Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

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ARLINGTON LF, LLC v. ARLINGTON HOSPITALITY, INC. (March 3, 2011)

Arlington Hospitality, Inc. owned a number of hotels, mostly in the Midwest. Because of financial difficulties, Arlington filed for Chapter 11 bankruptcy in 2005. At about the same time, it entered into an agreement with a special-purpose entity, Arlington LF. Pursuant to the agreement, LF agreed to provide a $6 million revolving loan as well as other financing. Arlington agreed to two fees, "payable immediately" -- a $100,000 commitment fee and a $210,000 funding fee. The bankruptcy court approved the agreement with the caveat that LF had to give Arlington notice of any default and three business days to cure. A few weeks later, after Arlington had drawn down over $3 million of the loan, LF told Arlington's investment banker that it was unwilling to fund additional monies. LF also told the creditors’ committee did it would make no further loans. Only after those statements were made did tell LF actually send Arlington an invoice for the unpaid fees. When Arlington failed to pay, LF sent the required notice of default and gave Arlington three days to cure. Arlington still did not pay. Instead, with the court's approval, it sold its assets to a third party. It repaid the money it had borrowed from LF but not the fees. LF filed a motion in the bankruptcy court for its fees. The bankruptcy court denied the motion, ruling that LF was not entitled to the fees because it was guilty of an anticipatory breach. The district court reversed and remanded. It noted that, because the fees were "payable immediately," Arlington was already in default at the time of the breach. On remand, the bankruptcy court agreed with Arlington that it was not in default before LF’s breach because LF had not provided the required notice and opportunity to cure. It nevertheless felt bound by the district court's earlier opinion and awarded LF $842,000. The district court again reversed. It stated that the bankruptcy court had misunderstood the scope of its earlier ruling. It agreed that Arlington could not have been in default until it had an opportunity to cure. It remanded with instructions to enter judgment for Arlington. LF appeals.

In their opinion, Judges Bauer, Wood, and Williams affirmed. The Court concluded that it was faced with a rather simple question -- who breached the contract first? Under Illinois law, an unequivocal intent not to perform amounts to an anticipatory breach. The Court found no clear error (and, in fact, agreed with) the bankruptcy court's findings that the statements to the investment banker and the creditor's committee constituted just such a breach. Statements to the investment banker, Arlington’s agent, are the same as statements to Arlington. The Court also rejected LF's argument that the Statement of Account that it later sent to Arlington acted as a retraction of its breach. The only "retraction" was one line on the form indicating $2.5 million of available loan commitment. That statement is not sufficiently clear and unequivocal to constitute a retraction of the earlier breach. By the time LF provided the required notice, it was in breach. Its breach discharged Arlington's remaining obligations, including its obligation to pay the fees.