Lender Liability: Defending Against Attacks

on Loans in Workout, Modification,

Default and Bankruptcy Lessons From Recent Financial Litigation and Best Practices for Evaluating and Minimizing Claims

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WEDNESDAY, JANUARY 15, 2014

Presenting a live 90-minute webinar with interactive Q&A

Zachary G. Newman, Partner, Hahn & Hessen, New York

Richard Donovan, Member, Rose Law Firm, Little Rock, Ark.

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January 15, 2014

LENDER LIABILITY:

DEFENDING AGAINST ATTACKS ON

LOANS IN WORKOUT, MODIFICATION,

DEFAULT AND BANKRUPTCY

LESSONS FROM RECENT FINANCIAL

LITIGATION AND BEST PRACTICES FOR

EVALUATING AND MINIMIZING CLAIMS

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This CLE live web seminar will analyze the most common types of lender liability claims, discuss how they are being asserted in various phases of the lending cycle and in bankruptcy, and explain lessons learned from recent financial litigation. The panel will outline best practices to minimize and avoid the risk of lender liability claims. Following the speaker presentations, you'll have an opportunity to get answers to your specific questions during the interactive Q&A.

7

Your Moderator

Zachary represents public and private

companies, national banking

associations, commercial lenders, leasing

companies, and hedge funds in business

litigation throughout the United States.

His practice focuses on

Banking Litigation (enforcing multi-

million dollar credit facilities on behalf

of national and regional banks and

institutional and specialty lenders,

securing provisional remedies, and

defending lender liability litigation);

Commercial Litigation (litigating

contract disputes, commercial

insurance claims, aircraft lease

disputes, unfair competition and

restrictive covenants, bankruptcy

disputes, and judgment

enforcement);

Fiduciary Litigation (contested

accountings, Prudent Investor Act

claims, and breach of fiduciary duty

claims); and

Art and Antique Litigation (national

and international reacquisition of lost

or stolen art, repossessions and

liquidations, and disputes regarding

valuations, fraudulent auctions,

consignor-lender issues, and lien

priority).

Fordham University School of Law (’94)

Co-Chair, Litigation Management

Subcommittee of the America Bar

Association Corporate Counsel

Committee

New York Metro Area Super Lawyers

2011, 2012, and 2013

212.478.7435 Znewman@

hahnhessen.com

8

Best Lawyers in America - 2006-2014 Editions - Commercial Litigation; Bet-the-Company Litigation, Litigation - Banking & Finance, and Litigation – Securities Chambers USA Leading Lawyers, 2004-2013, Litigation: General Commercial Mid-South Super Lawyer Top 50 Lawyers in Arkansas, 2011-2013

Pulaski County, Arkansas, and American Bar Associations; Member, American Board of Trial Advocates; Master of the Bench, Henry Woods American Inn of Court; St. Thomas More Society, Member University of Arkansas, Bachelor of Arts, University of Arkansas, Juris Doctor (honors) Member, Arkansas Law Review

Guest Speaker

Richard Donovan

501.377.0325 rdonovan@

roselawfirm.com

9

Introduction to Our Program

10

Banking, lending, financial services, and private equity have been subject to substantial criticism:

Websites (e.g., stopgreedybanks.com)

Courts

Borrowers

Editorials

Blogs

The current economic environment has created heightened tensions between lenders and borrowers

SCORECARD

11

ELECTED & COURT OFFICIALS ARE NOT

RELUCTANT TO SPEAK THEIR MIND

Representative Barney Frank, Chair of House Financial Services Committee, recently had a “blunt” statement to Bankers:

“People really hate you, and they’re starting to hate us because we’re hanging out with you.”

http://www.politico.com/news/stories/0209/18372.html

In an Orange County mortgage modification case, Justice Catherine M. Bartlett cut off the bank lawyer who argued the proper documentation was not submitted and noted:

You, she said, are telling me lies … [The bank] got a bailout, and this is an outrage, how this man has been treated … Hard-working, middle-class Americans are trying to make it, trying to refinance with your bank … Either bank officials show up in person, or I’m going to order them here in handcuffs.

12

“HE MUST HAVE DONE IT BECAUSE THEY DID IT”

From A Recent Brief Filed By A Borrower

(A Lawyer, And A Former Bank Executive):

Through its acts and omissions, [the Bank] – like so

many mortgage lenders and other banks in recent

years – acted in bad faith and/or negligent manner to the

detriment of [us borrowers] ....

While courts in New York and elsewhere are holding

lenders accountable for such conduct, [the Bank]

nevertheless seeks to shield itself from the

consequences of its own actions ....

13

WHY THE RISE IN CLAIMS?

HERE ARE SOME CONTRIBUTING FACTORS

Borrowers are defaulting

Distressed loans

Secondary markets and assignments

Constriction of availability / deepening insolvency

Busy court dockets

Deep pockets become the focus

The plaintiff’s bar

Club deals - participations - syndicated loans

Underwriting criteria

Health of the loan documents

14

LAWYER ADVERTISING AND

BORROWERS FLEXING THEIR MUSCLES

Google Answers Post:

I am looking for examples of borrowers who have

(successfully) sued banks for issuing them a highly risky loan.

I'd appreciate any pointers to U.S. legal precedence for action

taken against a bank for giving someone a risky loan. http://answers.google.com/answers/threadview?id=531128

Times Magazine:

Do banks, those powerful and wise institutions, sometimes

behave like bullies? While quite a few borrowers would say yes,

U.S. banks have long seemed virtually immune to retaliation for

heavy-handed tactics. Now, however, hundreds of borrowers

are taking their lenders to court and winning. http://www.time.com/time/magazine/article/0,9171,967374,00.html

15

THE STIGMA OF AFFIRMATIVELY

ACKNOWLEDGING A DEBT IS NON-EXISTENT

Danny Tarkanian, a U.S. Senate candidate, filed suit

against La Jolla Bank in Las Vegas seeking to avoid a

debt noting:

“It’s something happening quite a bit in this

environment … Unfortunately, we’re caught in the

middle of it.”

http://www.lasvegassun.com/news/2010/jan/22/tarkanian-family-sues-bank-avoid-propertys-

foreclo/

16

RISKS OF LENDER LIABILITY

Delay in recovery

Increased legal fees

More extensive discovery required

Imposition of counterparty legal fees

Recharacterization of debt

Equitable subordination

Cancellation of debt

Compensatory damages (lost profits – speculative)

Reputational damage (fraudulent and predatory lending claims)

Client resources (witnesses; document production; electronic discovery; in-house counsel)

17

SIGNIFICANT DELAYS IN

RECOVERING LOAN BALANCES

TSL (USA) Inc et al v. OppenheimerFunds Inc et al, New York State Supreme Court, New York County, No. 600976/2010

On the other hand, it may be difficult for a lender to recover if they lend funds under

circumstances in which they are found to have been without all material facts. The lenders alleged that Oppenheimer breached its duty under a certain administration agreement by failing to notify them of four amortization events that occurred as a result of non-conforming securities purchases, and two additional events when expenses exceeded revenue for certain transactions.

The lenders claimed they continued lending without being told of the events, and they could have terminated funding. The judge dismissed the fraudulent inducement claim with prejudice. No damages. The portfolio is performing and the theory of recovering loans lent is simply too speculative.

Court acknowledged that the specific performance claim could be replead to permit the lenders to claim Oppenheimer is obligated to replace the non-conforming securities with conforming securities.

18

TRENDING …

Loan commitment & failing to lend issues

Good-faith and fair dealing

Exercise of control

Cessation of funding

Declaring defaults & loan modifications

Waivers & financial covenants

Fiduciary duty

Roadblocks to recovery

19

LOAN COMMITMENTS, TERM SHEETS &

THE “FAILURE TO LEND” CLAIMS

20

THE INITIAL LOAN DOCUMENTS PROVIDE A ROAD

MAP FOR THE UNDERLYING LOAN TRANSACTION

If a lender deviates from its commitment after it has been accepted by the borrower, then the possibility for lender liability claims arises. What if underwriting and due diligence documents demonstrate that a

covenant is unattainable?

Failing to fund will be inevitably challenged by the borrower in a subsequent proceeding. Defaults can be many shades of gray.

If a borrower acts in reliance on a bank officer’s oral promise to make a loan, equity may intervene to protect the borrower. What about oral modification clauses?

Issuance of a commitment letter or term sheet may require a lender to pursue negotiations in good faith, even if market conditions have declined. Why can’t the lender simply shut down the negotiations?

21

CAN YOU ADVANCE TECHNICAL, FINANCIAL,

AND NON-PAYMENT DEFAULTS?

The “material adverse change” clause.

The MAC clause at issue provided that Wachovia may terminate the LCA if there is material adverse change in the capital, banking and financial market conditions that could impair the sale of the loan by Lender as contemplated in the term sheet.

Clear or not? Ambiguous or designed?

The issue typically becomes whether MACs apply only to unforeseeable events, or foreseeable events.

In Capitol Justice LLC v. Wachovia Bank, N.A., (D. D.C. 2009), the court said ambiguous because there is more than one interpretation that a reasonable person could assign to the MAC when viewing the contract in the context and circumstances surrounding the agreement.

22

LENDER’S CONDUCT, WAIVERS

AND MODIFICATIONS

23

LOAN MODIFICATIONS IN CALIFORNIA

Jolley v. Chase Home Finance, LLC, 213 Cal. App. 4th

872, 153 Cal. Rptr. 3d 546 (Cal. App. 1st Dist. 2013)

Modified an entire body of case law by holding that

whether a lender can be liable for negligence is a

question of fact. Thus, summary judgment is not

necessarily available to easily dispose a

disgruntled borrower’s negligence claims.

Chase’s statements to the borrower that the requested

modification was “highly probable,” “likely” and “look[ed]

good” were not just opinion, and could be fraudulent.

The court: “[T]he world [has been] dramatically rocked

in the past few years by lending practices colored by

short-sighted self-interest”

24

CALIFORNIA AGAIN? WHY IT SEEMINGLY

DESPISES THE PAROL EVIDENCE RULE

Riverisland v. Fresno-Madera Credit Assn. (Ca. 2013)

Plaintiff filed an action for fraud and negligent

misrepresentation, alleging that the bank’s vice-

president orally promised that the loan extension

would be for two years and only required two

additional property as additional collateral.

Abrogated California case law from 1935, regarding

evidence offered to prove fraud for purposes of the

parol evidence rule.

Affirmed reversal of summary judgment for

defendant.

25

FLORIDA WEIGHS IN ON

NEGLIGENT MISREPRESENTATION

In Dixon v. Countrywide Home Loans, Inc., 710 F. Supp. 2d

1325 (S.D. Fla. 2010),

the borrower argued the lender promised different financing terms from those included in

the loan documents.

The court barred the claim under the Banking Statute of

Frauds. Furthermore, the borrower could not establish

reasonable reliance when the purported misrepresentation is

contradicted by the express terms of the signed loan

documents.

In Coral Reef Drive Land Development, LLC v. Duke

Realty Limited Partnership, 45 So. 3d 897 (Fla. 3d DCA

2010),

the Third District stated that “[t]he world of commercial real

estate is not a warm and fuzzy place. That is why

parties to substantial transactions consult counsel and prepare highly-detailed

written agreements to address every contingency the parties

and counsel can imagine.”

26

INCREASE IN CASES LEADS TO INCONSISTENT

RULINGS AND INABILITY TO PREDICT OUTCOMES

Spaulding v. Wells Fargo Bank, N.A. (4th Cir. Md. Apr. 19, 2013)

Home Affordable Modification Program (“HAMP”). Passed as part of

Congress’s response to the financial and housing crisis that started in fall of 2008.

Mortgagors brought breach of contract, negligence, and violation of Maryland Consumer Protection Act claims when Wells Fargo rejected their application for a mortgage modification under HAMP.

There is no privity of contract without a Trial Period Plan agreement.

No private right of action for alleged failure to follow HAMP guidelines.

Dismissal of all claims affirmed.

27

OTHER COURTS HOLD

TRUE TO ESTABLISHED PRINCIPLES

ACA Fin. Guar. Corp. v. Goldman, Sachs & Co., (N.Y.

App. Div., 1st Dep't May 14, 2013)

Claims based on ABACUS CDOs were dismissed as

plaintiffs were found to be unable to plead justifiable

reliance as it was “a highly sophisticated commercial

entity” that could have verified the information it

allegedly relied upon.

Wells Fargo Bank, NA v. Cherryland Mall L.P., 2013

Mich. App. LEXIS 651, 5, 2013 WL 1442053 (Mich.

Ct. App. Apr. 9, 2013)

Interesting case – involving a solvency covenant for a

single purpose entity.

28

GOOD FAITH AND FAIR DEALING

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WHAT IS GOOD FAITH AND FAIR DEALING?

Can lenders rely on the terms of a loan agreement

when calling loans or otherwise enforcing their rights.

How should concepts of good faith and fair dealing

impact your lending decisions? How can borrowers

use this to their advantage?

Given the current economic climate, borrowers are

alleging breach of good faith and fair dealing by

lenders.

30

GOOD FAITH QUIZ

Gilmore v Ute City Mortgage Co, 660 F Supp 437, 442 (D Colo 1986)

Finding that where lender rescinded commitment to lend and commitment was

contingent upon lending committee approval, duty of good faith would not be

met, and bank would have breached contract, if lender failed to submit

commitment to lending committee.

KMC Co v Irving Trust Co, 757 F2d 752, 759-60 (6th Cir 1985

Finding that even where literal terms of credit agreement allowed bank control

over customer’s receivables and operating credit availability, duty of good faith

required bank to provide notice and an opportunity to seek alternative

financing before curtailing financing.

Continental Cas Co v Fifth/Third Bank, 418 F Supp 2d 964, 973 (ND Ohio 2006)

“’Mere failure to follow commercially reasonable banking procedures or to

comply with its own policies’ does not per se equal bad faith” and concluding

the bank had acted in good faith.

31

SUING LENDERS

FOR EMOTIONAL DISTRESS?

Claim allowed?

Lender’s alleged conduct of not providing borrowers with correct loan information, refusing to modify loan, losing papers and documents, and threatening foreclosure was “not so outrageous” as to support claim for intentional infliction of emotional distress.

Borrowers’ negligent infliction of emotional distress claim against lender failed where no physical impact alleged and no exceptions to impact rule applied.

Echeverria v. BAC Home Loans Servicing, LP, Case No. 6:10-cv-01933-JA-DAB (11th Cir. July 18, 2013) (affirming dismissal of plaintiff’s claim)

32

ACTIONS UNDER THE LOAN AGREEMENTS

Will a strict enforcement of terms and conditions form the basis for a breach of the implied duty of good faith and fair dealing?

Bank of America, N.A. v. Shelbourne Development Group, Inc., (N.D. Ill. Mar. 3, 2011) (“As the Seventh Circuit explains, Illinois law holds that parties to a contract are entitled to enforce the terms to the letter and an implied covenant of good faith cannot overrule or modify the express terms of a contract”).

Interpharm, Inc. v. Wells Fargo Bank, N.A. (S.D.N.Y. Mar. 31, 2010) (Lender liability claims dismissed to the extent that Wells Fargo had a right to threaten to do what it was legally entitled to do under the loan agreements).

Roswell Capital Partners LLC v. Alternative Constr. Tech., (S.D.N.Y. 2009) (Lender’s appointing two members to the Board of Directors, ownership of shares through the 2008 Funding were NOT an exercise of control, did not create a fiduciary duty, nor a breach of the duty of good faith and fair dealing as they were merely an exercise of plaintiff’s contractual rights).

Takeaway: Exercising contract rights to protect an investment should not constitute bad faith.

33

LENDERS MUST BE MINDFUL OF THE DUTY OF GOOD FAITH

AND FAIR DEALING WHEN INTERACTING WITH BORROWERS

A breach of this duty may be alleged as a defense or

claim in a later litigation

Lenders should try to avoid:

Deviating from an established course of dealing with

borrowers.

Acting precipitously and, without warning, exercising

rights under loan documents or in accordance with

depository set off language.

Exerting undue control over borrowers.

Demonstrating an unwillingness to negotiate or to

engage in meaningful workout discussions with

borrowers.

34

CONTROL BY LENDERS

35

THE DANGER OF EXERCISING CONTROL

Do lenders expose themselves to liability to borrowers and potentially third parties if they exert undue control over borrowers?

OVER THE LINE? Can lenders require borrowers to obtain permission before making major changes in their business operations where such changes might affect the lenders’ security?

OVER THE LINE? Can lenders dictate changes in borrowers’ business plans, sales and credit policies, and daily business practices?

′′[A] lender may offer advice and use the leverage which its position gives it vis-a-vis the debtor, without being viewed as controlling the debtor, so long as the debtor continues to operate, and the management of the debtor continues to make its own business decisions.” Lender Liability: Law, Practice and Prevention, § 5.7-8

36

DEFINING CONTROL

A determination of whether a lender has exerted undue control over a borrower typically is factual in nature, but a number of practices could raise red flags: Threatening the acceleration of a loan to influence borrowers’

decisions.

Instituting mandatory financial plans on borrowers

Deciding which of the borrowers’ creditors should be paid and in what order.

Making personnel decisions for borrowers.

Advice relating to marketing, equipment purchasing, products, location or expansion.

A bank’s ′′right to receive regular financial reports and monitor [the debtor’s] performance, and even to limit salaries paid . . ., was not at all unusual in the context of a commercial loan and [did] not create a fiduciary relationship′′ Shawmut Bank, N.A. v. Wayman, 34 Mass. App. Ct. 20, 606

N.E.2d 925, 928 (Mass. App. Ct. 1993)

37

ENDING THE RELATIONSHIP FAMM Steel Inc. v. Sovereign Bank, 571 F.3d 93 (1st Cir. 2009)

Court dismissed the borrower’s claims that Sovereign had a fiduciary relationship with them since there was no evidence that despite Sovereign’s insistence that the consultants be hired, that they were acting under the bank’s direction.

The court noted that the lender’s actions took place while FAMM was in default, and that the majority of the allegations were based on the lender’s failure to take actions that were not required under the loan agreements

F.D.I.C. v. LeBlanc, 85 F.3d 815, 822 (1st Cir. 1996) Under Massachusetts, law no breach of the implied covenant in

a bank’s ′′hard-nosed′′ dealings with a borrower where it was undisputed that the bank did not take any of the adverse actions before the borrower defaulted.

Plaintiffs raised new arguments on appeal based on Illinois law, under which they asserted that the implied covenant requires a bank to exercise its discretion reasonably, BA Mortgage & Int’l Realty Corp. v. Am. Nat’l Bank & Trust Co.

of Chi., 706 F. Supp. 1364, 1373 (N.D. Ill. 1989)

38

CONTROL AS “UNCLEAN HANDS”?

Domus, Inc. v. Davis-Giovinazzo Constr. Co., (E.D. Pa. Aug. 22, 2011) Creditors claiming priority to certain account receivables

obtained in an arbitration action alleged that the secured creditor, Susquehanna had overstepped its authority by filing AAA Arbitration proceedings on behalf of the borrower.

However, the Security Agreement explicitly allowed the bank to step into the borrower’s shoes and collect amounts due to the borrower.

Other creditors argued that Susquehanna had unclean hands due to its failure to comply with the minority business enterprise certification requirements.

The court however, rejected the argument as it found the bank neither knowingly or intentionally failed to comply, and regardless, there was no evidence that it thus harmed the other creditors.

39

LIABILITIES IN DEALING WITH COLLATERAL

Environmental

Ultimate Industries Site - October 2012 – Agreement by the

lender to pay for 10% of the costs incurred by the EPA in removing hazardous waste drums at a facility that had been owned by the defunct borrower.

State of Ohio v. Estate of Roberts (Ohio 2010) – Court of

Appeals found that there were issues of fact as to whether the bank failed to properly dispose of the drums and allowed useful assets to deteriorate into hazardous waste After the bank had taken possession of the property, it in fall of

2004, the bank sold some of the equipment, and 2 of the 35 drums with usable chemicals, paint, and stain.

Bank bought the property at the foreclosure sale but moved to vacate the sale due to “newly discovered evidence.”

The hole left by the sale of one piece of equipment led to a defect and subsequent leak, resulting in black mold.

40

INDIRECT LIABILITY

Consumer Financial Protection Bureau Bulletin 2013-02, dated March 21, 2013 In auto financing, auto dealers often facilitate indirect financing by a

third party (who does not actually meet the consumer) by providing basic information regarding the applicant and in turn receiving offers to provide financing at a certain rate.

Some indirect auto lenders allow dealers to mark up the interest rate above the indirect auto lender’s rate and the difference is typically called the “reserve,” which becomes one way the auto dealer is compensated.

The Bulletin warns that an indirect auto lender is a “creditor” under the Equal Credit Opportunity Act, which prohibits discrimination based on race, national origin, and other prohibited bases, and thus could be liable under the Act. Creditor includes “any assignee of an original creditor who participates

in the decision to extend, renew, or continue credit.”

Specifically, the Bulletin noted that the policy to allow auto dealer to mark up lender-established rate and compensate dealers from the markups created incentives, which, coupled with the discretion permitted, that posed a significant risk of resulting disparities in the pricing of auto loans.

41

INDIRECT LIABILITY - SUCCESSORS

Drakopoulos v. U.S. Bank National Association (SJC Mass. July 12,

2013)

Found that a bank, not the original lender but holder of a

residential mortgage through assignment and its servicer, was

subject to claims seeking damages and rescission for violations of

the Predatory Home Loan Practices Act, the Massachusetts

Consumer Protection Act, and the Borrower’s Interest Act.

Court determined that the fact that the bank was the assignee and

not the original lender did not shield the bank from liability.

The court absolved the servicer for claims arising from the actions

of the original lender, as it was not an assignee

42

OVERREACHING OR JUST BUSINESS?

Credit Suisse v. Official Committee of Unsecured Creditors (In re Yellowstone Mountain Club), Case No. 08-61570-11, Adv. No. 09-00014, 2009 Bankr. LEXIS 2047 (D. Mo. May 13, 2009) Facts:

CS creates loan for property developers that allows them to take most of the money in the form of a dividend. CS then sells off most of the loan to participants, externalizing all of the risk while keeping origination fees for itself.

CS markets loan to Yellowstone, a high end property development with cash flow problems, and after aggressive pursuit, an agreement is reached to loan $375M secured by the property.

Problem: Initial valuation of the property at “market value” was $420M, making loan-to-value ratio too high for CS.

Solution: CS invents the “Total Net Value” valuation method, applies a discount rate of zero to Yellowstone’s cash-flows, and originates loan through an offshore subsidiary to avoid compliance with Financial Institutions Reform Act of 1989 methodology.

CS collects $7.5M in fees and sells off all of the loan to third party investors

43

WHAT ELSE ARE THOSE

COUNTERPARTIES UP TO?

Attack on jury waivers

Reliance on state court claims to avoid the bounds of the credit agreement (interference with business relations; fraudulent inducement; duress; forum shopping; deceptive business practices; frustration of performance; etc.)

Impairing collateral

Resorting to bankruptcy filings

Multiple changes in counsel

Rushing to the courthouse to file first

Attacking legal fees incurred by the lender and other loan administration expenses

44

FOCAL POINTS WHEN ‘LITIGATING

LENDER LIABILITY CASES

45

POINT #1: TERM SHEETS AND LETTERS OF INTENT

Clearly Identify Binding v. Non-Binding Obligations

Agreeing to Negotiate?

Use Separate Sheets for Binding and Non-Binding Terms

Specific Terms v. Ranges

Be Careful Using Phrases “I Agree” or “I will fund the loan if”

Clearly spell out conditions to funding

Conduct Matters

Context of Statements

Be Consistent in Statements to Borrowers

Partial Performance?

Industry Custom?

Liability for Costs & Expenses

KEEP IT SIMPLE

46

POINT #2: REVIEW DEFINITIONS OF COLLATERAL

Actions can speak louder than words

Can negotiated protections under loan agreements be waived by lenders’ course of conduct with borrowers?

Common Sense Rules: 1. Include express reservation of rights language in all written

correspondence with borrowers.

2. Avoid informal modifications or waivers of agreement’s terms.

3. Include “no oral” waiver language in agreements and amendments.

4. Include settlement language in all documents and communications reflecting negotiations.

a) “Submitted in furtherance of settlement negotiations”

b) Subject to FRE 408 / Inadmissible in Court”

5. Refrain from editorializing in internal documentation or correspondence with the borrower.

6. Put everything in writing! But be mindful that whatever is put in writing may end up in court even if the lender believes it is protected.

47

POINT #3: ENFORCEMENT AND LIQUIDATION PLANS

Where to Enforce: Forum Selection Clauses What Country?

What Court?

State or Federal?

Where and How Can You Serve Legal Papers, and Who Must Get Them? Agents

Registered Mail?

Upon Default, What Are Your Rights? Right to Hold Collateral While Suing On Debt?

Duty to Take Possession of Collateral?

Right to Break and Enter?

Consent to Immediate Attachment/Replevin even if counterclaims/defenses to debt?

Waivers?

What is Commercially Reasonable? Private v. Public Sale?

Notice obligations?

Where Must Notice Be Given? Newspaper? Trade Journal?

48

POINT #4: E-MAILS

E-mails are forever and are discoverable.

E-mails are evidence.

Be aware of course of conduct arguments.

Often, e-mails are the best/worst evidence.

E-mails never tell the full story, leaving much room for

interpretation.

E-mails should only be used to confirm oral statements

from borrowers.

49

SIDEBAR:

CAN E-MAILS MODIFY CONTRACTS?

Stevens v. Publicis, S.A., 2008 NY Slip Op 2880, 3, 50 A.D.3d 253, 255-56, 854 N.Y.S.2d 690 (1st Dep't 2008)

Found that e-mails from plaintiff to defendant agreeing to modification of the contract were found to “constitute ‘signed writings’ within the meaning of the statute of frauds” and thus the contract, as modified was enforceable

Tomer v. Hollister Assocs., Massachusetts 2006

Contract altered despite existence of a no-oral-modification clause because the “Court considers e-mail communications, in which the sender and recipient are clearly identified, to constitute writings.”

Lesson Learned: If you wouldn’t send it to your counterparty in hard-copy form, don’t send it by e-mail.

Treat e-mail and hard paper as the same thing.

50

POINT #5: DEFAULTS, WAIVERS, & AMENDMENTS

Identify all defaults you discover, know and/or suspect

Clearly indicate which defaults are being waived by section

and title

Communicate with in-house counsel and do not spare the

details

Waiver of defaults

Make sure all amendments are defined and agreed to in

writing

51

POINT #6: PERFECTION: RECORD, MONITOR, & AUDIT YOUR

SECURITY INTEREST, LIEN & COLLATERAL

You cannot over-perfect

File financing statements in each jurisdiction

where an issue of filing may arise

Conduct reviews of UCC filing statements

concerning your debtor

Inspect your collateral, and be vigilant about

missing items

Knowledge of missing items + inaction ?=?

waiver

52

POINT #7: POSSESSION IS 9/10’S OF THE LAW?

• Get physical.

• Beware of unique collateral classes.

• If you can physically move the collateral, others can

too.

• In certain foreign jurisdictions, the first creditor to

take possession of collateral has priority rights to

that collateral.

• Consider bailees and bailors.

• Keep it in the United States if possible.

53

POINT #8: FORBEARANCE AGREEMENTS

• Be careful not to create enforceable obligations to extend credit or

renew the loan. Do not make promises inconsistent with the terms of

the agreement, or statements that may be construed as such.

• Acknowledgements concerning defaults and the amount of debt.

• Lock down the borrower. Use specific integration clause stating that

borrower has not relied on any promises outside of agreement. If orally

negotiating, never agree to anything and state that internal approval is

still required.

• Releases. Have borrower sign a broad release that specifically

precludes promissory fraud, misrepresentation, and language that could

be construed as a covenant not to sue.

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• Forbearance Period – stops the legal fees, the disputes, and cools

tempers

• Send follow-up emails after conversations stating that nothing is agreed to

without internal approval.

• Give all agreements to borrower in advance of closing to ensure time for

review. Have borrower sign specifying that it has:

• Read and understands agreement,

• Consulted with counsel,

• Not relied on any promises other than in the agreement, and

• Has made their own investigations and that the failure to do so is no

defense to enforcement of agreement.

FORBEARANCE CONTINUED

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POINT #9: VERIFY

• Due diligence

• Warranties and representations

• Release language

• Intercreditor Agreements

• Assignment documentation

• Collateral viability

• Boot collateral

• Guaranties

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