Action Items

  • Follow all of the loan documents’ notice and cure provisions (if any) when considering using the Material Adverse Change (MAC) clause.
  • Follow all of your bank's loan policies and procedures.
  • Document the data supporting the borrower's material change in financial condition.
  • Ask the borrower to provide the most current financial information available.
  • Review your loan documents to ensure they have jury waiver provisions.

In light of the COVID-19 (coronavirus) pandemic, businesses large and small are feeling financial stress. We expect the economy will continue to decline over the next several weeks, with federal social distancing guidance and state and local Shelter-in-Place orders being extended to April 30, 2020.

As businesses suffer declining revenue and profit, some banks may consider whether they are able to invoke the MAC clause in their loan documents to decline to extend additional credit or declare a borrower in default. The questions your bank must ask are what factors you should consider determining whether there has been a MAC in the borrower's financial condition, and can the borrower raise the pandemic as an excuse or defense against the MAC clause.

MAC Clause Guidance

There is surprisingly little law interpreting MAC clauses that provide a bright-line test. However, guidance from the law that does exist includes:

  • Interpretation of a MAC clause is a question of fact, which usually means it would be decided at a trial;
  • A MAC clause will be read with and in conjunction of the entirety of the loan documents, which would generally include provisions such as force majeure clauses invoked by the borrower;
  • Courts look at the economic data to determine whether the borrower has suffered a MAC (comparison of revenue, sales, real estate values, etc.); and
  • At least one New York court implied the terrorist attacks in New York City on September 11th would not serve as an excuse to relieve a borrower from the MAC clause.

We Can Help You

Barack Ferrazzano’s Financial Institutions and Litigation Group attorneys can help guide you through the determination of whether and how to exercise your bank’s rights under a MAC clause in your loan documents.

We draw on our experience to ask the right questions about your borrower’s situation and develop a strategy that will maximize the likelihood of prevailing in any litigation arising out of your exercise of rights under a MAC clause and maximize the likelihood of avoiding or quickly resolving a dispute.

COVID-19 Resources

We recommend reviewing the following pandemic-related business and legal considerations we have been discussing with our clients:

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