Category: Creditor’s Rights

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Creditor's Rights

Debtor/Creditor Negotiation Strategy: Under Promise And Over Deliver

Loan modifications in the commercial context usually yield better results than in the consumer world. This is because there’s usually a loan officer who is assigned to a troubled credit and has responsibility over collecting information, making fundamental decisions, reporting to committee and finally closing a loan modification or forbearance deal.  Unlike the consumer world where debtors wait for monolithic lenders to return with an answer as to the modification that will be permitted, in the commercial world the debtors are responsible for making written proposals to lenders to cure the default or modify the loan.

This is important because lenders don’t like to negotiate against themselves and recognize that debtors have a much stronger grasp on their cash flows, their operations and their ability to repay the debt.

Commercial lenders also recognize that debtors can more easily modify loans in bankruptcy when the loans are commercial loans, so they also want to stay out of bankruptcy if possible.  Loans secured by home mortgages that are the debtor’s principle residence are not subject to modification in a bankruptcy proceeding unless the lender consents.

So how does a borrower go about obtaining a loan modification in a commercial setting?  The process generally begins by debtors making written proposals to the lender.  It is important that in these proposals the debtor promises to make payments that are in line with what they can afford, not what they think the lenders want.  If a lender is willing to undergo the time, effort and expense to negotiate and draft a forbearance or modification agreement they don’t want to face an immediate default by their borrower.  That’s why borrowers need to be realistic in their promises after default so that they can rebuild credibility and a constructive commercial relationship.  By promising only as much as they know they can deliver debtors are much likelier to have a successful negotiation and a happy creditor.

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Creditor's Rights

Bankruptcy: 9.5 Million Reasons Why The Botticelli Will Stay In New York

Kraken Investments consigned the classic “Madonna and Child” painting by Botticelli to crooked NY gallery owner Lawrence Salander in 2006. The painting is valued at $9.5 million. Kraken, an Israeli company, probably thought it had dotted its “i’s” and crossed its “t’s” when it had Salander sign a consignment agreement agreeing that any disputes would be resolved by arbitration in the Channel Islands, where Kraken does business.

Consignment is a form of commercial transaction where the consignor places goods in the hands of a dealer for sale. Once the goods are sold, the consignor takes back  an agreed price and the dealer keeps the rest. If the sale doesn’t happen, the consignor receives back his goods and the dealer walks away.

The problem is that the outside world may not understand that the goods are part of a consignment transaction. To an uninformed viewer, it may just look as if the consignor is a seller and the dealer is a buyer, required to repay the sale price on normal credit terms. In unraveling modern commercial transactions, courts look more to the substance of a transaction than the description used by the parties. That’s why complex transactions like financing leases and consignments may be recast as sales with the goods earmarked to secure the unpaid purchase price.

To protect themselves from this reinterpretation of their transactions, lenders, sellers and consignors put on a belt and suspenders and file a financing statement with an office established for that purpose. This is a one page document that must identify the debtor and reasonably describe the goods. Financing statements enable lenders and consignors to perfect their rights by giving notice of their interest to the world. In modern commerce, the financing statement doesn’t even have to be signed.

Kraken made two enormous mistakes in this deal: (1) it allowed the consignment agreement to lapse and (2) it never filed a financing statement. Add a third: it got into bed with Salander, who stole $120 million from investors and is now serving an 18 year prison term.  Because of these mistakes, Kraken’s Botticelli was trapped in NY when Salander was forced into bankruptcy by his creditors. Last year the Bankruptcy Court ruled that due to the failure to file a financing statement Kraken needed to prove this transaction is a true consignment.  This is a daunting task, because Kraken will have to prove that a substantial portion of Salander’s creditors knew that the transaction was a consignment, a burden that appears to be nearly impossible.

To make matters worse, because the consignment agreement lapsed the arbitration clause is no longer valid, so Kraken needs to litigate in New York City and cannot flee to the Channel Islands. Last week the US District Court for the Southern District of NY agreed. So it turns out that the headline was somewhat misleading because there’s really only one reason why the Botticelli has to stay in New York: Kraken didn’t file a financing statement. As a result Salander’s creditors will likely split the $9.5 million and Kraken will leave the city empty handed.

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Creditor's Rights

California Dreaming: 3 Reasons Why Their New Foreclosure Law May Spread Across The Country

Inspired by the national attorney general mortgage settlement, California has passed a landmark foreclosure law that Governor Brown is expected to sign within days. Here are 3 reasons why the rest of the country will be watching the Golden State in the months and years ahead:

  • No “Dual Tracking”  The California law is designed to help homeowners enjoy real relief from loan modifications, not just anxiety and frustration. Lenders will not be able to rush through a foreclosure process at the same time they ask for endless packages of tax returns, paystubs, bank statements, utility bills and the like. The loan modification process will need to be completed before the lender can foreclose.
  • No robo-signing This practice of lenders’ auto-signing foreclosure documents without any review before a foreclosure sale scandalized the mortgage world and was a key motivator for the attorney general settlement. Private homeowners would have the right to sue lenders if they were damaged by robo-signing.
  • No processor runarounds Lenders will have to assign a single person to any loan modification file, who will be the homeowners’ point of contact. This rule alone may help reduce the considerable loan modification stress.

The law is only applicable to owner-occupied first mortgages.

Loan modifications are certainly a mixed bag. A recent TransUnion study showed that six out of 10 homeowners who received a loan modification stopped paying their mortgage again after 18 months. This study did not include statistics to address the many more homeowners who did not qualify for loan modifications. The question is: do loan modifications provide any real relief to borrowers? Perhaps the California law will finally force the mortgage industry to give meaningful focus on this process. The rest of the country will be watching.

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Creditor's Rights

A Jail Cell For A Debtor Who Went Too Far

In 2005 the credit card companies finally aligned all the stars to get BAPCPA passed: the Bankruptcy Abuse Prevention and Consumer Protection Act. Although BAPCPA has been roundly – and soundly – condemned as mucking up a perfectly good bankruptcy code, symbolically it rang true to the tone that most Americans believed: debtors simply had too much power, and creditors were paying the price.

Recently a North Carolina bankruptcy court helped a lender strike back against a debtor who had played every trick in the book to avoid a commercial foreclosure, and then found a few tricks not in the book. As detailed in this Forbes article, Nick Stratas said he wouldn’t interfere with his bank’s foreclosure sale and then did interfere. His claim? The auctioneer mumbled too much during the sale, so Stratas couldn’t compete with his lender by making phony bids to drive up the price of the sale.

Perhaps before BAPCPA the bankruptcy judge would have slapped him on the wrist with harsh words and a reprimand, but not now: the judge threw Stratas in jail until the lender could complete the sale and Nick paid the bank $10,000 for their trouble.

This judge got it right. Honest debtors are entitled to a fresh start and protection from their creditors. That’s what the bankruptcy laws are all about. They’re not to provide a playground for con artists trying to wing their way through on court delays and legal technicalities.

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