On March 25, 2025, the U.S. District Court for the Southern District of New York denied a motion to dismiss a lender’s claims for declaratory judgment and other relief under an intercreditor agreement (“ICA”), rejecting the defendant’s theory that the lender acted in bad faith by making a new loan that “perpetually subordinated” a seller’s collateral position.
The case arose from a June 27, 2014, asset purchase agreement, in which the defendant Fibers Plus, LLC f/ka/a United Fibers LLC (“United Fibers” or the “Seller”), agreed to sell certain assets of its cellulose insulation manufacturing business to a non-party (“SW Fibers” or the “Purchaser”). The Purchaser paid $7 million in cash at closing and delivered a roughly $3 million promissory note secured by certain assets of the Purchaser and its affiliates.
The plaintiff lender (“Fidus” or the “Lender”) entered into a senior subordinated credit agreement with the Purchaser and its affiliates, agreeing to lend $10 million secured by the Purchaser’s assets. On the same day, the Lender entered into an ICA with the Seller, which distinguished between “First Lien Debt”—consisting of the Purchaser’s obligations to the Lender under their credit agreement, which was secured by “First Lien Priority Collateral”—and “Seller Debt”—consisting of the Purchaser’s obligations to the Seller, which were secured by “Seller Collateral.” The Lender agreed to subordinate its first-priority interest in the Seller Collateral to the Seller. In exchange, the Seller agreed not to exercise any rights or remedies as to the First Lien Priority Collateral until the First Lien Debt was paid in full.
In 2019, after the Purchaser defaulted on its note, the Seller sought to recover. In 2024, the Lender brought a declaratory judgment action against the Seller, claiming that by enforcing its remedies with respect to the Seller Debt it had breached the parties’ ICA. The Seller moved to dismiss on multiple grounds, including that there was a lack of consideration for the ICA and that the Lender had breached its covenant of good faith and fair dealing under the ICA. The court denied the motion to dismiss, holding first that the Lender’s agreements under the ICA provided a benefit to the Seller and therefore consideration. The court rejected the Seller’s argument that the Lender’s promises were illusory because its unlimited borrowing capacity and lack of reporting requirements, coupled with the Seller’s conditional recovery, gave the Lender “significant discretion to manipulate the agreement in a way that court perpetually prevent” the Seller from exercising its rights under the Guaranty. As the court held: “A contract is not illusory merely because its terms give discretion to one party to the contract, as every contract encompasses the implied duty of good faith and fair dealing.”
The court also rejected the Seller’s defense of breach of the implied covenant. The sole alleged “bad faith” was that the Lender subsequently loaned another $28 million under its credit agreement with the Purchaser, which the Seller claimed “perpetually subordinated [the Seller’s] position in bad faith.” But the additional loan by the Lender to the Purchaser was expressly permitted by the ICA. “In such cases, the Court cannot employ the covenant of good faith and fair dealing to impose on the parties obligations that are consistent with the express terms of the [ICA].” Therefore, the court upheld the Lender’s complaint.
The case is Fidus Mezzanine Capital, L.P. v. Fibers Plus, LLC, No. 24-cv-3452 (S.D.N.Y. Mar. 25, 2025). of the plaintiff is represented by Robinson, Bradshaw and Hinson and Friedman Kaplan Seiler Adelman & Robbins LLP. The defendant is represented by Silver Cain PLC. The decision is available here.
