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.
