The following describes state policy that brutalizes commercial borrowers when they default on a loan. The punishment is total and the losses are complete.
On occasion, a building owner may need some extra financing. Perhaps there is another building available for sale or there are improvements that need to be made on a current building. Enter the lender.
The Lender will likely be a venture capitalist. The loan agreement can include a high loan amount paid back in huge installment payments each broken down into parts. The agreement will specify that any missed payments will cause a foreclosure on the loan and the immediate loss of collateral. The loan agreement will be voluminous and will include all the language that allows the lender to take the collateral and seek a deficiency judgment. A commercially reasonable sale will be defined automatically by the language of the agreement. If the collateral consists of shares of stock, that stock will become the property of the lender subject to public sale followed by a deficiency inquest to make up any difference between the loan amount and the sales amount plus costs and fees.
What Happens Next
The borrower immediately has trouble meeting the installment payments. These installments could consist of the loan principle, an interest amount and escrow fees. The numbers are difficult to remember and the installment payment requires adding up the three numbers which could change from month to month. The borrower can have a moving target, and must make the payment within each month*s payment deadline. Suppose the borrower finds a new source of funds and schedules a closing to pay off the lender. The switch could lead to a default if the lender promises to forebear on the loan, but then triggers default and collects the collateral.
The lender follows almost all the terms of his agreement to foreclose on the loan. Collateral is confiscated and ownership is changed. A public auction is scheduled. If shares of stock are not registered with the U.S. Securities and Exchange Commission, the lender can sell the collateral to himself for pennies on the dollar.
The classic response is for the borrower to turn to the legal system for help in preventing the sale. An Order to Show Cause seeking a stay of sale pending a sweeping review of all the breaches both sides committed in their mismanagement of the loan agreement process.
The first judge will likely grant a stay for only a brief period. This judge may state that there is no likelihood of success on a prolonged stay. The lender continues to sell the collateral to himself.
The borrower files a second Order to Show Cause for a stay, but this time, the judge sets a huge payment for the borrower to catch up with his payments. The borrower has no such cash flow and is unable to meet with the requirement to maintain a stay. The judge vacates the stay.
The borrower may decide to proceed to bankruptcy. However, the judge imposes a payment plan with a short deadline. The borrower has no such cash flow, and the automatic bankruptcy stay is modified by the judge to permit the sale of the collateral.
The borrower seeks another Order to Show Cause to stay the sale, and the lender files a motion for summary judgment. The judge grants the motion on a single-paged order which defines the low-ball sale as commercially reasonable and sets the matter for a deficiency inquest.
Here is Revealed the Judicial Mindset Against the Defaulting Borrower
By now it must become apparently clear that no matter what the borrower does, he always loses. Each application for a stay fails and there is no chance of a hearing on the various breaches of the loan agreement. Whether this is a judicial reaction to the 2008 mortgage collapse or not, the borrower is cooked meat as he proceeds down the road to failure. Even the contents of the loan agreement matter little to help the borrower.
The lender presents his case for a deficiency judgment. He uses an Excel spreadsheet to prove counsel fees with a lay witness on the stand. No hourly fee is revealed at any time and there I neither a retainer agreement nor timesheets entered into evidence. The judge grants a $200,000 counsel fee award. Various costs of publication are shown by hearsay evidence and the judge grants everything the lender asks for. The judge admits into evidence a building valuation which is three years out of date and once he closes the record, he tells all counsel that he believes the building will sell for five million dollars. His final judgment finds an amount a fraction of its current value thus maximizing the deficiency judgment for the lender.
The borrower files an appeal on the one page order and seeks a stay of enforcement. Denied. The borrower gets the judgment and seeks a stay of its enforcement. Denied.
Policy And Aftermath
This pattern of judicial decision-making reveals a strong policy that lobs off the head of the defaulting commercial borrower. The lender can do no wrong, but the borrower must be brutalized no matter any of the actual facts. Borrowers had better beware of this judicial mindset against the defaulting borrower.
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