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"" »

A good workout professional also knows how to help the Bank make loans that are properly structured. Many of the "sad" stories we have recently experienced were the result of a huge decrease in property values, but several arose out of mistakes made in underwriting and structuring loans. Well-run institutions are taking care to be mindful of past mistakes as they venture back into the lending arena.

In this post, my partner, Ben Young, points out a common misconception about golf courses. Over the years, we've seen countless golf course deals fail. Lenders often forget to take personal property security interests in inventory, equipment and clubhouse furniture, forget to tie down the water rights, ignore leased land and parking arrangements and do not take care to properly secure rights to the liquor license. As Ben points out, some lenders erroneously rely on ongoing accounts receivable, even if the golf course files Chapter 11.

Continue reading "Double Bogie: Bank's Security Interest in Green Fees Cut Off by Club's 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" »

Assignments for the Benefit of Creditors are an often overlooked procedure for liquidating a company. A good way to understand ABCs is to think of them as an out of Court Chapter 7 case. Creditors - both secured and unsecured - and debtors turn to ABCs when a company (or its assets) need to be sold so the proceeds can be paid over to creditors. An ABC is an alternative to liquidation by foreclosure, receiver's sale, Section 363 sale in bankruptcy, and sale by the debtor itself.

Continue reading "It's as Easy as "ABC" -- Assignments for the Benefit of Creditors" »

Unless you are a specialized lender who makes loans to debtors-in-possession, you do not make a loan with the expectation that your borrower is going to file bankruptcy. Although the number of bankruptcy filings in California and nationally is trending slightly lower, filings remain at higher than normal levels. Nearly every lender has received the notice of a bankruptcy filing that was unexpected and then faced decisions as to what to do next.

Continue reading "Why It Is Important For A Lender To File A Proof Of Claim" »

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" »

Creditors usually should file a proof of claim when the borrower files a bankruptcy case. In Chapter 7 cases where there are assets in the bankruptcy estate and in Chapter 11, 12 and 13 cases, the creditor should file a proof of claim. Here are some of the basics involved in preparing and filing proofs of claim.

Continue reading "Proof of Claim 101 -- What Is a Proof of Claim? What Is a Bar Date? What Information is Required to File a Proof of Claim?" »

Almost all loan documents that we enforce on behalf of our lender clients contain an attorneys' fees clause that requires the borrower to pay the bank's attorneys' fees, whether or not litigation or bankruptcy is required to enforce the loan. In California, Civil Code Section 1717 makes such clauses reciprocal. In other words, if a bank brings a lawsuit against the borrower and loses, the bank may be obligated to pay the borrower's attorneys' fees. Usually, because there is little doubt that the borrower does owe the money to the bank, the bank prevails and the borrower has to pay the bank's fees on top of the loan balances.

In bankruptcy court, secured lenders take the position that under Bankruptcy Code § 506(b), they are entitled to attorneys' fees if the loan agreements provide for them. Prior to 2007, the prevailing view in the Ninth Circuit, which includes California, was that unsecured creditors could not be awarded attorneys' fees. However, in 2007, the United States Supreme Court held that attorneys' fees should not be denied in bankruptcy, whether or not the lender was secured. Travelers Cas. & Sur. Co. of America v. Pacific Gas & Elec. Co. (In re Travelers), 549 U.S. 442 (2007).

The Travelers opinion has created uncertainty for creditors seeking relief from the automatic stay. On the one hand, a stay relief motion is not an action by itself, but rather simply a motion that is part of a larger case, usually a Chapter 7 or Chapter 11 bankruptcy case. On the other hand, stay relief can be the determining factor as to whether or not the lender or the debtor prevails. My partner, Bob Kaplan, notes that the Travelers decision has now been held to affect motions for stay relief and cautions lenders to consider this factor:

Continue reading "Bankruptcy News--CAUTION: Attorneys' Fees Awarded To Debtor" »

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" »

Every downturn creates an opportunity for the cash buyer to acquire valuable assets at a favorable price. The opportunity arises when the owner of an asset fails, and can no longer benefit from holding the asset. The failing company must either sell the asset to raise cash for operations or to pay its creditors. Assets can be everything from real estate to operating businesses to intellectual property.

Secured creditors are often the driving force behind asset sales. When a borrower gets into financial problems, most banks transfer the credit into the workout department, often known as Special Assets or Loan Adjustment. This allows the bank's workout professionals to take charge and to drive the process of either restructuring or collecting the loan. Often, this process requires sale of some or all of the collateral, which is the assets of the borrower.

Continue reading "Opportunity Buying--Purchasing Assets Before and After Bankruptcy" »

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?" »

I can't tell you how many times our client has successfully collected its loan out of the proceeds from a sale of the borrower's assets in a bankruptcy case. When a sale of assets occurs in bankruptcy outside of a Plan of Reorganization, it must meet the five part test set forth under Bankruptcy Code Section 363(f). Often, these sales are called "363 Sales." In 2008, the Ninth Circuit Bankruptcy Appellate Panel issued a significant ruling that effects Section 363 Sales. The key take away from this ruling is that even if the Bank is fully secured by the assets being sold, the sale - outside of a Plan of Reorganization - will not be approved unless the junior secured creditors are also paid in full or consent to the sale. This ruling deals a stunning blow to liquidating assets in Bankruptcy in the current marketplace, where the Bank's collateral has dropped in value in a meaningful way and junior creditors are out of the money.

My colleague, Walter Gouldsbury, a member of the JMBM Special Assets Team™, puts the Clear Channel opinion in perspective and in doing so, gives workout professionals a quick and easy place to go to understand the rules that govern Section 363 Sales.

Continue reading "Bankruptcy: Section 363 Sales Must be Free & Clear of Liens in Bankruptcy" »

Companies frequently file Chapter 11 cases because their cash flow is insufficient to finance operations and debt service. The idea is to take advantage of the automatic stay to hold off existing creditors during the time it takes to restructure the Debtor's obligations by a Plan of Reorganization. Debtors hope that by minimizing cash outflows to creditors, they can concentrate on "fixing" the business or leasing up the property to increase revenues.

But who will provide the necessary cash flow to bridge the gap between the filing of the Chapter 11 case and the confirmation of the Plan? Often, the Debtor's business is incapable of generating sufficient cash at the outset. When that happens, Debtors seek to obtain an order of the Bankruptcy Court under Section 364 to allow post-petition borrowing, or as it is commonly known, "DIP Financing." The acronym "DIP" stands for "Debtor in possession" and refers to the company that filed the Chapter 11 case.

Continue reading "Debtor in Possession Financing--Financing a Debtor after a Chapter 11 Filing" »

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" »