Magazine article The RMA Journal

Subordinated Creditor Violated Intercreditor Agreement by Accepting Payments from a Third Party

Magazine article The RMA Journal

Subordinated Creditor Violated Intercreditor Agreement by Accepting Payments from a Third Party

Article excerpt

FIRST CHOICE BANK V. RIVERVIEW MUIR DORAN, LLC (1) dealt with a purported violation of a subordination covenant contained in an intercreditor agreement.

First Choice Bank made a $5 million loan to JADT Development Group, LLC in 2005. Timothy O. Baylor and Doris P. Baylor guaranteed JADT's loan from First Choice. At the same time, Riverview Muir Doran, LLC (RMD) lent JADT $1,233,550.

The two lenders executed an intercreditor agreement under which First Choice allowed RMD to have a junior mortgage on the same property on which the bank had a first mortgage. However, the agreement subordinated the junior debt "in right of payment ... to the prior payment in full" of the senior debt.

The agreement barred JADT from making any payments on the subordinated debt if the senior debt were in default and barred RMD, as the subordinated debtor, from accepting any payment if the senior debt were in default, in each case without First Choice Bank's consent. It also barred RMD from accepting any additional collateral until the senior debt was paid in full.

JADT and the Baylors defaulted on the First Choice loan and, on November 10, 2006, First Choice sent a notice of default to each of them. Three days later the bank sent a notice of default to RMD.

First Choice sued JADT and the Baylors, naming RMD as an additional party.

After the lawsuit was filed, JADT and the Baylors entered into a forbearance agreement with RMD, under which JADT delivered a mortgage to RMD on property owned by JADT Development Group II to secure a debt of $650,000. …

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