Baker Donelson’s CMBS Special Servicer team recently lead a training session for one of our clients on unique issues and strategies involved with defaulted loans involving tenant in common (TIC) borrowers. We have seen multiple bankruptcy filings by individual TIC owners over the past 12 months. The program identified numerous issues that are unique in a TIC bankruptcy and highlighted various strategies to address these bankruptcies. (more…)

Lockboxes and Cash Management Agreements1 are being required with increasing frequency in loan originations and workout deals. When carefully planned, lockbox implementation can be seamless. When enforced as an afterthought, problems ranging from delayed closings to unnecessarily divisive negotiations can ensue. Below are pointers to consider when a lockbox is introduced into a deal. (more…)

On March 28, 2013, my colleagues Nelwyn Inman, Eric Pruitt and Spencer Clift provided an interesting webinar on recent trends in lender liability litigation. They noted that lender liability claims generally arise in the following contexts: (i) claims seeking recovery of damage or “leverage” to accept discounted payoffs, (ii) counterclaims to foreclosure/receivership/guarantor actions, or (iii) “first strike” lawsuits in anticipation of collection/foreclosure actions. Lately, borrowers seem to attack commercial lenders on one of the following grounds: (i) breach of contract/violation of obligation of good faith and fair dealing, (ii) tort claims (e.g., negligent servicing; deepening insolvency), and (iii) breach of fiduciary duties. Typically, lender liability allegations are about leverage.

With regard to alleged interference with or control of a borrower’s business, our team has seen claims relating to: (a) required lender approvals of material leases or renewals, (b) allowing or refusing use of escrows and reserves (tenant improvement/leasing commissions, replacements reserves, etc.), (c) cash water falls with a hard lock box that provide for disbursement of funds for operations, and (d) due diligence by lender (or possible note purchaser) prior to exercise of remedies, including the presence of third parties at property. It is important to consider the ramifications of these type of actions as it is critical that the lender comply with the contractual terms of the loan documents. A lender can get into trouble when it starts taking action that is not provided for in the loan documents.

Another area that borrowers have attempted to litigate is alleged oral modification of loan documents. These arguments typically take the form of either a course of conduct, where the borrower argues that the lender’s actions have waived defaults due to lack of action or objection, or a borrower alleging that a verbal or informal written communication constitutes a modification or extension of loan terms. The underlying loan documents should contain express provisions prohibiting any oral modification of the terms of the written documents and non-waiver provisions based on action or inaction. Assuming those types of provisions are in the documents, the lender should have a strong argument against these categories of claims.

The panelists noted some best practices in dealing with a defaulted loan in order to avoid lender liability allegations:

A. Develop a strategy at the front end of the matter.
B. Focus on the big picture and end game.
C. Do not “run” the borrower’s business.
D. Do not become the borrower’s advisor in any context.
E. Do not act suddenly or erratically in your dealings with the borrower.
F. Honor your agreements/act honorably in your interactions with the borrower.
G. Follow internal policies and procedures.
H. Know your opposition, including opposing counsel.
I. Determine whether a guarantor claim is worth pursuing.
H. Follow the Golden Rule.

I recently sat down for a Q & A session with Law 360 to discuss some of the challenges I’ve faced while representing special servicers and financial institutions. The discussion covers not just my own work, but also touches on some of the regulatory issues that special servicers and financial institutions will face in the near future. (more…)

Today I had the pleasure of having breakfast with Senate Minority Leader Mitch McConnell (R-KY) at Baker Donelson’s Washington, D.C. office. He spoke a lot about the current budget negotiations. I did take the opportunity to raise concerns I continually hear from our financial institution clients that they are getting killed by increasing regulatory oversight by the Federal government. When I asked him if he saw any way that Congress would provide relief to the financing industry, Senator McConnell said that while it is unlikely to see much relief along these lines, they have some leverage with the consideration of the Richard Cordray nomination to the Consumer Financial Protection Bureau (“CFPB”) to make some inroads into the current Dodd-Frank and CFPB regulatory overlay. (more…)

The headlines tell the story of the current state of CMBS and CRE defaults here and abroad. “Watch out for CMBS Re-Defaults” trumpets Real Estate Finance Intelligence. Financial News announces “Break Time Over as CMBS Bounce Back on Wall St.” “Cumulative CMBS Defaults Up but Slowed by New Issuances” states a headline in The Wall Street Journal informs that “CMBS Issuance Marks Largest Ever New-Year Kickoff.” Some predict that CMBS 2.0 will include improved structures to deal with problems not contemplated during the boom years and champion more conservative underwriting. Other fear that as securitization volumes rise and investors become increasingly desperate for yields, underwriting and collateral standards will fall. (more…)