Third-Party Beneficiary Rights to Legal Fees? Not So Fast!

I am confident my readers will understand that one of the things near and dear to my heart is having lawyers get paid for their work. Those of us at the lenders’ bar often take solace in knowing that borrowers are obligated to pay our fees; and when they do not, the institutions we represent have both the wherewithal and desire to work with us in getting paid.

But not always.

We understand that at times the scope of the transaction exceeds initial expectations and fees may run up. We lawyers remain sensitive to that and work with our clients and their borrowers to reach a reasonable resolution when this occurs. But when a deal does not result in a closing, things may get difficult.

The United States District Court for the Southern District of New York recently issued a decision concerning a law firm’s attempt to recover over $800,000 in legal fees owed in connection with its representation of the agent lender in a deal that resulted in an executed loan agreement that did not fund.

The $167 million loan was intended to fund the development and construction of an 18,000-seat arena on the Virginia Beach waterfront. The City retained the right to approve the financing, and when it declined to grant its approval, the deal fell through.

The developer sued the City, which resulted in a finding that the City had not breached its agreement with the developer. The law firm brought its action against the borrower-developer and not its client, the lender.

The loan agreement provided that the borrower would pay all reasonable fees, charges and disbursements of counsel for the agent. The law firm, however, was not a party to the loan agreement and the law firm argued that it was an intended third-party beneficiary. The developer moved to dismiss the complaint claiming that the law firm did not have standing to sue because it was neither a party to the loan agreement nor an intended beneficiary.

The Court wrote:

Under New York law, non-parties can sue for breach only if they are an intended beneficiary of the contract. Those who qualify as mere incidental beneficiaries have no standing to sue on the contract.

The Court then focused on whether the contract provided that the law firm was intended to be a third-party beneficiary. The contract specifically stated:

… Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person … any legal or equitable right, remedy or claim under or by reason of this Agreement.

The Court noted that the contract did not specifically include the law firm or even counsel to the agent.

So, the question becomes: Is there anything in the contract that “expressly contemplates” that [the law firm] can bring a claim against [the developer] for payment of the fees it incurred in representing [the lender]? The answer is no. There is no such provision. There is no indication anywhere in the Credit Agreement that [the law firm] was either to receive payment directly from [the developer] or that it had any right to sue … for payment.

In fact, the Court stated:

the contract specifically indicates that [the lender] was to receive payment from the “Borrower” … for its counsel fees.

The Court went on:

The New York Court of Appeals has “sanctioned a third party’s right to enforce a contract in two situations: when the third party is the only one who could recover for the breach of contract or when it is otherwise clear from the language of the contract that there was “an intent to permit enforcement by the third party.”

The contract provided that the lender would receive payment, which excluded the law firm from directly suing to collect.

In dismissing the law firm’s complaint, the Court added:

This dismissal is of course without prejudice to [lender]’s ability to sue to recover any attorney’s fees that it pays to [law firm].

However, it would appear that if the lender was willing to sue to pursue its legal costs it would have at least authorized the firm to bring the action in the lender’s name. It is understandable that the lender might not have wanted to sue in its own name to recover legal fees – especially when a transaction does not close. That left the law firm out of pocket for a significant fee.

So, what is the takeaway?

Lawyers write the agreements. Protect yourself and make yourself a third-party beneficiary.

But consider that this case was very rare in that the loan agreements were executed but the deal still did not fund. Most deals that fail collapse before execution of the loan agreements. That certainly takes away a significant element – the executed loan agreements. Commitment letters – even nonbinding term sheet/proposal letters, provide for the lender recovering its legal costs and fees. Consider this a plea to add the lawyers as third-party beneficiaries to the proposal/commitment letters.

One can only imagine what might have occurred in the relationship between lender and its lawyers to leave the law firm strung out.

Caveat attornatus. (Lawyers beware.)

Winston & Strawn LLP v Mid-Atlantic Arena, LLC, ESG Enterprises, Inc., SDNY July 19, 2021, 2021 WL 3037478

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