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.
When our clients receive a notice that a customer has filed a bankruptcy case, the first thing we do is ask for copies of the loan documents and payoff statement as of the date the bankruptcy petition was filed. We also request copies of recorded Deeds of Trust and filed UCC-1 Financing Statements.
We then put together a proof of claim that can be filed with the Bankruptcy Court to establish the accurate sum that the borrower owes the Bank as of the petition date.
In preparing a proof of claim, we make certain that all unreimbursed fees and costs incurred with respect to the loan or loans in question are included in the proof of claim. Frequently, we find that lenders neglect to include costs such as appraisal fees, fees for Phase I Environmental Reports, loan fees, late charges and attorney’s fees. All of these are proper charges that can and should be included in the Bank’s proof of claim.
In Chapter 11 cases, we file the proof of claim as soon as possible to make certain that our claim in on record. In Chapter 11 cases, the Court will set a “bar date” which limits the time that creditors have to file their proofs of claim. It is important to file the proof of claim before the bar date to avoid the costly procedure of moving the Court for an order to allow the filing of a late claim, or being stuck with a claim that was inaccurately scheduled by the debtor.
You may have heard the phrase that “liens pass through bankruptcy,” but this phrase is misleading. The phrase generally means that left alone, a secured creditor’s claim will survive the bankruptcy whether or not the creditor files a proof of claim or takes any action in the case. The rule is frequently misunderstood, as there is unfortunate case law that holds that a creditor with notice of a bankruptcy case who participates in the case but fails to protect its position or file a proof of claim may find itself receiving unfavorable treatment in a plan. The solution is simple: file an accurate proof of claim early in the case and pay attention.
In Chapter 7 cases, you have probably received notices from the Court that ask you to hold off filing a proof of claim until later notified by the Court. In those cases, take a moment to determine whether you think there is a possibility that your customer – now a Chapter 7 debtor – has sufficient assets to allow the Trustee to pay a dividend to creditors after liquidation of the assets in the bankruptcy estate. If there is a reasonable possibility of a dividend, it is a good idea to start preparation of the proof of claim even though the notice has asked creditors not to file it yet. This is because the process of preparing the proof of claim requires the lender and its counsel to complete the analysis of the credit and possibly the bankruptcy estate so that all strategic considerations may be taken into account from the outset. This way, once the Chapter 7 trustee determines that there are assets available for distribution to creditors, the Bank will be ready to file its proof of claim without further work.
The process of preparing the proof of claim and reviewing the bankruptcy estate also is useful in determining whether it is appropriate to move for stay relief.
Lenders often ask us what to do when one of several guarantors files a bankruptcy case but the loan itself remains current and has no payment default because its borrower, often an entity and sometimes a single purpose entity, has sufficient income to continue to service the debt. The answer here is to pursue the claim against the guarantor in the bankruptcy case because it is an event of default under most loan documents if a guarantor files bankruptcy. In those cases, it is also appropriate to send a letter to the borrower and any other guarantors calling the default and offering to treat the loan accordingly, depending upon whether payments continue to be paid on a current basis. In those instances, it may be appropriate to issue a formal forbearance.
Meanwhile, filing the proof of claim in the guarantor’s bankruptcy case is also appropriate and may result in a recovery if there are assets to be distributed.
The JMBM Special Assets Team™ can help you file proofs of claim, can file proofs of claim for you in an organized and economical fashion to make certain that the Bank protects its rights from the outset of the bankruptcy case.
This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what’s new in the World of Workouts.
Year after year, day after day, workout professionals in the know rely on JMBM’s Special Assets Team™ to handle problem commercial and real estate loans. Whatever problem loans you have, chances are, we’ve seen it. Give us a call.
Our Perspective. JMBM represents commercial banks, special servicers, private lenders, asset-based lenders, hard money lenders and factors. We help lender clients throughout the United States craft business and legal solutions to their commercial and real estate troubled loans. For more information, please contact Dick Rogan at RRogan@JMBM.com, or (415) 398-8080.
Richard A. Rogan is Chair of the JMBM Special Assets Team™. He also serves as the co-managing partner of JMBM’s San Francisco office and co-chair of its Bankruptcy Practice Group.
JMBM’s Special Assets Team™ has represented hundreds of lenders in California and throughout the United States. We regularly appear in bankruptcy courts, district courts and superior courts. We are proud to serve as trusted counsel and advisors who look for a business solution and try to help lenders find the best possible resolution for each troubled loan. Whether a loan is being newly documented, restructured or litigated, JMBM’s Special Assets Team™ has the skill, know-how and experience to solve your problem in a practical no-nonsense way.
NOTE TO CONSUMERS: As a matter of Firm policy, JMBM does not represent individual consumers who have disputes with their lenders. Many lenders have specialized consumer workout professionals who have the time to help consumer borrowers. There are many fine attorneys who specialize in representing consumers. Individuals with consumer lending problems should contact a lawyer or law firm who specializes in consumer insolvency and bankruptcy in their local area. When in doubt, we suggest you contact your local bar association’s Lawyer Referral Service. [For example, see Bar Association of SF or LA County Bar Association Lawyer Referral Services]
JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.