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Ethical Lapse: Don’t Abuse the Collateral

After the Bank forecloses on its collateral, it is important to administer the collateral in a commercially reasonable manner. The collateral is the source of repayment for the Bank. It is important to preserve its value and to liquidate it to pay off the loan to the extent possible. Workout professionals who are charged with caring for Bank-owned or controlled collateral must plan a strategic approach to their task. Once in a while, the collateral is exciting, and tempts the workout officers to cross the ethical line.

Recently, a major bank faced an embarrassing situation when a senior workout officer appropriated a luxurious beachfront home turned back to the Bank by a Madoff victim. Instead of sympathizing with the customer’s plight and respecting their dignity and their property, the workout officer literally moved in and used the home as her personal beach party pad.

Her behavior was a slap in the face of the customers, who already had been stunned by the loss of their fortune to the criminal Madoff. As might be expected in this very public world, the neighbors resented the abuse of the customer’s property and called the newspaper. The reporters broke the story, which immediately went national, taking the bank by surprise.

Two days later, the workout officer was out of a very good job and the bank was issuing formal apologies. One can only imagine the effect that this episode will have on the restructuring of the credit. And of course, the former senior workout officer will need to find a new line of work.

The lesson to be learned is simple: treat the customer with the same dignity that the bank treated him or her when the loan was first made. Many customers end up in the Special Assets Department through no fault of their own, especially when the markets trend downward. They may have made business mistakes or poor choices, but until a borrower deceives the bank, it is good practice to allow the borrower his or her dignity.

This is Dick Rogan, bank lawyer and author of, 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, 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.