AIG’s VALIC Ordered to Refund $3.7 Million by Federal Court

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Refund to go to a Chicago real estate development company for unenforceable commercial loan prepayment penalties.

The Variable Annuity Life Insurance Company (VALIC), a Houston, Tx. based unit of American International Group, Inc. (AIG), has been ordered by a federal court to refund more than $3.7 million to a Chicago real estate development firm for unjust loan prepayment penalty fees it had previously paid, it was announced here today.

Arthur Holtzman, a partner of Pedersen & Houpt, L.L.C. which represented River East Plaza, L.L.C. here, said the real estate development company will receive $3.7 million plus interest as a result of the ruling by Judge John W. Darrah in US District Court, Northern District, Eastern Division.    Judge Darrah ruled that River East Plaza should only have to pay 1% on the prepaid balance of $12,301,215 or $123,012.15.

Judge Darrah, following the bench proceedings, said certain prepayment fee provisions in a commercial loan are “unenforceable” penalties.

“Because the yield-maintenance clause of the prepayment provision is an unenforceable penalty, the prepayment provision’s second clause . . . . providing a prepayment charge of 1% of the remaining principal of the loan, determines the prepayment fee. To determine a prepayment fee based on some other basis formula would require the Court to rewrite the contract to impose a prepayment rate not based on an agreement between the parties,” wrote Judge Darrah.

VALIC initially demanded the prepayment penalty following the sale of the property at 2700 N. Clybourn here to COSTCO by MCL Clybourn South, L.L.C., the name by which River East Plaza was known at the time of the transaction in 2003. Despite challenges made by River East Plaza, management complied with the prepayment request, paying VALIC a prepayment premium fee of more than $4.7 million.

VALIC, according to Holtzman, had previously refunded more than $825,000 of the $4.7 million prepayment penalty when the borrower recognized that VALIC had miscalculated the amount due, leaving the remaining prepayment penalty at $3,808,505.

“This is a tremendous victory for River East Plaza and for owners of commercial real estate,” said Holtzman. “Borrowers should retain the flexibility to buy, sell or refinance properties without fear of onerous prepayment penalties.”

The case number for River East Plaza, L.L.C. f/k/a MCL Clybourn Square South, L.L.C. versus The Variable Annuity Life Company versus Daniel E. McLean, a third party defendant, is NO: 03 C 4354.


Raymond D. Minkus    

(847) 509-5777


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