Special Assets Lawyer Blog

Bank Loan Workouts: What to Send to Your Counsel

2010-03-09T14:27:30Z

A new deal has come into Special Assets and has been assigned to you. The line officer tells you that the customer has been a good customer of the Bank for several years and that you can expect nothing but cooperation. Everything was fine until last year, when business slowed to a crawl and cash flow dried up. The loan matured and the financials simply did not support the automatic extension that both line officer and customer wanted.

Your initial analysis confirms that until recently, the loan performed as agreed. You are fairly certain that you are going to be dealing with a business that has fallen on hard times, but might be able to right itself. The business is hanging on to old inventory rather than liquidate it, but it has leased out part of its building to raise extra cash.

After meeting with the customer and again reviewing the financials, you conclude that the best way to manage this credit is to temporarily forbear from enforcing existing financial covenants and to change the payment schedule to better match the expected, albeit reduced, projected revenue stream for a short time to see if the customer can manage its way out of the problem. The end of the quarter is fast approaching, and you need this deal documented and signed within days.

You have loan services copy the loan documents and send them to the JMBM Special Assets Team (good choice!!) to document your deal and turn it around promptly. When the loan documents arrive, however, your lawyers find that they need more information. They can get started, but they can't finish without more.

Counsel tells you that they also need the current outstandings, the UCC-1 financing statements, amendments and continuation statements and a UCC search. The lawyers also ask for the most recent borrowing base certificate and if you have one, an appraisal of the equipment and inventory would shed some light on the deal. Counsel also asks to see the loan policy of title insurance, as well as the new lease and the most recent appraisal of the property. One of the business owners recently retired, so we also need to see the entity documents, such as the LLC operating agreement. And just to be sure we get it right, can you please send over the credit authorization?

You wonder, "Why do they need to see all of that just to document a forbearance? Are they going to read every word of that mass of documents and bill the Bank hours and hours for doing so? If they read it all, this deal will never get documented!!" Good question, but rest assured, there are excellent reasons why experienced bank counsel want to know what you know before diving in and starting to write loan documents.

]]> You've spent several hours wading through the credit file, the legal file and the appraisals. You've been to the site, seen the plant and talked to the customer. You've debriefed the line officer and talked to credit administration. You've had a few weeks to put all of this information together to get a clear view of the credit, and you are pretty sure you know what you want the documentation to do.

The lawyers are new to the deal. They are being asked to absorb a wealth of selected information quickly, to learn documentation that someone else drafted and to apply the changes you've specified - all in a matter of days. To do this, they may not need to read every line of every document you have sent to them, but they will need access to those documents at a moment's notice to get the job done. Today, for the modest cost of scanning, copying and printing, you can provide total access to your counsel that will enable him or her to get the job done right and on time.

The simple reason why lawyers need quick access to the raw materials of loan documentation is that they often do their drafting during off-hours. During these busy days, bankers and lawyers are working hard after normal business hours. On weekends, at night, early in the morning - any time that a few uninterrupted hours can be found, workout professionals are addressing the complex, time-consuming part of the job. Bankers can't write up credits while the phone is ringing off the hook or they are in a meeting, and lawyers can't draft loan documents and forbearance agreements without peace and quiet, either. We can't write loan documents and agreements without constantly referring to the existing documentation and other information that is relevant to the credit. If we have them on hand, we can get the job done without interruption.

One of the most savvy and experienced workout professionals I know makes it a standing practice to send us everything anytime he gets that feeling that counsel is going to become involved in the deal. He sends the documents to us often weeks before he finally decides to get us involved. His rationale: counsel can run conflict checks, get the documents on site and in the file, ready for immediate use should the need arise, all for the modest cost of scanning, copying, printing and mailing. He's prepared when that emergency strikes to call us and get us involved at a moment's notice.

At the JMBM Special Assets Team, we've been retaining electronic copies of documents and other materials whenever our clients send them to us. It takes almost no time to save the attachment electronically (and it costs nothing), but it sure saves time when we need to insert a legal description of real property, recite the interest rate, draft a waiver of financial covenants or correct a mistake in existing documentation. (That's not to say that we don't usually have to print out complicated loan documentation. It's virtually impossible to trudge through 40 or 50 pages of documentation on a computer screen!!)

We also use the information you send to us to double check the status of the Bank's liens, having recently witnessed what happens when the lender assumes that the lien is valid but never bothers to check. Most of you are probably aware that a major bank came up short in collecting its eight-figure supposedly secured loan to the Heller Ehrman law firm. A bank employee had mistakenly filed a UCC termination statement, which had the effect of immediately unperfecting the bank's security interest in the law firm's major asset, its accounts receivable. After the firm filed its bankruptcy case, the bank's security interest was avoided and the bank will lose the benefit of being a secured creditor and be required to share pro rata with the unsecured creditors. If ever there was a lesson to be learned, this sad incident teaches us to double check the UCC filings and the title insurance policies to be certain that the bank actually has the collateral position it thinks it has.

Good counsel ask and listen to what their clients want and need, and good workout professionals anticipate those questions and do what can be done under the circumstances to help get the job done. In the end, it is a real team effort between banker and counsel to get mountains moved, deals cut and documented and loans collected.

What to Send Counsel

This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what's new in the World of Workouts.

Year after year, day after day, workout professionals in the know rely on JMBM's Special Assets Team to handle problem commercial and real estate loans. Whatever problem loans you have, chances are, we've seen it. Give us a call.

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Our Perspective. JMBM represents commercial banks, special servicers, private lenders, asset-based lenders, hard money lenders and factors. We help lender clients throughout the United States craft business and legal solutions to their commercial and real estate troubled loans. For more information, please contact Dick Rogan at RRogan@JMBM.com, or (415) 398-8080.

Richard A. Rogan is Chair of the JMBM Special Assets Team. He also serves as the co-managing partner of JMBM's San Francisco office and co-chair of its Bankruptcy Practice Group.

JMBM's Special Assets Team has represented hundreds of lenders in California and throughout the United States. We regularly appear in bankruptcy courts, district courts and superior courts. We are proud to serve as trusted counsel and advisors who look for a business solution and try to help lenders find the best possible resolution for each troubled loan. Whether a loan is being newly documented, restructured or litigated, JMBM's Special Assets Team has the skill, know-how and experience to solve your problem in a practical no-nonsense way.

NOTE TO CONSUMERS: As a matter of Firm policy, JMBM does not represent individual consumers who have disputes with their lenders. Many lenders have specialized consumer workout professionals who have the time to help consumer borrowers. There are many fine attorneys who specialize in representing consumers. Individuals with consumer lending problems should contact a lawyer or law firm who specializes in consumer insolvency and bankruptcy in their local area. When in doubt, we suggest you contact your local bar association's Lawyer Referral Service. [For example, see Bar Association of SF or LA County Bar Association Lawyer Referral Services]

JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.

How Commercial Real Estate Borrowers Should Approach Their Lender: What to Do Before Defaulting (Part 5)

2010-03-05T15:04:25Z

Experienced workout professionals carefully think through the first meeting with a troubled borrower. It is critical that the borrower, often unaccustomed to failure, recognizes why its loan has been reassigned to the Special Assets Department and why its new banker is a workout professional. It is also critical that the borrower comes to understand that the lender is willing to explore various means of getting the loan repaid consensually as an alternative to filing a collection lawsuit or foreclosing.

Savvy workout professionals take time to let the borrower know exactly what is expected by the bank before the first meeting takes place and then reinforce that information at the meeting. A bewildered borrower is of little help in troubleshooting the problem and looking for solutions. A prepared and thoughtful borrower who is willing to engage the lender may find a way out that is palatable to the bank. The fifth and final post in our series taken from my Urban Land article, "What to Do Before Defaulting," lays out some basic steps for a commercial borrower to follow before meeting its workout team for the first time. Do not assume that your borrowers know these steps, even if they are otherwise sophisticated investors or business people. Tell them clearly and as simply and as soon as possible.

]]> What to Do Before Defaulting (Part 2)
Copyright © Urban Land Institute's Urban Land Magazine 2010. Reprinted with permission.

Meeting the Lender
The first meeting between lender and borrower is critical. This is an opportunity not only for the two parties to get to
know one another, but also for the borrower to demonstrate competence and the ability to identify and manage any difficulties facing the building. The borrower's goal is for the lender to walk away from the meeting with an understanding of the problems and the knowledge that the owner recognizes those issues and want to works with the lender to resolve them favorably for the benefit of both parties.

Here are some steps to follow:

• Come prepared with handouts explaining how well the building performed when times were better, and show why the building's performance has tailed off.
• Prepare a sophisticated, yet brief, description of the local marketplace similar to the flyers that local brokers provide from time to time. Let the lender know where vacancies are in the neighborhood. Tell the lender exactly what the vacancy rate in the building is today and what it has been in the past. Project current and upcoming leases in a realistic manner. Never assume that the lender understands the local marketplace, but do not talk down to the lender either.
• Address operating costs and explain what can and cannot be done to cut them. Be frank, realistic, and humble--but also be convincing and forthright. If you truly believe that you can manage the building through this crisis, make certain that the lender gets that message.
• Avoid confrontation, even if inappropriate remarks are made in frustration by either side. Assume that both the lender and the borrower had the same information available before the loan was made: the mistake that has resulted is mutual, if it is a mistake at all. No one could have foreseen the sharp downturn in the real estate market in the past two years.
• Invite the lender to tour the facility and to review any books and records he or she has not already seen. Ask the lender to suggest areas of improvement or change that might not be apparent.
• Explain that you want to find a way to repay the lender, but that the constraints of the marketplace will have to be taken into account. Show the sacrifices that you and your team have made to keep the building operational and explain what further sacrifices you are willing to make in order to preserve your investment and their loan.

This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what's new in the World of Workouts.

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Richard A. Rogan is Chair of the JMBM Special Assets Team. He also serves as the co-managing partner of JMBM's San Francisco office and co-chair of its Bankruptcy Practice Group.

JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.

How Commercial Real Estate Borrowers Should Approach Their Lender: What to Do Before Defaulting (Part 4)

2010-03-02T14:46:32Z

Many commercial borrowers have not faced problems as dire as the ones they face today. They do not realize that their lender often wants to avoid a meltdown as much or more than does the borrower. Nevertheless, there are cases where bankruptcy becomes inevitable. These should be loans where the borrower actually has equity (at today's values) to preserve. Filing bankruptcy for a commercial real estate venture that is seriously underwater is simply a waste of time because the borrower sooner or later should realize that there is nothing of value for him or her to preserve.

Bankruptcy is often a good option where there are numerous unsecured obligations or other complications, such as litigation, that are difficult or costly to resolve, both in time and money. If your commercial borrower appears to be at its wits end and is contemplating bankruptcy, it is usually worthwhile to see whether some pre-filing planning is possible. Where there is an operating business, the borrower will need your consent (or the Court's order) to use your cash collateral or to obtain "DIP (debtor-in-possession) financing" to keep the company afloat while it reorganizes. In those cases, if the borrower does not come to you, reach out to it before the bankruptcy petition is filed. The fourth installment of my Urban Land article, "What to Do Before Defaulting," outlines topics that could be fruitful for pre-petition discussions between borrower and lender.

]]> What to Do Before Defaulting (Part 2)
Copyright © Urban Land Institute's Urban Land Magazine 2010. Reprinted with permission.

Plan for Bankruptcy and Foreclosure Before It Is Necessary
If the borrower and the lender cannot reach agreement, the lender will start to enforce the loan, usually through foreclosure. The lender may first seek to have a court-appointed receiver take over operations of the building and collect rent if there is a significant amount of time before the foreclosure is complete. This period varies by jurisdiction from only a few days to several months.

A borrower who has been unable to negotiate a restructured loan with its lender is left with few options. The most obvious choice is for the borrower to file for Chapter 11 bankruptcy. At an early stage, it is advisable for a borrower--and the guarantors--to retain competent insolvency counsel, making sure that the lawyers practice actively in the local bankruptcy courts, know the judges and other practitioners, and have excellent reputations. The lawyers should understand the economics of real estate and of the particular project, and attend meetings with the lenders and other interested parties. The owner should be sure that he or she can work with the lawyers as a team and verify their commitment to playing it straight and being truthful with the lender.

The owner should start planning for bankruptcy early, even while remaining hopeful that there is a deal to be made. Nothing is worse than a last-minute, surprise bankruptcy with no exit strategy in place. These rarely succeed and usually waste thousands of dollars in legal fees and other costs. The owner should take the time at an early stage to see what a bankruptcy would look like and learn the answers to these questions:

• Is this a single-asset real estate case, and will that have an effect?
• What options does bankruptcy provide?
• Is there an opportunity for a cramdown plan that will lower the secured debt to the value of the property, and what effect will that have? The owner should explore what type of protection payments to the lender will be needed, if any.
• Is there a possibility of selling the building under Bankruptcy Code Section 363, or does inadequate equity in the building prevent it?
• Can a plan of reorganization be confirmed, or is it impossible absent the consent of all parties?

The owner and his or her lawyer should explore these questions at an early stage. It is pointless to spend money filing for bankruptcy that might otherwise be directed toward restructuring the loan or used for a fresh start, unless bankruptcy can truly provide the answer to a restructured loan.

If the commercial property is not performing well enough to cover the owner's financial obligations, it is easy to panic and assume that bankruptcy and foreclosure are the only outcome. The borrower should remember that other options exist if action is taken quickly and creative thinking is employed. Everyone is trapped in the same bad commercial real estate market. Trying to work things out with the lender and the tenants is a more sustainable solution than bankruptcy or foreclosure. It is possible to hold on to the investment--if the owner recognizes problems when they crop up and plans ahead to deal with them.

This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what's new in the World of Workouts.

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Richard A. Rogan is Chair of the JMBM Special Assets Team. He also serves as the co-managing partner of JMBM's San Francisco office and co-chair of its Bankruptcy Practice Group.

JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.

How Commercial Real Estate Borrowers Should Approach Their Lender: What to Do Before Defaulting (Part 3)

2010-03-01T13:15:27Z

It comes as a surprise to many commercial borrowers and lenders that they can be one another's best allies in a successful workout. Where the commercial borrower has an investment of both hard work and money to preserve, the banker has a loan to collect. Working together, borrower and lender can often find common ground that results in a successful turnaround for both. The third installment of my Urban Land Institute article, "What to Do Before Defaulting," discusses ways that a commercial borrower can work with its lender to avoid losing the property to foreclosure. Workout professionals often use these tried and true techniques to make sure that their troubled borrowers know what the bank needs to forbear rather than to foreclose.

Work with the Lender to Avoid Foreclosure
Owners should put themselves in the position of the lender. In the lender's eyes, the building does not produce adequate cash flow to service the debt and maintain building operations at an acceptable level. The lender's only realistic move is to foreclose and acquire the building.

If the owner has a nonrecourse loan, the lender usually has no choice but to foreclose. Most lenders do not want to foreclose because they realize they will face the same problems as the owner, only the lender, not being in the real estate business, does not know the building as well as the owner does.

The owner should consider the value he or she can add to the lender to help bridge the gap during these difficult times. Most studies indicate that the real estate industry is in for at least two or three years of difficulty. How can the lender protect its investment and, at the same time, allow the owner to protect its own investment?

The lender will demand additional fees, additional interest, attorneys' fees, other professional fees, new appraisals, and perhaps other consultant fees. The owner should resist as many of these as possible; if cash is in short supply, the owner will not have the money to pay those fees upfront, maintain and operate the building, and service the debt. The best way for the owner to minimize these external fees is to come prepared and offer the lender a thoughtful alternative to foreclosure.

The owner should set up a meeting with the lender and come armed with all the knowledge that can be mustered about the building, its tenants, the local marketplace, the financial marketplace, and the lender's situation. The best workouts start with an open dialogue between borrower and lender. There is no reason to hide facts about the operation of the building: chances are it would perform well if this were even an average marketplace, but in this difficult market, it, like hundreds of other buildings, has been hit hard.

The owner should present the facts as they are to the lender, providing the best estimate for the months and years going forward. Owners should resist the temptation to project revenue increases that take the shape of a hockey stick--a sharp increase after a flat period. The lender will know the owner did not spend the necessary time carefully projecting future revenues if the projections show an unwarranted steep increase in revenue.

The owner's goal is to convince the lender that his or her ownership adds value to the building. Otherwise, there are building managers looking for business, and the lender can simply foreclose and replace the owner with one of the many companies looking to operate the building.

The lender wants to avoid foreclosure as much as the owner does because it results in a loss for both parties--for the lender, the loss of any opportunity to recoup the money loaned. Interest income has gone by the wayside, and the expense of capitalizing and operating the building will fall squarely on the shoulders of a foreclosing lender. The lender will try to cut off the bleeding by selling the property as soon as possible. But in today's market, a quick sale may not be possible, so the lender must come to understand that it may be operating the building, possibly at a loss, for many months or years to come.

A thoughtful presentation by the owner can offer the lender hope, just as the lender offers the building owner hope. While the owner needs to talk to the lender about forgiving or restructuring payments, it also is important that the owner explain what can be done to direct some cash flow to the lender in the early years to give the lender an opportunity to be made whole toward the end of the loan. The owner should make certain that any payment restructuring plan entered now will be realistic tomorrow--in short, that a deal made today will not result in default a year from now.

The owner should ask the lender to keep the interest rate low and try to determine the lender's cost of funds to obtain a clue regarding an acceptable interest rate. Although it may not be possible if valuations have dropped dramatically, the owner should try to find a way to restructure the loan so it becomes or could become a performing loan.

The owner also should try to determine whether there is additional collateral that might be offered to the lender. In some cases, there may be other real estate that can be offered, although in the case of special purpose entities, it can be extremely difficult to find additional collateral that can be offered.

Lenders may ask for guaranties of the debt, but the owner should consider the ramifications of offering a personal guaranty. Is the owner really willing to risk other assets in order to save the investment in the property? If the owner cannot truly answer yes to that question, he or she should tell the lender no as soon as the issue is raised and be prepared to defend that response.

This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what's new in the World of Workouts.

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Richard A. Rogan is Chair of the JMBM Special Assets Team. He also serves as the co-managing partner of JMBM's San Francisco office and co-chair of its Bankruptcy Practice Group.

JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.

How Commercial Real Estate Borrowers Should Approach Their Lender: What to Do Before Defaulting (Part 2)

2010-02-25T13:09:20Z

All of the forbearances in the world will not help a property that has little chance of recovering in value. The market value of a property can and does change over time, and as many of our borrowers (and lenders) have discovered, that value can go down even faster than it goes up. Identifying and creating or preserving value is often a key to a successful workout, but many borrower and lenders fail to think dynamically and often miss critical factors. The second installment of my Urban Land article, "What to Do Before Defaulting," suggests that commercial real estate borrowers get a handle on the true current value of their property and how that value is likely to change as the market changes.

]]> What to Do Before Defaulting (Part 2)
Copyright © Urban Land Institute's Urban Land Magazine 2010. Reprinted with permission.

Know the Property and the Marketplace
The single worst thing a troubled borrower can do is nothing. While it may be hard to believe that things will not be made better simply by waiting--because that has been true for years--today's world is different, and waiting is
likely to bring nothing but pain.

An owner with a troubled property should quickly prepare for and arrange a meeting with the lender (a post on "Meeting Your Lender" coming soon). While no amount of preparation can save a leveraged property that is beyond rescue, most properties have intrinsic value at some level, and opportunities exist even in these difficult times to increase that value. Thoughtful preparation before meeting with the lender can be the critical difference between success and failure.

To prepare for a meeting with the lender, the owner should:
• Know the property and its financial situation.
• Know the tenants and understand the rent roll.
• Know when the leases expire and the likelihood of renewal.
• Understand the local market, and try to determine what rental rate will attract new tenants and retain existing tenants.
• Look at the marketplace through the eyes of the tenants who can make or break the property.
• Regard all the existing tenants as if they are prospective tenants and try to make the property as attractive as possible, financially and otherwise, to convince them to stay in the building.
• Plot the expected income of the building over time to determine the amount available to service debt in the future. Simple dynamic projections can determine whether the building can support the debt that is already against it and, if it can, at what rate.
• Factor in an extension of the existing loan at current market rates to see the effect it would have on the future performance of the building.
• Create a model spreadsheet that shows the effect of backloading the debt service to later time periods when higher cash flow is projected.
• Analyze lease expirations, potential opportunities to increase lease rates, rate increases that are built into existing leases, and opportunities for new tenancies. The analysis does not have to be perfect or exact, but the estimates should be based on verifiable facts and an understanding of what makes the building successful.

Check with other prospective lenders to determine whether there is any interest in refinancing the building based on current performance or reasonable projections. If the building has significant vacancies or other problems, the owner will be hard pressed to find any interested lenders. If an alternative is found, the owner should carefully consider whether changing lenders is a viable option.

This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what's new in the World of Workouts.

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Richard A. Rogan is Chair of the JMBM Special Assets Team. He also serves as the co-managing partner of JMBM's San Francisco office and co-chair of its Bankruptcy Practice Group.

JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.

Special Assets Team welcomes two new associates

2010-02-24T14:54:54Z

JMBM's Special Assets Team welcomes Juan Galvan and Kevin Chen, two talented young attorneys, to our San Francisco office. Juan and Kevin will represent major institutional lenders and creditors in negotiating, documenting, and restructuring commercial and real estate loans and in enforcement actions in federal and state court and in bankruptcy court.

]]> As a Certified Public Accountant, Juan Galvan has an excellent understanding of detailed financial statements and accounting principles. He is a graduate of University of California, Berkeley, School of Law (Boalt Hall) and California State University, Northridge (B.A., magna cum laude, in Accounting and Business Administration). While in law school, he was a judicial extern for Chief Judge Vaughn R. Walker in the U.S. District Court of California. After graduation, Juan was an associate at a major national law firm and he currently serves on the Board of Directors for San Francisco's La Raza Lawyers Association. Juan grew up in Los Angeles and speaks fluent Spanish.

Kevin Chen brings his experience with workouts and loan restructuring at an international law firm to the San Francisco Bankruptcy practice. He received his J.D. from the University of California, Los Angeles School of Law, and a B.A. in Economics and History from Yale University. He also clerked for U.S. Bankruptcy Court Judge Thomas B. Donovan in Los Angeles. Kevin hails from Sacramento and is also fluent in Mandarin Chinese.

The addition of Juan and Kevin will bring their analytical skills to the JMBM Special Assets Team, which serves as trusted counsel and advisors who look for a business solution and try to help lenders find the best possible resolution for each troubled loan. The JMBM Special Assets Team has substantial expertise in Chapter 11 cases, pre-bankruptcy planning and strategizing, out-of-court debt and equity restructuring, complex workouts, assignments for the benefit of creditors, receiverships and foreclosures representing creditors, trustees, receivers, assignees and creditors' committees. We also handle the purchase and sale of assets out of bankruptcy and insolvency proceedings.

We are excited to have both Juan and Kevin on the JMBM Special Assets Team and know they will be a great resource to our clients.

How Commercial Real Estate Borrowers Should Approach Their Lender: What to Do Before Defaulting (Part 1)

2010-02-23T00:32:14Z

This blog is aimed at the lending community - so why are we giving hints to commercial real estate borrowers as to how to approach their lenders? There is, of course, a simple answer.

The goal here is to get the bank paid as quickly and inexpensively as possible. It is easiest to accomplish the goal while working with a motivated and cooperative borrower. One of the telltale signs of an experienced workout professional is the ability to help the borrower past the "denial stage" to face the stark reality of a troubled loan so that a thoughtful strategic workout plan can be formulated and implemented. Many borrowers are poorly counseled to take a combative approach with their lender. Others are not counseled at all and come totally unprepared to their first meeting with the workout team. Still others have no idea what has happened to them and even less grasp as to what is going to happen next.

Recently, at the request of Urban Land magazine, I wrote an article (with the assistance of two attorneys who were then associates here at JMBM) addressed to commercial real estate borrowers who are on the brink of defaulting. Entitled "What to Do Before Defaulting," workout professionals will find this article helpful in making it clear to their troubled borrowers exactly what they need to do. We've segmented the article into five separate posts, the first of which follows.

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What to Do Before Defaulting
Copyright © Urban Land Institute's Urban Land Magazine 2010. Reprinted with permission.

Profitable commercial office space depends on healthy numbers of employees in order to keep companies initiating and renewing leases. As office vacancies increase due to the recession and downsized office staffs, many building owners find themselves heading toward foreclosure, struggling to service mortgages on office buildings that are declining in value. In 2009, commercial office vacancies nationwide jumped to a 15-year high of 17 percent from 14.5
percent a year earlier, according to commercial real estate research firm Reis Inc. Commercial rents plunged by nearly 9 percent in 2009, the largest drop since Reis began tracking commercial occupancy in the 1980s.

Commercial mortgage-backed securities (CMBS) became one of the top sources of real estate finance early in the 2000s, providing sizable liquidity to both investors and commercial lenders. Many financial institutions met the increased demand for CMBS during the real estate bubble of 2005 to 2007 by lowering their underwriting standards. Then the bubble burst, rents and occupancies in commercial properties fell, and borrowers found themselves with insufficient revenue to make regular principal and interest payments to meet current debt service. There is now more than $600 billion of commercial real estate loans in the CMBS structure. According to Deutsche Bank's April 2009 report, The Future Refinancing Crisis in Commercial Real Estate, at least two-thirds of loans maturing between 2009 and 2018, totaling $410 billion, likely will not qualify for refinancing at maturity. To refinance all $600 billion in loans, borrowers would need to put up at least an additional $100 billion of equity.

While CMBS loans were not the only source of investment during the real estate bubble, these numbers paint a picture of the dire situation property owners are facing and help explain why commercial real estate will not see a recovery in the near future. Owners facing the numerous problems in the commercial real estate market have several options to consider before foreclosure or bankruptcy.

When Cash Flow Becomes a Problem
When a property begins to experience cash-flow problems, owners are often placed in the unenviable position of meeting monthly debt-service payments that can far exceed the amount of monthly cash flow generated by the property. Even those who can still meet monthly payments might find themselves in default of their loan if the property can no longer generate enough money to meet the prescribed debt coverage or loan-to-value ratios
imposed by the loan documents.

In the world of commercial real estate, properties are measured by the amount of cash they produce. When cash flow drops, owners are forced to think creatively in order to maximize their investments.

One option is simply to sell the underperforming property and move on to the next deal. However, this may not be feasible for most owners of cash-strapped properties. Because the value of a commercial property is primarily derived using some measure of the holding's annual cash flow, a property with reduced cash flow will garner a reduced price on the open market and often will be valued at less than the total debt on the property.

For the owner, the only option may be a short sale, but lenders are not always willing to take a huge hit if they think there are better roads to recovery. Short sales also do not necessarily protect a personal guarantor from liability. In some cases, requesting a short sale from a lender may actually increase the potential liability of the guarantor. This is the case when lenders include in their documents "badboy" carve-outs--stipulations that allow the lender to convert a limited guaranty to a full guaranty when one in a list of prohibited actions is taken.

Owners may also want to consider restructuring their leases in order to continue generating income. Reducing rents or granting deferrals to tenants who are having difficulty paying rent is an option if there is a possibility that the owner can maintain ownership by taking a slight hit now to keep the property successful in the future.

A tenant whose lease is due to expire soon is in a good position. A credit tenant may be sought out by other landlords dangling enticing offers, including "free" rent and generous improvement allowances to encourage that tenant to disrupt its operations and move across town. They may hide fees and costs and hope that the tenant--attracted by a
teaser lease rate and an appealing package of tenant improvements--will bite.

Tenants are often willing to extend the term of the lease or make a small payment toward a past-due amount if the owner is willing to reduce the rent. An owner may be able to increase cash flow in the long term and lock in longer leases by thinking creatively and working with tenants who may also be struggling financially.

Another option for owners is to seek a capital infusion from additional investors--either in the form of equity or debt--though this approach is easier to consider than to execute. But if a property is generating cash flow--or has the potential to maintain or even increase cash flow--obtaining additional short- or long-term equity investment
or financing may be possible.

Equity investors are looking for bargains, so an owner should be prepared to part with a sizable stake in the property. One of the most successful examples of an equity investment occurred several years ago when Bank of America--then, as now, a troubled institution--sold a 50 percent interest in its San Francisco headquarters to a major developer, which also obtained an option to sell its stake back to the bank when times improved. Several years later, the bank was able to buy out the developer, which pocketed a tidy profit while Bank of America preserved its complex, as well as its dignity.

Much-needed cash can also come in the form of debt from private, mezzanine, or hard money lenders. Success will depend on the cost of the additional capital, but refinancing is often the easiest way for a property owner to inject new cash into a troubled property.
________________________________

This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what's new in the World of Workouts.

________________________________

Richard A. Rogan is Chair of the JMBM Special Assets Team. He also serves as the co-managing partner of JMBM's San Francisco office and co-chair of its Bankruptcy Practice Group.

JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.

2010 Receivership Rules of the Court

2010-02-15T15:02:04Z

As promised, here are the Rules of the Court governing receivership:

]]> Rule 3.1175. Ex parte application for appointment of receiver
(a) Application
In addition to any other matters supporting an application for the ex parte appointment of a receiver, the applicant must show in detail by verified complaint or declaration:
(1) The nature of the emergency and the reasons irreparable injury would be suffered by the applicant during the time necessary for a hearing on notice;
(2) The names, addresses, and telephone numbers of the persons in actual possession of the property for which a receiver is requested, or of the president, manager, or principal agent of any corporation in possession of the property;
(3) The use being made of the property by the persons in possession; and
(4) If the property is a part of the plant, equipment, or stock in trade of any business, the nature and approximate size or extent of the business and facts sufficient to show whether the taking of the property by a receiver would stop or seriously interfere with the operation of the business.
If any of the matters listed above are unknown to the applicant and cannot be ascertained by the exercise of due diligence, the applicant's declaration or verified complaint must fully state the matters unknown and the efforts made to acquire the information.

Rule 3.1176. Confirmation of ex parte appointment of receiver
(a) Order to show cause
Whenever a receiver is appointed without notice, the matter must be made returnable upon an order to show cause why the appointment should not be confirmed. The order to show cause must be made returnable on the earliest date that the business of the court will admit, but not later than 15 days or, if good cause appears to the court, 22 days from the date the order is issued.
(b) Service of complaint, order to show cause, declarations, and memorandum
The applicant must serve on each of the adverse parties:
(1) A copy of the complaint if not previously served;
(2) The order to show cause stating the date, time, and place of the hearing;
(3) Any declarations supporting the application; and
(4) A memorandum supporting the application.
Service must be made as soon as reasonably practical, but no later than 5 days after the date on which the order to show cause is issued, unless the court orders another time for service.
(c) Failure to proceed or serve adverse party
When the matter first comes on for hearing, the party that obtained the appointment must be ready to proceed. If that party is not ready to proceed or has failed to exercise diligence to effect service upon the adverse parties as provided in (b), the court may discharge the receiver.
(d) Continuance
The adverse parties are entitled to one continuance to enable them to oppose the confirmation. If a continuance is granted under this subdivision, the order to show cause remains in effect until the date of the continued hearing.

Rule 3.1177. Nomination of receivers
At the hearing of an application for appointment of a receiver on notice or at the hearing for confirmation of an ex parte appointment, each party appearing may, at the time of the hearing, suggest in writing one or more persons for appointment or substitution as receiver, stating the reasons. A party's suggestion is without prejudice to its objection to the appointment or confirmation of a receiver.

Rule 3.1178. Amount of undertakings
At the hearing of an application for appointment of a receiver on notice or ex parte, the applicant must, and other parties may, propose and state the reasons for the specific amounts of the undertakings required from (1) the applicant by Code of Civil Procedure section 529, (2) the applicant by Code of Civil Procedure section 566(b), and (3) the receiver by Code of Civil Procedure section 567(b), for any injunction that is ordered in or with the order appointing a receiver.

Rule 3.1179. The receiver
(a) Agent of the court
The receiver is the agent of the court and not of any party, and as such:
(1) Is neutral;
(2) Acts for the benefit of all who may have an interest in the receivership property; and
(3) Holds assets for the court and not for the plaintiff or the defendant.
(b) Prohibited contracts, agreements, arrangements, and understandings
The party seeking the appointment of the receiver may not, directly or indirectly, require any contract, agreement, arrangement, or understanding with any receiver whom it intends to nominate or recommend to the court, and the receiver may not enter into any such contract, arrangement, agreement, or understanding concerning:
(1) The role of the receiver with respect to the property following a trustee's sale or termination of a receivership, without specific court permission;
(2) How the receiver will administer the receivership or how much the receiver will charge for services or pay for services to appropriate or approved third parties hired to provide services;
(3) Who the receiver will hire, or seek approval to hire, to perform necessary services; or
(4) What capital expenditures will be made on the property.

Rule 3.1180. Employment of attorney
A receiver must not employ an attorney without the approval of the court. The application for approval to employ an attorney must be in writing and must state:
(1) The necessity for the employment;
(2) The name of the attorney whom the receiver proposes to employ; and
(3) That the attorney is not the attorney for, associated with, nor employed by an attorney for any party.

Rule 3.1181. Receiver's inventory
(a) Filing of inventory
A receiver must, within 30 days after appointment, or within such other time as the court may order, file an inventory containing a complete and detailed list of all property of which the receiver has taken possession by virtue of the appointment.
(b) Supplemental inventory
The receiver must promptly file a supplementary inventory of all subsequently obtained property.

Rule 3.1182. Monthly reports
(a) Content of reports
The receiver must provide monthly reports to the parties and, if requested, to nonparty client lien holders. These reports must include:
(1) A narrative report of events;
(2) A financial report; and
(3) A statement of all fees paid to the receiver, employees, and professionals showing:
(A) Itemized services;
(B) A breakdown of the services by 1/10 hour increments;
(C) If the fees are hourly, the hourly fees; and
(D) If the fees are on another basis, that basis.
(b) Reports not to be filed
The monthly reports are not to be filed with the court unless the court so orders.

Rule 3.1183. Interim fees and objections
(a) Interim fees
Interim fees are subject to final review and approval by the court. The court retains jurisdiction to award a greater or lesser amount as the full, fair, and final value of the services received.
(b) Objections to interim accounts and reports
Unless good cause is shown, objections to a receiver's interim report and accounting must be made within 10 days of notice of the report and accounting, must be specific, and must be delivered to the receiver and all parties entitled to service of the interim report and accounting.

Rule 3.1184. Receiver's final account and report
(a) Motion or stipulation
A receiver must present by noticed motion or stipulation of all parties:
(1) A final account and report;
(2) A request for the discharge; and
(3) A request for exoneration of the receiver's surety.
(b) No memorandum required
No memorandum needs to be submitted in support of the motion or stipulation served and filed under (a) unless the court so orders.
(c) Notice
Notice of the motion or of the stipulation must be given to every person or entity known to the receiver to have a substantial, unsatisfied claim that will be affected by the order or stipulation, whether or not the person or entity is a party to the action or has appeared in it.
(d) Claim for compensation for receiver or attorney
If any allowance of compensation for the receiver or for an attorney employed by the receiver is claimed in an account, it must state in detail what services have been performed by the receiver or the attorney and whether previous allowances have been made to the receiver or attorney and the amounts.

Receivership Statutes and Rules of the Court

2010-02-12T13:16:56Z

Many people have asked for an easy place to locate statutes and Rules of the Court that govern Receivership. I have republished the California Codes Code of Civil Procedure Sections 564-570 here and will republish the Rules of the Court on Monday:

]]> 564. (a) A receiver may be appointed, in the manner provided in this chapter, by the court in which an action or proceeding is pending in any case in which the court is empowered by law to appoint a receiver. (b) A receiver may be appointed by the court in which an action or proceeding is pending, or by a judge thereof, in the following
cases:
(1) In an action by a vendor to vacate a fraudulent purchase of property, or by a creditor to subject any property or fund to the creditor's claim, or between partners or others jointly owning or interested in any property or fund, on the application of the plaintiff, or of any party whose right to or interest in the property or fund, or the proceeds thereof, is probable, and where it is shown that the property or fund is in danger of being lost, removed, or
materially injured.
(2) In an action by a secured lender for the foreclosure of a deed of trust or mortgage and sale of property upon which there is a lien under a deed of trust or mortgage, where it appears that the property is in danger of being lost, removed, or materially injured, or that the condition of the deed of trust or mortgage has not been performed, and that the property is probably insufficient to discharge the deed of trust or mortgage debt.
(3) After judgment, to carry the judgment into effect.
(4) After judgment, to dispose of the property according to the judgment, or to preserve it during the pendency of an appeal, or pursuant to the Enforcement of Judgments Law (Title 9 (commencing with Section 680.010)), or after sale of real property pursuant to a decree of foreclosure, during the redemption period, to collect, expend, and disburse rents as directed by the court or otherwise provided by law.
(5) Where a corporation has been dissolved, as provided in Section 565.
(6) Where a corporation is insolvent, or in imminent danger of insolvency, or has forfeited its corporate rights.
(7) In an action of unlawful detainer.
(8) At the request of the Public Utilities Commission pursuant to Section 855 or 5259.5 of the Public Utilities Code.
(9) In all other cases where necessary to preserve the property or rights of any party.
(10) At the request of the Office of Statewide Health Planning and Development, or the Attorney General, pursuant to Section 129173 of the Health and Safety Code.
(11) In an action by a secured lender for specific performance of an assignment of rents provision in a deed of trust, mortgage, or separate assignment document. The appointment may be continued after entry of a judgment for specific performance if appropriate to protect, operate, or maintain real property encumbered by a deed of trust or mortgage or to collect rents therefrom while a pending nonjudicial foreclosure under power of sale in a deed of trust or mortgage is being completed.
(12) In a case brought by an assignee under an assignment of leases, rents, issues, or profits pursuant to subdivision (g) of Section 2938 of the Civil Code.
(c) A receiver may be appointed, in the manner provided in this chapter, including, but not limited to, Section 566, by the superior court in an action brought by a secured lender to enforce the rights provided in Section 2929.5 of the Civil Code, to enable the secured lender to enter and inspect the real property security for the purpose of determining the existence, location, nature, and magnitude of any past or present release or threatened release of any hazardous substance into, onto, beneath, or from the real property security. The secured lender shall not abuse the right of entry and inspection or use it to harass the borrower or tenant of the property. Except in case of an emergency, when the borrower or tenant of the property has abandoned the premises, or if it is impracticable to do so, the secured lender shall give the borrower or tenant of the property reasonable notice of the secured lender's intent to enter and shall enter only during the borrower's or tenant's normal business hours. Twenty-four hours' notice shall be presumed to be reasonable notice in the absence of evidence to the contrary.
(d) Any action by a secured lender to appoint a receiver pursuant to this section shall not constitute an action within the meaning of subdivision (a) of Section 726.
(e) For purposes of this section:
(1) "Borrower" means the trustor under a deed of trust, or a mortgagor under a mortgage, where the deed of trust or mortgage encumbers real property security and secures the performance of the trustor or mortgagor under a loan, extension of credit, guaranty, or other obligation. The term includes any successor in interest of the trustor or mortgagor to the real property security before the deed of trust or mortgage has been discharged, reconveyed, or foreclosed upon.
(2) "Hazardous substance" means any of the following:
(A) Any "hazardous substance" as defined in subdivision (h) of Section 25281 of the Health and Safety Code.
(B) Any "waste" as defined in subdivision (d) of Section 13050 of the Water Code.
(C) Petroleum including crude oil or any fraction thereof, natural gas, natural gas liquids, liquefied natural gas, or synthetic gas usable for fuel, or any mixture thereof.
(3) "Real property security" means any real property and improvements, other than a separate interest and any related interest in the common area of a residential common interest development, as the terms "separate interest," "common area," and "common interest development" are defined in Section 1351 of the Civil Code, or real property consisting of one acre or less that contains 1 to 15 dwelling units.
(4) "Release" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, or disposing into the environment, including continuing migration, of hazardous substances into, onto, or through soil, surface water, or groundwater.
(5) "Secured lender" means the beneficiary under a deed of trust against the real property security, or the mortgagee under a mortgage against the real property security, and any successor in interest of the beneficiary or mortgagee to the deed of trust or mortgage.

565. Upon the dissolution of any corporation, the Superior Court of the county in which the corporation carries on its business or has its principal place of business, on application of any creditor of the corporation, or of any stockholder or member thereof, may appoint one or more persons to be receivers or trustees of the corporation, to take charge of the estate and effects thereof, and to collect the debts and property due and belonging to the corporation, and to pay the outstanding debts thereof, and to divide the moneys and other property that shall remain over among the stockholders or members.

566. (a) No party, or attorney of a party, or person interested in an action, or related to any judge of the court by consanguinity or affinity within the third degree, can be appointed receiver therein without the written consent of the parties, filed with the clerk.
(b) If a receiver is appointed upon an ex parte application, the court, before making the order, must require from the applicant an undertaking in an amount to be fixed by the court, to the effect that the applicant will pay to the defendant all damages the defendant may sustain by reason of the appointment of the receiver and the entry by the receiver upon the duties, in case the applicant shall have procured the appointment wrongfully, maliciously, or without sufficient cause.

567. Before entering upon the duties of a receiver:
(a) The receiver must be sworn to perform the duties faithfully.
(b) The receiver shall give an undertaking to the State of California, in such sum as the court or judge may direct, to the effect that the receiver will faithfully discharge the duties of receiver in the action and obey the orders of the court therein. The receiver shall be allowed the cost of the undertaking.

568. The receiver has, under the control of the Court, power to bring and defend actions in his own name, as receiver; to take and keep possession of the property, to receive rents, collect debts, to compound for and compromise the same, to make transfers, and generally to do such acts respecting the property as the Court may
authorize.

568.1. Any securities in the hands of a receiver may, under the control of the court, be deposited by the receiver in a securities depository, as defined in Section 30004 of the Financial Code, which is licensed under Section 30200 of the Financial Code or exempted from licensing thereunder by Section 30005 or 30006 of the Financial Code, and such securities may be held by such securities depository in the manner authorized by Section 775 of the Financial Code.

568.2. (a) A receiver of real property containing rental housing shall notify the court of the existence of any order or notice to correct any substandard or unsafe condition, as defined in Section 17920.3 or 17920.10 of the Health and Safety Code, with which the receiver cannot comply within the time provided by the order or notice.
(b) The notice shall be filed within 30 days after the receiver's appointment or, if the substandard condition occurs subsequently, within 15 days of its occurrence.
(c) The notice shall inform the court of all of the following:
(1) The substandard conditions that exist.
(2) The threat or danger that the substandard conditions pose to any occupant of the property or the public.
(3) The approximate cost and time involved in abating the conditions. If more time is needed to approximate the cost, then the notice shall provide the date on which the approximate cost will be filed with the court and that date shall be within 10 days of the filing.
(4) Whether the receivership estate is likely to contain sufficient funds to abate the conditions.
(d) If the receivership estate does not contain sufficient funds to abate the conditions, the receiver shall request further instructions or orders from the court.
(e) The court, upon receipt of a notice pursuant to subdivision (d), shall consider appropriate orders or instructions to enable the receiver to correct the substandard conditions or to terminate or limit the period of receivership.

568.3. Any tenant of real property that is subject to receivership, a tenant association or organization, or any federal, state, or local enforcement agency, may file a motion in a receivership action for the purpose of seeking further instructions or orders from the court, if either of the following is true:
(a) Substandard conditions exist, as defined by Section 17920.3 or 17920.10 of the Health and Safety Code.
(b) A dispute or controversy exists concerning the powers or duties of the receiver affecting a tenant or the public.

568.5. A receiver may, pursuant to an order of the court, sell real or personal property in the receiver's possession upon the notice and in the manner prescribed by Article 6 (commencing with Section 701.510) of Chapter 3 of Division 2 of Title 9. The sale is not final until confirmed by the court.

569. Funds in the hands of a receiver may be deposited in one or more interest bearing accounts in the name and for the benefit of the receivership estate with one or more financial institutions, provided that all of the following conditions are satisfied:
(a) The deposits are fully guaranteed or insured under federal law.
(b) The financial institution in which the funds are deposited is not a party to the action in which the receiver was appointed.
(c) The receiver does not own 1 percent or more in value of the outstanding stock of the financial institution, is not an officer, director, or employee of the financial institution, and is not a sibling, whether by the whole or half-blood, spouse, aunt, uncle, nephew, niece, ancestor, or lineal descendant of an owner, officer, employee, or director.

570. A receiver having any funds in his hands belonging to a person whose whereabouts are unknown to him, shall, before receiving his discharge as such receiver, publish a notice, in one or more newspapers published in the county, at least once a week for four consecutive weeks, setting forth the name of the owner of any unclaimed funds, the last known place of residence or post office address of such owner and the amount of such unclaimed funds. Any funds remaining in his hands unclaimed for 30 days after the date of the last publication of such notice, shall be reported to the court, and upon order of the court, all such funds must be paid into the State Treasury accompanied with a copy of the order, which must set forth the facts required in the notice herein provided. Such funds shall be deemed to have been received by the State under Chapter 7 (commencing with Section 1500) of Title 10 of Part 3 of this code and may be recovered in the manner prescribed therein.
All costs and expenses connected with such advertising shall be paid out of the funds the whereabouts of whose owners are unknown.

This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what's new in the World of Workouts.

________________________________

Richard A. Rogan is Chair of the JMBM Special Assets Team. He also serves as the co-managing partner of JMBM's San Francisco office and co-chair of its Bankruptcy Practice Group.

JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.

Special Assets Law--What is Judicial Reference?

2010-02-09T13:45:15Z

In 2005, the California Supreme Court overruled the practice of including waivers of the right to a trial by jury in commercial agreements and loan documents before a lawsuit has been filed. For many years, sophisticated commercial businesses and institutional lenders included a clause in their agreements providing that the parties waive the right to a jury trial. A jury trial waiver authorizes a judge to try the case without a jury, resulting in a speedier, less costly trial and avoiding the possibility of jury prejudice against banks and institutional lenders.

]]> Approved Alternatives to Jury Trial Waivers.
Fortunately, the Supreme Court did not leave parties to commercial contracts and loan documents without an alternative to a jury trial. The Supreme Court specifically noted that California statutes authorize alternatives, including arbitration and referral to a referee.

Arbitration. Arbitration is a familiar process. The parties agree to select one or more persons to act as arbitrators to decide a dispute. Although arbitration has many favorable qualities, in commercial cases, concerns are often raised because arbitrators are not always required to follow the law, there is no right of appeal and timetables that might otherwise be enforceable in a court proceeding can drag out, thus delaying the ultimate decision and increasing costs.

Reference. The other approach expressly approved by the Supreme Court involves the referral to a court-appointed "referee." Under Section 638 of the California Code of Civil Procedure, a court is empowered to transfer a dispute to a referee upon the agreement of the parties. Section 638 expressly provides that a contract, agreement or lease made before a lawsuit has been filed can require that any controversy arising out of that contract or lease shall be heard by a referee.

The reference procedure is similar to that of arbitration in that one party to a contract or lease files a lawsuit to compel the resolution of the matter by referral to a referee. The court then appoints the referee who acts as decision-maker. Typically, the contract requires the referee to be a former judge. The advantage of using the referral procedure is that the referee must follow the law and the decision rendered by the referee will become a judgment that can be enforced and appealed.

Review Your Contracts, Leases and Loan Agreements.
Many existing loan documents, contracts and leases now contain jury waiver clauses that are no longer enforceable. We recommend that clients change these provisions in each and every one of their contracts, leases and loan agreements, particularly those that come up for renewal or need amendment.

While arbitration may be the best method of dispute resolution in certain circumstances, our experience at JMBM is that the referral process is a better choice in most commercial cases. This is particularly true where provisional remedies such as injunctions, claim and delivery, attachment and the appointment of a receiver are desirable.

The JMBM Special Assets Team has successfully invoked the judicial reference clause many times. We understand how to put this valuable tool to work for you immediately.

JMBM has also developed standardized clauses that address alternative dispute resolution --whether by arbitration or by judicial referral -- that can be readily inserted into new agreements or inserted into existing agreements that are being amended. Please contact JMBM if you have any questions or need assistance in making certain that your new or existing agreements and forms are in compliance.

This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what's new in the World of Workouts.

________________________________

Richard A. Rogan is Chair of the JMBM Special Assets Team. He also serves as the co-managing partner of JMBM's San Francisco office and co-chair of its Bankruptcy Practice Group.

JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.

Foreclosure Notices of Sale Must Be Carefully Drafted - Or Unintended Consequences May Follow

2010-02-04T13:23:42Z

No one pays much attention to preparing a Notice of Trustee's Sale or a Uniform Commercial Code ("UCC") Notice of Intended Disposition. Both are regulated by statute, and a Notice of Trustee's Sale is usually prepared by the foreclosure company here in California (and other states where non-judicial foreclosure of real estate is commonly used). A Notice of Trustee's Sale is also used in California to conduct a "unified" foreclosure sale of both real and personal property collateral.

The concern here is to double check exactly the description of the collateral that is being sold at foreclosure. Where the notice is prepared by an outside vendor, it is critical to make certain that the vendor has all of the necessary information to prepare the notice properly. Even then, costly mistakes can be made, so it is very important to check carefully.

]]> In a recent bankruptcy of a hotel, the FDIC had taken over the lender to a troubled hotel. A Chapter 11 trustee was appointed and she engaged a hotel management company to operate the hotel. Ultimately, the FDIC obtained stay relief and foreclosed. When the dust cleared, the buyer demanded that all the cash on hand be turned over to it. The buyer's rationale was that the FDIC, as secured creditor, had a security interest in the accounts receivable and proceeds, and that when the FDIC conducted a unified foreclosure sale of both the real and personal property, its Notice of Trustee's Sale included a definition of accounts receivable and proceeds as collateral being sold.

If the buyer wins this dispute, it leaves the Chapter 11 trustee with no cash to pay administrative expenses (generally speaking, "administrative expenses" are fees earned by the Chapter 11, the lawyers and the accountants) and unsecured creditors. If the Chapter 11 trustee wins the dispute, the buyer gets no cash to put in the till on its opening day as hotel owner.

If this was an arms-length sale of a business, the issue of who gets the cash is determined by negotiations and the purchase and sale agreement. But in a foreclosure sale, what is sold is determined by what is advertised for sale at auction and what the auctioneer describes is being sold when the auction is conducted.

Because this foreclosure occurred in the context of a Chapter 11 case, there is a twist. The cash was actually sitting in bank accounts in the name of the Chapter 11 trustee at the time of the foreclosure sale. My analysis is that the Chapter 11 trustee gets to keep the cash because the collateral description in the FDIC's deed of trust and security agreement does not include a description of cash in a deposit account in the name of the Chapter 11 trustee.

A similar circumstance occurred last year with serious consequences in the context of an arms-length sale of an operating business during a Chapter 11 bankruptcy case. The parties did not specifically address the question of who gets the cash in the purchase and sale agreement. The sale closed and the buyer demanded the cash. The Chapter 11 debtor, who was the seller, refused, as it was counting on the cash to pay administrative expenses. The end result: the bankruptcy court awarded the cash to the buyer, leaving an administratively insolvent bankruptcy estate.

I am waiting for a lender to notice up the sale of an income property that is under water, i.e., the property is worth less than the debt. The sale notice will include a description of all the collateral, including the rents. For some reason, the rent proceeds will still be in deposit accounts belonging to the borrower when the foreclosure sale takes place. The lender will be expecting to be the successful credit bidder at the foreclosure sale and figures to get the cash for operating expenses. But another bidder sneaks in at the last minute and overbids the lender - winning the auction and ending up with the cash in the borrower's accounts as well as the property.

We've also run into problems caused by signals crossing between the lender and the foreclosure company. In one matter, the lender only had real property collateral, but the foreclosure company noticed a "unified" sale of real and personal property. The dispute was ultimately resolved, but it at a cost of time and attorneys' fees that could have been avoided.

The JMBM Special Assets Team can help make sure that your foreclosure sale goes as planned. Most commercial lenders want to avoid foreclosure and they go to auction only where there are no other realistic choices. If you find that you must take that final step, make sure that you do it properly and structure your sale for the highest possible return. Most lenders want third party buyers to buy at the foreclosure sale, and carefully setting the stage and making sure the notices are properly drafted are important steps in the process.

The lesson here is clear: look carefully at foreclosure notices before they go out. If you have any doubts, ask questions until you get answers that make sense to you. Ask to see a draft. Compare it to the collateral descriptions in your deed of trust and security agreement. Take extra care where intangible property, such as stock, accounts or other rights, is being sold. Exclude the cash from the property being sold. That way, if you end up bidding less than the full amount of your debt, you will get some cash to help cover the shortfall.

This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what's new in the World of Workouts.

________________________________

Richard A. Rogan is Chair of the JMBM Special Assets Team. He also serves as the co-managing partner of JMBM's San Francisco office and co-chair of its Bankruptcy Practice Group.

JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.

Receivership 101 program has been moved to a larger venue to accommodate the tremendous response!!

2010-02-02T20:18:17Z

I've given the Receivership 101 program many times, and it always generates an enthusiastic turnout. We figured our large conference room here at JMBM could handle the event, but the response was so great that we sold out almost immediately. Due to popular demand, the Bay Area Chapter of the California Receivers Forum decided to move our program, "Receivership 101" to a larger room at the Omni Hotel, in the heart of San Francisco's Financial District at the corner of California and Montgomery Streets. This is only a few blocks away from the JMBM office in Embarcadero Center.

If you haven't signed up yet, now is your chance.

To download a copy of the registration form below, click here.

]]>

Dick Rogan to Speak at California Bankers Association's Annual Lender Conference - "Illuminating the Dark Side of the Bank During Challenging Times"

2010-01-26T19:13:59Z

Please join me at the California Bankers Association's 23rd Annual Lenders Conference on March 22nd and 23rd. I'll be presenting a practical program that I call "Illuminating the Dark Side of the Bank During Challenging Times." My program will cover many of the problems that California bankers are facing in these difficult economic times.

My program will be aimed at an experienced audience of chief lending officers, chief credit officers and loan administrators. We'll touch on issues involving bankruptcy, foreclosure, workouts and forbearance agreements.

I will be speaking on Monday, March 22nd at 1:05-2:30 p.m. and Tuesday, March 23rd at 1:30 p.m. to 2:30 p.m. The Conference will be held at the Renaissance Esmeralda in Indian Wells, California and will run from Sunday, March 21 to Wednesday, March 24. Hope to see you there.

For more information about the Lenders Conference please visit: http://www.calbankers.com/content/event_detail.asp?EventID=1012

Amend the Borrower's Tax Return and Help Pay Back A Loan (Part 2) - Directing the Borrower's Tax Refund

2010-01-25T14:00:59Z

In the last post, we discussed the newly expanded net operating loss (NOL) carry back period, and explained how for some borrowers, the new law could generate "found money" that could be put to good use - such as paying down bank debt (one of my favorite uses!!). As with all gift horses, however, it is necessary to carefully examine this one so that the cash ends up where it ought to go.

First, it is necessary to understand that a creditor cannot take a security interest in a taxpayer's right to a tax refund. We've seen unwary lenders naively assume that the IRS is going to honor a security agreement and a UCC-1 financing statement. The usual result is the tax refund lands in an account at another bank and is used to pay "more pressing" obligations. Because a secured creditor cannot take a security interest in the right to a tax refund before the refund is issued, the lender must take steps to channel the tax refund so that once paid out by the Government, it goes to pay down bank debt.

The JMBM Special Assets Team has developed a technique that minimizes the substantial risk that a borrower will divert the tax refund and put it to other uses. This technique requires the taxpayer/borrower to elect direct deposit of the refund into a bank-controlled blocked account, which is subject to the bank's perfected security interest. While not foolproof, the use of a direct deposit into a blocked account reduces the risk of diversion and increases visibility to the bank.

]]> We prepare an agreement among bank, borrower and guarantors that obligates the taxpayer/borrower (or the taxpayer/guarantor, as may be the case) to file the appropriate election with IRS to apply the NOL carry back, to file the appropriate amendments to its old tax returns by a date certain (using tax professionals selected by the borrower, but approved by the bank), and to elect direct deposit into the blocked account. The agreement also requires copies of all forms filed with IRS to be promptly delivered to the bank. Meanwhile, the borrower makes a nominal deposit into a blocked account at the bank so that everything is ready when the tax refund is issued. The final key is that the agreement must also authorize the bank to apply the tax refund, once received in the blocked account, against the loan.

A concern exists that a taxpayer/borrower might try to change the direct deposit information in connection with an electronic refund after the election for direct deposit is filed. A taxpayer can call to notify the IRS of incorrect direct deposit information; however, because of the timing of the refund, it may be difficult for the IRS to stop the payment. The IRS needs a few weeks lead time to stop an electronic refund. Beware, however, that if enough time is available, the IRS can block a direct deposit of a refund, and issue a paper check instead.

We've seen that happen as well. Should the tax refund proceeds be diverted, the result is, of course, a default under the loan and a borrower who has willfully deceived its lender - and we all know how to deal with a borrower who intentionally diverts money away from its lender.

The bottom line is that lenders may be ignoring a cash windfall that is available to companies who did well over last several years but performed poorly in 2008 and 2009. Take the time to go through your troubled credits to see whether your borrowers might be entitled to claim a tax refund under the expanded NOL carry back rules. Require those companies who are candidates to consult with their tax advisors and report back to the bank, preferably with a letter from the tax advisor. Don't rely on a handshake to assume you will get the proceeds from the tax refund. Instead, consider a process like the one I have outlined above. Hope this helps get some loans paid down or off!!

This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what's new in the World of Workouts.

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Richard A. Rogan is Chair of the JMBM Special Assets Team. He also serves as the co-managing partner of JMBM's San Francisco office and co-chair of its Bankruptcy Practice Group.

JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.

Dick Rogan to Present Receivership 101 for California Receivers Forum

2010-01-22T14:05:10Z

One of our most-viewed pages on SpecialAssetsLawyer.com is the Receivership 101 slideshow presentation. I've given this program several times, often with my long-time close friend and colleague, Bruce Cornelius. Bruce and I serve together on the Board of Directors of the Bay Area Chapter of the California Receivers Forum, and given the sharp rise in the number of receiverships, the Forum has once again decided to present Receivership 101 live and in person.

This is a great program for those workout professionals who know how to use receivers and would like to stay current, as well as for those who are new to workouts and would like to learn the basics. Bruce and I have lots of amusing anecdotes and practical tips to share along the way.

Bruce and I will be giving the program on February 10, 2010, and all of you are cordially invited to join us.

To download a copy of the registration form below, click here.

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