Special Assets Lawyer Blog

Recently, we've been seeing debtors try to confirm cram down plans of reorganization that are unfavorable to the secured creditor by "gerrymandering" the class of unsecured claims. The typical situation finds the secured creditor holding an undersecured loan. Under Section 506(a) of the Bankruptcy Code, the secured creditor's claim is automatically bifurcated into a secured claim in an amount equal to the value of the collateral and an unsecured claim for the balance of the debt.

Here's an example taken from a recent case that Ben Young, the author of this important article, and I handled. Our litigation partners, Joe Demko and Matt Kenefick, won a long, hard-fought jury trial in a fraudulent transfer case. Joe and Matt were victorious on appeal and perfected a judgment lien. The judgment debtor filed a Chapter 11 case, too late to avoid the judgment lien, and scheduled its co-judgment debtors as unsecured creditors. Our client's claim was larger than the value of the collateral, so our client had both an secured claim and an unsecured claim.

The judgment debtor filed a plan of reorganization that treated our client very unfairly and sought to cram down that plan on our client. To succeed, the judgment debtor needed one class of her impaired creditors to vote for her proposed plan of reorganization. Let's break down what this means:

• A plan of reorganization is supposed to treat substantially similar creditors alike. As a practical matter, that means that each secured claim is usually placed in its own class, and all unsecured claims are usually lumped together in one unsecured class.

• A debtor may obtain confirmation of its plan despite the negative vote of a class of creditors as long as at least one class of impaired creditors votes for its plan, and the plan itself meets certain other tests.

• A class of claims accepts the plan if creditors holding more than two-thirds in amount and more than one-half in number of the claims in the class vote for the plan, not counting the votes of any insiders.

In our case, the judgment debtor knew that our client's unsecured claim was more than one-third of all unsecured claims. It also knew that our client would not vote for her plan. The judgment debtor's clever solution was to argue that our client's unsecured claim was not "substantially similar" to the other unsecured claims, and that the other claims should be placed in their own class. Since the other claimants were her co-judgment debtors and were friendly, the debtor figured it could get their votes and confirm the plan. Ultimately, Ben, Joe and Matt were able to negotiate a settlement that paid our client's judgment in full.

It is against this backdrop that Ben's article on "gerrymandering" claims should be read. Workout professionals should be aware of this tactic and be able to recognize and respond to it.

Continue reading "Can a Plan of Reorganization Separately Classify a Claim That Is Personally Guaranteed?" »

Recently, my partner, Matt Kenefick, obtained a large judgment here in California against an Arizona resident. The desert rat refused to pay up voluntarily, hiding behind Arizona's unique and highly protective community property laws. The problem Matt faced was that only one spouse had been involved in the nefarious scheme to separate our client from its money.
Matt ultimately collected from the Arizona judgment debtor, but the difficulties he faced are worth highlighting for those of us who normally do business in states other than Arizona.

Lenders commonly rely upon form documentation when making a loan, often assuming that the form complies with the ever-changing law governing the deal. As we all know, a mistake in documentation can result in serious collection issues if the loan goes into default. If the defaulting obligation is secured by a personal guaranty given by an Arizona resident, or if the guaranty has to be enforced in Arizona, there may be enforcement problems.

Continue reading "Lenders: Beware of the Arizona "Two-Dollar Bankruptcy"" »

My partner, Guy Maisnik, is well-known as a fabulous real estate and hospitality law guru. Guy always seems to be closing an exciting deal for one of our good clients. Guy has been working on the Hidden Liens Project with the Commercial Transactions Committee of the Business Law Section of the State Bar of California, and he prepared a bulletin about a troublesome hidden lien that tends to surface when we close down an operating company for a secured creditor.

Continue reading "Hidden Liens - ERISA liens arising under 29 U.S.C. Section 1368" »

Once again, my partner, Joe Demko, who handles much of our bank litigation, has a tip to pass along. This time, Joe warns about a drafting problem in a carve out from a "bad boy" guarantee. The essence of Joe's warning is that the person drafting loan documents must consider all possible outcomes of a condition. All too often, we see loan documents drafted to assume only the expected outcome. When the JMBM Special Assets Team is asked to get involved, we are faced with loan documents that fail to give us the teeth we need to collect the loan. Joe tells this sad story well.

Recently the California Court of Appeal in GECCMC 2005-C1 Plumber Street Office Limited Partnership v. NRFC NNN Holdings LLC 2012 Westlaw 1035318 held there was no recourse against a guarantor who had signed a "bad boy" guaranty which provides for, among other things, the guarantor to be liable if "without the prior written consent of [the lender, either lease] is terminated or cancelled." The lender attempted to hold the guarantor liable because the tenant abandoned the property and thereafter the borrower defaulted. The lender brought suit against the guarantor, seeking to recover $42,000,000. The trial court entered summary judgment for the lender, but the appellate court reversed, holding that the tenant's abandonment of the property did not "terminate" the lease because the landlord/borrower never gave notice of termination to the tenant.

Continue reading "Lenders Beware: Read your guaranty carefully for technicalities that could leave you unprotected" »

As many of you may know, I was asked to help launch the Northern California chapter of the Special Assets Management Association (SAMA), and I currently serve on its Event Planning Committee. SAMA is hosting a luncheon program on "The Dos and Don'ts of Lender Liability" on March 1st at the Hyatt Regency in San Francisco.

My partner, Joe Demko, is a panelist, along with other professionals with deep experience in lender liability issues.

Continue reading "The Dos and Don'ts of Lender Liability - SAMA Program in San Francisco" »

This past quarter end once again reminded us that the economy remains weak and borrowers who have managed to hang on for the past three or four years are running out of staying power. The topic again arose - what to do when a borrower files bankruptcy? Faced with the prospect of throwing good money after bad, some lenders bury their head in the sand and simply wait it out, often with terrible results. Others charge ahead aggressively and run up large legal bills that are not justified by the amount of the obligation or the difficulty of recovery.

Over the years, I have encouraged clients facing a bankruptcy filing by a customer to stop and carefully consider the available options. Here is a simple checklist to run through while reaching a decision that will preserves the Bank's rights in a manner that is cost-effective.

Continue reading "When Your Borrower Files Bankruptcy - A 10-Point Checklist" »

Many lenders are not very familiar with creditors' plans, which can be a useful tool to break through a logjam in a Chapter 11 bankruptcy case. JMBM Special Assets Team members and expert creditors' rights attorneys, Bob Kaplan and Nick De Lancie, are veterans at crafting and confirming creditor's plans in tough cases. Bob and Nick have created a seminar entitled, "Commercial Finance Roundtable: A Creditors Plan - A Way Out of the Morass of A Single Asset Real Estate Bankruptcy Case." The complimentary program is based on their 30 years of experience of representing creditors and includes recent bankruptcy court trial experience where they obtained a very successful result.

The program will take place on March 10, 2011, in our San Francisco office at Two Embarcadero Center, 5th Floor, with registration beginning at 5:00 PM and wine, cheese, and networking after the one-hour program. The seminar will also be MCLE accredited. RSVP your attendance to aluk@jmbm.com.

For more information, see the brochure by clicking the link below.

Continue reading "For Creditors with Clients Filing Chapter 11- Commercial Finance Roundtable: A Creditor's Plan - A Way Out of the Morass of a Single Asset Real Estate Bankruptcy Case" »

In addition to compliance with financial and securities regulations, financial institutions must also be mindful of laws and regulations affecting a financial institution's responsibilities to disabled Americans.

As a member of the State Bar of California's Financial Institutions Committee, I have the opportunity to hear interesting speakers on timely issues directed toward general counsel, regulatory specialists and outside counsel for major financial institutions. JMBM Special Assets Team member and real estate attorney, Marty Orlick, recently gave an excellent presentation on the accessibility rules of the Americans with Disabilities Act (ADA). Marty is an expert at ADA defense and counseling having defended more than 400 ADA claims with many clients from financial institutions like Bank of America, Union Bank, and City National Bank. See his presentation and message by clicking the link below.

Continue reading "The Americans with Disabilities Act and your retail properties and services" »

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.

Continue reading "Special Assets Law--What is Judicial Reference?" »

The JMBM Special Assets Team™ is looking for a 2-3 year junior litigation associate for our commercial creditors rights practice based in San Francisco's Financial District. The successful candidate will have excellent law school credentials, some courtroom and deposition experience and be capable of preparing pleadings and motions. Bankruptcy experience is desirable but not required. Salary is commensurate with experience.

I'm asking our readers to help us find the right young lawyer to fill this spot. We have found that it works out well to hire lawyers who come recommended by our clients and friends. This is a great opportunity for a lawyer in the first few years of his or her practice who is interested in financial and credit matters. Our new lawyer will have a chance to work on some of the most interesting and challenging matters around with experienced practitioners who know the ropes.

JMBM is an AmLaw Top 200 firm with offices located in San Francisco, Los Angeles and Orange County. The JMBM Special Assets Team™ is composed of lawyers in all three offices who specialize in representing commercial and real estate lenders in bankruptcy, litigation, receivership, foreclosure, workouts, documentation and negotiation.

Most loans today are secured by real or personal property collateral, so the homestead exemption is of less importance to institutional lenders than it used to be. However, if you do find yourself administering an unsecured loan, or if you discover that the loan you thought was well secured turns out to be unintentionally unsecured, then it is good to know about the California homestead exemption.

Continue reading "California Increases Homestead Exemptions" »

The final segment of Stan Gibson's series on Litigation Readiness and Electronic Discovery addresses the practical problem of assembling and collecting all of the data needed for use in the lawsuit. Stan's point is that advance preparation, a luxury in today's fast-paced, cost conscious world, pays dividends when a lender is faced with short time deadlines to respond to massive requests to produce documents and electronic records.

Continue reading "On Bank Litigation--E-discovery (Part 4): Establishing a Data Assembly Process" »

Stan Gibson returns to the Special Assets Lawyer Blog with the third segment of his important series on Litigation Readiness and Electronic Discovery. In his last segment, Stan Gibson explained why it is so crucial to quickly locate and preserve the bank's records by implementing a Litigation Hold. This time, Stan explains what a Data Map is and why you will need one to successfully navigate the waters of electronically stored information.

Continue reading "On Bank Litigation--E-discovery (Part 3): Creating a Data Map and Assembling a Discovery Response Team" »

Stan Gibson's timely series on Litigation Readiness and Electronic Discovery continues with an explanation of the vital "Litigation Hold" process, what it is and how it is implemented. Stan is co-chair of JMBM's E-Discovery Group, and at my request, is sharing his wealth of knowledge with our readers in a four-segment series. Members of the JMBM Special Assets Team™ assist clients in implementing a litigation hold and in making certain that all available information, whether stored on paper or electronically, or known only to witnesses, is collected and preserved.

Our second installment builds on Stan's opening segment, "Record Retention and Compliance," which is a must read for anyone administering litigation in connection with a troubled loan.

Continue reading "On Bank Litigation--E-discovery (Part 2): The Litigation Hold Process" »

E-discovery, or electronic discovery, has come to California's court system. Given our litigious society, there is a good chance that your bank or financial institution will soon be responding to requests for e-discovery. Litigation is never the process of choice, but as all workout professionals know, there are times when the only way to collect the loan is to file suit.

Continue reading "On Bank Litigation--E-discovery (Part 1): Record Retention and Compliance" »

Thousands of motor vehicles dealerships will fail before the restructuring of the auto industry is over. Clients of the JMBM Special Assets Team™ are facing significant potential losses on loans to dealerships and property owners as these once-thriving local businesses fall on hard times, fail and close. As in every crisis, a calm, guiding hand is required to minimize loss, maximize value and perhaps, to find an opportunity to build for the future. The JMBM Special Assets Team™ provides experienced counsel to lenders holding troubled loans to motor vehicle dealerships and to draw on JMBM's broad expertise representing motor vehicle manufacturers, secured lenders and real estate investors to help find and preserve value.

The JMBM Special Assets Team™ represents clients' financial interests that are put at risk by failing vehicle, farm implement and marine dealerships. JMBM does not represent consumers, motor vehicle dealers or franchisees; instead, we provide expert guidance for:

• Manufacturers who must address the problems created by failing dealerships
• Secured lenders who must take prompt action to preserve their collateral or defend lender liability claims and class actions
• Investors who have leased sales and service facilities to dealers.

Continue reading "Special Assets Law: How do lenders, manufacturers and investors preserve value, minimize loss and repurpose shuttered motor vehicle dealerships?" »

With great fanfare, the California Legislature passed a bill in 2008 that amends the State's Elder Abuse Law. Neither the legislators nor Governor Schwarzenegger must have paid much attention to this legislative travesty, given the ongoing budget crisis, because this bill is a real doozy. No one wants to see financial abuse of the elderly, certainly not the mainstream responsible banking community. The California banking community has long taken appropriate steps to spot and guard against the financial abuse of seniors and other disadvantaged persons. Most institutions have procedures in place to verify the source of questionable transfers, and most provide training to their employees to help combat financial abuse. Nevertheless, thanks to the new Elder Abuse Law, our bank clients are now being hit with nasty lawsuits accusing them of the financial abuse of elders when nothing of the sort has taken place.

Continue reading "Bank Litigation: California's New Elder Abuse Law is being Abused" »

Welcome to SpecialAssetsLawyer.com, a place where problem loans and troubled debts are the topic of discussion. I am Dick Rogan, bank lawyer and chair of the JMBM Special Assets Team™. Every day, problem loans of all types cross my desk and the desks of my colleagues here at JMBM. That's because we ask for them. Our clients are banks, special servicers, private lenders and others dealing with the fallout from the "Great Lending Bubble." Our clients challenge us to help them find value where all appears to have been lost. They rely on our collective years of experience to develop the right approach for each loan. Let's face it, our task is to work with our clients to make the most out of a bad situation.

Over the years, we've been asked by young people just joining a lender's workout team and by experienced lenders who have crossed over to the "dark side" of the bank to explain the tricks of the trade in dealing with special assets. In response, we created SpecialAssetsLawyer.com - a collection of some of our accumulated wisdom and a place for bank workout professionals to come find out what works when attempting to collect and deal with problem loans.

Continue reading "Special Assets Lawyer.com: A Place Where Problem Loans and Troubled Debts Are The Topic of Discussion" »