Tough Times for Lenders : Financial Services Lawyer & Attorney : Winstead Law Firm : Finance, Banking, Bankruptcy

This is a series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).

Strangely enough, I associate diversion of rent with lender liability  -  because both are common liability claims based upon "bad acts" of either a borrower or a lender.

FAQ #20 - What if I think the borrower might be diverting rents or other income?

• Consider seeking a restraining order or receiver (link to prior blog on these topics)
• Consider pursuing the borrower and/or its principals for fraudulent transfer or as a recourse event under the loan (link to prior blog posting)
• Exercise remedies under the Assignment of Rents  (blog #1 posting) (blog #2 posting)

FAQ#21 - What lender liability issues should I be concerned with after a borrower defaults?

• Lender Control
  • Avoid involvement in the day to day managerial operations of the borrow
  • Avoid involvement in borrower's management
  • Avoid having actual or apparent control over the borrower's payroll payments or
       withholding payments
  • Avoid requiring joint checks to contractors and the borrower in construction loans
       UNLESS the loan documents clearly allow this
  • Avoid causing the borrower to make a decision that results in business activities solely for the lender's benefit 
• The other "Golden Rule": Be truthful and take no actions that breach agreements or commitments
• Communicating with other lenders (on unrelated loans)
• Here's our listing of current cases handled by us, where the borrower asserts similar claims of lender wrong-doing (link)

To read the entire Tough Times FAQ series, please click here.

Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, suggestions or questions on this topic, please post a comment below.

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I know, I know:  This is a real tease if you're NOT located in the Dallas/Fort Worth area.  But, please be patient.  Help is on the way (Sorry, bad memories there).

If you are unable to attend this seminar, we're planning a webinar series for 2010.  If this topic is as "hot" as we think it should be, then we'll cover it again as a webinar in 2010.

But, if you're in North Texas and looking to tackle this subject (and mingle with like-minded people—free food and liquids), or simply looking for an excuse to hit the road . . . .

Seminar Details:
How to Maximize Your Recovery on Guaranties & Credit Enhancements

Thursday, November 5, 2009
3:00 - 5:00 p.m.  presentation
5:00 - 6:00 p.m.  reception

To RSVP, contact:
Valerie Macalik, vmacalik@winstead.com

Topics will include:

-What type of guaranties & credit enhancements exist
-How are guaranties & credit enhancements enforced and collected
-What obstacles stand in the way of collecting
-Strategies you can use to maximize your recovery in a down market

Who Should Attend:
Banking professionals, including workout, audit and loan officers, and any potential
investors in debt.

Location:
Winstead PC
1201 Elm Street, Suite 5400, Dallas, Texas 75270

Parking validation will be provided for the Renaissance
Parking Garage located at the intersection of Field and Pacific

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Once a month, our regular group of authors discuss topics that we view as being of interest (the "hot" topics) in the commercial loan workout arena.  We then hash out a list of what we'll write on for the next month.

Identifying "hot" workout topics can be a dangerous thing for lawyers.   Yes, we -

• are active in industry organizations (such as the several committees with the Mortgage Bankers Association and working on creating workout data standards through MSMO 
• give workout seminars to clients and at legal industry meetings, and
• now handle an increasing number of workouts and bankruptcies every day . . .

BUT as "outside" counsel,  we're keenly aware that we are not privy to all of the discussions (both formal and informal) that you, the front-line participant, are having on this growing topic.  (There you have it: that long sentence proves I'm a lawyer - which is the reason why we need your help.)

While we believe that we're generally in touch with the market, we understand that we still remain "outside" legal counsel.  So, we're looking to you for the "inside" scope on topics of interest.

- Do you have any topics that you'd like us to address in Tough Times?

Please post a comment to give us some guidance.

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Real estate financing in recent times has generally involved non-recourse loans. While this is virtually a given in a conduit loan situation – the regular portfolio lenders often found it necessary to offer non-recourse loans to compete. A corollary to this basic market term, is the recourse carve-out – circumstances which trigger an exception to the otherwise non-recourse nature of the loan.

Each recourse carve-out will turn on the specific language included in your loan documents – so review them carefully. But, some general overview points are helpful to the review of your unique situation.

"Extent of loss" carve-outs
Some recourse carve-outs impose liability to the extent of a loss caused to the note holder. Review your loan document carefully to understand which these are. These carve-outs are usually associated with fraud or misrepresentations, waste, improper handling of rents (particularly unearned/future rents), improper handling of insurance claim proceeds and improper handling of condemnation proceeds. For the last items on this list, the concept of a limited extent of loss and a direct causal connection is relatively easy to see and measure. For fraud claims, the issue can get much more complicated. What if the fraud occurred before the loan closed? Is the entire unpaid balance the "extent" of your loss? Each of these claims will involve its own story and will stand or fall on the strength of the particular facts. And for each, two questions come in to play – 1) did the recourse trigger cause a loss, and 2) how much?

Springing recourse liability
Some recourse carve outs convert the loan obligation from non-recourse to full recourse. If one of these recourse events occurs – the result is more like the true "I promise to pay" language of the standard note. In that event, there is no issue about the amount of the loss – it is the full unpaid debt. Also, there is no issue about the cause of the loss – the issue is simply one of an agreement to be fully liable. These recourse triggers commonly arise upon breach of covenants restricting transfer of the collateral without the lender's consent, the filing of a bankruptcy involving the collateral or obligated parties and, sometimes, the failure of the borrower to maintain Single Purpose Entity status.

Do your homework
If a loan default is pending – do your homework. Get some background information and start developing your case for recourse – if the facts are there.
 

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