Mon 08/10/2020 15:13 PM
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Steak ’n Shake last week filed a complaint in the U.S. District Court for the Southern District of New York against Wilmington Trust as administrative and collateral agent under the company’s credit agreement, seeking a declaration that Steak ’n Shake has the authority under the agreement to sell up to $50 million of real property and that “upon doing so, Wilmington is obligated to release its security interest in those properties.” According to the complaint, however, Wilmington has “refused to release its security interest in the real estate the Company sells, and in doing so has willfully breached its obligations under the Credit Agreement.”

“Wilmington’s refusal to comply with its contractual obligations has already caused the Company significant harm, and will continue to do so absent the Court’s intervention,” the complaint states, adding that “[t]he longer Wilmington persists in failing to abide by the express terms of the Credit Agreement, the more time and opportunity slips away for the Company to sell the properties at what it had determined is an opportune time.”

Specifically, Steak ’n Shake says it is seeking to sell between $6.225 million and $9.225 million of its property and to date has sold assets pursuant to the asset sale provisions in the credit agreement with proceeds totaling $7.7 million. Despite operating within the bounds of the document and being “fully transparent with Wilmington and the Lenders regarding its proposed sale of these properties,” the complaint says, Wilmington has only “delayed and interfered with Steak n Shake’s efforts at every turn by issuing onerous requests for information that is either irrelevant, or that the Company has no obligation to provide - and that Wilmington had no right to demand.”

There have been repeated requests and letters from the company requesting the release of collateral, the complaint says, and Wilmington responded in a letter dated July 31, asserting that “Wilmington’s obligation to release the collateral is subject to the Company having ‘previously provided to [Wilmington] such certifications or documents as [it] shall reasonably request in order to demonstrate compliance with this Section 6.06.’ In support of this position, Wilmington relied upon the language in the final paragraph of Section 6.06,” which the company argues is incorrect.

Under section 6.06(b) of the credit agreement, which governs asset sales, the complaint states, Steak ’n Shake is permitted to sell real and other property provided that:
  • “(i) the aggregate consideration received in respect of all dispositions of property pursuant to this clause [does] not exceed $50,000,000 during the term of this Agreement,
  • “(ii) such dispositions of property are made for Fair Market Value and on an arms-length commercial basis,
  • “(iii) at least 80% of the consideration payable in respect of such disposition of property is in the form of cash or Cash Equivalents, and
  • “(iv) [Steak ’n Shake] uses the proceeds of the disposition to prepay the Loans as and to the extent required by Section 2.10(c).”

Section 2.10(c) referenced above provides that Steak n Shake is not required to use asset sale proceeds to prepay the loan and may reinvest those proceeds within 360 days, so long as doing so would not cause an event of default and no default exists.

Accordingly, Steak ’n Shake argues, “Under these conditions, Wilmington must release any security interest it has in the property the Company sells: Section 9.14(c)(i) provides that Wilmington ‘shall ... take such actions as shall be required to release its security interest in any Collateral subject to any disposition permitted by the Loan Documents [which includes the Credit Agreement].’ In other words, so long as the conditions set forth in Section 6.06(b) are met, Wilmington must release any security interest it has in the Steak n Shake assets that are being disposed of. This provision is non-discretionary.”

According to the complaint, Wilmington conflates two separate concepts in the credit agreement: “Wilmington’s obligation to release the Collateral in Section 9.14(c)(i), and the receipt of information referenced in the final paragraph of Section 6.06.” Steak ’n Shake argues, however, that the two sections are in no way related to one another: “they are independent terms found in separate parts of the contract. Section 9.14(c)(i) is unequivocal, non-discretionary, and provides that when 6.06(b) is satisfied, Wilmington must ‘release its security interest in any Collateral.’ This obligation is not conditioned on its right to receive information.”

Steak ’n Shake is therefore seeking a declaratory judgment that its real estate sales are “expressly permitted by and comply with the terms of the Credit Agreement in all respects, that Wilmington must release any collateral it holds over the property Steak ’n Shake sells, that in refusing to release the collateral Wilmington has engaged in willful misconduct and acted in bad faith, and that Wilmington must comply with all of its other obligations set forth in the Credit Agreement.”

A list of Steak ’n Shake properties to be sold, attached as an exhibit to the complaint, is reproduced below:

Plaintiff Steak ’n Shake is represented by Latham & Watkins, and the case has been initially assigned to Judge Lewis J. Liman. According to the docket, the designated magistrate judge for the case is Judge Stewart Aaron.
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