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

Following up on my earlier posting covering impossibility performance as a possible defense to performance\pay-off of a loan at loan maturity -

As everyone knows, yesterday the #2 owner of malls in the U.S. (General Growth Properties) filed for bankruptcy.  Here's link to a blog on seekingalpha.com that contains copies of GPP's 8-K and the voluntary filing, and some interesting commentary about the situation.

From my perspective, the GPP filing simply might be the logical and ultimate outcome of an impossibility of performance "defense" or perspective - with the important twist that GPP is simply too big to assert the defense in each of the states where it does business.  In other words, the combination of (i) an "impossible market" and (ii) a huge, multi-jurisdiction business footprint simply forced it to file BK.

Here are portions of the blog posting that lead me to this perspective:

• This is not a typical Chapter 11 as the reason for reorganization is not due to a company that cannot pay bills, credit markets have cause extenuating circumstances.  Because of that, the "usual outcome" some assume must be discounted and other options receive more weight.
• There is legal precedent in 11 for equity remaining whole
• [The COO on CNBC states]:
  
  * Rent are stable
  * NOI up
  * Not negotiating leases
  * Occupancy strong

Please post your thoughts, comments or perspective.

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In a prior posting, I mentioned the need to watch for local legislative and regulatory\administrative trends or changes.  But don't forget to watch for changes at the court house, too.

We've been watching, waiting and even researching this one: an assertion that Borrower would pay at maturity of the commercial mortgage loan, except that the credit crisis makes it "impossible" for the Borrower to find another loan to pay-off the matured debt!  This is NOT a "new" legal theory.

In the "old" economy, such as argument was, well, perceived as silly in the context of commercial mortgage finance.  What fool will argue impossibility when money is plentiful?  And, today there still is money available - it just costs an arm and a leg (from equity sources and from debt sources).

However, in the "new" economy (or whatever you want to call it), the argument becomes more interesting. 

It's just begging for the right jurisdiction, the right facts, the right judge, etc.  Maybe a jurisdiction where charging an arm or a leg will no longer be tolerated.  Maybe a jurisdiction with an implied covenant of good faith and fair dealing, and a "new" judiciary willing to extend the concept in a crisis . . . .

This "impossible" assertion has bubbled up on two recent cases: (i) a recent posing at The Dirt Lawyer's Blog describes a case in Chicago involving a "dead" acquisition of an office building located at 180 North LaSalle in Chicago, and in passing refers to a case that we've been watching, (ii) the Trump Tower case, also in Chicago, but involving mortgage finance issues.

Succinctly stated:

• I can't buy this office building (180 North LaSalle), because I can't find reasonable funds
• I can't pay off the loan on this building (the Trump Tower), although I can continue to make the monthly payments, because I can't find reasonable funds

Strangely, Chicago seems to be ground zero.  (What 's going on in Chicago?  Recall the River East case in late 2006, which involved a Federal trial court ruling that a yield maintenance clause was an unenforceable penalty under Illinois law.  Of course, the Seventh Circuit Court of Appeals reversed the trial court in 2007.)

I can think of several other jurisdictions where this argument might find a home - if not in Chicago.

From my perspective, this is exactly the type of innovative lawyering that we'll experience in these tough times.

You need to get ready for change from the legislatures, the administrative\regulatory agencies, and the courts.

• are you seeing the "impossibility" argument in any cases where you operate?
• are you hearing borrowers starting to beat the drum on this one?

Please post your comments and observations.

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