Steak n Shake Inc. v. Wilmington Trust, National Association

Background

Steak n Shake and two subsidiaries borrowed $220 million under a 2014 credit agreement. The loans were secured by Steak n Shake assets, including real property used for its restaurants. The agreement generally restricted property sales but allowed certain sales subject to conditions, including a $50 million aggregate limit, fair-market-value and arm’s-length requirements, cash or cash-equivalent consideration, and use of the proceeds to prepay the loans as required by the agreement.

The agreement also stated that collateral could be sold free of Wilmington’s liens if the sale was permitted under the agreement or the required lenders waived the restriction. Before releasing the liens, however, Steak n Shake had to provide certifications or documents that Wilmington reasonably requested to show compliance with the property-sale provisions.

Steak n Shake planned to auction 15 properties on September 3, 2020. It said it intended to use the expected proceeds, estimated at $7 million to $10 million, to reinvest in its business. Wilmington requested information about earlier dispositions involving Cracker Barrel shares and Lion Fund interests, the remaining capacity under the $50 million limit, the expected proceeds and fair-market value of each property, and Steak n Shake’s intended use of the proceeds. Wilmington declined to release the liens while those issues remained unresolved.

Motion and governing standard

Steak n Shake filed the lawsuit seeking a declaration that its planned sales complied with the credit agreement. It later sought a mandatory preliminary injunction requiring Wilmington to release the liens. A mandatory preliminary injunction is an emergency order requiring a party to take action rather than merely preserve the existing situation.

Because the requested order would change the existing situation and could provide much of the relief Steak n Shake sought, the court applied a heightened standard. Steak n Shake had to make a clear or substantial showing that it was likely to succeed, show actual and imminent harm that could not be repaired after trial, show that the injunction served the public interest, and show that the balance of hardships strongly favored it.

Irreparable harm

The court held that Steak n Shake had not made the required strong showing of irreparable harm. Its chief financial officer described possible losses involving property values, business opportunities, goodwill, franchise partners, vendors, employees, and restaurant operations, but the court found those assertions speculative and largely based on an understanding of what advisers had said.

The court also noted that Steak n Shake’s auction procedures did not require the liens to be released before a bid was accepted or the transaction closed. The procedures contemplated obtaining the mortgagee’s consent to release the liens at closing. In addition, the deadline for irrevocable bids had passed before the court ruled. The court reasoned that Steak n Shake had either already suffered the harm it feared or had not suffered it, and that an injunction would not substantially help in either event.

Likelihood of success on the contract dispute

The court found factual disputes about whether Wilmington had breached the credit agreement, but Steak n Shake had not shown a clear likelihood of prevailing on those disputes. The court interpreted Section 6.06 as giving Wilmington discretion to reasonably request documents and certifications showing compliance with the property-sale conditions. Wilmington’s role was not merely ministerial; it could determine what information it reasonably needed, subject to acting reasonably and in good faith.

The court rejected Steak n Shake’s position that its own certification was enough. Because the agreement allowed Wilmington to request both certifications and documents, the court concluded that Steak n Shake could not establish compliance merely by asserting that it intended to comply. The court also concluded that Wilmington’s obligation to release the liens could not be triggered until there was an actual sale, because fair-market value and the required consideration could not be demonstrated until there was a committed buyer and a transaction capable of closing.

The court said Wilmington’s reasonable requests could cover all four conditions in Section 6.06(b), including the $50 million limit, fair-market value and arm’s-length terms, cash consideration, and the required use of proceeds. Wilmington could also reasonably inquire into earlier property dispositions and the provisions of the credit agreement that allegedly permitted them. The court further held that Wilmington could request information about whether Steak n Shake’s intended reinvestment of the proceeds complied with the agreement, including whether a default or event of default might require prepayment instead.

The court rejected Steak n Shake’s reliance on other provisions allowing Wilmington to rely on apparently valid documents and requiring an agent to release liens for permitted dispositions. Those provisions did not eliminate Steak n Shake’s duty to comply with the credit agreement or Wilmington’s right to request reasonable supporting information.

Other factors and disposition

The court found that the public-interest argument depended on Steak n Shake first showing that Wilmington had failed to meet its contractual duties. It also found the parties’ competing interests balanced evenly: Steak n Shake sought capital for its business, while Wilmington and the lenders sought to preserve the property securing the loans unless compliance with the agreement was shown.

Judge Lewis J. Liman denied the motion for a preliminary injunction and directed the Clerk of Court to close the motion. The court did not finally decide whether Wilmington’s requests were reasonable, whether Steak n Shake’s responses were sufficient, or whether Wilmington could continue demanding the information. It said those questions would have to await discovery and ordered the parties to propose how the case should proceed.