Loan Enforcement Improving the Odds of Recovery. By Michael A. Campbell Polsinelli Shughart PC

Transcription

1 Loan Enforcement Improving the Odds of Recovery By Michael A. Campbell Polsinelli Shughart PC Copyright 2009

2 Contents 1. Good Underwriting 2. Speed and its Effect on Recoveries 3. Pre-Enforcement Asset Searches 4. Assess Loans and Collateral Early 5. Identify Other Creditors and Actions Affecting Your Borrowers 6. Use Advantageous Loan Workout Agreements 7. Capitalize on Tax Refunds from Loss Carrybacks 8. How to Secure Tax Refunds 9. Use Receivers to Take Charge of Certain Collateral 10. Avoid Immediate Charge-offs and Improve Likely Sales Prices Through Transfers of Collateral to Receivers 11. Deeds in Lieu of Foreclosure 12. Follow the Money 13. Scrutinize Construction Escrow Disbursements 14. Modify Loans to Capitalize on Available Tax Credits 15. Consider Bifurcation of Loan to Reduce Impaired Classifications 16. Use Your Real Estate Broker as an Additional Resource 17. Pursue Remedies and Claims in Bankruptcy 18. Insure, Insure, Insure: Title, CGL, E&O and Community Bank Bonds 19. Avoid Risks and Pitfalls that Might Impede Enforcement

3 1. Good Underwriting Perform better investigations of borrowers - Obtain information on all other borrowing - Search for lawsuits filed against borrowers and guarantors o Missouri Casenet o Illinois Clericus Magnus Obtain detailed Personal Financial Statements - Require itemization of real estate, stocks, accounts, etc. - Segregate qualified retirement accounts from the underwriting analysis Perform an end game analysis of all collateral - Real Estate - Equipment - Inventory - Accounts Receivable - analysis File Deeds of Trust and UCC s immediately 1

4 2. Speed and its Effect on Recoveries Heed the maxim Your first loss is your lowest loss Move quickly while borrowers and guarantors still have capacity to deal with your loans Recognize declining values of collateral Understand the scope and aggressiveness of other secured and unsecured creditors who may be pursuing your borrowers and guarantors 2

5 3. Pre-Enforcement Asset Searches Scrutinize borrowers and guarantors financial statements Consider using an asset search investigator Identify banking relationships of the borrower and guarantors - Review borrower and guarantor deposits at your bank to identify other DDA accounts - Review cancelled checks of borrower and guarantors to identify transfers to other banks - Perform UCC search for other lenders on file (indicating possible deposit relationships) Inspect cancelled checks from payments made by borrowers and guarantors - Identify transfers to other business interests, projects, etc. - Search for transfers to mutual funds, - Identify payments of life insurance premiums - Identify payments of hazard insurance, taxes, utilities and expenses associated with other properties, businesses or assets - Search for transfers to family members, partners, etc. (for possible UFTA claims) Identify lawsuits filed by or against the borrowers and guarantors (Casenet, Clericus Magnus) for possible assets 3

6 4. Assess Loans and Collateral Early Understand the remedies available to the bank under the loan documents Determine the notices required to exercise any remedies Determine whether there are any caps or limits on guaranties and future advance Deeds of Trust, and whether there are any caps under subordination agreements that might apply Realistically appraise and value all collateral Calculate the likely deficiency you must collect from borrowers and guarantors after the liquidation of the collateral 4

7 5. Identify Other Creditors and Actions Affecting Your Borrowers Ask borrowers for full disclosure of all such relationships Conduct UCC searches regularly during the relationship Check court records on line to identify other lawsuits or civil proceedings affecting your borrowers o Missouri Casenet o Illinois Clericus Magnus Update title work on all real estate collateral with a letter report or title commitment to uncover mechanics liens, judgments or other liens 5

8 6. Use Advantageous Loan Workout Agreements Provide for control of the collateral Provide methods for calculating any deficiencies Ratify the indebtedness and all guaranties Consent to remedies required by the lender Consent to appointment of Receiver Consent to Consultants (with Receiver powers) Correct mistakes in the loan agreement, collateral documents and perfection of security interests Cross-collateralize and cross-default multiple loans and collateral Give the bank a power of attorney to take actions Obtain Assignment of Rents Obtain tenant direction letters and agency direction letters, and arrange for direct deposit of rents (lockbox) Establish Auto Debit Account Provide for sales of properties and collateral Provide bankruptcy protections (recognition of subsequent new value) 6

9 7. Capitalize on Tax Refunds from Loss Carrybacks Review borrowers and guarantors tax returns for three (3) prior years determine whether carry back of current tax losses will result in tax refunds from prior years Require that borrowers and guarantors amend prior returns to collect and apply tax refunds to loan Right to a tax refund is a general intangible under the UCC; when the right turns into a refund check, the check is an instrument under the UCC A lender can perfect a general intangible by filing, but must have possession to perfect a security interest in an instrument Problem: how to secure an interest in tax refunds 7

10 8. How to Secure Tax Refunds Borrower assigns and endorses a refund check by completing IRS Form 2848 (Power of Attorney and Declaration of Representative) Borrower signs U.S. Treasury Form 234 for authorization to endorse check. Perform a UCC search for any collateral descriptions that include general intangibles, instruments or income tax refunds Obtain a signed security agreement in general intangibles, instruments and income tax refunds. Include the following covenants: No other assignments of tax refunds Immediately deliver and endorse refund check Immediately deliver a complete copy of the tax return and all amendments If the borrower is expected to e-file a return and obtain a refund by wire, open an account at the bank to which the refund is deposited The bank has the right to apply the deposit to the debt File a UCC financing statement describing the collateral 8

11 9. Use Receivers to Take Charge of Certain Collateral Individual or entity that is appointed by the court to preserve collateral, operate or wind up a business, or otherwise take action to protect the interests of creditors Situations where a receiver may be appropriate: Ongoing and profitable business operations The need to collect rents or enforce leases The need to protect perishable or seasonal collateral Where multiple borrowers are at odds with each other Where third parties (such as account debtors and tenants) will not recognize the authority of a lender Benefits of a Receivership: - Assumption of control of properties and collateral by Receivers under court order - Protection from lender liability Can sometimes provide for sale of collateral without placing the bank in the chain of title Use broad powers in Orders Appointing Receiver (including sales of properties, completion of construction, management of properties, payment of expenses, etc.) 9

12 10. Avoid Immediate Charge-offs and Improve Likely Sales Prices Through Transfers of Collateral to Receivers Loss mitigation benefits of a Receiver: Ability of Receivers to market and sell properties and collateral at best market prices, without a forced sale More realistic estimates of recognition of impairment under FAS 114 (when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement or upon restructuring ) (FAS 114, para. 8 and 9) Conditions for accrual exist when it is probable that an asset has been impaired or a liability has been incurred and that the amount of loss be reasonably estimable Foreclosures, deeds in lieu of foreclosure and workout agreements trigger immediate FAS 114 accrual Control of collateral by receivers may not necessarily require restructuring of loan 10

13 11. Deeds in Lieu of Foreclosure Establish a special purpose entity ( SPE ) owned by the bank or its holding company that will take title to collateral from its borrowers for later sale or foreclosure under the name of the SPE Contact your title company prior to accepting any deed in lieu of foreclosure to assure that a transfer will occur free and clear of all junior liens (ie- obtain a non-merger endorsement ) If a title company cannot assure a clean title under a deed in lieu of foreclosure, foreclose on the property to extinguish any underlying liens 11

14 12. Follow the Money Examine the borrower s demand deposit accounts for sources of income and transfers of assets Payments of insurance premiums Payments to other lenders Transfers to family members or affiliated companies Uniform Fraudulent Transfers Act ( UFTA ) Two types of fraudulent transfers: Intentional transfer of property made by a debtor with intent to defraud, hinder, or delay his or her creditors. Constructive transfer of property without receiving "reasonably equivalent value" in exchange for the transfer if: Examples: the debtor is insolvent at the time of the transfer, or becomes insolvent or is left with unreasonably small capital to continue in business as a result of the transfer. Transfers to family members Transfers to partners Transfers to affiliated companies 12

15 13. Scrutinize Construction Escrow Disbursements Obtain and review all draw requests, supporting invoices and disbursement records Identify improper disbursements for potential claims: - Disbursements exceeding construction budget categories - Disbursements assigned to wrong budget categories - Direct disbursements to borrowers or their affiliated entities - Draw requests that have not been approved by the bank - Disbursements for expenses or properties other than the property securing the loan - Disbursements without proper draw requests, invoices and lien waivers - Disbursements for improvements that have not been performed (based on inspection reports, photographs or other information available to title company) Consider claims against escrow agents and title companies for improper disbursements 13

16 14. Modify Loans to Capitalize on Available Tax Credits Conversions of projects from condos to apartments Possible tax credits: Federal tax credits / State tax credits Historic tax credits Low income tax credits New markets tax credits Brownfield tax credits 14

17 15. Consider Bifurcation of Loan to Reduce Impaired Classifications FDIC Policy Statement on Prudent CRE Loans Restructure loan into two separate notes: - First note reasonably assured of repayment (accrual status) - Second note not reasonably assured of repayment (nonaccrual, charged-off) Use an appropriate Loan Agreement (either Master Loan Agreement, or Loan Modification Agreement) Include provisions to protect the bank s security and priority: - Cross-default - Cross-collateralization - Special enforcement provisions (consents to Receivership, coordinated enforcement between notes and collateral, assignments of rents and payments to auto-debit accounts, etc.) - Guarantor acknowledgements and ratifications Determine whether Deed of Trust Modification is needed Obtain approvals and endorsements from title company 15

18 16. Use Your Real Estate Broker as an Additional Resource Perform the legwork necessary to ready a property for sale Secure property Notify utilities Arrange for repairs 16

19 17. Pursue Remedies and Claims in Bankruptcy Always file a Proof of Claim In Chapter 7, 11 and 13 Cases: Determine if grounds exist for relief from stay, and file Motion for Relief: For cause, including lack of adequate protection (waste, mismanagement, depreciating values, interest accrual and erosion of equity) Debtor has no equity in the property and it is not necessary for effective reorganization Scrutinize loan origination and history to find any evidence of fraud by the borrower in the procurement of the loan, or misuse of loan proceeds, and file a Complaint to determine non-dischargeability of loan Other motions: Motion to Dismiss Motion to Convert (from Ch. 11 to Ch. 7) Motion to Appoint Trustee (Removes DIP) 17

20 17. Pursue Remedies and Claims in Bankruptcy (Cont.) In Chapter 11 Cases: Negotiate with debtors for advantageous cash collateral orders File Motion for Order restricting use of cash collateral Preferences Fraudulent Transfers 363 Sales Benefits to Lender: Subject to court control, lender usually retains right to credit bid, lender has greater control (especially if funding purchase), often results in higher price, eliminates need to acquire property or foreclose Benefits to Purchaser: Sale free and clear of liens, binds creditors and sellers, eliminates fraudulent transfer risks, and often results in higher price 18

21 18. Insure, Insure, Insure: Title, CGL, E&O and Community Bank Bonds Title insurance Hazard insurance Commercial general liability insurance Make sure that all hazard insurance properly names the bank as loss payee or additional insured Force place hazard insurance whenever other insurance has lapsed Notify insurance carriers of any losses, even when your borrower has already done so (Union Mortgage Clause) 19

22 19. Avoid Risks and Pitfalls that Might Impede Enforcement Borrowers and guarantors look for available defenses Mistakes in enforcement and liquidation can include Failures to give required notices of default, set-offs or sales of collateral (per loan documents, UCC or foreclosure laws) Failures to properly notify borrowers, guarantors or junior lien creditors Failures to use commercially reasonable sales methods on liquidation of collateral Avoid disclosures of nonpublic personal information, and observe exceptions to prohibited disclosures under the Gramm-Leach-Bliley Act, 15 U.S.C

23 19. Avoid Risks and Pitfalls that Might Impede Enforcement (Cont.) Comply with Article 9 requirements when repossessing and liquidating all non-real estate collateral Order UCC search days before sending notice of disposition of collateral Send UCC notice of disposition of collateral at least 10 days before sale date Exercise caution in negotiations with borrowers and guarantors Make no oral or written promises that you are not fully prepared to keep Use a pre-negotiation meeting terms letter signed by your borrowers (providing an acknowledgement that no discussions or communications shall be considered an agreement to work out the loan or forbear from enforcement unless these are set forth in a written agreement, signed by the bank and approved by the board or directors or management) 21

24 Michael A. Campbell is the Chair of the Creditors Rights, Loan Enforcement and Creditor Bankruptcy Representation Practice Group with Polsinelli Shughart PC, in its downtown St. Louis, Missouri office. He concentrates his practice in the area of Financial Services, serving a wide variety of needs of financial institutions. If you have questions about this article or any other matter, please contact Michael at (314) or mcampbell@polsinelli.com. 22