U.S. District Court Reaffirms Distressed Debt Funds Not Eligible Assignees under Loan Agreement

A recent decision by the U.S. District Court for the Western District of Washington found that certain distressed debt funds were not “financial institutions” under the definition of “Eligible Assignee” in the applicable loan agreement and thus were not entitled to vote on the debtor’s chapter 11 plan of reorganization. The District Court decision affirmed a bankruptcy court decision enjoining loan assignments to the funds and recently denied the funds’ motion to vacate the decision.”

Although the decisions in Meridian may have been driven by the particular facts, the case nevertheless serves as a cautionary tale for distressed debt investors and more generally as a reminder for parties drafting and negotiating loan documents.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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