigation, Mill Financial discovered that in fact it had received copies of the proposed side letters and two of the forbearance agreements in which RBS extended the due dates for payments. However, Mill Financial told the court that Gillett had given it the documents, not RBS. Mill Valley received other documents pertaining to RBS's negotiations with the club either immediately before or immediately after they were signed.

The appellate panel affirmed a lower court ruling that Mill Financial did not waive any of its claims simply because it had received copies of some of the letters that RBS sent to the club outlining the concessions it demanded in return for extending the payment dates.

But the panel did agree with RBS on one point: Mill Financial's claim for breach of the covenant of good faith and fair dealing should have been dismissed because it is based on the same facts and seeks the same damages as the breach of contract claim, Renwick said.

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