Breaches Of Non-Monetary Provisions Of Credit Agreement Are Material

On January 26, 2024, Justice Melissa A. Crane granted plaintiffs’ motion for summary judgment regarding, inter alia, their breach of contract claim. The decision in Regions Bank v. VativoRX, LLC, Index No. 654741/20229, rejected defendant’s argument that the breach of certain terms in the credit agreement at issue requiring the provision of annual audited financial statements, along with related certifications and accompany documentation, and the transfer of accounts to plaintiffs were not material breaches. The Court disagreed:

Finally, Defendant argues that Plaintiffs are not entitled to the remedy of acceleration because Defendant's breaches were not material. Defendant contends that the Audit Breach is not material because it does not involve a breach of Defendant's primary financial obligations to repay the loan. Defendant further contends that the account breach is not material because it performed the essential part of the bargain, i.e. it made payments. Moreover, Defendant did eventually move their bank accounts over to Regions, albeit grudgingly and pursuant to court order.

However, the court rejects Defendant's arguments. The breaches were clearly material. A breach is considered material if it is "substantial enough to defeat the parties' objectives in making the contract" (Alberts v CSTV Networks, Inc., 96 AD3d 447, 447 [1st Dept 2012]). Defendant's argument ignores the purpose of Section 7.1 (b) and Section 7.12( d)(i) in the context of the underlying credit facility and Credit Agreement. The requirements to provide audited financial statements and implement Account Control Agreements protected the lenders by giving visibility into the borrower's financial condition and permitting the lender to exercise remedies as quickly as possible in the event of a downturn in the borrower's business.

Defendant's failure to meet those obligations under the Credit Agreement significantly undermined Plaintiffs' security. Plaintiffs required audited financial statements without a qualification as to Defendant's ability to continue as a going concern to ensure that Defendant could meet its financial obligations under the Credit Agreement. Defendant's inability to provide compliant audited financial statements, after receiving multiple extensions from the Plaintiffs, reflected Defendant's poor financial condition and amount to a material breach.

In addition, Defendant's failure to implement required Account Control Agreements deprived Plaintiffs of the ability to exercise their respective rights upon Defendant's defaults. As such, Defendant's breaches of the Credit Agreement were material and sufficient grounds for Plaintiffs to accelerate the loans.

Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning a whether a breach is material.