Commercial Litigation and Arbitration

The Defense of “Impracticability in Commercial Transactions” under Delaware Law (Interposed as a Defense to Loan Repayment Based on the Financial Meltdown)

From Headway Invest. Partners II, LP v. A.M. Todd Group, 2010 U.S. Dist. LEXIS 107178 (W.D. Mich. Oct. 6, 2010):

[T]hree parties — Headway Investment Partners, Blue Orion Limited, and AM Todd Group — are the sole members of "Great Spirit Ventures, LLC," a limited liability company organized in Delaware in 2004 for the purpose of acquiring and disposing of investments in securities***. [E]ach party as a member of the Limited Liability Company is "obligated to make capital contributions to the Company ... when, as and if called by the Manager" ***.

In the fall of 2008, the parties entered into two amendments to the LLC Agreement***: the "First Amendment" and the "Third Amendment," wherein plaintiffs agreed to pay defendant AM Todd's continuing capital contribution obligations to the Company through June 30, 2009 as temporary loans *** to AM Todd, and AM Todd agreed to repay plaintiffs 125 percent of the drawdown loans by July 1, 2009 ***.

AM Todd failed to repay the drawdown loans to plaintiffs in accordance with the terms of the parties' agreements***. Defendants opine that AM Todd "strongly desires" to repay the drawdown loans and make all properly called capital contributions to Great Spirit Ventures, LLC, but AM Todd's bank has prohibited it from doing so***.

2. Impracticability

[C]iting Delaware law, defendants *** rely on the defense of "impracticability in commercial transactions" ***. Specifically, defendants assert that the worldwide financial crisis of 2008 made its performance impracticable ***.

The defense of impracticability requires a defendant to establish three elements: "(1) the occurrence of an event, the non-occurrence of which was a basic assumption of the contract; (2) the continued performance is not commercially practicable; and (3) the party claiming impracticability did not expressly or impliedly agree to performance in spite of impracticability that would otherwise justify non-performance." Chase Manhattan Bank v. Iridium Africa Corp., 474 F. Supp. 2d 613, 620 (D. Del. 2007) (rejecting applicability of impracticability defense on facts before it). "Discharge or alteration of contractual obligations is an extraordinary remedy, however, and is not justified absent a showing of the occurrence of an event which has in fact rendered performance commercially impracticable." Freidco of Wilmington, Delaware, Ltd. v Farmers Bank, 529 F. Supp. 822, 825 (D. De1. 1981) (rejecting applicability of impracticability defense on facts before it).

Discharging AM Todd's contractual obligation based on commercial impracticability is not a remedy warranted on these facts, where defendants knew of the "impracticability" they now raise. As noted, the provision of the parties' LLC Agreement governing the terms of the drawdown loans is § 6.3.4, as amended by the Third Amendment***. The parties entered into the Third Amendment on March 31, 2009, i.e., after the worldwide financial crisis that began in October 2008. Hence, as plaintiffs point out, the financial crisis was not a non-occurrence assumed by the parties but an event defendants anticipated when it sought other parties to help fund the Company ***. The Court therefore agrees with plaintiffs that defendants cannot satisfy the elements of a commercial impracticability defense necessary to avail themselves of this extraordinary remedy.

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