Usually income property defaults follow an orderly sequence. There is a default, the lender initiates the foreclosure and seeks the appointment of a receiver, the borrower files bankruptcy, the lender eventually obtains relief from stay and completes the foreclosure, and the property thus becomes REO. The only argument which occurs is over the value of the property during the bankruptcy proceeding, and even that is a gentlemanly debate between appraisers. I've been involved in any number of these when there is literally not a single discussion between the lender and the borrower during the entire process. A single lender workout officer can handle a lot of these simultaneously (during the early 1990's our group typically had 70+ loans per asset officer).
This situation changes radically if the lender decides to pursue a deficiency judgment or a guarantee. Every time I've done so there has been all out litigation warfare complete with lender liability claims, discovery, depositions, and sometimes even trials. If you know in advance you will never pursue remedies beyond your collateral you can stop reading. But, if you might go after a borrower, there are some procedures you should follow in advance of the fight which will save you heartache later on.
Discovery. These lawsuits are almost never settled before extensive discovery takes place, because the borrower is looking for something that will take them off the hook and there's no point in paying up until he or she is satisfied there is nothing there. This means the borrower's legal team will be looking at pretty much every piece of paper, email, electronic document, and report which mentions the loan. The cost of producing these documents is substantial and probably won't be recovered, and the more there is, the more likely it is that the borrower will latch onto something to use as a defense. Therefore, it makes sense to follow two simple rules when it looks like a loan may be headed for trouble:
- Keep the number of people involved to a minimum. Some banks like to get a group together to discuss their problem loans, which means everyone in the group will need to produce all their documents and emails related to the loan. It's much better to have a single officer responsible for the loan, so that only that officer and the manager(s) above that person are involved. In particular, restrict copies on email; if you send an email with a bunch of people copied, they will all be sucked into the process too.
- Keep written and electronic communication to a minimum. There are obviously action plans, loan rating forms, etc. which need to be completed, but the fewer the better.
Before you write anything, you need to pause and think about the fact the borrower's attorney will be reading it at some point in the process. When it comes down to it, beyond what is necessary for regulatory records there is not much that needs to be written down when working a problem loan.
Attorney Client Privilege and Work Product Doctrine. In general, information exchanged between you and your attorney is not subject to discovery. Similarly, materials prepared in anticipation of litigation are also generally not subject to discovery. But, as soon as you start sharing the information with people other than your attorney there’s an excellent chance you will lose these protections. The commonest mistake in real estate litigation relates to new appraisals of the collateral. Most lenders are smart enough to have their attorney order the appraisal – so far, so good. But when the appraisal comes in they promptly give it to the appraisal department for review and put the value in memos and reports which are sent to managers, accountants, etc. D'OH!! Again, keep the number of people involved to a minimum and ask your attorney before you disseminate information.
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