The use of managed accounts as an investment vehicle has been widely publicized of late with institutional investors such as the California State Teachers’ Retirement System and the New York State Common Retirement Fund (referring to such vehicles as “separate accounts”), and the Teacher Retirement System of Texas and the New Jersey Division of Investment (referring to such vehicles as “strategic partnerships”) making sizeable investments with high-profile private equity firms such as Apollo Global Management, LLC, Kohlberg Kravis Roberts & Co. and the Blackstone Group.1

Regardless of name, these tailored investment vehicles represent a significant trend, with 32% of surveyed fund managers indicating they were intending to invest more from separate accounts during 2013.2 And although structurally divergent from commingled real estate or private equity funds (“Funds”), these separate accounts share a common objective with Funds: to produce strong returns with respect to invested capital in the most efficient manner possible.

In many situations, accessing a credit facility can facilitate achieving investment objectives. This is quite clear in the context of Funds establishing subscription credit facilities, also frequently referred to as a capital call facility (a “Facility”). These Facilities are popular for Funds because of the flexibility they provide to the general partner of the Fund in terms of liquidity and the efficiency associated with consolidating the number of capital calls made upon limited partners. These benefits would equally apply to institutional investors establishing separate accounts with private equity firms and, despite fundamental differences between separate accounts and Funds, a separate account may be structured to take advantage of the flexibility afforded by a similar credit facility.

Definition of “Separate Account”

The term “separate account” has been used generically to describe an arrangement whereby a single investor provides virtually all of the necessary equity capital for accomplishing a specified investment objective. It is important, however, to distinguish a “separate account” from a joint venture or partnership in which there is an additional party (frequently the investment manager) with an equity interest in the owner of the investment. The equity provided (or earned) by the investment manager may be slight in comparison to the equity capital provided by the institutional investor. However, despite the imbalance of economic interests, these joint ventures and partnerships involve two or more equity stakeholders and generally require careful consideration with respect to many of the same issues which arise in the context of Funds (whether such Fund includes just a few, or a few hundred, investors). And confusion arises when these joint ventures and partnerships are incorrectly referred to as a “separate account.”

In fact, a separate account (“Separate Account”) is an investment vehicle with only one (1) commonly institutional investor (“Investor”) willing to commit significant capital to a manager (which may also simultaneously manage a Fund or Funds (“Manager”)) subject to the terms set forth in a two (2) party agreement (commonly referred to as an Investment Management Agreement or the “IMA”). The IMA is structured to meet specific goals of the Investor, which may be strategic, tax-driven or relate to specific needs (such as excluding investments in a particular type of asset or market). As a result, it is not atypical for a Separate Account to be non-discretionary in terms of investment decisions made by the Manager (with Investor approval being required on a deal-by-deal basis). Separate Accounts can also be tailored to match the specific investment policies and reporting requirements of the Investor.

Separate Accounts vs. Commingled Funds

Aside from fundamental differences such as the number of investors and the potential lack of Manager discretion in making investment decisions (described above), several key distinctions exist between Separate Accounts and Funds. Notably, fees paid to the Manager under Separate Account arrangements are typically lower than those paid to a Manager operating a Fund (in part because of the leverage maintained by an Investor willing to commit significant capital to a Separate Account), and any performance fees must be carefully structured to ensure they do not violate applicable law relating to conflicts of interest.

The popularity of Separate Accounts may be attributable to the greater flexibility they provide to the Investor. In addition to Investor input related to investment decisions, IMAs are sometimes structured to be terminable at will upon advance notice to the Manager (although there may be penalties associated with early termination), while termination of a Fund Manager ordinarily requires the consent of a majority or supermajority of the other limited partners, and oftentimes must be supported by “cause” attributable to the action (or inaction) of the Manager. However, there are also significant costs and trade-offs associated with this flexibility, including that the Investor must identify and agree upon terms with a suitable Manager, and the time commitment and expertise required by the Investor to be actively involved in analyzing and approving investment recommendations made by the Manager. Likewise, the Manager will require a sizeable commitment to the Separate Account to overcome the inefficiency of a Separate Account as compared to operating a Fund with a larger pool of committed capital, more beneficial fee structures, and discretion over investment decisions.

Benefits of Credit Facilities for Separate Accounts

Notwithstanding the differences between Separate Accounts and Funds, Investors and Managers alike would benefit from access to a credit facility in connection with a Separate Account. To begin with, credit facilities provide a ready source of capital so that investment opportunities (once approved) can be quickly closed. Timing considerations are critical in a competitive environment for quality investments, particularly if internal Investor approvals are difficult to obtain quickly. The liquidity offered by a credit facility can decrease Investor burden and shorten the overall investment process by eliminating the need for simultaneous arrangement of funding by the Investor. The closing of an investment through a credit facility minimizes administration by both the Investor and Manager, as funding of the obligations to the Separate Account can be consolidated into a routine call for capital (instead of multiple draws taxing the human capital of both the Manager and Investor executing the objectives of the IMA). And, perhaps most importantly from the Investor’s perspective, a credit facility may eliminate the need to continually maintain liquidity for the capital required to fund investments contemplated by the Separate Account.

Although alternatives exist (including asset level financing arrangements), many Funds have established Facilities for purposes of obtaining liquidity, flexibility and efficiency in connection with portfolio management. The most common form of Facility is a loan by a bank or other credit institution (the “Creditor”) to a Fund, with the loan obligations being secured by the unfunded capital commitments (the “Unfunded Commitments”) of the limited partners of the Fund. Under a Facility, the Creditor’s primary and intended source of repayment is the funding of capital contributions by such limited partners, instead of collateral support being derived from the actual investments made by the Fund. The proven track record of Unfunded Commitments as collateral has generally enabled Creditors to provide favorable Facility pricing as compared to asset-level financing, although many Funds utilize both forms of credit in order to increase overall leverage of the investment portfolio.

Assuming the Investor is a creditworthy institution, the IMA can be drafted to take advantage of the flexibility afforded by a Facility by including certain provisions found in most Fund documents supporting the loan.3 More specifically, the IMA should expressly permit the Manager to obtain a Facility and provide as collateral all or a portion of the unfunded commitment of the Investor (the “Required Commitment”) to supply a capital contribution for approved investments (“Account Contributions”) contemplated by the Separate Account. Then, as part of the Investor’s approval of an investment under the IMA, the Investor may elect to authorize the Manager to make a draw upon the Facility for the relevant investment(s) and cause the Required Commitment to be pledged, along with the right to request and receive the related Account Contribution when called by the Manager (a “Capital Call”), to the Creditor. If so, the Investor retains discretion with respect to both investment selection and Facility utilization and, when drawn upon the Facility, would be supported by a pledge of: (a) the Required Commitment; (b) the right of the Manager to make a Capital Call upon the Required Commitment after an event of default under the Facility (and the right of the Creditor to enforce payment thereof); and (c) the account into which the Investor is required to fund Account Contributions in response to a Capital Call. Creditors may also require investor letters from the Investor acknowledging the rights and obligations associated with this structure from time to time. As mentioned above, most Investors and Managers are familiar with these terms and recognize the benefits afforded by establishing a Facility for purposes of flexibility, efficient execution, and administration of private equity investments.

Conclusion

The number of Funds seeking a Facility is steadily increasing due to the benefits these loans provide to Investors and Managers in terms of liquidity and facilitating investment execution, while simultaneously decreasing the administrative burden associated with numerous and/or infrequent capital calls. Likewise, Creditors have benefitted from the reliability of unfunded capital commitment collateral and the low default rates associated with these Facilities.

These same attributes apply in the context of Separate Accounts and, with careful attention to Facility requirements at the onset of Separate Account formation, similar loans may be provided for the benefit of parties to an IMA. Please contact any of the authors with questions regarding these issues and the various methods for effectively establishing a Facility in connection with Separate Accounts.

Endnotes

1 “CalSTRS Joins Chorus Favoring Separate Accounts Over Funds”, Pension & Investments, March 5, 2012.

2 “The Rise of Private Equity Separate Account Mandates”, Preqin, February 21, 2013.

3 In the context of a Separate Account structured so the Investor does not maintain any form of commitment (and instead merely funds individual investments with equity capital in connection with approval and closing thereof), this Facility support structure would not apply.

A subscription credit facility (a “Facility”), also frequently referred to as a capital call facility, is a loan made by a bank or other credit institution (the “Lender”) to a private equity fund (the “Fund”). The defining characteristic of such Facilities is the collateral package, which is composed not of the underlying investment assets of the Fund, but instead by the unfunded commitments (the “Capital Commitments”) of the limited partners in the Fund (the “Investors”) to make capital contributions (“Capital Contributions”) when called from time to time by the Fund’s general partner.

The loan documents for the Facility contain provisions securing the rights of the Lender, including a pledge of (i) the Capital Commitments of the Investors, (ii) the right of the Fund’s general partner to make a call (each, a “Capital Call”) upon the Capital Commitments of the Investors after an event of default accompanied by the right to enforce the payment thereof, and (iii) the account into which the Investors fund Capital Contributions in response to a Capital Call.

The number of Facilities is rapidly growing due to the flexibility they provide to Funds (in terms of liquidity and consolidating Capital Calls made to Investors) and the reliability of the Capital Commitment collateral from the Lender’s perspective. As the Facility market continues to grow and evolve, both Lenders and Fund sponsors seek to put in place Facilities for fund structures that vary from the typical closed-end Funds that have historically dominated the Facility market. As recovery from the financial crisis continues, Investors are increasingly investing in open-end Funds due to the Investors’ interest in increased liquidity due to the availability of voluntary Investor redemptions in open-end Funds. Historically, Lenders have not pursued open-end Funds for Facilities because of concerns surrounding the transient nature of the Capital Commitments in those Funds. As discussed below, however, with a few structural tweaks, Facilities can be provided to open-end Funds, offering Lenders the same comforts of a traditional Facility while providing Funds convenient and costeffective fund-level financing. Such financing can be used for leveraging investments, liquidity and bridging Capital Calls. This newsletter provides background on how open-end Funds generally differ from a typical closed-end Fund, and proposes solutions for structuring a Facility for open-end Funds.

Background

While there are many types of open-end Funds, there are a number of common characteristics that generally distinguish an open-end Fund from a typical closed-end Fund. These include: the long-term fund-raising period during which it can accept additional Capital Commitments and close in new Investors, the extended or perpetual investment period during which it can make Capital Calls, and most important and potentially concerning for purposes of Facilities, the increased flexibility for Investors to redeem their interests. Unlike a closed-end Fund, where redemption and withdrawal rights are generally not available to Investors, or, to the extent that they are available to Investors, are generally limited to specific legal or regulatory issues, Investors in an open-end Fund are generally free, subject to notice and timing restrictions, to redeem their interests in the Fund. True open-end Funds by their nature permit redemption of equity at the election of the Investor (and, in some circumstances, the remaining unfunded Capital Commitment of the redeeming Investor may be cancelled). It is important to note that some open-end Funds require Investors to fully fund all Capital Contributions concurrently with closing into the fund and, thus, do not retain the concept of an unfunded Capital Commitment. A traditional Facility would not be feasible for such a Fund. For purposes of this newsletter we will focus on structuring issues related to the expanded redemption and withdrawal rights of Investors in open-end Funds that retain unfunded Capital Commitments.

Structuring and Documentation Concerns

A Facility for an open-end Fund should contain a representation, warranty, covenant and an event of default package that is generally consistent with that seen in Facility documentation for a closed-end Fund. The collateral package would also be similar, if not identical, to that for a closed-end Fund. As a gating issue, it is important to review the constituent documents of the open-end Fund to ensure that the timing of requests for redemption and the timing for satisfying redemptions allows for Capital Calls to be made and the proceeds thereof applied to make any mandatory prepayment that would result from any such redemption. Notwithstanding the generality of the foregoing, there are a few structural changes that should be noted in a Facility for an open-end Fund.

COLLATERAL ISSUES

As discussed above, the collateral and expected source of repayment in a Facility is the Capital Commitments of the Investors. Given the nature of open-end Funds, the potential fluidity with respect to the Investors and, therefore, the collateral for the Facility raise potential concerns. Notwithstanding the issues related to a changing pool of Investors, with a careful review of the Fund’s constituent documentation and attention to the redemption timing and mechanics, a Facility could be structured to address a Lender’s concerns while still providing flexibility (in terms of liquidity and consolidating Capital Calls made to Investors) to an open-end Fund. As described in more detail below, the Facility documentation can address the foregoing concerns with some minor changes, including additional exclusion events, mandatory clean-up calls, additional events of defaults and/or additional covenants.

An exclusion event tied to any request by an Investor to redeem its interest in the Fund must be structured so as to remove any such requesting Investor from the borrowing base while also allowing sufficient time to make a Capital Call to cure any resulting borrowing base mismatch in the time period between receipt of such request from an Investor to the time the Investor has been redeemed from the Fund. Tying the exclusion event to a request for redemption, rather than to an actual redemption, is important not only for timing concerns, but also because an Investor that has redeemed its equity in a Fund, even if it is not also seeking to cancel its unfunded Capital Commitment, may not be as concerned by the defaulting investor penalties in the constituent documents of the open-end Fund as an Investor that still has equity at stake. Additional Lender protection can be obtained by requiring cleanup calls (to reduce amounts outstanding under a Facility) in advance of each regularly occurring redemption window under the constituent documents of the open-end Fund. An event of default can be mayer brown 33 structuring a subscription credit facility for open-end funds added that is triggered upon a threshold percentage of Investors requesting redemption of their interests in the Fund. Such event of default can be structured to be cumulative or with respect to any redemption window. A net asset value covenant can be inserted to provide additional early warning of any Fund problems.

ADDITIONAL REPORTING

Because of the potential for changes in the Investor base and the collateral package associated with an open-end Fund, Facilities should be structured to provide additional reporting as to borrowing bases and Investor events, including notice of redemption requests, cues of Investors seeking admission to the Fund and net asset values. Additional delivery of borrowing base certificates and notices of redemption requests should coincide with the time periods under the constituent documents of the open-end Fund such that the Lender can properly monitor borrowing base changes and anticipate any necessary mandatory prepayments resulting from Investor redemptions, while maintaining time to issue any necessary Capital Calls before the effectiveness of any requested redemptions. Tracking redemption requests and Investor cues should provide a Lender with an early indication of underlying problems with a Fund. We note that reporting and documentation required in connection with a Facility for an open-end Fund may be more administratively burdensome than a Facility in a typical closed-end Fund. Beyond the additional reporting with respect to borrowing bases and Investor redemptions discussed above, deliverables (such as constituent document changes, new side letters and subscription agreements) with respect to additional Investors can continue for a longer period than in a typical closed-end Fund. Moreover, given the increased potential for Investor turnover, it may be burdensome for both Lenders and Fund sponsors to negotiate and obtain investor letters and opinions from Investors. Lenders may want to consider addressing any additional administrative burden related to an open-end Fund Facility by increasing the administrative fees under the Facility. Even with an incremental increase in fees or the interest rate, a Facility still likely provides cheaper liquidity than many asset-level financings.

FACILITY TENOR

Because of its long-term nature, there are a number of options to structure the tenor of a Facility for an open-end Fund. Since open-end Funds typically are not subject to limited investment periods during which they may make Capital Calls for investments and repay Facility obligations, there are more options available to Lenders and Fund sponsors in terms of the tenor of the Facility. Some open-end Funds prohibit initial Investors from redeeming their interests and/or withdrawing from the Fund for a predetermined period of time (often one or two years). Such lock-out periods help the Fund achieve and maintain a critical size during its ramp-up period. During the early stages of such an open-end Fund, a Facility could be structured with a tenor equal to any applicable redemption lock-out period for the Investors. A Facility of this type would look very similar to a Facility for a typical closed-end Fund. Secondly, a Facility could have a longer tenor, even in excess of five years or more, to match the long-term investment period and life-span of an open-end Fund. Although rare in this market, such a long-term tenor is regularly seen in other leveraged lending products. Lastly, a Facility could be structured with a 364-day tenor, subject to any number of one-year extensions, allowing the Lender and Fund sponsor to re-evaluate their respective needs on an ongoing basis during the life of the Fund.

Conclusion

While Facilities for true open-end Funds have to date been relatively rare, the opportunity is ripe for new market entrants. With a careful review of an open-end Fund’s constituent documentation and some modifications to the 34 Fund Finance | compendium 2011-2018 Facility documentation, a Facility can be structured to provide the traditional benefits of a Facility for an open-end Fund while still addressing a Lender’s standard Facility credit criteria. Please contact any of the authors with questions regarding open-end Funds and the various structures for effectively establishing Facilities for such entities.

Subscription credit facilities have become a popular form of financing for private equity and real estate funds. Governmental pension plans, state endowment funds, sovereign wealth funds and other instrumentalities of foreign and domestic governments are frequent Investors that may possess certain sovereign immunity rights against enforcement proceedings rooted in the common law concept that “the King can do no wrong.” Governmental Investors must be evaluated on a case-by-case basis to ascertain if any sovereign rights apply and, if so, whether such Investor has effectively waived its immunity. This Legal Update seeks to set forth the basic legal framework of sovereign immunity in the United States relevant to subscription credit facilities.

Credit Facilities

Subscription credit facilities (a Facility) have become a popular form of financing for private equity and real estate funds (Funds). The Facility’s lenders (the Lenders) are granted a security interest in the uncalled capital commitments of the Fund’s limited partners (the Investors) and the Lenders rely on the Investors’ obligations to fund capital contributions as the primary source of repayment. Governmental pension plans, state endowment funds, sovereign wealth funds and other instrumentalities of foreign and domestic governments are frequent Investors that may possess certain sovereign immunity rights against enforcement proceedings rooted in the common law concept that “the King can do no wrong.”1

Sovereign immunity in its purist form could shield a governmental entity from all liability—e.g., enforcement by a Lender seeking to collect uncalled capital commitments contractually owed by the Investor to the Fund. Thus, as Lenders evaluate the creditworthiness of governmental Investors for inclusion in a Facility’s borrowing base, they naturally inquire into how sovereign immunity may impact the enforceability of such Investors’ capital commitments.

Governmental Investors must be evaluated on a case-by-case basis to ascertain if any sovereign rights apply and, if so, whether such Investor has effectively waived its immunity. Given the financial troubles facing many governmental Investors as a result of the ongoing economic crisis and sovereign debt concerns, Lenders are increasing their scrutiny of the credit wherewithal of such Investors and their potential ability to raise sovereign immunity as a defense in subsequent litigation. This Legal Update seeks to set forth the basic legal framework of sovereign immunity in the United States relevant to a Facility.

Basis of Immunity

At its most basic level, the doctrine of sovereign immunity states that the government cannot be sued in its own courts unless it has otherwise consented to waive its sovereign immunity. As it relates to governmental Investors organized under the laws of the United States or a political subdivision thereof (a US governmental Investor), the doctrine of sovereign immunity comes in two flavors: (i) sovereign immunity of the federal government2 and (ii) sovereign immunity of state governments and their instrumentalities pursuant to the Eleventh Amendment of the US Constitution, and in some states, through the state’s Constitution.

Sovereign immunity of the US federal government is a concept that has existed in US jurisprudence since the country’s founding.3 Through the Tucker Act,4 however, it is well settled that the US federal government has waived sovereign immunity with respect to any express or implied contract. With respect to state governments, the Eleventh Amendment, along with US Supreme Court jurisprudence on the issue, provides that states generally are immune from being sued in federal or state court without their consent.5 Recognizing the inequities of such a rule in the commercial context however, many state constitutions, legislatures and high courts have eroded the sovereign immunity of state governments to permit actions based on contractual claims.

The doctrine of sovereign immunity also protects certain foreign governments and international organizations of a quasi-governmental nature, such as the United Nations, against claims in US courts. The Foreign Sovereign Immunities Act of 1976 (the FSIA) generally shields such Investors, but provides an exclusive basis and means to bring a lawsuit against a foreign sovereign in the US for certain commercial claims.6

Waivers of Immunity—US Investors

There are three ways that sovereign immunity is generally waived by US governmental Investors: (i) an Investor expressly and unequivocally waiving such immunity in a writing that can be relied upon by the Lender (i.e., an “Investor Letter” delivered to the Lenders in connection with the Facility or a side letter provision running to the benefit of the Lenders), (ii) a statute enacted by the applicable governing legislature that explicitly waives immunity for contract claims in commercial transactions, such as the Tucker Act7 in the case of the US federal government, or (iii) controlling case law, typically from a federal or the applicable state’s highest court, that precludes governmental Investors from effectively raising sovereign immunity as a defense to contractual claims.

WRITTEN WAIVERS FROM INVESTORS

The best case scenario for the Lenders is an explicit waiver from the Investor or an express statement that sovereign immunity does not apply. Often in an Investor Letter, the subject Investor: (i) acknowledges and agrees that, to the extent it is entitled to sovereign immunity now or at any time in the future, it irrevocably waives such immunity to the fullest extent permitted by law and/or (ii) represents that it is not subject to, or cannot claim, immunity from suit in respect of contractual claims to enforce its obligations under the applicable partnership agreement and subscription agreement.

A second variety of waiver is an implicit waiver. With an implicit waiver, the Lenders are provided with an affirmative representation that the Investor is subject to commercial law and that its performance under the partnership agreement, the subscription agreement and the Investor Letter (if applicable), constitutes private and commercial acts, not governmental acts. While this form of waiver is not as strong as the explicit waiver, it puts the Investor at a severe disadvantage when distinguishing itself from a private actor in the marketplace and when attempting to argue that it should be entitled to immunity as a governmental actor (note: the comfort afforded by this waiver to a Lender certainly pivots on whether applicable law has abrogated immunity for commercial transactions).

In transactions where Lenders receive Investor Letters and Investor opinions as a condition to including a particular Investor in the borrowing base, it is best practice that the Investor’s counsel opine, among other things, that the Investor has effectively waived immunity or that such Investor does not enjoy sovereign immunity in connection with its obligation to fund capital contributions to the Fund.

A third variation of waiver language common in the Facility market involves neither an explicit nor an implicit waiver, but rather a statement by the governmental Investor that despite the Investor’s sovereign immunity and its express reservation thereof, such immunity does not in any way limit the Investor’s obligations to make capital contributions under the partnership agreement. While this seemingly contradictory language is not really a waiver at all, it provides some comfort to the Lenders that the Investor has agreed to fund its capital contributions. The Facility market seems to accept this language cautiously, and then only after a careful review of the underlying law to determine whether the applicable Investor could potentially raise a successful immunity defense in the context of a Facility.

STATUTORY WAIVERS

While it is ideal for Lenders to receive a written waiver as discussed above, Investors often are unwilling to provide such a waiver, or the Facility does not permit Lenders to request and rely on Investor Letters. US governmental Investors will frequently reserve their Eleventh Amendment rights in a side letter; hence, it is very important to carefully review and vet governmental immunity provisions in side letters against applicable law. Many states, however, have waived sovereign immunity for commercial contract claims by constitution, statute or case law. Several states, including California and New York, have passed statutes explicitly waiving sovereign immunity with respect to contractual claims.8 In these states, a plaintiff may proceed against the state government just as if it were proceeding against a private citizen. If obtainable, Lenders should seek an explicit statement from the Investor acknowledging that the Facility qualifies under the applicable sovereign immunity waiver statute of that state. An example of such language would be: “Each of the Partnership Agreement, the Subscription Agreement and the Investor Letter constitute a contract within the meaning of [insert applicable state statute (e.g., Cal. Gov. Code Section 814, New York Court of Claims Act §8 (L. 1939, c 860), Section 12-201, State Gov. Article, Ann. Code of Maryland and ORS Section 30.320)].”

These state statutes often contain a specific set of requirements and procedures that must be complied with in order to bring suit and obtain a judgment. For example, statutes that waive sovereign immunity for contractual claims often require that a claimant show that the contract was validly authorized and entered into by the governmental Investor.9 Additionally, it is not uncommon for such statutes to require that a claimant bring the claim within a certain period of time and in a particular venue, often a certain county or an administrative law court within the applicable state.10

Given the variations among statutes with respect to waivers of sovereign immunity, it is prudent for Funds, Lenders and their respective counsel to examine each individual state’s statute on a case-by-case basis.

COMMON LAW WAIVERS

Some state high courts have rendered decisions eliminating sovereign immunity with respect to contractual claims. For example, the South Carolina Supreme Court held that when the state enters into a contract, the state implicitly consents to be sued and waives its sovereign immunity to the extent of its contractual obligations.11 Similarly, in 2006, the Missouri Supreme Court held that sovereign immunity does not apply to breach of contract claims against state agencies.12 State courts are continuing to follow such decisions. In 2010, the Virginia Supreme Court reaffirmed its prior ruling that sovereign immunity is not a defense to a valid contract entered into by a duly authorized agent of the state.13 State courts, like state legislatures, have taken varying approaches with respect to the procedures and timelines that must be followed for a claimant to bring an action based on a contractual claim.14

We note, however, that a minority of states have bucked the trend to waive immunity for contract and thus leave Lenders at risk of enforcement uncertainty if the state defaults. While not entirely clear, the general rule in Texas may still be that state government entities cannot be sued for a breach of contract, even with evidence of a waiver to the contrary.15 At least one appellate court in Texas has attempted to reverse course, holding that there is a waiver-by-conduct exception to sovereign immunity in breach of contract cases against state entities.16 However, the Texas Supreme Court denied review of this holding, leaving the viability of such an exception unsettled.

Waivers of Immunity—Non-US Investors

Foreign governments and their instrumentalities are also frequent Investors, often with sizable capital commitments. Lenders should carefully review such Investor’s credit, as well as the procedural requirements for enforcement of their capital commitments, including with respect to immunities.

The general premise of the FSIA is that a foreign government has immunity and cannot be sued in the United States. There are, however, three exceptions to this rule. First, waivers where the Investor has expressly waived immunity by contract, including any such waivers that arise from language in applicable international agreements.17 Second, implied waivers where the Investor (i) agrees in a choice of law provision to be “governed by” US law,18 (ii) agrees to arbitration with the expectation of enforcement of an award in the United States,19 (iii) affirmatively files a suit or responds to a pleading without raising an immunity defense20 or (iv) has signed an international convention permitting the enforcement of an award in the United States.21 Third, the “commercial activity” exception.22

Under the commercial activity exception, a claimant may sue a foreign government in a US court when the claim is based on (i) a commercial activity carried on in the United States by the foreign government, (ii) an act by a foreign government that is performed in the United States in connection with a commercial activity outside the United States or (iii) an act by a foreign government that is performed outside the United States in connection with commercial activity that occurs outside the United States, if such action “causes a direct effect” in the United States.23

Absent an express written waiver, a valid submission to jurisdiction in the United States or an agreement to binding arbitration,24 non-US governmental Investors in the context of a Facility should fall into the commercial activity exception. In Republic of Argentina v. Weltover Inc.,25 bond holders sued the Government of Argentina for breach of contract. The US Supreme Court articulated the applicable legal standard: “[w]hen a foreign government acts, not as a regulator of a market, but in the manner of a private player within it, the foreign sovereign’s actions are ‘commercial’ within the meaning of the FSIA.”

Argentina argued that that the commercial activity exception did not apply because (i) the issuance of sovereign debt should not constitute commercial activity and (ii) the alleged breach did not have a “direct effect” on the United States. The Court disagreed on both counts. First, the Court concluded that the issuance of the bonds was of sufficient commercial character. Second, the Court rejected the argument that the FSIA required the direct effect to be “substantial” or “foreseeable,” instead concluding that it need only follow “as an immediate consequence” of the sovereign’s activity. Despite the fact that none of the bondholders were situated in New York, the Court held that the effect was direct because New York was the designated place for payment.26 This is certainly helpful precedent for Facility Lenders. For a more in-depth review of the “commercial activity” exception, please see Mayer Brown’s White Paper, “Sovereign Immunity and Enforcement of Arbitral Awards: Navigating International Boundaries,” available at http://www.mayerbrown.com/ publications/detail.aspx?publication=5048.

Satisfaction of a Judgment Against a Sovereign Entity

While a governmental Investor may have waived sovereign immunity by one of the means identified above, enforcing a judgment against a governmental Investor merits additional discussion.

First, side letter provisions may prescribe a particular jurisdiction (other than New York or Delaware) or a means of alternative dispute resolution (e.g., binding arbitration by the International Chamber of Commerce or similar body), and such provisions will affect how a Lender should pursue the Investor.

Further, once a judgment is obtained from the proper tribunal, satisfying a judgment against a governmental Investor may differ from satisfying a judgment against a private person. Due to public policy concerns, some government entities that do not enjoy immunity from suit may nonetheless argue they are effectively exempt from monetary judgments.27 In these cases, a Lender can initiate enforcement proceedings but may not be able to collect on a judgment. In other cases, payment of the judgment may require that a specific appropriation be made by the appropriate legislative body of the governmental Investor, or statutory limits may exist on the amount of the judgment that may be satisfied.

For example, in Kentucky, while the state has waived its sovereign immunity with respect to contract claims, damages are capped at twice the amount of the original contract.28 Certain states, including West Virginia, Louisiana and Connecticut, require the special approval of the legislature or some other administrative body before paying a claim.29 Obviously, a Lender needs to be familiar with these particularities.

Seeking satisfaction of a judgment against a foreign governmental Investor that has defaulted on its capital commitment poses an additional set of issues, including whether or not such Investor has any commercial assets in the United States upon which a Lender can levy in the event the governmental Investor does not voluntarily settle a judgment awarded. In the event that the foreign governmental Investor does not have any commercial assets within the United States, a Lender may need to go abroad to seek enforcement of a judgment. Enforcing a US judgment abroad requires an analysis of whether or not the applicable foreign court will respect the judgment of the US court and if not, how such foreign court will rule if contractual liability needs to be re-litigated.

PRACTICAL CONSIDERATIONS

The good news is that Facilities have been around for many years and anecdotal evidence from active Lenders in the market during the financial crisis indicates that there have been no material governmental Investor defaults, despite significant budget issues faced by many governmental Investors. Additionally, there are practical reasons mitigating the likelihood that a state pension fund or other governmental Investor would renege on its commitment to fund capital contributions. These include the often severe default penalties found in partnership agreements, the bad publicity such Investor would likely receive and the damage the default might cause to the Investor’s credit rating and reputation in the market. Thus, while the potential for such an Investor to claim immunity when a Lender exercises default remedies is nonetheless real and must be considered in connection with formulating each Facility’s borrowing base, the practical likelihood of this happening with frequency in practice may be remote.

Conclusion

There are numerous avenues by which governmental Investors have waived sovereign immunity with respect to commercial contracts. While there are complex legal issues surrounding the interplay between the doctrine of sovereign immunity and the capital commitments of governmental Investors, Funds, Lenders and their respective counsel have vetted many of these issues in connection with prior investments and often have the analysis readily available. Accordingly, after careful review, Lenders are typically getting the comfort they need to include the majority of such Investors in the borrowing base. As no two jurisdictions are the same and the law continues to evolve, it is important for both Funds and Lenders to evaluate governmental Investors individually and stay current on sovereign immunity analysis.

Endnotes

1 See 5 Kenneth Culp Davis, Administrative Law Treatise 6-7 (2d. ed. 1984) (quoting William Blackstone’s Commentaries Book III, Chapter 17 (1765-1769)).

2 Gray v. Bell, 712 F.2d 490, 507 (D.C. Cir. 1983).

3 See Cohens v. Virginia, 19 U.S. 264 (1821).

4 28 U.S.C. §1491.

5 See Hans v. Louisiana, 134 U.S. 1 (1890), Blatchford v. Native Village of Noatak, 501 U.S. 775 (1991) and Alden v. Maine, 527 U.S. 706 (1999) (establishing that the immunity extends to state court).

6 28 U.S.C. §§ 1330, 1332, 1391(f), 1441(d), and 1602-1611.

7 28 U.S.C. §1491.

8 NY Ct of Claims Act §8 (L. 1939, c 860); Cal. Gov. Code §814.

9 See Or. Rev. Stat. §30.320, which requires a government agency to be “acting within the scope of its authority”.

10 For example, New York has vested exclusive jurisdiction in the New York Court of Claims for actions brought against the state of New York (See NY Ct. of Claims Act §8 (L. 1939, c 860)), Michigan, Pennsylvania, West Virginia, Ohio and Connecticut are among other states that have established judicial bodies to hear claims against the state (See Mich. Comp. Laws. Ann.. 600.605; 62 Pa. Consol. Stat. §§1721-1726; W. Va. Code §14-2-1; Ohio Rev. Code §2744.01 et seq.; and Ct. Gen. Stat. §4.142). In order to bring an action against the state of New Mexico under its statutory waiver of contractual immunity (N.M. Stat. Ann. §37-1-23), a plaintiff must (i) bring the claim within two years from the time of accrual, (ii) show that the contract is legally enforceable by pleading the basic elements of contract claims—offer, acceptance, consideration and mutual assent(See Hartbarger v. Frank Paxton Co., 115 N.M. 665, 669 (1993))—and (ii) show that the governmental entity was not acting outside of its designated authority or power (See Spray v. City of Albuquerque, 94 N.M. 199, 201 (N.M. 1980)).

11 Hodges v. Rainey, 533 S.E. 2d 578, 585 (S.C. 2000).

12 Kunzie v. Olivette, 184 S.W. 3d 570 (Mo. 2006).

13 Commonwealth v. AMEC Civil, LLC, 699 S.E. 2d 499, 516 (Va. 2010).

14 Supra note 11.

15 See Tooke v. City of Mexia, 197 S.W.3d 325 (Tex. 2006), which held that a public entity does not waive immunity despite a statutory provision permitting such entity to “sue and be sued.”

16 TSU v. State Street Bank and Trust Company, 212 S.W.3d 893 (Tex. App. 1st Dist. Jan. 11, 2007).

17 Harris Corp. v. Nat’l Iranian Radio & Television, 691 F.2d 1344 (11th Cir. 1982).

18 Marlowe v. Argentine Naval Commission, 1985 WL 8258 (D.D.C. 1985).

19 Creighton v. Qatar, 181 F.3d 118 (D.C. Cir. 1999).

20 See, e.g., Drexel Burnham Lambert v. Committee of Receivers, 12 F.3d 317 (2d Cir. 1993).

21 Seetransport Wiking Trader v. Navimpex Centrala Navala, 989 F.2d 572 (2d Cir. 1993).

22 28 U.S.C. §1605(a)(2).

23 Id.

24 In order to limit its exposure to the US courts, it has been our experience that a number of foreign sovereigns will submit to binding arbitration with the Fund or a Lender.

25 504 U.S. 607 (1992).

26 Id. at 619.

27 See Section 31452 of the California County Employees Retirement Law (Cal. Gov. Code §31450 et seq.), which suggests that the assets of a California county retirement system are generally exempt from levy, execution, assignment, and any other collection process. Notwithstanding the express language of Section 31452 and a lack of certainty related thereto, we think there are good arguments that Section 31452 was intended to protect the pension benefits of the underlying beneficiaries from garnishment and not to shield a California county pension fund from liability for breach of contract.

28 Ky. Rev. Stat. Ann. 45A.245 et seq

29 See W. Va. Code § 14-2-3 (An award by the Court of Claims is a recommendation by the court to the legislature, and is not binding); La. Const Art. XII, §10 (provides for the appropriation of funds by the legislature); and Ct. Gen. Stat. §4.158-160 (for claims in excess of $7,500, the Claims Commissioner may either (i) grant the claimant permission to sue the state agency, in which case the state has waived sovereign immunity or (ii) recommend payment of the claim to the General Assembly, in which case the Assembly may accept, modify or reject the recommendation. Upon rejection, the Assembly may authorize the claimant to sue, or it may reject the claim altogether.).

A subscription credit facility (a “Facility”), also frequently referred to as a capital call facility, is a loan made by a bank or other credit institution to a closed end real estate or private equity fund secured by the capital commitments of the fund’s investors. As the number of new funds in formation appears to be up markedly from the recent past, interest in Facilities from funds and potential creditors is up dramatically.

Introduction

A subscription credit facility (a “Facility”), also frequently referred to as a capital call facility, is a loan made by a bank or other credit institution (the “Creditor”) to a closed end real estate or private equity fund (the “Fund”). The defining characteristic of a Facility is the collateral package: the obligations are typically not secured by the underlying assets of the Fund, but instead are secured by the unfunded commitments (the “Capital Commitments”) of the limited partners of the Fund (the “Investors”) to fund capital contributions (“Capital Contributions”) when called from time to time by the Fund or the Fund’s general partner. The loan documents for the Facility contain provisions securing the rights of the Creditor, including a pledge of (i) the Capital Commitments of the Investors, (ii) the right of the Fund to make a call (each, a “Capital Call”) upon the Capital Commitments of the Investors after an event of default and to enforce the payment thereof, and (iii) the account into which the Investors fund Capital Contributions in response to a Capital Call.
As we come out of the recent financial crisis, Investors appear willing to again make Capital Commitments to Funds, and the number of Funds in formation and seeking Capital Commitments appears to be up markedly from the recent past. Correspondingly, Fund inquiries for Facilities are also on the rise. As Creditors evaluate these lending opportunities, they naturally inquire into the enforceability of Investors’ Capital Commitments in the event of a default under a Facility. This Legal Update seeks to address the current state of the law on point.

Enforceability of Capital Commitments

Although the subscription credit facility product has been around for many years, the volume of published case law precedent on point is limited. Creditors typically see this as a good thing: few Facilities have defaulted and thus there has been little need for litigation against Investors seeking to compel the funding of Capital Contributions. Anecdotal evidence during the financial crisis certainly supports this positive performance, as very few Investor defaults, let alone Facility defaults, have been reported by active Creditors in the market. There is, however, published legal precedent supporting Creditors’ enforcement rights, and it is generally accepted that a Creditor can enforce the Capital Contributions of the Investors under two separate theories of liability: state statutory law and general contract law. We examine each in turn below. Additionally, a Creditor’s rights to the Capital Commitments of the Investors should not be materially impaired by a Fund’s bankruptcy proceeding. While there is not definitive legal authority negating all possible defenses an Investor could raise, there is sufficient law on point to give Creditors’ ample comfort that the collateral supporting a Facility is enforceable.

STATE STATUTORY RIGHT OF CREDITORS TO CAPITAL COMMITMENTS

Delaware Statutory Law. Most Funds are formed as either limited partnerships or limited liability companies, and the vast majority of stateside Funds are organized under Delaware law. Delaware statutory law contains specific provisions addressing the obligations of an Investor to a Fund: “Except as provided in the partnership agreement, a partner is obligated to the limited partnership to perform any promise to contribute cash or property or to perform services, even if that partner is unable to perform because of death, disability or any other reason.”1 In addition, an Investor’s obligation to honor its promise to make Capital Contributions explicitly extends for the benefit of Creditors, and although an Investor’s obligations to the Fund can be “compromised” by consent of the other Investors, this compromise will not excuse the liability or obligations of the Investor in question to Creditors of the Fund. Title 6, Section 17-502 (b) (1) of the Delaware Code provides:

Unless otherwise provided in the partnership agreement, the obligation of a partner to make a contribution or return money or other property paid or distributed in violation of this chapter may be compromised only by consent of all the partners. Notwithstanding the compromise, a creditor of a limited partnership who extends credit, after the entering into of a partnership agreement or an amendment thereto which, in either case, reflects the obligation, and before the amendment thereof to reflect the compromise, may enforce the original obligation to the extent that, in extending credit, the creditor reasonably relied on the obligation of a partner to make a contribution or return.2

The Revised Uniform Partnership Law, adopted by most states, contains similar provisions allowing a Creditor to enforce its rights against an Investor, even if the Investor’s obligations to the Fund have been compromised.3 The Delaware LLC statutory framework provides similar protections for Creditors.4

A Delaware Superior Court has confirmed a Creditor’s cause of action against an Investor to compel the funding of its Capital Commitment under Delaware statutory law. In In re LJM2 Co-Investment, L.P., a Delaware limited partnership was formed by Andrew Fastow, the then-CFO of Enron, for the purpose of making investments in energy and communications businesses related to Enron. The Fund secured nearly $400 million in Capital Commitments and entered into a $120 million syndicated Facility, in what appears to have been a “No Investor Letter” transaction.

The Facility included an “Undertaking” pursuant to which, if the Fund defaulted, the Creditors could issue Capital Calls to cure any payment default. When Enron went bankrupt, the Fund defaulted and the Investors declined to fund Capital Calls issued by both the general partner and subsequently by the Creditors. Instead, the Investors amended the Partnership Agreement, in violation of the Facility provisions, to compromise and rescind the Capital Calls. Without additional Capital Contributions, the Fund could not meet its obligations and filed for bankruptcy. The bankruptcy trustee issued an additional Capital Call—which the Investors again declined to fund—and then commenced litigation against the Investors. The Investors moved to dismiss the statutory cause of action under Title 6, Section 17-502(b)(1) of the Delaware Code based on a variety of arguments, including that the Creditors could not demonstrate “reliance” on their Capital Commitments as required by the statute. The court ruled in favor of the Creditors, holding that they stated a claim for relief under Section 17-502(b)(1) and that the Creditors adequately alleged reliance on the Capital Commitments.5 While not an ultimate ruling, the framework set forth by the court looked quite favorable for the Creditors, and the case appears to have been resolved prior to the issuance of any subsequent opinions.

New York Statutory Law. New York law imposes a similar duty on Investors for “unpaid contributions” to the Fund, and this obligation extends for the benefit of the Fund’s Creditors.6 Additionally, an Investor may be liable with respect to its unfunded Capital Commitment even after exiting the Fund. In In re Securities Group 1980, the trustee of the Fund’s bankruptcy estate brought an action seeking to enforce the Investors’ Capital Commitments, which they had declined to fund after principals of the Fund sponsor were convicted of tax fraud. The Federal Court of Appeals, affirming the Federal Bankruptcy Court, held that the Investors were obligated to fund their Capital Contributions irrespective of the alleged fraud committed by the Fund Sponsor: “Under the statutory provision (of New York Law), even if a debt to a partnership creditor ‘arises’ after the limited partner’s withdrawal, the withdrawn limited partner is nevertheless liable for the debt if the creditor ‘extended credit’ before the amendment of the limited partnership certificate.”7 The court went on to uphold the liability of the Investors to the Fund’s Creditors reasoning that “the limited partners should bear the risk that the partnership’s assets could become worthless.”8

CONTRACTUAL RIGHT TO CAPITAL COMMITMENTS

Breach of Contract. Under a theory of contract liability, an Investor’s obligation to fund its Capital Commitment is an enforceable contractual obligation pursuant to the terms of the partnership agreement (the “Partnership Agreement”). An Investor is held accountable for its Capital Commitments on the ground that it has entered into a contractual relationship with the other partners to make Capital Contributions or contribute other property to further the Fund’s financial growth. Accordingly, the failure of an Investor to honor its obligations would constitute a breach of contract, and the Investor would be liable for such a breach.9

To rely on a theory of contractual liability, the Creditor needs to have standing to assert the claim for breach. To help establish standing, the Partnership Agreement and the Facility documents should contain affirmative language evidencing: (i) the right of the Fund or general partner to make Capital Calls on the Investors and their obligation to fund their related Capital Contributions and (ii) a pledge by the Fund of its right with respect to such Capital Calls and the enforcement thereof to Creditors. If the Partnership Agreement provisions create the contractual obligation and the Facility documents contain the requisite pledge, the Creditors will be wellpositioned legally to enforce the Investor’s Capital Commitments.10

Iridium. A federal district court’s ruling in Chase Manhattan Bank v. Iridium Africa Corporation illustrates the importance of the Partnership Agreement in protecting the rights of Creditors. In this case, the Creditor entered into a $800 million Facility with Iridium LLC based on provisions in the Iridium LLC agreement (the “LLC Agreement”) that the Creditor had the right to call on Iridium’s members’ Reserve Capital Call obligations (“RCC Obligations”), and a certificate from the secretary of Iridium LLC certifying that the LLC Agreement was “true and correct.” Under the terms of the Facility, the Creditor was assigned Iridium’s RCC Obligations. When Iridium defaulted on its loan, the Creditor sought to enforce the assignment of the RCC Obligations. In resolving the dispute, the district court reviewed the language of the LLC Agreement, which contained provisions stating that a member’s duty to perform its RCC Obligations was “absolute and unconditional” and that each member “waived in favor of [the Creditor] any defense it may have or acquire with respect to its obligations under the [RCC].” Therefore, the court granted summary judgment in favor of the Creditor on its breach of contract claim against the Investors.11

Material Breach. An Investor may argue, under contract law, that it should be excused from further performance of its obligations to a Fund in instances where there has been a material breach by the Fund or its General Partner. This is a relatively well-established general legal principle.12 However, this release of an Investor’s liability has been held not to extend to the obligations the Investor owes to Fund Creditors. In distinguishing the relationship between an Investor’s duty to the Fund and other parties contracting with the Fund, a Massachusetts Court of Appeals held that “relations of a limited partner to the partnership … are more complex in that other limited partners and third parties rely on an expressed obligation, made public by filing, to contribute resources to the partnership.”13 The court further noted that the Uniform Partnership Law places an emphasis on protecting the rights of outside parties that rely on the commitments of limited partners in extending credit to the partnership, because, without this guarantee, Creditors would be unlikely to enter into the loan with the limited partnership.14 In fact, in a different case, even where the Fund’s principals were convicted of fraud in relation to the Fund, a court has held that the obligation to pay Capital Commitments to Creditors was not excused.15 These case precedents provide strong authority supporting the enforceability of Capital Commitments—even in the case of a material breach by the Fund. However, it is still advisable to require language in the Partnership Agreement and, if applicable, the Investor Letter, that Capital Contributions will be funded by the Investor “without set-off, counterclaim or defense” to further weaken any material breach defense.

ENFORCEABILITY OF CAPITAL COMMITMENTS IN BANKRUPTCY PROCEEDINGS

In the event of the bankruptcy of the Fund, the causes of action entitling the Creditor to relief will not change—they will still be based on the same statutory and contractual theories. But the context of the proceedings, and the potential defenses asserted by the Investors, will likely change. A Creditor’s rights will be subject to the applicable provisions of the U.S. Bankruptcy Code (the “Code”) and will likely be represented by the Fund itself, as debtor-inpossession (“DIP”) or a bankruptcy trustee (the “Trustee”). Within a bankruptcy, the DIP or the Trustee acts on behalf of the Fund and seeks to maximize the value of the Fund’s estate to pay off its obligations to its creditors. As such, the Trustee typically seeks to marshal Fund assets by making a Capital Call and bringing litigation against the Investors if necessary.16

In a Fund bankruptcy, an Investor’s primary argument is likely to be that its remaining Capital Commitment is an “executory contract” under Section 365(c)(2) of the Code, rendering the obligation voidable. An “executory contract,” although not specifically defined in the Code, is generally considered to be a contract where both counterparties have material, unperformed obligations. Generally, in bankruptcy, the DIP or the Trustee gets to decide whether to assume an executory contract (and be bound thereunder) or to reject it and thereby effectively disaffirm any such continuing obligations. However, under Section 365(c)(2) of the Code, a DIP or Trustee is prohibited from assuming an executory contract if it is by a third party to “make a loan, or extend other debt financing or financial accommodations to or for the benefit of the debtor, or to issue a security of the debtor.”17

In Iridium, the Investors argued that the LLC agreement containing their RCC Obligations was a financial accommodation contract that the Code prohibited from being assumed. The court rejected this argument, noting that the purpose of Section 365(c)(2) of the Code is to protect parties from extending additional credit or funding whose repayment relies on the fiscal strength of an already bankrupt debtor. The court held that the RCC Obligations, in contrast, were not “new” obligations, having long since been committed by the members: “In these circumstances, the Court concludes that the [members] are not within the class of creditors Congress intended to protect under Section 365(c)(2) of the Bankruptcy Code.”18

This ruling leaves an important consideration from a practitioner’s perspective, as tax considerations have caused some Funds to allow for Capital Contributions to be funded in the form of loans instead of equity. While we would be hopeful a court would look through this phraseology to the substance of what an Investor’s Capital Contributions are, the “loan” language might give an Investor a stronger basis to argue that the applicable agreement was one to extend a loan or financial accommodation, and thus non-assumable under Section 365(c)(2). To help better protect the Creditor against this possibility, we prefer to see explicit language in the applicable Partnership Agreement and, if applicable, in the Investor Letter, substantially to the effect that, in the event that any loans funded in lieu of Capital Contributions under the Partnership Agreement would be deemed to be an executory contract or financial accommodation in connection with a bankruptcy or insolvency proceeding, each Investor irrevocably commits to cause any amounts that would otherwise be funded as loans to be made as a Capital Contribution to the Fund.

Conclusion

While there is not a definitive case fully vetting and dismissing every argument Investors could potentially assert in attempting to avoid honoring their Capital Commitments, the existing statutory and case law provide significant comfort that Investors’ Capital Commitments are enforceable obligations, even in a Fund bankruptcy context.

Endnotes

1 DEL. CODE ANN. tit. 6, § 17-502(a)(1) (2010) (emphasis added).

2 DEL. CODE ANN. tit. 6 § 17-502(b)(i) (2010).

3 See UNIF. P’SHIP LAW § 502(c) (provisions allowing a Creditor to enforce its rights against a limited partner, even if a limited partner’s obligations to the limited partnership have been compromised).

4 See DEL. CODE ANN. tit. 6, § 18-502 (2010).

5 See In re LJM2 Co.-Investment, L.P., 866A. 2d 762 (Del. Super. Ct. 2004).

6 N.Y. P’SHIP LAW § 106(1)(b) (limited partner liable for “any unpaid contributions which he agreed in the certificate to make in the future at the time and on the conditions stated in the certificate”); see also § 106(3) (“[T]he liabilities of a limited partner … can be waived or compromised only by the consent of all members; but a waiver or compromise shall not affect the right of a creditor of a partnership, who extended credit … to enforce such liabilities.”).

7 In re Sec. Group 1980, 74 F.3d 1103, 1110 (11th Cir. 1996); see also Int’l Investors v. Bus. Park Fund, 991 P.2d 219 (Alaska 1999) (limited partners liable to creditors who extend credit based on limited partners’ capital commitments).

8 Id. at 1111 (citing Kittredge v. Langley, 252 N.Y. 405, 169 N.E. 626 (1930)).

9 Each case cited hereunder was decided under Delaware or other U.S. law. While applicable local counsel should be consulted in connection with funds that have parallel or feeder vehicles formed in other jurisdictions, other jurisdictions do have precedent consistent with these holdings. For example, Appleby has confirmed that, assuming that the New York law Facility documentation creates a valid and enforceable security interest over the Capital Commitments, Creditors will be well placed legally to enforce the Investor’s Capital Commitments in a Fund governed by the laws of the Cayman Islands (Mayer Brown LLP does not opine on the laws of the Cayman Islands). See also Advantage Capital v. Adair [02 Jun 2010] (QBD) Claim no. HQ10X01837 (Order for breach of contract granted in favor of private equity fund that sued a limited partner for repudiation under English law).

10 See NAMA Holdings, LLC v. Related World Mkt. Ctr., LLC, 922 A.2d 417, 434 (Del. Ch. 2007) (“As a general rule, only parties to a contract and intended third-party beneficiaries may enforce an agreement’s provisions.”); see also Insituform of N. Am., Inc. v. Chandler, 534 A.2d 257, 268 (Del. Ch. 1987) (“It is universally recognized that where it is the intention of the promisee to secure performance of the promised act for the benefit of another, either as a gift or in satisfaction or partial satisfaction of an obligation to that person, and the promisee makes a valid contract to do so, then such third person has an enforceable right under that contract to require the promisor to perform or respond in damages.”).

11 Chase Manhattan Bank v. Iridium, 307 F.Supp 2d 608, 612-13 (D. Del. 2004). Similarly, the Bankruptcy Court in In re Securities Group 1980 held that the Investors were liable under a contractual theory of liability under the applicable Partnership Agreement. See 74 F.3d at 1108.

12Partnership Equities, Inc. v. Marten, 15 Mass. App. Ct. 42, 45, 443 N.E.2d 134, 136 (Mass. App. Ct. 1982) (“If (limited partner’s)) enrollment were merely a bilateral agreement between the defendants and the general partners, the principle of contact law upon which the defendants rely, that a material breach excuses nonperformance might well apply.”).

13Id. (emphasis added).

14 Id. at 45

15 In re Securities Group 1980, 74 F.3d at 1109 (“[A] material breach of the partnership agreement … would not excuse a limited partner’s commitment to contribute additional capital on the conditions stated in the certificate [of limited partnership].”).

16 See Lowin v. Dayton Sec. Assoc., 124 B.R. 875, 892-93 (M.D. Fla. Bankr. 1991); see also In re LJM2 Co-Investment, L.P., 866A.2d 762, 781 (Del. Super. Ct. 2004).

17 11 U.S.C. § 365(c)(2).

18 Chase Manhattan Bank v. Iridium Africa Corp., 2004 WL 323178 at *4 (D. Del. 2004); see also Lowin, 124 B.R. at 901 (stating that a Trustee’s enforcement of the limited partners’ Capital Commitments “is not the equivalent of requiring the limited partner defendants to extend new credit to the debtors in the form of loans, lease financing or purchase of discount notes”).