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Harris N.A. v. Acadia Investments L.C.

November 16, 2010

HARRIS N.A., PLAINTIFF,
v.
ACADIA INVESTMENTS L.C. AND LOREN W. HERSHEY, DEFENDANTS.



The opinion of the court was delivered by: Judge Robert W. Gettleman

MEMORANDUM OPINION AND ORDER

Plaintiff, Harris N.A. ("Harris"), a national banking association, sued defendant Acadia Investments L.C. ("Acadia"), a Virginia limited liability company, and defendant Loren W. Hershey ("Hershey"), its principal officer, seeking judgment for default of a $15.5 million note and a personal guaranty. Count I of the complaint alleges that Acadia defaulted on the note. Count II alleges that Hershey breached a personal guaranty on that note. Plaintiff has moved for summary judgment. For the reasons stated below, that motion is granted in part and denied in part.

BACKGROUND

Acadia is a limited liability company that mostly consists of the Hershey family: defendant Loren Hershey, his wife, and his three adult children. Three trusts -- one charitable trust and two family trusts -- constitute the rest of Acadia's membership.

In 2007, a division of Harris known as HarrismyCFO and Acadia began discussing a possible lending arrangement.*fn1 HarrismyCFO primarily markets its investment-management services to family-owned businesses and wealthy families. Following discussions between Acadia and HarrismyCFO, they agreed to begin a lending arrangement between Harris and Acadia, with HarrismyCFO serving as manager of the lending relationship.

In February 2008, Acadia and Harris entered a Credit Agreement, whereby Harris agreed to lend up to $12.5 million to Acadia on a revolving basis. The $12.5 million debt was scheduled to mature on January 31, 2011. The Credit Agreement afforded plaintiff the right, however, to accelerate the full amount of principal and interest due upon any "Event of Default." One such "Event of Default" was defined as the failure to reduce the principal balance below 35% of the value of Acadia's investments by March 31, June 30, September 30, and December 31 of each year. The Credit Agreement also provided that interest would be calculated at a "Base Rate," but that Acadia had the option to request certain portions of the interest to be calculated at the London Interbank Offered Rate ("LIBOR"). In conjunction with the Credit Agreement, Acadia executed a $12.5 million promissory note to Harris ("First Note"), and Hershey executed a personal guaranty on Acadia's indebtedness.

Acadia planned to use this line of credit primarily to purchase limited partnership interests in other private equity funds, hedge funds, and real estate funds.*fn2 Acadia used the income from its investments to reinvest, distributing the balance to its members for their living expenses and, in the case of the charitable trust, for philanthropic activities. Aside from these distributions, defendant Hershey contributed his services to Acadia without compensation.

Shortly after Acadia executed the First Note, defendants, through Hershey, began to express interest in exercising its option to have a portion of the interest calculated at the LIBOR rate. Thus, Hershey contacted one of plaintiff's representatives and asked him for a quote as for the LIBOR rate at both one- and two-year intervals. Thereafter, plaintiff applied the LIBOR rate for one year of interest. Hershey contacted plaintiff and told it that this was an error by plaintiff's representative; he wanted the LIBOR rate to be applied only to a six-month period. Plaintiff and defendants never resolved the dispute.

On August 18, 2008, plaintiff and defendants entered into the First Amendment to the Credit Agreement ("First Amendment"). The First Amendment provided for a $3 million advance to defendants, and required Acadia to execute another promissory note ("Second Note") for $15.5 million. The Second Note provided that it was "in replacement and substitution for" the First Note, but was "issued by [defendant] under the terms and provisions of the Credit Agreement...." Hershey also executed a second guaranty, personally guaranteeing Acadia's indebtedness under the Second Note.

In October 2008, plaintiff and defendant began to discuss Acadia's ability to make payments on the Second Note in light of the spreading financial crisis. No agreements resulted from these discussions, however.*fn3 By February 1, 2009, defendants had failed to reduce the amount of principal below 35% of the value of its assets as required by the Credit Agreement.

In light of this event of default, on May 12, 2009, plaintiff and defendants executed a "Forbearance Agreement and Second Amendment to Credit Agreement" ("Forbearance Agreement"). Under the Forbearance Agreement, plaintiff agreed to forbear from exercising its rights accrued by reason of defendants' defaults until August 6, 2009. In return, defendants were required to make the $3 million principal reduction outlined in the Credit Agreement before that date. The Forbearance Agreement contained a provision purporting to waive all of defendants' defenses, except those arising out of the pending dispute over whether the LIBOR interest rate should be applied to a six-month or one-year period.

During the discussions over the terms of the Forbearance Agreement, defendants sought assurance from plaintiff that it would assist defendants in selling some of Acadia's assets to make the required payments. Defendants offer evidence, which plaintiff does not contest, of a HarrismyCFO employee reassuring Hershey that plaintiff would work with him in such a sale. The Forbearance Agreement's terms, however, place no obligation on plaintiff to participate in such a sale. Defendants further contend that plaintiff never assisted with this sale.

Instead, plaintiff served defendants with a Notice of Default on August 11, 2009. In response, defendants tendered interest payments to plaintiff reflecting payments due in May, July, and August 2009. Plaintiff responded to these payments with a letter stating that it would accept the payments so long as defendant would forfeit any claim to an improper interest calculation, and plaintiff could retain its rights obtained by the expiration of the Forbearance Agreement. By September 11, 2009, defendants did ...


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