Lender Liability: Lender Suing Lender - The "New" Reality?
The Zerohedge Blog [link] reports on a NY state court filing related to the high-profile Extended Stay Motel bankruptcy case.
Zerohedge focuses on the hedge fund involvement in the case.
I view it as the beginning of the lender liability battles between classes of lenders.
Over the past several months, we've been giving presentations to our clients on basic lender liability stuff―dusting off our materials from the late 80s and early 90s. (I'll admit it: Texas plaintiff lawyers led the charge back then against lenders and in the development of lender liability causes of action; so, we dealt with it extensively [look at Mike Baggett's bio [link], for example].)
However, this round of lender liability will be different because the last 15 years saw an incredible growth not only in complicated deal structure from the borrower (equity) side of the ledger, but also from the lender (credit) side of the deal. Co-lender structures (participations, syndications, etc.), A\B\C notes, mezz debt at every point on the equity stack, etc., all seemed to explode during the last 15+ years (it's mantra: "use someone else's money").
So, now that the economy is in the tank, and the long-awaited "stress test" of commercial real estate debt ready to crank up . . .
The prediction is that law suits between lenders will be a new "feature" of the current story, and "lender liability" will have an expanded meaning. No longer will it simply mean borrower v lender.
One important reason for the change: The "new" intercreditor stack no longer is comprised of the relatively homogeneous group of life companies who utilized the old-time "club loan" structure.
Instead, the lender\credit "stack" (i.e., the lender side of the deal) often contains a very diverse group of creditors who (we're discovering) have a very different balance sheet and set of goals. (See my earlier posting on this perspective and on some tangible tasks to understand the credit stack [link].) And the stack is much, much more complicated than the structures from the 80s. Finally, there simply just is more of it. (Again, the "other people's money" mantra.)
We'll be writing on this subject in future.
- Are you seeing examples of this?
- Do you know of other law suits that we should be tracking?
Please post your comments or your information.
Keith,
Where I have seen the potential for increasing interbank litigation in my practice is with loan participations done on boilerplate participation agreements for deals under $15 million among community banks. The deal documents consist of forms which are basically "fill in the blanks." The custom in much of the country, it appears, is to assume that an industry standard embodied in the boilerplat document protects all parties.
The originating bank may have a multifaceted relationship with the borrower which influences its actions and omissions in terms of sound loan management and collection practices for the participated loan. Because of the unusual amount of losses occurring now, the participants are scrutinizing the conduct of the originator in servicing the loan when default occurs. The boilerplate may be wholly inadequate in giving either the protection the originating bank may expect or the remedies the participating banks may expect.
The community banks are probably coming to the party later than others in that many had conservative underwriting practices, but the environment is such that even conservatively underwritten loans are falling into default.
This is not an example of different classes of creditors with different structures and interests, but identical classes of creditors who are unused to disputes among their peers. Losses may mount to the point that their natural reluctance to enter into litigation may be overcome by their duty to shareholders to seek recourse.
Jim Maniace
Chester, Willcox & Saxbe, LLP
Columbus, Ohio
Jim: good comment - problems can jump up within "identical classes" of creditors in a co-lender structure.
For example, I know of a bank that offered up its "pro-agent" participation agreement for use in a deal where it was the participant. Yes, the bank shot itself in the foot, as it now complains about its lack of rights (as a mere participant) in the structure.
Keith