As we all know, there are business cycles that affect certain industries. When the going is good, lenders are lining up to make loans, and borrowers are not as picky as one might hope in taking on debt. When the worm turns, however, borrowers often find themselves in financial distress, right along with their competitors.
Currently, we are seeing assisted living facilities running into problems. These borrowers pose special problems for lenders, who must walk a thin line between collecting a bad debt and dispossessing seniors and handicapped persons. The lender handling a troubled assisted living facility wants to avoid taking over the property because the lender is ill-equipped to care for the residents. But how do you do the right thing – both for the bank and for the residents?
Marianne Dickson of our office recently was faced with this dilemma when a bank client called and asked us to move to have a receiver appointed over an assisted living facility. Here is how Marianne dealt with the problem for our client.
What is the lender’s role? Who is responsible for patients?
by Marianne Dickson
Smaller, home-like assisted living facilities are increasingly common today for America’s aging population. Unlike the traditional, hospital-like or sterile facilities that were common just twenty years ago, there are more options available to patients and their families for quality care in a more comfortable setting. In anticipation of the increasing aging population, many small businesses have sprung up, offering patients quality care in a home-like setting, much to the relief of their families. Like most businesses, these assisted living facilities typically require financing, especially to purchase the facility. Unfortunately, not all businesses are successful and it is often the lender that has to make this point clear to the business owner when the mortgage payments stop coming in.
In a typical commercial loan, when the mortgage payments fall behind and communication with the borrower breaks down, the lender files a notice of default (“NOD”) and, in California, files a notice of trustee’s sale 3 months later if the payments are not brought current, and finally proceeds with a trustee’s foreclosure sale 20 days after that. The lender will often have a receiver appointed to collect the rents and manage the business until the foreclosure sale process is completed. However, when the business is an assisted-care facility, lenders find themselves in unfamiliar territory. The lender does not want to be responsible for the health and safety of the borrower’s patients. Also, what rights do the patients have? Are they considered tenants?
What are the patients’ rights?
Surprisingly, patients have very little rights with respect to the premises they inhabit. Recently, a lending client had a borrower who had not made any mortgage payments in over a year. The borrower operated an assisted living facility with over a dozen patients, many of whom suffered from Alzheimer’s or dementia. Yet, with over a year of non-payment, the lender could no longer put off the inevitable – foreclosure.
What about appointing a receiver?
The lender first contemplated appointing a receiver to preserve the going concern value, but the value of the business was not worth much more than the value of the property by itself. Further, the lender would need a receiver who was licensed with the California Department of Healthcare Services. If a receiver came in, the receiver would be responsible for the welfare of the patients. In this case, the cost of going the receiver route would be prohibitively expensive.
What happens if the owner walks away?
Understandably, the lender was concerned about just foreclosing on the property, with no plan in place for the patients. What if the owner walked away? Would the lender be responsible for the patients after foreclosure? Shockingly, what typically happens is that after the foreclosure sale, the sheriff goes to the property, discovers there are patients still there, and then contacts the local Long-Term Care Ombudsman (“Ombudsman”) whose job it is to find the patients an immediate place to relocate – which may not be an easy task. The patients and their families are often taken
completely by surprise.
When a facility goes into foreclosure, the licensee of the facility, who is often the borrower, should call the community care licensing representative to notify them of the situation. The licensee then must notify the families in order to arrange for the patients’ relocation. But as is often true of troubled borrowers, they tend to hope that their monetary problems will disappear and usually believe that before long, all will be well.
What is the role of the Long-Term Care Ombudsman?
In this case, the borrower was in denial. As the lender’s attorney, I contacted the local Ombudsman’s office to notify them that the lender had begun the foreclosure process on the property. Not surprisingly, they were unaware of the situation. I worked closely with the local Ombudsman, who made frequent visits to the facility, notified the licensee that she had to inform the patients and their families (and fined her for not having done so already), contacted the patients’ families to follow up, and informed us of the progress. Luckily, I was in contact with the local Ombudsman shortly after the lender filed the NOD, which allowed sufficient time to move the patients into new facilities prior to the foreclosure sale.
In the end, our client foreclosed on a vacated building and was very relieved that the patients had been relocated before the sale. The best resource throughout the entire process was the local Ombudsman who tirelessly looked after the patients and their well-being. Even though the lender missed out on collecting the rent during foreclosure, it was better off to have left the difficult, important and costly business of patient care to the Ombudsman.
This case is a good example of the increasing specialization that is needed in dealing with troubled loans. It is also demonstrates the need to carefully understand all of the facts before taking action to collect a loan. Everyone was better off because Marianne took the time to locate and contact the appropriate authorities. The patients ended up in new, more secure surroundings with licensed care, and the bank avoided making a bad loan even worse. Had a receiver been appointed, the bank would have had to make significant advances to keep the facility in operation.
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.
Marianne Dickson is an associate in the Bankruptcy and Creditors’ Rights groups in JMBM’s San Francisco office. She has represented debtors, Chapter 7 bankruptcy trustees, and secured creditors in all aspects of Chapter 11 and Chapter 7 cases and has dealt with a wide variety of industries and businesses. She is also experienced in out-of-court workouts, including assignments for the benefit of creditors in bankruptcy, insolvency and creditors’ rights. Marianne frequently represents lending institutions in bankruptcy and state court proceedings, including the appointment of receivers. Reach her at MDickson@jmbm.com.
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.