Contract Law - Repudiation

ARLINGTON LF LLC v. ARLINGTON HOSPITALITY INC., Court of Appeals, 7th Circuit 2011 - Google Scholar

This case holds that a finance company breached an agreement with a bankruptcy debtor when it refused to lend further funds to the debtor. The Seventh Circuit held that because the finance company repudiated the contract, it could not obtain any further relief under that contract.

Arlington Hospitality was the manager of the Ameriquest hotel chain. The Finance company agreed to lend Hospitality the sum of $11 million under a revolving line of credit.

The Bankruptcy court approved the term sheet and Hospitality drew 3.53 million on the credit line.

After the loan was made the finance company decided to terminate its relationship with Hospitality. It notified Hospitality that it would no longer advance any more funds to Hospitality. Slip Opinion at 7.

Several months later Hospitality repaid the $3.5 million loan, but did not pay the fees associated with the loan. The finance company sought an award of those fees from the Bankruptcy Court.

The Seventh Circuit held that when the finance company stated that it would not advance further funds under the "DIP loan" (debtor in possession loan) it "committed an anticipatory breach of the parties' lending agreement.

Under Illinois law, "when one party has committed a repudiation, the other party can treat the contract as ended." Slip Opinion at 15 (citing Timmerman v. Grain Exch. LLc, 915 N.E.2d 113, 124 (Ill. App. 2009); Truman L. Flatt & Sons, Co., Inc., v. Schumpf, 649 N.E.2d 990, 994 (Ill. App. 1995).

A party commits an anticipatory repudiation when it manifests a clear, unequivocal intent not to perform under the contract when performance is due. Id. citing In re Marriage of Olsen, 428 N.E.2d 684, 686 (Ill. 1988); Draper v. Frontier Ins., Co., 638 N.E.2d 1176, 1181 (Ill. App. 1994).

There was no retraction of the repudiation.

Thus, when it repudiated the contract, the Finance Company lost the right to any future performance by Hospitality.

Comment: this case is an excellent summary of the law of contract and repudiation.